Fixing low dollar should be high priority

The high cost of energy, rising resin prices, a slowing economy, shortages of skilled labor, customers demanding cost cuts. All or some of these developments could have harsh effects on your profits in 2001. In the long term, however, a more serious threat to the health of your business and the country’s economy is the low value of the loonie against the Yank greenback.

The above opinion conflicts with the standard view that a low dollar is, on the balance, good for Canadian business because it makes it cheaper to export Canadian-made goods to the United States. We should be fatalistic, our leaders tell us, and enjoy the benefits from a sort of magic dispensed by the economic gods who have ordained our currency to drop 34 percent in value over the past 25 years. Lately, however, both the view that a low dollar is wholesome for Canadian business, and the belief there is nothing we can do about it anyway, have increasingly been challenged by economists, politicians and journalists.

The loonie, of course, is not the only currency to take a beating in the currency market. The euro, mark, franc and others have all suffered devaluation relative to the U.S. dollar. Unlike the loonie, however, these currencies are not circulating in economies in which the lifeblood is importing/exporting activity with the U.S.

A low dollar does indeed make it cheaper to supply U.S. customers, which in turn can attract more business to this side of the border and create jobs. To the extent that some business costs, such as labor and taxes, are marginally fixed and independent of currency value, a low dollar gives Canadian companies a cost-structure advantage in comparison to their U.S. competitors. But this gain can be greatly offset by higher costs for materials, energy, transportation and other outlays.

In industries such as moldmaking, where the labor, or fixed component of production costs is relatively high, the advantage of a low dollar is strongest. For a blow molder or injection molder, however, for whom the cost of resin is often the largest single component of production costs, the benefits of a low dollar are much less substantial. Many of these processors, which include the majority of our readers, have adjusted to the steadily declining value of the dollar by becoming adept at ‘swallowing’ costs. This means their profits, relative to their revenues, are smaller than they used to be. It also means, in many cases, they’ve delayed making capital investments in technology, plant infrastructure, research, training and other areas.

The net result of the dollar’s slide has been a growing technology and productivity gap between small- to medium-size Canadian manufacturers and their U.S. counterparts. At a recent SPE Ontario meeting, the Business Development Bank of Canada cited a Statistics Canada study showing that 53 percent of medium-size U.S. firms use at least five advanced technologies, while only 33 percent of similar-sized Canadian companies use the same amount of technology in their plants. Likewise, manufacturing productivity in Canada grew at only two-thirds the rate of the U.S. during the 1990s. Canadian manufacturing-based companies also invest much less in R & D compared to U.S. companies.

The currency market, based on floating exchange rates, is in effect a stock market for economies. When a government makes decisions that create good conditions for investment and growth, the market rewards it by buying more of its money, therefore increasing its value.

The U.S. dollar is the strongest currency in the world because that nation’s leaders have actively pursued policies–low taxes, less regulation, competitive banking– to make it strong. A strong currency is in the best interest of any country because it keeps inflation low and creates a powerful incentive to acquire that currency, and therefore to invest capital in that country.

There are no economic gods. There is no magic.

e-mail: mlegault@corporate.southam.ca