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

Author

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  • W. Max Corden

    (Department of Economics, The University of Melbourne)

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.

Suggested Citation

  • W. Max Corden, 2012. "The Dutch Disease in Australia: Policy Options for a Three-Speed Economy," Melbourne Institute Working Paper Series wp2012n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  • Handle: RePEc:iae:iaewps:wp2012n05
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    References listed on IDEAS

    as
    1. R.G. Gregory, 1976. "Some Implications Of The Growth Of The Mineral Sector," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 20(2), pages 71-91, August.
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    7. Corden, W Max & Neary, J Peter, 1982. "Booming Sector and De-Industrialisation in a Small Open Economy," Economic Journal, Royal Economic Society, vol. 92(368), pages 825-848, December.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Dutch Disease; resource boom; macroeconomic policy; exchange rate protection; sovereign wealth fund; Australia;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • Q33 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Resource Booms (Dutch Disease)

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