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The 'dutch disease'

By Ian McAuley - posted Friday, 13 May 2011


The Budget document anticipates this concern, and it has a section explaining how the Netherlands economy did not, in fact suffer from the "Dutch disease", or that if they did there was a quick recovery. At the height of the boom there was some contraction in the trade-exposed manufacturing sector, but as the North Sea oil boom ended, the manufacturing sector quickly recovered and went from strength to strength. If the Netherlands can manage, so can we.

But is this a fitting analogy for Australia? The Dutch economy is very closely integrated with the German economy, and even in the pre-Euro days, the Guilder and the Deutschmark tended to move together. The North Sea oil boom was effectively absorbed within the large integrated European economy, not by the Netherlands alone.

Australiais much more vulnerable, because we have no strong integration with a large economy (our economic relationships are more about dependence rather than integration), and our currency has become the plaything of commodity speculators and carry traders. Last year Australian Dollar foreign exchange transactions were $35 trillion, or about 25 years of our GDP. Perhaps Nauru may be a more fitting (and more frightening) model for Australia.

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The document's comparisons with previous industry adjustments are also a little glib. The huge adjustments of the 1980s, which saw tariff protection reduced, financial markets de-regulated, and competition policy enacted, were difficult, but the government at the time had some advantages not enjoyed by the present government.

For a start, the Hawke-Keating Government did not face such an obstructive Opposition. This was because, in large part, the Labor Government was implementing the Liberal Party's economic platform. The present Opposition has the luxury of not being bound by any clear platform, apart from a general commitment to conservatism.

Also, the mainstream media is atrociously ill-informed on economic issues; questions about economic structure don't get a run. It's always easier to run stories about who loses from structural change that the yet-to-materialize stories about who will benefit.

Second, the 1980 reforms were largely about withdrawing government from microeconomic management and giving the market more free rein. The present situation is far different, for financial instability associated with currency speculation and the carry trade is a case of market failure, as is the inadequacy of unregulated markets to account for the negative externalities of carbon dioxide.

As the recent (and ongoing) global financial crisis illustrates, finding the right policy instruments to deal with economic stabilization is difficult enough in big diversified economies; it is even harder in a small, specialized economy.

And third, as the Government points out, adjustment this time is going to depend on skills acquisition. That's inevitably a slow process. It's an easier task for governments to deregulate and reduce tariff protection than it is to develop and implement policies, which will result in people taking on skills.

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The 2011-12 Budget, with its emphasis on skills and workforce participation makes the right moves towards structural reform, but it's a difficult task. It's could make that task easier for itself, however, if it explained more clearly its economic policies.

That was another characteristic of the Hawke-Keating Government. Rather than pretending that the transition would be smooth, they acknowledged that adjustment would be painful and difficult, and in so doing they deprived the Opposition of the opportunity to run a negative campaign.

It's a leadership model the Gillard Government could well emulate, and it would force the present Opposition to engage with the community in something more sophisticated than three word slogans.

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About the Author

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

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