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Dutch dollars down under

Nick Bryant | 01:21 UK time, Monday, 18 April 2011

Is Australia in danger of catching the Dutch disease? Lest there be any confusion, this has nothing to do with soft drugs, canal jumping, total football, wooden footwear or cycling royals. It is the economic malady that infects a country when its resources sector becomes so very dominant that it has a distorting and damaging effect on its manufacturing. Revenues from natural resources make the national currency so strong that the country's other exports are simply too expensive to buy.

A shopper brandishes Australian dollar banknotes in Sydney

The term was first coined by The Economist in the early 1970s, which reported on the decline of Dutch manufacturing in the wake of the discovery of a large natural gas field in the 1950s. And it was the same newspaper, as The Economist prefers to think of itself, that this month asked whether Australia had become infected. It quoted a survey of manufacturing chief executives, 93% of whom warned that their exports could not compete when the Australian dollar was at parity with the US greenback. In recent weeks, a currency once mocked as the Pacific Peso has been purchasing well over a dollar.

A resources-linked currency, the strength of the Australian dollar is bonza news if you are importing goods from abroad or a tourist visiting a foreign country because your money obviously goes a lot further. It is also quite useful for mortgage holders, because the strong Australian dollar is suppressing inflation and thus reducing the pressure on the Reserve Bank of Australia to increase the cost of borrowing. Tellingly, interest rates have been on hold since November.

But the soaring Australian dollar is near disastrous for manufacturing companies which export and the Australian tourism industry, whatever the much-vaunted Oprah Effect.

It also means that the phrase "the wonder from down under", which was coined after Australia avoided recession in the aftermath of the global financial crisis, is wholly inadequate in describing the economy as a whole. Instead, Australia has a two-tier economy. A wonder economy centred on the country's quarries, and the rest.

I've written a piece here about the fortunes that are to be made in the mining states, where employees in their early twenties without a university degree can earn up to $220,000 a year.

But I'm keen to harvest your comments on the broader question of whether the mining boom has made Australia economically complacent, and whether enough money is being invested in higher education, trade apprenticeships and research and development. Right now, Australia's national prosperity is based on digging things up rather than being inventive, creative or ingenious. And crucially, its own economic strength is increasingly dependent on China's inexorable rise.

When economists predict a golden Australian era lasting until mid-century and reflect on the once-in-a-generation mining boom - or super-cycle, as it is called - the temptation always is to think China. But should Australia be trying harder to boost others sectors of the economy, ever mindful that it is in danger of going Dutch?

PS: I didn't think so at the time but the last blog, I suppose, was a textbook example of the "light the blue touch paper and step back" form of the genre. Feisty stuff, and lots of material to pick up on for a future blog. Thanks, as ever, for the comments. I'm still not sure why threads get shut down. I will find out.


  • Comment number 1.

    This makes me wonder why Swan couldn't sell the resources super profits tax. Well, kind of wonder, I mean the miners threw massive dollars at their campaign and the loudest media is vastly liberal-centric, and the parliament which approved Joe Cocker for GST wouldn't let the government pay to counterract the - basically false - information everyone was being fed.

    Interesting tho that (ING? - dont quote me) .. lets say "a bank".. has studied the economic performance of states recently and Victoria was 3rd behind WA (obviously) and Canberra (????!!!! Politicians are a plus to the economy? I hope I dont have any investments with an organisation that decided thus..) and the Vic output was based on construction & housing.

    And yeah.. I still say an RSPT is a logical - and possibly even essential - policy in such circumstances. Once the dirt has been dug, all you've got left is holes. Its how you spend the stuff you get out that shapes your future.

  • Comment number 2.


    Australia has always suffered from the 'Dutch Disease', as far back as the Gold Rush of the 19th century, however, in the past, the symptoms were masked by government policy.
    Until the last quarter of the 20th century we earned foreign exchange by exporting mineral and agricultural products and protected our manufacturing industry by tariffs. The government set the exchange rate at what it considered the optimum.
    The result, of course, was a generally uncompetitive maufacturing sector and a second rate industrialist class more attuned to rent-seeking than enterprise.
    In Australia's case, it's not so much an outbreak of the 'Dutch Disease', but an acute phase--sooner or later, as Donald Horne predicted, the country's luck will run out.
    Horne quoted a French economist in the 1960s as characterising Australia as "an idiot that keeps winning the lottery"-little has changed,apart from the idiots running the nation.

    Given the current political climate, a return to fixed exchange and tariffs seem highly unlikely.

    What we need is --

    (1) a sovereign wealth fund on the Norwegian model, to capture some of the revenue earned from mineral exports.
    (2) indicative economic planning that ignores neo-liberal fantasies.

    I'm extremely pessimistic as to the likelihood of either of the policies ever being implemented. As Camo pointed out with the super profits debacle, big capital (and its Coalition supporters) will try to sabotage any attempts at more prudential economic policies.
    Given the irresponsibilty of the Coalition and the ineptitude of the current 'Labor' government, the best hope for the country's economic future is an end to the mining boom.

  • Comment number 3.

    What's a uni degree got to do with how much money you can make?

    I'm 21 and from the Illawarra. Basically been looking for an apprenticeship for years, but nothing going in this region. What I've come to realise, the hard way, is that you go to where the work is. You adapt.

    I don't see what the big worry is about this whole two-speed economy thing. If digging up stuff makes a lot of money, then carry on. When we've run out, then everyone will just go back home and work on making stuff and inventing things. Basically, whatever jobs need doing.

    I don't pretend to know a lot about this stuff, but I imagine that a century ago when everyone wanted our wool, the shearers were making a killing whilst the other industries were crying foul.

    So, yeah. When all this mining boom ends, people will get over it and move onto other stuff. Good times.

  • Comment number 4.

    I generally agree with Treaclebeak's sentiments, watching labors ineptitude is truly getting painful, as they attempt to compromise with political and business entities who are diametrically opposed and there by making no-one happy, accomplishing little and dumping tax-payers with the bill "compensation payments" aside, unfortunately the Liberals and their "Free market solves all" mantra doesn't inspire confidence either, you get the impression they want to open the doors to big miners and say welcome take what you like and don't mind the mess we'll clean that up for you.

    The whole things too depressing where is the vision? We have an excellent opportunity (in the medium term) to invest in large infrastructure projects that's largely going to waste. I'd escpecially like to see a sovereign wealth fund. I'm not very optimistic, when short term political points (not to mention greed) are all that matter there is little will from the politicians to commit to unpopular agendas.

    As to the Dutch disease no doubt once its clear there's only empty holes left, we'll see an 11th hour scramble to invest in manufacturing and R&D projects. Followed by a few years of recession as we slowly purge the economy of its addiction to mining profits.

  • Comment number 5.

    Nick's "Dutch Disease" blog points directly towards the logic and necessity of reform such as the RSPT, and as Treaclebeak says "a sovereign wealth fund on the Norwegian model".
    Not only to build the infrastructure so essential to the continuing growth and strength of Australia, but to make sure as Nick says "enough money is being invested in higher education, trade apprenticeships and research and development".
    I have also suggested in previous posts in Nick's blogs that some of the revenue gained from the RSPT should be used to fund start-up miners, perhaps in 50-50 ventures with the Commonwealth to prospect for and mine the "new metals" such as rare earths.
    Yet I also believe Australian manufacturing, if I can use that term in general, needs to be producing a whole new array of products that are relevant to world markets today.
    I saw recently that Ford Australia is laying off workers because "big cars are not selling like they used to".
    I mean really...wasn't that obvious 20 years ago?
    Where are, for example, the seven seater family cars that Asian markets are buying by the millions?
    Of course, the car manufacturers in Australia are multi-national conglomerates...why should General Motors market Holdens in Asia when they have South Korean sourced "Chevrolets"?
    Isn't the marketing positioning of Australian cars obvious..."We build them tough in Australia because we have to!"
    Again, why not use some of the revenue from the RSPT to provide seed capital for new and promising Australian manufacturing innovations?
    I am so tired of the current Coalition's attacks on long range new reforms such as the RSPT, Carbon Pricing and the NBN.
    On the NBN, I have a question for all those proponents of "wireless" internet connection including Malcolm wireless secure enough for banking and personal data transactions?

  • Comment number 6.

    Let's not be shy about this Australia is a 'one trick pony' economy which will always leave you exposed . When/if/as China's economy overheats it's going to be messy for Australia and the party will well and truly be over. It would take national leaders of true vision and authority to steer the nation towards a balanced economy.
    Spot on Nick about the domestic tourism industry - it's so tempting for Aussies to go overseas and spend the strong Dollar and so expensive for visitors (especially from Europe/the States and Japan) to visit.

  • Comment number 7.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 8.

    A strong dollar is a problem if you're making stuff that China also makes - especially when China is keeping the RMB artificially low. Australia should be investing profits from minerals in stuff that we do much better than developing/dodgy places like China - like medical research. Instead, we're cutting research by hundreds of millions of dollars. How short sighted.

  • Comment number 9.

    I agree with Mick, very short sighted. It has been leaked that $400 million is going to be slashed from the National Health and Medical Research Council (the major research funding body) budget over the next three years. Currently they invest $700 million per year so this is big cut in funding to a sector that has provided Australia with many successes that benefit so many. For example Fiona Stanley identified the importance of a mother’s folic acid intake in preventing serious birth defects such as spina bifida; Ian Frazer’s development of the Gardasil vaccine, which protects against the cervical cancer-causing human papilloma virus (HPV). And there are many many more research success stories. Right now the scientists (normally a quiet bunch) are standing up, with rallies around the country and a campaign going to protest against these cuts. Instead of investing in research the government choose to investing billions in fast internet for Australia. Saving lives and improving the quality of life for sick people is important but Julia Gillard doesn't seem to think so. VERY short sighted.


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