The Dutch Disease in Australia: Policy Options for a Three-Speed Economy

Abstract

This paper expounds the concept of Dutch Disease as it applies currently to Australia, noting the various gains and losses resulting from the Australian mining boom. "Dutch Disease" refers to the adverse effects through real exchange rate appreciation that such a boom can have on various export and import-competing industries. Particular firms or industries may be both gainers and losers. The distinction is made between the Booming Sector (mining), the Lagging Sector (exports not part of the Booming Sector, and import-competing goods and services), and the Non-tradable Sector. The main discussion focuses on policy options, given a floating exchange rate regime. What should the government do-if anything-to reduce or avoid this Dutch "disease"? The principal options are: Do nothing, piecemeal protectionism, and run a fiscal surplus, combined with lowering the interest rate and possibly establishing a Sovereign Wealth Fund. Piecemeal protectionism is likely to be politically popular but there are strong arguments against it. The costs of any measures that successfully moderate real appreciation of the exchange rate and thus Dutch Disease effects are noted, and may be considerable. This is "exchange rate protection". Gains to some industries are likely to be balanced by losses to others. It is shown, surprisingly, that a fiscal surplus that is financed by taxation of the profits of the Booming Sector may not significantly moderate real appreciation. The reason is that this sector is to a significant extent foreign owned. An issue is whether firms and industries can be clearly divided into those that belong to the Non-tradable Sector and those that belong to the Lagging Sector, the latter being the losers from Dutch Disease. If such a clear distinction cannot usually be made, then the case for "doing nothing" is strengthened.

Do coal-related health harms constitute a resource curse? A case study from Australia's Hunter Valley

“…Nonetheless, the Dutch disease illustrates an aspect of the causes and consequences of the resource curse in a fully industrialised economy and, like Goodman and Worth (2008) and Corden (2012), we argue that many of the characteristics of the resource curse are evident in the political economy of Australia's mining boom. Nonetheless, a recent report from Australia's Grattan Institute, of which the mining giant BHP Billiton is a founding member, claims that the negative effects that characterise the resource curse LMICs are not reflected in mining booms in high income countries (HICs) like Australia (Minifie et al, 2013).…”

“…Additionally, while Goodman and Worth (2008) and Corden (2012) took a perspective on Australia as a nation, we propose that similar effects are manifest at the local community level and that the geo-political nature of Australia's Hunter Valley, with its high concentration of coal mines and power plants in closer proximity to human habitat than elsewhere in Australia (Hunter Communities Network, 2013), provides a natural laboratory for exploring these issues.…”

“…be a mixed blessing as economic and political reliance on mining raises multiple concerns such as: the impact of the cyclical boombust nature of extractive industries on Australia's long term economic stability; the political economy of coal (ATSE, 2009;Richardson and Denniss, 2011); the negative impacts of coal on human health (Colagiuri et al, 2012) and suggestions that Australia may be suffering from a resource curse (Goodman and Worth, 2008;Corden, 2012). Despite recent signs that export revenue from Australian coal has peaked, the expansion of many extraction facilities and export infrastructure is either underway or in planning (Shearman and Selvey, 2012a;Minifie et al, 2013;Edwards, 2014).…”

Responsible mineral and energy futures: views at the nexus

“…By contrast, in the last half decade in Australia, strong base metal prices have driven a concentration on primary production, to the detriment of the local steel industry, including secondary production facilities (Corden, 2012).…”

Mining operations and corporate social responsibility: A case study of a large gold mine in regional Australia

“…Notwithstanding the fact that the exchange rate has depreciated significantly in the current year, Corden (2012) has claimed that the Australian economy is now a 'three-speed' economy and everything is not lost. Specifically, the ''fast moving part is the 'booming' sector, the slow moving or even declining part is the 'lagging' sector, and the rest -which is the largest part and where there are almost certainly net gains -is the 'non-tradeable' sector' ' (p. 290).…”