The Dutch Disease and Structural Adjustment – Day 4 of ACE 2012

The Dutch Disease and Structural Adjustment – Day 4 of ACE 2012

The focus of my final post will be the first session of the ACE Business Symposium, titled ‘Structural Adjustment: The Dutch Disease and Public Policy in Australia’.

The session opened with a methodical and articulate speech from Professor Max Corden of the University of Melbourne, summarising his findings in a recent paper for the Melbourne Institute[1]. He defined the term ‘Dutch Disease’ as the real appreciation in the home currency, which has both positive and negative effects, depending on the industry. In Australia, the industries suffering from the high Australian dollar include manufacturing, education and tourism, whilst the gains are mostly felt by the general populace who are enjoying higher real wages due to cheaper imports. Corden pointed out that Australia is not alone in this; Brazil and Mongolia are also currently experiencing this phenomenon due to their respective export-driven natural resource booms.

Professor Corden then set out the policy options available to government to respond to these economic circumstances. The first is the free-market approach – do nothing and let the market run its course. The second is what Corden described as ‘piecemeal protectionism’, which based on the distaste in his voice was clearly not his favourite approach. This is where the government implements protectionist measures to shore up local industries that are suffering; a very attractive proposition to politicians, but one which is counter-productive and just delays important structural adjustment in the economy. The third was government implementing tighter fiscal policy, with the argument that this will bring lower interest rates and hence a depreciation in the Australian dollar. The key point made by Professor Corden was that all of these policy options involve trade-offs. They involve the loss of jobs in once place, so that they are protected or gained in another; they involve the redistribution of wealth between firms and people. The decision on which option to take is purely based on what jobs and people we want to favour relative to others.

The next speaker was Vince Fitzgerald, Director at Allen Consulting Group. Fitzgerald started his speech with a quote from The Economist that encapsulated the essence of his speech: “to refer to a vast, valuable resource as the source of a disease sounds rather ungrateful”. He went on to describe why this is true – Australia’s real consumption wages have increased by 2.6% year-on-year from 2003 to 2011 due to higher wages and lower import prices. He acknowledged that some industries were doing it tough, including home building, retail and manufacturing. But he dismissed the idea of piecemeal protection for these industries, and argued for Professor Corden’s first policy approach: do nothing. Fitzgerald’s reasons were simple: government assistance delays rather than facilitates the necessary structural adjustment needed in the Australian economy. He argued that this type of assistance was a waste of resources, and that more focus should be on adjustment assistance, which has only received $150million in government funding over the past 5 years. Finally, Fitzgerald argued that we should see the mining boom as a “godsend” rather than a onerous burden, and avoid any policy intervention that will try to deliberately reduce the significant net gains that are flowing into the Australian economy as a result of the boom.

The final speaker was Bob Gregory, Emeritus Professor at ANU College of Business and Economics.  Gregory made two very interesting points in his speech.

The first was related to how the mining boom was currently being defined in Australian policy debate. He believes that we should not be thinking about this as a scenario of manufacturing vs mining; that this is a macro issue that is benefiting the whole economy. He showed this in one simple statistic; the income effect from the high terms of trade has added 15-17% to Australian’s take home pay since the boom started in the early 2000’s. He also argued that we must distinguish between mining construction and mining production. The mining construction boom has brought a substantial boost to macro-employment, with over 200,000 people now employed in mining construction. However, this boom will go away, with only mining production to remain. Gregory argued that mining production employs hardly anyone, and hence has little connection to the broader economy. Gregory therefore argued that the mining boom and its economic fruits will be realised much sooner than currently projected.

Other notable highlights from the final day from ACE2012 were Dr Ken Henry’s lunchtime address (great to see Henry back to his best, free from his Treasury Secretary role), and a fascinating discussion on the world economy from world-renowned economists Jagdish Bhagwati and Padma Desai.

I will also use this space to thank the organisers of the ACE2012 Conference for both their hospitality and the fantastic line-up of speakers that I enjoyed immensely over 4 days. I will now be looking forward to next year’s conference with heightened anticipation!

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