The myth of manufacturing decline

Posted on July 30, 2009 in Debates, Governance Debates – FPComment – The myth of manufacturing decline
Posted: July 29, 2009.   Terence Corcoran

The 2009 recession has produced another round of hand-wringing over Canada’s declining manufacturing base. Weakness in high-profile sectors — autos, forest products, telecom — add to the already-entrenched idea that the heart of industrial Canada, its manufacturing base, has long been in the grip of a major long-term decline. Canada is being deindustrialized.

The idea of deindustrialization has been around for decades, manifested, for example, in the 1990s, with slogans about becoming a nation of hamburger flippers and call-centre operators. The howls of deindustrialization have grown in recent years, with calls for more government aid to manufacturing to offset losses suffered in the face of increasingly stiff foreign competition. “Canada’s manufacturing industry is in the midst of a uniquely terrible crisis,” Jim Stanford of the Canadian Auto Workers wrote recently.

Now along comes Statistics Canada with a new analysis that essentially debunks much if not all of the deindustrialization claims as unfounded. John Baldwin and Ryan Macdonald, with Statscan’s economic analysis division, argue in a paper published this week that Canada’s manufacturing sector has not been in major decline. Indeed, in terms of volume of output, Canadian manufacturing production as a share of the economy has not changed much in almost half a century.

A summary of the paper, “The Canadian Manufacturing Sector: Adapting to Change,” poses and answers the key question: “Is Canada deindustrializing? No.” Since 1961, Canadian manufacturing has adapted to a variety of forces and shocks — from recessions to currency moves to resource-price booms and free-trade deals — with flying colours. According to the paper, “Between 1961 and 2005 the volume of manufactured goods produced, relative to total goods and services, was approximately constant.” (See graph: ) More important, the volume of goods produced during the period actually rose.

This appears to fly in the face of all the reports and economic analyses that plot the decline in manufacturing jobs and the decline in the dollar value of manufacturing as a share of Canada’s gross domestic product (GDP). A frequently cited deindustrialization statistic, in national and international studies, is the decline of manufacturing as a share of the dollar value of GDP. In Canada, since the 1960s, manufacturing has fallen from about 26% of GDP to 16% in 2005. The proportion of Canadians working in manufacturing has also declined.

Manufacturing dollar values and employment levels, however, “do not necessarily mean that manufacturing output is in decline nor that deindustrialization is present.” The problem with jobs and dollar measures is that they do not accurately capture what’s going on in manufacturing output by volume. As productivity increased, and prices of manufacturing goods fell over the decades — good things for the economy — Canadian manufacturing continued to produce.

The Baldwin/Macdonald study also tramples on some of the great deindustrialization themes. The North American Free Trade Agreement (NAFTA), long a hobby horse of the deindustrializationists, led to changes in the composition of Canadian manufacturing, but it did not lead to a decline in output. The volume of goods produced increased during the 1990s following NAFTA’s implementation. And during the years following the bursting of the tech bubble in 2001, manufacturing growth averaged 0.4% per annum between 2002 and 2007.”

The current economic slowdown may seem like another plunge into a the abyss of deindustrialization. But recessions have come and gone in the past, and the Baldwin/Macdonald paper shows that manufacturers have an uncanny ability to adjust to changing economic circumstances. Each turn of the business cycle, somewhat tracked in the graph above, brings a decline in output. But new price levels bring out new opportunities for improved productivity that, in the end, returns Canadian manufacturing output to previous levels.

What the new Statscan paper does, above all, is put the current manufacturing downturn into perspective. Declining prices are not the curse they are made out to be. Job losses are not reliable measures of trends in actual manufacturing activity. And the constant calls for aggressive government action to support a collapsing industry are unsupportable, since the fact is that Canadian manufacturing has managed to survive the last five decades and is likely to survive the next five.

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