Tuesday, August 23, 2011

New Holland Disease?

Dutch Disease is the term used by economists to describe the situation now being faced by Australia (aka New Holland). The Sydney Morning Herald (link below) describes some of the effects the mining boom is having on the rest of the economy - where most people work. The demise of BlueScope is covered in a related article from The Conversation, 'Once upon a time, when Australia had a steel industry …’, which has the great line, "governments ... wedded to day trading for policies".
Dutch disease is a concept that purportedly explains the apparent relationship between the increase in exploitation of natural resources and a decline in the manufacturing sector. The claimed mechanism is that an increase in revenues from natural resources (or inflows of foreign aid) will make a given nation's currency stronger compared to that of other nations (manifest in an exchange rate), resulting in the nation's other exports becoming more expensive for other countries to buy, making the manufacturing sector less competitive.
The current situation in Australia appears to be a textbook example.

Squeezing the life out of local industry

The SMH, August 23rd

The cost of the mining boom is a high dollar and a desperate manufacturing sector.

WERE you among the multitudes who cheered last year when the mining industry managed to hobble Ken Henry's proposal for a comprehensive resources rent tax?

Did you begin to feel a strange sense of unease when, just a few weeks later, those same mining groups delivered earnings results that would have been unimaginable a couple of years earlier?

And are you becoming alarmed at the forces sweeping through the economy right now that are ravaging our ever diminishing manufacturing base?

At some stage, either demand for our minerals and energy will slow or we'll simply run out. That's the thing about natural resources; they are finite. You only get to dig them out of the ground once.

When this boom does end, you'd hate to think that as a nation we would be left with nothing more than a pile of worn out, imported flat screen televisions, a lot of empty holes in the landscape and no way of earning a crust in the future.

Yesterday's long-expected restructuring from BlueScope Steel, which will shed a quarter of its workforces at Port Kembla and Hastings, follows a similar announcement by OneSteel last week and proposed layoffs at Qantas and Westpac.

These workers aren't just units of labour, as the economics textbooks would have us believe, who can quickly transfer to the mines of Western Australia. They have families and commitments and specialised skills that make them far less mobile than machines.

The simple explanation for what is happening right now is that the resources sector is squeezing the life out of our manufacturing industries. The enormous amount of money flowing into Australia - from mineral exports and in new capital to fund new projects - has pushed our dollar and our interest rates higher.

There is a way forward for Australia but it requires bold leadership, a refusal to be held hostage to opinion polls and an end to the easy capitulation to vested interests.

The fruits from the resources boom need to be harvested and invested for our future. And they could be invested in such a way as to take the pressure off our currency, thereby maintaining the competitiveness of our manufacturers. (Remember too, Henry proposed tax cuts to industry.)

Norway has done just that with its oil revenues. It has a sovereign wealth fund with accumulated assets of more than half a trillion dollars. All of it is invested offshore, thereby helping to stabilise the amount of cash flowing into the economy. That counteracts the pressure on its currency and longer term diversifies its earnings base.

Chile has a stabilisation fund while Alaska and the Canadian province of Alberta have similar funds. That's not to mention the Gulf states that invest the proceeds of their oil revenues abroad. Countries such as Singapore and China have massive sovereign wealth funds that invest the proceeds of their trade surpluses.

But the bulk of the owners are foreign institutions. And that is where the proceeds from the biggest-ever resources boom in our history are headed.

‘Once upon a time, when Australia had a steel industry …’
The Conversation, 24th Aug.

Once upon a time, 30 years ago, when we still thought the steel industry was an endless and bottomless well for economic growth and employment, many of us also believed in industry policy, corporate responsibility to communities, and the right to stay in the same place and space as long as we wanted.

But that was 30 years ago. Shortly after, the Australian steel industry began to spin into crisis, an early home-grown casualty of the globalisation of production.
Even so, when it came, that first steel crisis was pretty shocking – postwar Australians were not yet used to major job losses, nor the allied multiplier effects that devastated towns and communities.

In those distant decades, governments were not wedded to day trading for policies – they took longer term views, knew “the market” could be as mindless and destructive as Triffids, and also took it as their responsibility to intervene so the polity, society and economy were not mere flotsam among the blips and bumps of market fluctuations.

The most important factor has been the high Australian dollar – paradoxically driven by the resources boom – which has raised the price of steel exports.

The paradox is that the second factor leading to the current steel crisis has been increased input costs – notably iron ore and coal. The drivers of the very mining boom which has raised the Australian dollar have also raised the costs of production – coal prices for example have tripled in the last decade.

The wikipedia entry notes;
There are two basic ways to reduce the threat of Dutch disease: by slowing the appreciation of the real exchange rate and by boosting the competitiveness of the manufacturing sector.

One approach is to sterilize the boom revenues, that is, not to bring all the revenues into the country all at once, and to save some of the revenues abroad in special funds and bring them in slowly. Sterilisation will reduce the spending effect. Another benefit of letting the revenues into the country slowly is that it can give a country a stable revenue stream, rather than not knowing how much revenue it will have from year to year. Also, by saving the boom revenues, a country is saving some of the revenues for future generations.
I guess the Chinese know economics and history better then we do...
We chose instead to help out poverty stricken urchins like Gina and Clive.

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