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Competitiveness and currency

The Globe and Mail published an article yesterday morning called, “Why a lower loonie is (mostly) good for Canada.” It talks about the recent decline of the Canadian dollar from parity last May to roughly USD $0.92 today. But that the drop is essentially because of a rising US dollar. 

Irrespective of what’s causing the devaluation though, the article takes the tone that it’s generally good for the country:

“On net, this could be seen as a good thing because it’s making Canadian goods and services more competitive,” said Michael Devereux, a professor at the University of British Columbia’s Vancouver School of Economics.

But this viewpoint always gets me concerned. 

Canadian goods and services shouldn’t be competitive because they’re cheaper; they should be competitive because they’re the best damn good and services in the world. And so my fear with statements, like the one above, is that it almost makes us believe that a weak dollar is a prerequisite for competitiveness. It’s not.

In fact, research done by Professor Walid Hejazi at the Rotman School has shown that a weak Canadian dollar actually lowers productivity levels and creates a disincentive for innovation. Why bother to innovate when you can always get your goods and services to market at a lower cost than your competitors?

Thankfully, the outgoing Senior Deputy Governor of the Bank of Canada (and upcoming Dean of the Rotman School), Tiff Macklem, has acknowledged this perspective. In a talk at Queen’s University last January, he said:

“What should Canadian businesses do? First, don’t count on a weaker Canadian dollar. Hoping for a weaker Canadian dollar is not a business plan. A sustainable export strategy cannot rely on expectations of a more favourable exchange rate, since Canada is likely to remain an attractive investment destination.”

That sounds like good advice to me.

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