U.S. Dollar could lift our economy
Abandoning loonie would triple trade, raise
incomes, American analysis suggests
OTTAWA - Canada's economy could grow by as much as 37% if it
abandoned the loonie and adopted the U.S. dollar, a new report by
two leading U.S. economists has found.
The startling results, drawn from an evaluation of bilateral
trade between nations that share a common currency, is stirring the
debate over the current flexible exchange rate regime that has seen
steady declines for the Canadian dollar over the last decade.
"By raising overall trade, currency unions also raise income,"
concludes the study by international finance experts Jeffrey Frankel
and Andrew Rose.
Their research, which estimates the effects of dollarization on
89 countries, found only a handful of countries topped Canada in
potential benefits of adopting a currency union with the United
Based on an analysis of trade among 186 countries, the study
found belonging to a currency union more than triples trade with the
other members of the zone. And for every 1% increase in trade as a
portion of the economy, per capita income climbs by at least one
third of 1% over 20 years.
Mr. Rose says that although the figures seem improbably high, the
model devised for the study has so far proved unbreakable. He has
posted the methodology and the model on the Internet to invite
critics to try it themselves.
"They seem far too large to be plausible, I'm the first one to
say that. I've worked extremely hard to reduce them, and the amazing
thing is, it is virtually impossible," he said in a telephone
"I would be more comfortable if the results were weaker."
Mr. Rose, who holds both Canadian and U.S. citizenship, said the
United States would benefit to a smaller degree from a currency
union with Canada, but the results for Canada are too dramatic to
"We estimate having the Canadian dollar acts as a serious barrier
Many defenders of the floating currency, including Paul Martin,
the Minister of Finance, argue that a floating dollar helps cushion
a country's economy, making its exports more attractive when the
value of the currency declines during economic downturns.
And although the Bank of Canada also rejects a currency union,
David Dodge, the new governor of the Bank of Canada, said this month
it could make sense if the two economies continue to become more
"In a decade or so, it may well be clear that the Canadian and
U.S. economic structures have converged sufficiently that there is
little advantage to preserving the floating rate," he told
Parliament's finance committee. "If so, we would have to give very
serious thought to dollarization."
David Laidler, an economics professor at the University of
Western Ontario, dismissed the Frankel-Rose findings.
"I don't believe these numbers," he said. "But it's a very
interesting paper. No question the work they are doing is the kind
of thing that is going to generate more research. It's
controversial, it's a new tack, so for academics it's very nice. But
I think they are being, to put it mildly, premature."
Mr. Rose is a professor of international trade at the University
of California at Berkeley. Mr. Frankel is a professor at Harvard
University's Kennedy School of Government and a former economic
advisor to the White House during Bill Clinton's presidency.
Mr. Rose agreed the results should not change Canada's policy
overnight. He is in France studying the impact of the Euro on trade
in the European economic union and said that will prove to be the
most significant test of the model over the next five years or
Don Drummond, TD Bank's chief economist, said yesterday a
Canada-U.S. currency merger in the near future would not make
"Even if Mexico came in, the U.S. would be 80% of that economic
sphere. Can you ever see the U.S. federal reserve board saying, 'we
better raise interest rates because the Canadian economy is quite
hot even though the American economy is not'? I can't."
He added: "There is a little practical problem with dollarization
that everyone seems to overlook: at what rate do you exchange the
Canadian dollar for the American dollar? If you exchange them at the
current rate, you forever and a day lock in the standard of living
loss we've got with a 65¢ dollar."
But Simon Fraser University economist Herbert Grubel, a long-time
proponent of North American-wide monetary union, said: "These
figures are possible."
The debate, he said, has already been won on the merits, but he
said the initiative will not come from the Bank of Canada or the
federal government because of the political sensitivities.
Mr. Rose acknowledges there are costs associated with a currency
merger that might make it unpalatable for Canada, despite the
promise of economic growth.
"I would assume that any move toward dollarization would make the
most sense from an economic and social perspective if they were
accompanied by a strengthening of the social safety net in Canada,"
John McCallum, a Liberal MP and economist whose research is cited
in the Rose-Frankel study, expressed doubt about the methodology
because there are no pairs of large countries with any significant
history of currency union to measure. "I'm agnostic. I don't think
the experience of these tiny little countries proves anything for
Canada," he said.
"The real evidence is going to come from the experiment with the
Euro. If they are right, we should see a tripling of trade between
France and Germany and Italy -- that would say