Fraser Forum

Don’t blame Ontario’s manufacturing woes on the currency

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According to a prominent narrative at Queen’s Park, policymakers are not to blame for the decline of Ontario’s manufacturing because the province has been struck by economic forces beyond its control including a strong Canadian dollar. (A Fraser Institute study subjected this narrative to empirical scrutiny.)

However, the popular angst over the “strong Canadian dollar” of the 2000s is arguably misplaced because one could plausibly describe the 1990s as a period of a “weak Canadian dollar.”

The first chart below shows the long-term nominal exchange rate between the Canadian and U.S. dollars. The Canadian dollar strengthened sharply against the USD from 2002 to 2007, but only after a sharp fall in the Canadian dollar during the 1990s.

Another complication in the story of what happened in Ontario is the distinction between manufacturing employment versus manufacturing output.

The chart below plots the long-term movement in the USD/CDN exchange rate against Ontario manufacturing employment and manufacturing output (expressed as percentages of their respective totals).

Notice that Ontario manufacturing output during the period of consistent data availability (from 1984 through 1999) responded symmetrically to the movements in the foreign exchange rate. That is, when the Canadian dollar strengthened from 1986 through 1991, Ontario manufacturing output fell from about 24 per cent down to about 20 per cent of all-industries output.

Then when the Canadian dollar weakened from 1991 through 1999, manufacturing output regained all of its lost ground as a share of total output.

However, the pattern with Ontario manufacturing employment was different. As the second chart indicates, there was a general downward trend throughout the period. When the Canadian currency weakened, the share of manufacturing employment did rise very gently from 1993 through 2000, but that was not enough to offset the preceding fall.

This means that the decline in Ontario manufacturing employment in more recent times is not solely due to the stronger Canadian dollar; it reflects a longer term trend that was occurring in addition to movements in the currency.


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