TheDeclineofManufacturinginCanada:ResourceCurse,ProductivityMalaiseorNaturalEvolution?

RobertPetrunia1LivioDiMatteo2

August30,2016

PaperPreparedforPresentationattheRiminiConferenceinEconomicsandFinance,Waterloo,Ontario,September16-18,2016.ConferenceDraft:Commentswelcome.

Abstract

ThestateofCanadianmanufacturingisaconstantissueincurrenteconomicandpublicpolicydebates.Overthepast50years,therehasbeenadeclineinthecontributionofmanufacturingto the overall Canadian economy. This decline is especially true for the economies of twoprovinces, Ontario and Quebec, which traditionally were the most manufacturing intensive.Ontario, in particular, is hit hard by the 2008 recession in terms of both employment andoutputsharedeclineofitsmanufacturingsector.Thispaperexplorestherelativeimportanceofthree explanations for the decline of the Canadian manufacturing sector. Natural evolutionoffers the first explanation as the economies of most Western countries move away frommanufacturingandtowardtheservices.AsecondexplanationforthisdeclineisDutchDisease.Theperiod from2003 to2014seesbotha significant rise in commoditypricesandCanadiandollar. This period also saw a booming resource sector – in particular, energy / commodityproducing provinces of Alberta, Saskatchewan and Newfoundland and Labrador. Finally,Canada’smanufacturingproductivityperformancehasbeenweak relative toother countries,whichmayalsobeafactorinitsmanufacturingdecline.OurinitialresultsshowthatmostoftheCanadianmanufacturing sector decline occurs inOntario andQuebec,whilemanufacturing'scontribution remains flat or slightly increases in most of the other provinces. Furthermoreresourceintensiveprovinces,suchasAlbertaandSaskatchewan,experiencethefastestlabourproductivitygrowthintheirmanufacturingsector.JELClassification:D2,L1,L6,N5,N6,R1Keywords:manufacturing,resourcecurse,productivity

1LakeheadUniversity,955OliverRoad,ThunderBayONCanada,P7B5E1.Phone:+1(807)343-8384.Email:rpetruni@lakeheadu.ca.2LakeheadUniversity,955OliverRoad,ThunderBayONCanada,P7B5E1.Phone:+1(807)343-8545.Email:ldimatte@lakeheadu.ca.

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Section1:IntroductionThestateofCanadianmanufacturingisaconstantissueincurrenteconomicandpublicpolicydebatesespeciallywithrespecttotheeconomiesofcentralCanada.BothOntarioandQuebechave seen manufacturing employment decline with Ontario particularly hard hit during the2009 recession. Between2000and2013,manufacturingemployment inOntariodrops from1,072,000jobsto777,300jobs–adropof27percent-whileinQuebecitdropsfrom629,000to 486,000 – a 23 percent decline. In 2000,Ontario andQuebec together accounted for 76percent of Canada’s 2,242,300 manufacturing jobs whereas by 2013 it was 73 percent of1,734,200jobs.3The explanations for this manufacturing decline and the lament of deindustrialization haveoftenfocusedonaDutchdiseaseorresourcecurseexplanation.Aboomingresourcesector–in particular, energy in Alberta, Saskatchewan and Newfoundland and Labrador- ostensiblycontributetotheCanadiandollar’sappreciationwhichinturncausesmanufacturingexportstodecline.4TherelationshipbetweenresourcesandashrinkingmanufacturingsectorinresponsetoexchangerateandproductivityeffectscausedbyaboomingresourcesectorwasexploredbytheworkofCordenandNeary(1982,1983)duringtheNorthSeaoilboom.Furthermore,SachsandWarner(1995,1999,2001)showresourceabundanteconomiesgrewslowerthanresourcescarceeconomiessince1970anddubbedthisphenomenonthe“CurseofResources.”ResourceexportshavealwaysbeenimportantinCanadianeconomichistorybutmanufacturingdeclinehasgeneratedsomediscomfortwithourresourcesectoranditsallegedimpactontherestoftheeconomy. This isdespitethefactthatnearlyhalfofCanada’stotalmanufacturingoutput – from pulp mills to automobile production - is indeed still resource based.5 Theresource sector is also vital to the economic health of our transportation sector as naturalresourceproductsaccount formore than two-thirdsof rail andmarineshipments inCanada.This suggests that thereare substantialeconomic linkagesbetweenCanada’s resourcesectorandtherestoftheeconomy.63DataSource:Table2820012-Labourforcesurveyestimates(LFS),employmentbyclassofworker,NorthAmericanIndustryClassificationSystem(NAICS)andsex,annually(Persons). .4NaturalresourceshavebeenanimportantdriverofgeneralCanadianeconomicprosperity.ForCanada,Keay(2007)findsthattheexploitationofCanada’snaturalresourcesduringthe20thcenturymadedirectandindirectcontributionstothesizeandefficiencyoftheCanadianeconomyandhadasubstantialpositiveimpactonthelevelofrealpercapitaGDP,contributingabout20percent.AnothercomprehensivestudybyBaldwinandMacDonald(2012)alsofindsnaturalresourcesandtradetobeimportantcontributorstoCanadianrealgrossnationalincomebetween1870and2010.5Cross(2015)statesthat46.2percentofallmanufacturingoutputinCanadain2010wasresourcebased.6“Staples”(naturalresourcesforexport)approachestoeconomicdevelopmentdescribeaprocessbywhich“linkages”associatedwiththenaturalresourceproductionencourageindustrializationprovidedthelinkagesarestrongenough,andtheincomeassociatedwiththemisretainedinthedomesticeconomy.Theeconomicdevelopmentofresourceabundant,sparselypopulatedregionshasbeenexplainedbytheclassicstaplesapproachormodelsofexport-leddevelopmentasoriginallysetoutintheworkofH.A.Innis.whofollowedearlierworkbyG.S.Callender(1902,1965[1909])andW.A.Mackintosh(1923).TheclassicworksonCanadianstaplesbyInnisare

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Other explanations of this manufacturing decline have sought other sources of changes inCanada’smanufacturingsector. Cross(2013)forexamplearguesthattheappreciationoftheCanadiandollarintheearly21stcenturywasnotdrivensolelybycommoditypricesbutwasdueto a decline in the value of the US dollar and increased investment flows into Canada.Moreover, the struggles in Canadian manufacturing affected mainly automobile production,clothing and forestry related manufacturing and these industries also all contracted in theUnitedStatesatthesametime.BaldwinandMacDonald(2009)actuallyfindlittleevidenceoflong-term manufacturing decline as in terms of volume of output, Canadian manufacturingproductionasashareoftheeconomyhasnotchangedmuchinabouthalfacentury.Capeluck (2015a,b) finds that demand side factors and outsourcing have been factorsexplaining the decline in Canadianmanufacturing but labour productivity growthhas been aparticularlyimportantfactor.Capeluckfindsaboveaveragelabourproductivitygrowthexplainsmostofthedeclineinthemanufacturingemploymentsharebefore2000,whilethepost2000declineisexplainedbyalossincostcompetitivenesslinkedtoanappreciationoftheCanadiandollar;increasedcompetitionintheU.S.importmarket;andaslowdownindomesticdemandgrowthintheUnitedStates.ThispaperprovidesanexaminationofthreeexplanationsforCanada’smanufacturingdecline.First,acomparison isdonewithother developedcountriestosee ifCanadadiffersmarkedlyfromthemorisalsopartofagradualevolutionawayfromgoodsproductioninmostdevelopedcountries.Second, is thedeclineofmanufacturingsimplya functionofCanadianproductivitygrowth being weaker than other countries. Third, can Canada’s manufacturing decline beattributed to a resource curse argument related to the appreciation of Canada’s currencyespeciallywithregardstoitsmajortradepartner-theUnitedStates.Theoverallresultsofouranalysis suggest thatCanada’smanufacturingdecline ismorerelated togeneral internationaltrends inmanufacturing decline and productivity results rather than the effects of currencyappreciation.Section2:DeclineofManufacturingacrossCanadaandtheG7CountriesCanada has witnessed a decline inmanufacturing’s share of GDP since 1926 (See Figure 1).From1926to1943,themanufacturingshareofGDProsefrom20percentto29percentandthendeclinedtoreach18percentby1981.Between1981and2001,themanufacturingtoGDPratio stabilized averaging 17 percent and ranging from a high of 19 percent to a low of 16percent. Since 2001, the ratio has declined going from 19 to approximately 13 percent by2014.

TheFurTradeinCanada(1930)andTheCodFisheries(1940).Modernversionsofstapletheoryseeeconomicdevelopmentasaprocessofdiversificationaroundanexportbase.Forrelevantliterature,seethepapersbyBaldwin(1956),Watkins(1963)andCaves(1966,1971).

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This manufacturing decline is a feature of numerous other economies around the world.Figures2a,2band2c,and3aand3bpresentUnitedNationsdataonthemanufacturingshareoftotalvalue-addedintheotherG-7andinworldregionsfrom1970to2013.Between1970and 2014, the manufacturing sector’s share of total value added declined in all of the G-7countrieswiththeexceptionofJapanandItalywhereitroseslightly.TheaveragepercentagepointdeclineacrosstheG-7countriesbetween1970and2014was2.6percentwiththelargestdeclinesregisteredbyGermanyandtheUKat-6.5and-8.8percentagepointsrespectivelywithCanadaasthenext largestdropat-3.7points. ComparedtotheG-7asawhole,Canadahasgenerally always had a lower manufacturing to GDP ratio. The G-7 as a whole sees acontinuous decline in themanufacturing share ofGDPover the period,while Canada sees asharpdecline since2001.However, Figure2c indicatesa strongpositive correlationbetweenthetwo.Tobettercaptureshort-termfluctuations,Figures2dand2ecompare thegrowthrateof themanufacturingsector’sshareofvalueaddedforbothCanadaandtheaveragefortheotherG-7countries.7TheriseandfallofthisgrowthrateforCanadaandtheotherG-7countriesfollowsimilarpatternsoverthe1970to2013period.Priorto2000,themanufacturingsector’ssharegrowth experiences both positive and negative years but there is a gradual drop in themanufacturingsector’scontributionduetothelargerabsolutevalueduringnegativeyears.Thepost 2000 period shows mainly negative growth in manufacturing’s share of the Canadianeconomy.BothCanadaand theG-7countriesexperiencea largedrop in theirmanufacturingsector’ssharein2008,butthissubstantialdropisfollowedbyalargerisein2010.Tosummarizetherelationship,Table1providesresultsforaregressionofthemanufacturingshare of GDP in Canada against the average in the other G-7 countries. Column 1 presentsestimatesusingthelevelsvariables,whilecolumn2showsestimatescomparinggrowthrates.Theresults indicate thatCanada'smanufacturingshareofGDPmoves inalmost tandemwiththeotherG-7countriesbothintermsoflevelsandgrowthrates.Inbothcases,thecoefficientontheG-7variableisnotstatisticallysignificantlydifferentfromone.AgeneralpictureemergesfromTable1andFigure2a-e.ManufacturingcontributiontotheeconomyisdecliningacrossalltheG-7countriesOver the period 1970 to 2014, the manufacturing share of world economic activity hasremained relatively stable ranging from 15 to 18 percent. Figures 3a and 3b look atmanufacturing’scontributioninvariousworldregions.However,withtheexceptionofAsia,theCaribbean,andEasternEurope,mostregionshaveseenadeclineinthemanufacturingshareofeconomicactivity.Whencomparedtotheworldasawhole,Canada’smanufacturingshareofeconomicactivityhasbeen close to theworldaverageuntil approximately2003when it hasfallendramaticallybelow. However,Canadahas stillmanaged to retainmoremanufacturingthanAustralia andNewZealand– countrieswitha resourceexportorientation thatparallelsCanada.Indeed,overtheperiod1970to2014,Canadasawitsmanufacturingshareofvalued

7Thegrowthrateiscalculatedasthedifferenceinthelogarithmvaluesofthevariables.

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addedfallfrom17to11percentwhileAustraliaandNewZealandcombinedfellfrom20to9percent.AnydiscussionofmanufacturingdeclineinCanadainvariablyfocusesonthesector’sdecliningshare of GDP and employment. In the case of employment, there is a difference inperformancebetweenthesectorshareoftotalemployment–whichhasseenadecline–andthe absolute level of employment which has fluctuated but at present is not that muchdifferent than it was several decades ago. Figure 4 illustrates the sector’s employmentperformance in termsof total jobnumbers and total employment share from1976 to 2015.Totalmanufacturingemploymenthasbeenmarkedbyseveralcyclesofincreaseanddecreasewith the decline period since 2000 amongst the steepest. Yet, total manufacturingemployment in2015 isonly8percent lowerthan1976. Ontheotherhand,manufacturing’sshareoftotalemploymenthasbeenmuchmorepronounceddroppingby50percentoverthesameperiod.Section3:ProductivityDeclineGiven the growth in value ofmanufacturing output over time, another important variable isproductivity. Figure 5 presents Canadianmanufacturing value added per employee in 2005constantU.S.dollarsovertheperiod1970to2008usingUnitedNationsdataandcomparedtoaselectnumberofothercountries.The increase inCanadianmanufacturingvalueaddedperemployeeisstriking.However,Canadianproductivitygrowthinmanufacturinghasslowedsince2000especiallycompared to theUnitedStatesand Japan–bothofwhichhavenotseen thedeclineinmanufacturingseenbyCanada.Indeed,ofthesefivecountriesovertheperiod2000to2008,Canadaactuallyhadthesecondlowestaverageannualgrowthrateinmanufacturingvalue added per employee at 1.4 percent. The United States and the United Kingdom incontrasthadgrowth ratesof5.2and3.3percent respectivelywhile Japan’swas4.5percent.OnlyAustraliawaslowerat0.7percent.Figures 6a-6dprovide a comparisonof themanufacturing sector’s shareof CanadianGDP tolabourproductivity of theCanadianmanufacturing sector. Labourproductivitymeasures realoutputper employee. Figure6ademonstrates a negative relationshipbetween the shareofmanufacturingandlabourproductivityinmanufacturing.Figure6bconfirmsthisrelationshipbylooking at the time series patternsof the two variables.Naturally, labourproductivity in theCanadian manufacturing factor increases over time with the accumulation of capital andtechnologicalgrowth.One problem with comparing levels of manufacturing sector’s share of GDP with labourproductivity is the relationship may be spurious due to the time series properties of thevariables.Tothispotentialspuriouscorrelationandlookattheshorttermfluctuations,Figures6c and 6d compare the growth of the two variables. These figures indicate a positive shorttermgrowthrelationshipbetweenthetwovariables.Further,Table2providestheresultsfromtheregressionthegrowthrateofmanufacturing’sshareonitslabourproductivitygrowthand

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confirmsthatthereisastrongpositiveunconditionalrelationshipbetweenthesetwovariablesovertheshortrun.Thus,declininglabourproductivitygrowthcanbeconsideredtobeafactorinmanufacturingdecline.Section4:TheExchangeRateImpactCanada’s manufacturing sector has declined over the course of the twentieth century in amanner similar to other developed countries though its manufacturing share of economicactivitywasremarkablystablebetween1970and2000. Whiletherecentsteepdeclinesince2000 has been ascribed to the effect of a resource commodity boom and an appreciatingCanadiandollar,therehavebeenotherperiodsofcurrencyappreciationpriorto2000whichdonotappeartohaveresultedinashrinkingmanufacturingsector.Moreover,thedepreciationofthe Canadian dollar since 2013 does not appear to have sparked a rebound in Canadianmanufacturing.Thissectioncomparesthemanufacturingsector’sshareofGDPwithexchangeratemovements.ThebilateralCanada-USexchangerate(CADperUSD)isused.Atrade-weightedexchangerateprovidesanalternativetocapturethemovementsoftheCanadiandollar.Traditionally,importsfromtheUSrepresentover65percentoftotalimports,whileexportstotheUSrepresentover75percentoftotalexports.8Thus,mostofthemovementsinthetrade-weightedexchangerateareduetomovementsinCanada-USexchangerate.9Asfortheeffectofresourcesandcurrencyappreciationonthemanufacturingsector,Figure7apresentsaplotof therelationshipbetweentheCanada-USexchangerate (CADperUSD)andthemanufacturingshareofGDPfortheperiod1926to2014.Thediagramsuggeststhatoverthecourseofmostofthe20thcenturyand intothe21stcentury,therehasnotbeenastrongrelationship between a lower Canadian dollar and a larger manufacturing sector. Betweenparityand1.15CAD/USD,there isawidevariation inmanufacturingtoGDPratios. Between1.15and1.60CAD/USD,thereismuchlessfluctuationinthesizeofthemanufacturingsector.Indeed,themanufacturingsector’sshareofGDPappearstobequiteinelasticwithrespecttoaCanadiandollarthatdepreciatestomorethan1.15CAD/USD(that isavaluebelowabout85centsUS).Figures7band7cexaminetherelationshipbetweenCanada-USexchangerate(CADperUSD)and the manufacturing share of GDP in terms of growth rates. These figures indicate nodiscerniblepatternorcorrelationbetweenthetwovariables.

8Source:CansimTable228-0069.9Thecorrelationbetweenthetwovariablesis0.97.

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Section5:ConditionalAnalysisTo sumup the analysis thus far, the reasons for Canada’smanufacturing decline are indeedcomplex.First,thereisthe“natural”evolutionawayfromprimaryandsecondaryindustryandintoserviceswhichhasmarkedthedevelopmentofmostadvancedindustrialcountries.Inthisregard,theworld’sshareofmanufacturingoutputhasstayedrelativelyconstantsince1970buttheregionsandcountriesaccountingforthatoutputhavechanged.Canadaactuallywasclosetotheworldaverageintermsofitsmanufacturingshareofoutputformostofthelatterhalfofthetwentiethcenturybutithasonlybeensince2000thatthesharehassignificantlydeclinedanddivergedfromtheworldaveraged.Second, Canada’s manufacturing productivity performance has been weak relative to othercountriesandthismayalsobeafactorinitsrelativemanufacturingdecline.Whileoutputperemployee has increased over time, since 2000 the growth rate has slowed substantiallyespeciallycomparedtotheUnitedStates.ThedeclinerelativetotheUnitedstatesissignificantgiven the cross-border integrated nature of manufacturing – especially in the automobilesector.WhilethetendencyhasbeentoblametheappreciationoftheCanadiandollar,thefactremainsthatthereisnotavisiblystrongrelationshipbetweenthemanufacturingshareofGDPandthevalueoftheCanadiandollar.Thirdly, productivity may indeed be the key variable behind the weaker performance ofCanadianmanufacturing especially since 2000. However, evenmanufacturing productivity isquitevariablewithinCanadaandmaybeafactorbehindwhyOntarioandQuebechavebeenparticularly hard hit by the recent loss of manufacturing employment. Our internationalproductivityinmanufacturingisultimatelyfoundedonproductivityacrossCanada’sregionsandthe preliminary evidence suggests that manufacturing output per employee in Canada isactuallyhighintheresourceintensiveprovincesofCanadaandparticularlyinwesternCanadawhichismoreresourceintensivethantheremainderofthecountry. Thiswouldsuggestthatbeing resource intensive need not necessarily harmmanufacturing productivity and is not afactorinthecurrentmalaise.Tables 3 and 4 present regression analysis for the period 1971 to 2011. Table 3 presentsestimates fromthe regressionof the level valueofmanufacturing shareofGDPagainst levelvalues of our three variables of interest: (i) G-7 (excluding Canada) share of manufacturingvalueadded; (ii)Manufacturing labourproductivity;and (iii)CAD/USDexchangerate.Table4provides estimates for the regressions in terms of growth rates. Each table contains sevenregressionspecifications,whichreflectthevariouspossiblecombinationsoftherighthandsidevariables.Table3suggestsastablerelationshipinlevelvaluesbetweenthemanufacturingshareofGDPinCanadawith the threevariablesof interest.ThecoefficientonG-7shareofmanufacturingvalueaddedisclosetoavalueoftwoandstatisticallysignificantattheonepercentlevelacross

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the specifications.10 Column 7 of table 3 presents the full specification with all threeindependentvariables.Thecoefficientonlabourproductivityisessentiallyzeroandstatisticallyinsignificant,whilethecoefficientonCAD/USDexchangerateis0.04andstatisticallysignificantattheonepercentlevel.Overall,theseresultsindicatethatthemaindriversofthelong-termmovements in the Canadian manufacturing share relate to long-term movements in themanufacturingshareacrossalltheG-7countries.ThisfallinmanufacturingshareacrosstheG-7islikelyrelatedtotheincreasedimportanceoftheservicesectorintheseeconomies.Forgrowthrates,therelationshipsarelessstableacrossvariousspecificationsasdemonstratedin Table 4. Column 7 presents the full specification containing all of the variables. In thisspecification,thecoefficientsonallthevariablesarepositiveandstatisticallysignificantatthefivepercentlevel.ThegrowthratesoftheG-7manufacturingshareofvalueadded,Canadianmanufacturing labourproductivity,andtheCAD/USDexchangerateallprovideacontributiontothegrowthrateintheCanadianmanufacturingshareofGDP.Thecoefficientvaluessuggestthefollowing.First,short-termmovementsoftheCanadianmanufacturingsharefollowshort-termmovements in the G-7manufacturing share, but the other variables are also relevant.Second, growth in the manufacturing labour productivity leads to expansion of themanufacturingshareoftheCanadianeconomy.Finally,thepositivecoefficientontheCAD/USDexchangerategrowthrate indicatesthat theappreciationof theCanadiandollarvis-à-vis theUSdollarassociateswithafallinthemanufacturingshare.Section6:ProvincialAnalysisAnexaminationofmanufacturingandproductivityovertimeattheprovinciallevelisillustrativeinunderstandingtheforcesbehindthedeclineofCanadianmanufacturinginlightofthebasicreasonsadvancedinthisanalysis. Figure8presentsa long-termseriesofmanufacturingasashareofGDPforCanadaconstructedfromStatisticsCanadadata11overallaswellaseachoftheprovincesfrom1961to2014.Theoveralldecline inmanufacturing’s shareofGDPcancertainlybe interpretedaspartofanatural evolution away from goods to service producing industries, as is the case in mostdeveloped economies. However, this natural evolution is not consistent across all theprovinces.Ontario,Quebec and British Columbia have seen a steady declinewithOntario inparticulardroppingfromover30percentto justover10percentoverthespanof fiftyyears.WhilethePrairieshavehistoricallybeen lessmanufacturing intensivethancentralCanada,atthe same time, the declines for Saskatchewan, Alberta and Manitoba have been less

10Theestimatesincolumn1oftable3donotmatchtheestimatesfromtable1,sincethedependentvariableisfromdifferentsources.Intable1,thedependentvariableisCanadianmanufacturingshareofvalueaddedtakenfromUNdatasource.Intable3,thedependentvariableisCanadianmanufacturingshareofGDPtakenfromCANSIMtables379-0023and379-0028.11GDP:1961-2011CANSIMtables384-0015,384-0038.ManufacturingGDP.1971-2014CANSIMtables379-0028,379-0009,379-0025Pre1976:HistoricalStatisticsofCanada.

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pronounced. Even the Atlantic region has seen relatively stable manufacturing sharesparticularlysincethelate1980s.The case for either a resource curse effect or productivity malaise in explaining theperformance of the manufacturing share of GDP is also mixed. Alberta, Saskatchewan andManitobaareallmuchmoreresourceintensivethaneitherOntarioorQuebecandyetappeartohavedoneabetterjobinmaintainingtheirmanufacturingsectorshareofGDP.Ifaresourcecurseisoperatingviaexchangerateeffects,surelyitwouldalsoservetoreducemanufacturinginresourceintensiveprovinces.As for a productivity malaise, Figure 9 presents manufacturing output per employee inmanufacturingover theperiod1958 to2014. Aside fromproductivitydifferencesacross theprovinces, the evidence suggests that productivity has been rising over time. Productivity isgenerally highest in Alberta, Ontario, Saskatchewan and British Columbia and lower in theremainingprovinces.Section7:ConclusionDeindustrialization and manufacturing decline have become perpetual laments in thedevelopedworld and Canada is no exception to this narrative. Recent years have seen themanufacturing heartland of Ontario and Quebec particularly hard hit by the shedding ofmanufacturing employment and as is inevitably the case the search for explanations hasintensified. Muchof theblame in recentyearshas focusedon the resourceboomdrivenbyCanada’s energy producing provinces and the attendant effects on the appreciation of theCanadiandollar.OurevidencesuggeststhatmanufacturingdeclineinCanadaisindeedacomplexphenomenon.To start, while it has intensified since 2000, it has generally paralleled the trend in otherdeveloped countries that over time sees an evolution away from goods production tomoreservice intensive economies. In this sense, one could termmanufacturing decline a naturalevolution.Aswell,Canadahasseenweakerproductivitygrowthespeciallysince2000andthiscorrelateswellwith the intensificationof thedeclineduring the sameperiod. Theproductivity story isfurtherreinforcedbythefactthatresource intensiveprovincesappeartohavedoneabetterjobinmaintainingtheirmanufacturingsectorGDPshares.Asforexchangerateeffects,asanexplanationthisdoesnotappeartobewellsupportedbyourevidencesuggestingtheothertwoexplanationsarebetter. Ratherthanthesimplestoryofaresourcecurse,Canada’smanufacturingdeclineismorerootedinlongtermeconomicfactorssuchasproductivitygrowthandtheevolutionofeconomiestowardsserviceproduction.

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ReferencesBaldwin,R.E.(1956)“Patternsofdevelopmentinnewlysettledregions.”Manchester SchoolofEconomicandSocialStudies.XXIV:161-179.Baldwin,J.R.andR.MacDonald(2012)NaturalResources,theTermsofTrade,andRealIncomeGrowth in Canada: 1870 to 2010. Statistics Canada, Economic Analysis (EA) Research PaperSeries,No.11F0027M–No.7.Baldwin,J.R.andW.Gu(2007)Long-termproductivitygrowthinCanadaandtheUnitedStates.StatisticsCanadaCatalogueno.15-206-X.Ottawa,Ontario.TheCanadianProductivityReview.No.13.Baldwin, J.R. and R. Macdonald (2009) The Canadian Manufacturing Sector:Adapting toChallenges.StatisticsCanada.11F00227M-No.057.Callender, G.S. (1902) “The early transportation and banking enterprises of the states inrelationtothegrowthofcorporations.”QuarterlyJournalofEconomicsXVII:111-162.Callender,G.S. (1965[1909])SelectionsfromtheeconomichistoryoftheUnitedStates,1765-1860.NewYork:AugustusM.Kelley.Capeluck,E.(2015a)ExplanationoftheDeclineinManufacturingEmploymentinCanada.CentrefortheStudyofLivingStandardsResearchReport,October,2015-17.Capeluck,E.(2015b)TheEvolutionofManufacturingEmploymentinCanada:TheRoleofOutsourcing.CentrefortheStudyofLivingStandardsResearchReport,October,2015-18.Caves, R.E. (1966) “’Vent for surplus’models of trade and growth,” in Baldwin et al., Trade,growth and the balance of payments: Essays in honor of Gottfried Haberler. Chicago: RandMcNally:95-115Caves,R.E.(1971)“Export-ledgrowthandtheneweconomichistory,”inBhagwatietal.,(eds.)Trade,BalanceofPaymentsandGrowth.Amsterdam:NorthHolland:403-442Chambers,E.J.andD.F.Gordon(1966)“Primaryproductsandeconomicgrowth:Anempiricalmeasurement.”JournalofPoliticalEconomy,74:315-331.Corden,W.M.andJ.P.Neary (1982)"BoomingSectorandDeindustrialization inaSmallOpenEconomy"EconomicJournal,92,825-848.Corden,W.M.(1983)"TheEconomicEffectsofaBoomingSector"InternationalSocialScienceJournal,35,441-454.

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Cross, Philip (2015) Unearthing the Full Economic Impact of Canada’s Natural Resources.MacDonald-LaurierInstitute.Cross,Philip(2013)DutchDisease,CanadianCure.MacDonaldLaurierInstitute.Innis, H.A. (1984[1930]) The Fur Trade in Canada: An Introduction to Canadian EconomicHistory.Toronto:UniversityofTorontoPress.Innis,H.A.(1978[1940])TheCodFisheries:TheHistoryofanInternationalEconomy.Toronto:UniversityofTorontoPress.Innis, H.A. (1969[1956]) Essays in Canadian Economic History. Mary Q. Innis (ed.) Toronto:UniversityofTorontoPress.Keay, I. (2007) “The Engine or the Caboose? Resource Industries and Twentieth-Century CanadianEconomicPerformance,”TheJournalofEconomicHistory,Vol.67,1,1-32.Sachs,J.D.andA.M.Warner(2001)“NaturalResourcesandEconomicDevelopment:ThecurseofNaturalResources,”EuropeanEconomicReview,45,827-838.Sachs, J.D. and A.M. Warner (1999) “The big Push, Natural Resource Booms and Growth,”JournalofDevelopmentEconomics,59,43-76.Sachs, JefferyD., andAndrewM.Warner (1995) “Natural resourceabundanceandeconomicgrowth,”NBERWorkingPaper5398,54p.Watkins,M.H. (1963) “A staple theory of economic growth.” Canadian Journal of EconomicsandPoliticalScienceXXIX:141-158.

Tables:

Table1:RegressionsComparingManufacturingSector’sShareofValueAdded,CanadaandG-7minusCanadaAverage(1970-2014)

DependentVariableCanadaManuShare GrowthCanadaManuShare

G-7ManuShare 0.937***(0.199)

-

GrowthG-7ManuShare - 0.991***(0.198)

Constant -1.014(3.402)

-0.003(0.005)

Note:***,**,and*indicatesignificanceatthe1percentlevel,5percentleveland10percentlevel,respectively.Standarderrorsareinparentheses.

Table2:RegressionsComparingManufacturingSector’sShareofGDP

andLabourProductivity(1970-2011)DependentVariable:GrowthofManufacturingShareofGDP

GrowthLabourProductivity

0.661***(0.141)

Constant -0.023***(0.006)

Note:***,**,and*indicatesignificanceatthe1percentlevel,5percentleveland10percentlevel,respectively.Standarderrorsareinparentheses.

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Table3:RegressionsComparingManufacturingSector’sShareofGDP(1971-2011) DependentVariable:ManufacturingShareofGDP

Variable: 1 2 3 4 5 6 7G-7(excluding

Canada)ManuShare1.93***(0.20)

2.00***(0.36)

2.25***(0..18)

2.42***(0.319)

LabourProductivity

-.00***(0.00)

-.00(0.00)

-.00***(0.00)

.00(0.00)

Can-USExchangeRate

-.01(0.02)

.02(0.01)

.04***(0.01)

.04***(0.01)

Constant

-.15***(0.03)

-.23***(0.01)

.19***(0.02)

-.17***(0.07)

.22***(0.02)

-.25***(0.04)

-.29***(0.07)

Note:***,**,and*indicatesignificanceatthe1percentlevel,5percentleveland10percentlevel,respectively.Standarderrorsareinparentheses.

Table4:RegressionsComparingManufacturingSector’sShareofGDP(1971-2011) DependentVariable:GrowthofManufacturingShareofGDP

Variable: 1 2 3 4 5 6 7G-7(excludingCanada)ManuShareGrowth

.87***(0.20)

.54**(0.21)

1.10***(0.21)

.77***(0.23)

LabourProductivityGrowth

.66***(0.14)

.45***(0.15)

.67***(0.14)

.40**(0.15)

Can-USExchangeRateGrowth

.02(0.13)

.08(0.11)

.29**(0.11)

.24**(0.11)

Constant

-.01(0.01)

-.02***(0.01)

-.01*(0.01)

-.02***(0.01)

-.02***(.01)

-.01(0.01)

-.02***(0.01)

Note:***,**,and*indicatesignificanceatthe1percentlevel,5percentleveland10percentlevel,respectively.Standarderrorsareinparentheses.

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Figures:Figure1-ManufacturingtoGDPRatio,Canada,1926-2014

Figure2a–ManufacturingValueAddedasaPercentShareofTotalValueAdded,1970to2014,G-7countries

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Figure2b–ManufacturingValueAddedasaPercentShareofTotalValueAdded,1970to2014,CanadaandG-7countriesminusCanadaAverage

Figure2c–ComparisonofManufacturingValueAddedasaPercentShareofTotalValueAdded,1970to2014,CanadaandG-7countriesminusCanadaAverage

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Figure2d–GrowthofManufacturingPercentShareofTotalValueAdded,1970to2014,CanadaandG-7countriesminusCanadaAverage

Figure2e–ComparisonofGrowthofManufacturingPercentShareofTotalValueAdded,1970to2014,CanadaandG-7countriesminusCanadaAverage

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Figure3a-ManufacturingValueAddedasaPercentShareofTotalValueAddedWorldRegions,1970-2014

Figure3b-ManufacturingValueAddedasaPercentShareofTotalValueAddedCanada,

Australia&NewZealandandWorld,1970-2014

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Figure4-ManufacturingEmploymentinCanadaTotalandEmploymentShares,1976-2015

Figure5-ManufacturingValueAddedPerEmployee,1970to2008

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Figure6a:ManufacturingShareofGDPVersusManufacturingLabourProductivity(000)1958-2011

Figure6b:ManufacturingShareofGDP(1958–2014)andLabourProductivity(000s)(1958–2011)

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Figure6c:ManufacturingShareofGDPGrowthversusManufacturingLabourProductivityGrowth1958–2011

Figure6d:ManufacturingShareofGDPGrowth(1958–2014)andLabourProductivityGrowth

(1958–2011)

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Figure7a-ManufacturingShareofGDPversusExchangeRate(CAD/USD),1926-2014

Figure7b–GrowthofManufacturingShareofGDPversusGrowthofExchangeRate

(CAD/USD),1926-2014

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Figure7c–GrowthofManufacturingShareofGDPandGrowthofExchangeRate(CAD/USD),1926-2014

Figure8–ManufacturingShareofGDP,Canadaandprovinces,1961-2014

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Figure9–ManufacturingLabourProductivity,Canadaandprovinces,1958-2011