Washington Consensus and Dutch Disease – yesterday saw an interesting convergence of these two ideas which are vitally important to the debate, or lack thereof about the structure of the Australian economy and the changes being wrought by mining and the high Australian dollar.
Briefly, the Washington Consensus was the set of “rules” which replaced the Bretton Woods philosophy with the rise to power of Margaret Thatcher and Ronald Reagan as they set the ground work which managed global capitalism along laissez faire lines from around 1980 to the GFC. It was synonymous with belief in both free and efficient markets, deregulation, privatization, inflation targeting and floating exchange rates.
Speaking at George Washington University April 4th the International Monetary Fund’s Managing Director, Dominique Strauss-Kahn delivered a eulogy for the Washington Consensus and its laissez fair attitudes that led us to the Global Financial Crisis. Specifically he said:
Before the crisis, we thought we knew how to manage economies pretty well. This “Washington Consensus” had a number of basic mantras. Simple rules for monetary and fiscal policy would guarantee stability. Deregulation and privatization would unleash growth and prosperity. Financial markets would channel resources to the most productive areas and police themselves effectively. And the rising tide of globalization would lift all boats.
This all came crashing down with the crisis. The Washington Consensus is now behind us. The task before us is to rebuild the foundations of stability, to make them stand the test of time, and to make the next phase of globalization work for all. This rebuilding has three core areas—a new approach to economic policies, a new approach to social cohesion, and a new approach to cooperation and multilateralism.
The importance of this speech should not be underestimated as the IMF has for decades been a proponent of the very free market ideology Strass-Kahn seems now to be disavowing.
It goes against the financial markets professional in me, but these days I too distrust the notion that markets will channel resources to the “optimal” outcome. In recent days, that has seen me writing against the moves in the AUD/USD exchange rate and the structural changes that are being wrought in the Australian economy with little, if any, debate. I’m not averse to making money by trading these moves but we should still have a broader macro debate on what’s going on in the economy.
That debate needs to take up the baton offered yesterday with the release of the latest World Trade Organisation’s (WTO) Trade Policy Review for Australia. The WTO is now clearly concerned about a hollowing out of sectors in the economy outside of mining:
In 2008/09,the exchange rate of the Australian dollar against the U.S. dollar depreciated sharply, thus boosting exports and reducing imports, but since then it has been appreciating and negatively affecting Australia’s export competitiveness.
But it’s more than that. While Australia has been insulated from global turmoil by a “virtual doubling of China’s share of total exports” there are risks to this changing structure of the economy. According to the WTO:
Australia’s growing dependence on mining may amplify the business cycle, as the economy will become more vulnerable to swings in its highly favourable terms of trade. A major economic challenge confronting Australia, with potential trade policy implications, is to formulate appropriate macroeconomic and structural policies to facilitate rather than impede adjustment to the effects of its greatly improved terms of trade owing to the mining boom and the associated appreciation of the Australian dollar. The latter is likely to reduce the competitiveness of import-competing activities and non-mining exports, unless productivity in these activities can be improved. This will have far-reaching implications for the pattern of growth and structure of the economy by necessitating a reallocation of domestic resources. Significant structural adjustment by the non-mining economy will be required.
There we have it. If Australia doesn’t have Dutch Disease it soon will have.
Crucially, the WTO goes further, warning Canberra about policy and a lack of appetite to deal with the issues facing the Australilan economy:
Although Australia is still considered one of the most competitive economies in the world, it has experienced a marked decline in multi-factor productivity growth owing mainly to special developments in agriculture, mining, electricity, gas, and water…soaring export prices and low unemployment seem to have reduced the appetite for further structural reforms, which appear to have slowed or failed to deliver during the review period, thereby possibly affecting the prospects for achieving sustained growth in the future.
I don’t at all disagree. Our competitiveness in everything but mining is under assault. But it seems to me that it’s pretty laughable to discuss boosting productivity in an effort to overcome a currency disadvantage that is as large and fast growing as the rampant Aussie.
The Aussie sits around 1.0450 as I write and the path of least resistance remains up in the short term while the USD remains weak driving the leveraged bet that is commodities and the Aussie. We truly could be seeing an unstoppable march of the AUD driving toward 1.10 and even beyond. Certainly in the current global economy there is little reason to sell Aussie yet when you look at our 5 drivers: global growth and commodities; interest rates; investor sentiment, technical indicators and, crucially, weakness in the $US. So the kinds of changes being wrought in the economy will continue, productivity boost or not.
The fact is, the currency is caught in the back wash from the world’s two largest economies actively managing their currencies lower. By doing so, they have abandoned the Washington Consensus. Yet, we’re still hanging on to the same old doctrine, despite the artificiality of the circumstance. We need a debate on the currency now.