Canadians should take pride in a strong currency - John Manley

A northern tiger doesn't hide behind a low dollar

JOHN MANLEY

From Tuesday's Globe and Mail

Headlines this past week about the loonie's rise to 90 cents (U.S.) reminded me of one of my visits to New York as then-finance minister in 2002.

My hosts suggested Canada's G7-leading economic performance (surpluses, job creation, etc.) was due to the federal government "manipulating" our dollar to keep it below 65 cents.

"That's the giant sucking sound," said one Wall Street financier about Canada's incredible job-creation record. "Those are U.S. jobs heading north!"

My somewhat cheeky reply was that we were not capable of holding the Canadian dollar at a particular level for very long, and if he thought the loonie was underpriced, he should buy it.

The dollar's recent rise is not the result of Canadian government manipulation any more than was its sojourn at 62 cents. It is a product of high commodity prices -- especially in the energy sector -- together with fiscal, current account and trade surpluses. All of these are in sharp contrast to corresponding deficits in the United States, against whose currency we typically compare our own. In addition, my friend in New York is probably buying Canadian dollars now because the financial herd always follows a good thing.

Is this bad -- and should the Bank of Canada respond in some fashion?

No doubt, Canadian manufacturers who export to the United States are finding they are less and less competitive, and have become so in a rather short time. Those who hedged the currency risk are finding their hedges running out. Those exporters who failed to invest their profits -- earned when the dollar was low -- in productivity enhancements are discovering they are not as smart as they thought they were when sales and profits were strong.

With a low dollar, it was as if we started a 100-metre race with a 10-metre advantage. We hit the finish line a few metres ahead of our U.S. competitor, and didn't worry about the fact he had outrun us.

Well, the starting line for us now is much closer to the starting line for our U.S. competition. And what was formerly important for Canadian businesses is now becoming urgent. We must improve our productivity, we must enhance our climate for investment, and we must ensure our citizens improve their skills and training.

Arguably, last week's federal budget, while politically effective, was at best neutral in advancing the productivity agenda: Reducing consumption taxes instead of income taxes is a negative for productivity gains, while the elimination of the capital tax is a positive. Almost all of the vaunted 28 tax cuts had nothing whatsoever to do with enhancing productivity. But the higher dollar itself makes the acquisition of technology and equipment from the U.S. more affordable, as it does for the acquisition of U.S. businesses and assets.

In reality, success in business and trade requires competitive costs as well as quality. To sustain success requires a continuous struggle for improvement. This cannot be reliant solely upon a rate of exchange, which is something that is always volatile. When you consider the economies that have performed well over the long term, they are not characterized by weak currencies. When the Canadian dollar is weak, our assets -- companies, real estate, even brains (remember the "brain drain?") -- are relatively cheap for foreigners to acquire, while technologies that enable productivity improvements often come from abroad and thus are more costly. A low exchange rate can therefore cause a negative cycle in which our firms lose productivity because they choose not to invest in the improvements necessary to be truly competitive.

The recent rise in value of the Canadian dollar should help firms to invest in productivity, but some businesses find themselves so stressed on costs that they are cutting back on anything long-term, including research and capital expenditures. This may be a strategy for survival, but not for success.

The Bank of Canada cannot pursue one policy for manufacturers and a different one for commodity producers. There is only one currency and the bank must remain clearly focused on maintaining price stability for the Canadian dollar, fighting inflation whenever its ugly head appears.

Thus, Ontario Premier Dalton McGuinty is wrong to look to the Bank of Canada to help his province's manufacturers, while he is right to make innovation, research and education his government's highest priorities.

Now that I am no longer finance minister and am free to comment on the value of the dollar, let me say I found no satisfaction in a low dollar, as it was not a hallmark of a "northern tiger."

Looking to the future, global demand for our natural resources will ensure we continue to run trade surpluses. And prudent fiscal policy, which has become Canada's trademark, should ensure continued fiscal surpluses. Thus the dollar will not return to its previous low levels. Despite some manufacturing job losses, the service sector is doing well and domestic demand is strong. Unemployment is at 30-year lows and Canadians are, on the whole, optimistic about the future.

Therefore, Canadians should take pride in a strong currency, reflecting a strong economy. We should flex our muscles as a northern tiger and aggressively pursue a global strategy based on innovation, intelligence and enhanced productivity.

John Manley, an Ottawa-based lawyer with McCarthy Tétrault LLP, was deputy prime minister to Jean Chrétien.