Dutch Disease

This was a blog we posted in 2012.  Did Australia suffer from Dutch Disease?

Dutch Disease

 

Byronvale Advisors: Posted on 10 September 2012

 

Is Australia going to suffer from ‘Dutch Disease’?

 

Evidence is starting to mount that the adverse effects of what is colloquially named Dutch Disease is going to take hold in Australia.

 

Dutch Disease is the adverse effect on an economy due to the appreciation of the currency due to a booming resources sector and the negative effect on other export sectors such as manufacturing and agriculture.

 

It is so named after the economic impact in the Netherlands in the late 1950s after the discovery of gas and oil in the North Sea.

 

A prolonged resource boom can in turn obliterate the non-boom sectors and when the resource boom ends the whole economy could be in trouble.

 

So, what is the antidote for Dutch Disease? Essentially there are three options: –

 

Option 1 – a government could subsidise particular industries or firms in the manufacturing or agricultural sectors e.g. the car industry subsidies. This protects this sector during the resource boom and means it is still around after the boom.

 

Option 2 – create a fiscal surplus with lower interest rates. This is difficult politically as it involves a government cutting spending and/or raising taxes. This fiscal contraction would lower inflation and allow the Reserve Bank to lower interest rates, which in turn would depreciate the exchange rate.

 

Option 3 – do nothing! – let the market dictate and the strong survive.

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