Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.

 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate


On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.


RSS 2.0

The 'dutch disease'

By Ian McAuley - posted Friday, 13 May 2011

One of the Budget statements which has failed to capture media attention is the analytical document "Opportunities and Challenges of an Economy in Transition" – a chapter within the major Budget Strategy and Outlook document (Budget Paper No 1).

It lacks the immediate political impact of a cut in family allowances or a change in single mothers' benefits, but it is probably the most important document in the set of budget papers, because it outlines looming economic challenges – challenges which could be very costly and disruptive if not handled with sound policies.

It confronts us with the economic environment Australia will be face in coming years and the adjustments we will have to make in our economic structure, if we are to survive as a prosperous nation.


Unsurprisingly, its focus is on the rising economic strength of India and China. It is a story of exponential growth; for example it cites a projection indicating that by 2020 Asia will have more middle class consumers than the rest of the world combined, and most of these will be in India and China.

Its analysis of the Australian economy is mainly about the mining boom, which will support that Asian growth. Here, too, the figures are extraordinary. Mining investment in the coming year will be about $76 billion, and their analysis of mining investments indicates that there are projects to the value of $380 billion already in the pipeline.

These are difficult figures to grasp. We're talking about $40 000 a household, eight National Broadband Networks or ten Melbourne-Sydney very fast trains.

The document's message is that while there will be strains on the Australian economy, some of which we are currently experiencing – a high exchange rate and labour shortages in particular – we should have no difficulty in coping with the transition.

We have coped with big transformations before, first in our agricultural sector and more recently in our manufacturing sector. Although these changes have been disruptive, each time we have come through them with a stronger and more competitive economy.

In other words, we do structural change well, and we should have no difficulty in coping with the demands of a mining boom and the need to place a price on carbon.


Critics of such a Panglossian scenario will point to the downsides. Commodity prices are volatile. Prices of iron ore and coal are more volatile than prices of steel, which, in turn, are more volatile than prices of motor cars; it's a wild ride at the start of the supply chain.

Another problem is what is called the "Dutch disease", a term describing the impact of the North Sea gas boom of the 1970s and 1980s on the Netherlands economy.

Inflows of investment capital, and subsequent commodity exports, drive up the exchange rate, to the detriment of other trade-exposed sectors, and because these trade-exposed sectors contract, the economy becomes even more dependent on commodity exports. When, in time, the commodity cycle ends and the currency returns to pre-boom levels, the economy faces a difficult task because it has lost so many of its trade-exposed industries.

  1. Pages:
  2. Page 1
  3. 2
  4. All

Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

8 posts so far.

Share this:
reddit this reddit thisbookmark with Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Ian McAuley lectures in Public Sector Finance at the University of Canberra and is a Centre for Policy Development Fellow.

Other articles by this Author

All articles by Ian McAuley

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Ian McAuley
Article Tools
Comment 8 comments
Print Printable version
Subscribe Subscribe
Email Email a friend

About Us Search Discuss Feedback Legals Privacy