Canada's economic core shifts west

flovestock

STEPHEN GORDON
Globe and Mail Blog
Posted on Tuesday, May 24, 2011 6:31AM EDT

Discussions of the problems facing the euro zone often distinguish the ‘core’ countries of the north (eg: Germany) and the southern ‘periphery’ (eg: Spain). The recovery is well underway in the euro zone core, but the periphery is still deep in recession. If countries such as Spain still had their own currency, they would have adopted a more expansionary monetary policy. Instead, Spanish monetary policy is set by the European Central Bank, which appears to be focusing its attention on the euro zone core. It’s unlikely that the euro would be appreciating so strongly if the ECB were making policy with Spain in mind.

This story of unbalanced growth in which different regions are obliged to live with a common monetary policy is of course familiar to Canadians. While people may acknowledge that an appreciating dollar is appropriate for Alberta and other commodity exporters, the same appreciation is making life difficult for manufacturing exporters based in Ontario.

But the resemblance seems to end here. Core-periphery tensions in Europe are serious enough to question the viability of the euro, but there are no serious proposals to set up separate currencies for Alberta and Ontario. Why not?

The answer lies in the theory of optimal currency regions developed by the Canadian economist Robert Mundell, which sets out the conditions in which regions would be better served by sharing a common currency. As does Canada, the euro zone has free flows of capital and a system of transfers that redistributes income across regions. But the key condition that Canada satisfies -- and which Europe does not -- is labour mobility. It is fairly straightforward for an Ontarian to benefit from a booming Alberta economy: she can simply move to Alberta. The language and cultural barriers facing a Spaniard wishing to profit from Germany’s good economic fortune are much more formidable.

More than 300,000 Canadians -- a little less than 1 per cent of the total population -- moved from one province to another in 2009, and the graph suggests that employment opportunities are an important factor behind these inter-provincial migrations. Provinces with above-average rates of employment growth have seen net inflows, and there have been net outflows from provinces with below-average rates of employment growth.

Several analysts have noted that the last federal election consolidated a decades-old trend in which economic and now political power has shifted steadily to the West. The core-periphery distinction is still useful -- but the regions have switched roles. As long as people are willing and able to leave the periphery in search of work, the West will consolidate its position as Canada’s new economic core.