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

Warner Corden

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, 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.

Keywords: Dutch Disease; resource boom; macroeconomic policy; exchange rate protection; sovereign wealth fund; Australia (search for similar items in EconPapers)
JEL-codes: E63 F41 Q33 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2012-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (46)

Downloads: (external link)
http://melbourneinstitute.unimelb.edu.au/downloads ... series/wp2012n05.pdf (application/pdf)

Related works:
Journal Article: Dutch Disease in Australia: Policy Options for a Three-Speed Economy (2012)
Working Paper: The Dutch Disease in Australia Policy Options for a Three-Speed Economy (2012)
Working Paper: The Dutch Disease in Australia Policy Options for a Three-Speed Economy (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2012n05

Access Statistics for this paper

More papers in Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Sheri Carnegie ().