Parko: No such thing as Dutch disease

Yesterday Treasury Secretary, Martin Parkinson, gave a speech in the lions den of the Australian Industry Group National Forum (perhaps not lion’s den, more like cat’s basket). In it, the head of the Australian Treasury held forth on the benefits and risks of the mining boom. It was a very long speech and I won’t bore you with it all, but the core of it, given the audience of manufacturers in the room, was a discourse dismissing the effects of Dutch disease:

In light of this, it is worth reflecting on concerns about Dutch disease. In the written version of the speech I go through this issue in detail but given the time I will briefly touch on it here.

Dutch Disease concerns are overstated.

Dutch disease refers to changes in the economy caused by an appreciation in the real exchange rate arising from a commodity boom. Dutch disease got its name from the anticipated adverse effect on Dutch manufacturing following the 1960s and 1970s exploitation of North Sea gas discoveries. In light of limited gas reserves, the fear was that their temporary commodity boom would permanently harm the Dutch industrial structure — leading to long term economic underperformance, lower living standards and high unemployment.

In recent times, concerns about Dutch disease in Australia have intensified. But is the Dutch situation relevant for Australia?’

One line of concern that I recently heard relates to the size of Australia’s resource deposits. But unlike the Dutch, Australia has a great abundance of natural mineral and energy resource wealth.

But for the sake of argument, let us say that our plight was that the price of our resources plunge. What then?

Dutch disease would only be problematic to the extent that it harmed our long-term welfare because of future economic underperformance or the creation of entrenched problems like persistently high unemployment.

As Statement 4 in this year’s Budget papers went to some length to discuss, the international evidence suggests that Dutch disease does not reduce overall economic growth. This was even the case for the Dutch — as Chart 4 shows. Dutch manufacturing exports (the blue line on the left panel) declined during an intense period of energy resource extraction (the grey line on the left panel). This period ended in the early- to mid-1980s.

Subsequently, Dutch manufacturing exports rebounded, both as a share of GDP and as a share of total exports. Manufacturing exports continued its resurgence in the 20 years following the Dutch disease period — reaching nearly 40 per cent of GDP and around 70 per cent of total exports in 1997. This period was also matched by solid long term per capita GDP growth (the blue line on the right panel) — matching and, for long periods, exceeding average growth in the OECD (the grey line on the right panel).

I am becoming increasingly amused at this new line of argument about Dutch disease that not even the Dutch ever had it. A few points. First, Australian manufacturing is approaching 8% of output in its current decline, not 20% as happened to the Dutch. That seems to me to be a FAR more serious situation for any economy to combat. One of the tenets of Dutch disease is that it eliminates the skills and IP that enable a bounce back when competitiveness returns through the falling currency. At 20% of output, you’re still surely harbouring significant resources. At 8% and below, you’re not.

This tips into a second, equally important point. As Parko’s chart makes clear, the Dutch had their disease for about six years. Australia has so far had Dutch disease for probably half that time. Moreover, on Treasury’s own projections of the spectacular urbanisation in China and India, we’ll have it for most of the rest of this decade (at least).

So, I agree with Parko on one thing. Australia doesn’t have Dutch disease, it has something much worse, Australian disease.

But the Treasury Secretary isn’t finished. He proceeds with another analysis in defense of mining specialisation:

But you might ask, ‘What about the effect of commodity booms on employment? Didn’t the Dutch experience rapid rises in unemployment in the 70s?’

Again, the relevance of this line of argument for Australia is difficult to substantiate — as both aggregate unemployment and the spread of unemployment declined during mining boom mark I. The boom has also meant that regions which were previously experiencing difficulties have now benefited from strong income and employment growth.

Consider Chart 5, which shows the regional dispersion of unemployment in Australia (the vertical axis) relative to the aggregate unemployment rate (the horizontal axis).

The dot on the top right hand side of the chart shows that, for September quarter 1998, the average unemployment rate was around 8 per cent. The degree to which unemployment was dispersed evenly between the regions is measured by a regional ‘dispersion’ indicator.

Referring to the vertical axis, this indicator was around 3½ in September 1998. The bigger the number, the more unequal the distribution of unemployment.

This is not to say that outcomes for some regions have not been patchy — I’m thinking of areas like Far North Queensland. Nevertheless, the evidence is that, despite different rates of economic growth between regions and industries, the material gains of our national success are being spread broadly to people across Australia through (amongst other mechanisms) improved labour market outcomes.

We should have strong reservations about the relevance of Dutch disease for Australia. Overstating Dutch disease concerns could mean that we understate the ability and resilience of Australia’s people and businesses.

In doing so, the risk is that we end up taking actions which would squander the opportunities from global economic conditions swinging in our favour.

As I have argued before, pre-GFC, the major redistribution channels for mining income was through lower taxes and the nation’s households capacity to borrow and pump asset prices. These are now slowly reversing as the Federal government strains to towards a surplus and the global credit reversal closes in. So, Parko’s chart is now reversing too.

However, more important, and overlooked by Parko, is the point that Dutch disease is a not much of a problem until after the boom is over. As Parko shows, the Dutch manufacturing sector immediately boomed following the fall in the currency, ensuring that it preserved a current account surplus (which it’s had ever since).

In Australia’s case, however, with it’s giant private debt load and structural current account deficit, what do you think will happen if there is a sharp and enduring reversal in commodity prices fortunes. Yes, that’s right, a current account crisis with sudden and widespread unemployment. Manufacturing may bounce from its low base, but depending upon when it occurred, will increasingly be unable to help pick up the export slack. Of course, if Treasury is right and there is no end to the boom, then we’ll be fine.

My final point is to simply remind the Secretary that his predecessor put his job on the line proposing a very broad-based set of fiscal reforms that were, at heart, an attempt to remedy Dutch disease. So far as I can tell, the macro settings since have only made that attempt look more prescient.

Parko is right about one thing. Dutch and Australian diseases aren’t that alike. The risks posed by our version are more malignant.

AiG Speech

David Llewellyn-Smith
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  1. Peter Martin also reports on Dr Parko’s speech…

    “There is a certain distinction attached to premium goods that are ‘designed in Germany’ or ‘made in Japan’. Rather than being the cheapest goods, they are labels that signal quality. It is my view the same cachet can and should be attached to those premium goods made or designed in Australia.”

    This has to be one of the more hilarious statements from a senior policymaker in recent months, and there have been some doozies!

    Earth to Parko: Japan and Germany have developed their high-end manufacturing expertise over the past 60 years. They are light years ahead of where we are, and we are supposed to somehow catch up at the same time our competitiveness is being smashed by the FX rate and the manufacturing sector is in a death spiral?!

    It. Won’t. Happen.

    We are on the fast track to become a quarry, and the process has been cheered on every step of the way by Treasury, the RBA, and the economic commentariat.

    This idea that we somehow have a competitive advantage selling into China and India because of proximity is complete and utter nonsense. Japan is a helluva lot closer to China than Australia, and Australia’s east coast ports are no closer to India than Germany.

    Get out the atlas and check it out Parko!

    Seriously, is the aspirational upper middle class Chinese gonna lust after a Beemer, a Lexus or a Miele, or a Holden Ute with an American engine designed in 1973?

    • >Seriously, is the aspirational upper middle class Chinese gonna lust after a Beemer, a Lexus or a Miele, or a Holden Ute with an American engine designed in 1973?

      All made from Australian iron ore?

      Great analysis HnH.

    • “We are on the fast track to become a quarry”
      What to do here? Delete that, cut this phrase. Now what have we got left?

      We are a quarry!

      Yep that’s heaps better.

      Oh, and we can aspire to be a broad acre bread basket of a most unreliable type.

    • Dumb_Non_Economist

      As a non_economist, I just don’t GET IT!

      The problem of Australia being or becoming a quarry has been talked about for close to three decades due to the continuing decline in manufacturing, yet here we are still talking about it! Why is that? Is it the political cycle, have we become just fat, dumb and happy as house prices soared making us “rich”, which in my mind meant nothing but trouble for the future.

      • Most astute observation here thus far!

        This Quarry Australia idea has been around a long time. Our manufacturing sector has been in decline a over decades, as one would expect – the continuing evolution of free market globalization ensures this.

        Always the shift offshore to comparative advantage, cheaper manufacturing cost, cheaper labour cost, etc or the shift onshore to comparative advantage via specialisation. As long as the global growth story continues so we too will continue the shift to our comparative advantage. An irresistible force.

        Some attempt to apportion responsibility on individual sectors, to stifle profit and growth in the ‘offending’ sector, to make a particular sector ‘pay’ via impost of additional taxes. Wrong approach.

        Some may attempt to control some of these forces:

        And DNE you are right – a real problem remains with the massive foreign debt built up over the past decade or two largely funding a substantial housing bubble. Few noticed, few cared – we were all getting ‘rich’. Alas that debt remains to be paid, funds flowing to overseas creditors.

        A Canadian report on the Canadian resources boom also considered the idea of Dutch Disease, but concluded it did not exist, certainly not in any lasting way. They found that manufacturing capacity resumed and returned to previous levels (and above) some six years after structural transition. They referred to the issue as China Syndrome – the boom riding on the back of the China story, but overall a challenge an economy would prefer to face when compared with the alternative.

        Existence of Dutch Disease is much disputed.

        • Mining PR Bot talking point #17:

          Its not the mining boom, manufacturing has been in decline for decades.

          Mining PR Bot talking point #21:

          Its not the mining boom, its the credit / housing bubble.

    • I’ll go with aircraft since I know them well.

      Brazil produces the Embraer Ejet which is widely used by Virgin.

      Spain’s CASA which made military aircraft alone is now part of EADS (Airbus, Eurofighter etc).

      Italy’s Finmeccanica (military), Alenia (civ and military, Virgin getting ATRs), Agusta (QLD rescue choppers and Navy trainers), Aermacchi, Sia-Marchetti.

      Canada’s Bombardier group is the 3rd largest civ aircraft manufacturer in the world (DHC8 series, CRJ jet, Global Express).

      France numerous.

      Sweden same.


      PS Italy, Sweden and France also develop and export iconic cars (I have a Peugeot).

      PPS Great post HnH. We really are hooped when we have a puppet at treasury.

      • Austal makes aluminium hulled boats/ships.
        But the US Navy recently found out that the Austal made combat ships tend to dissolve rather fast 🙂 (Mind you, It was not entirely Austal’s fault)

      • I’m also into aviation, and there is one:

        A few started up here and moved to the US as there was no VC.

        Here is one in question with the design and prototype built here then off to the US:

        But, like you say there is NOTHING of significance in Australia.

        When it comes to science, manufacturing, and engineering we need to move overseas to work in the field, and that’s what I did.

        • We (the CSIRO) did invent WiFi and we are also working on Photonic Routers.

          Just Think NBN as the horse and cart once we crack these babies as it will be warp speed internet… download a libaryliterally in a few hours…

          I digress…

          Point being we just need to build some VC and back ourselves… I ranted about this circa 6 months back.

          Agree with all points though in spirit… but we need to celebrate our successes as well.


  2. So, I agree with Parko on one thing. Australia doesn’t have Dutch disease, it has something much worse, Australian disease.

    The Australian Ailment?

    • +1
      “we understate the ability and resilience of Australia’s people and businesses”. Sounds like the Dunkirk spirit. If Parko had watched a recent BBC program on people living on & earning their living from huge rubbish dumps he’d know that they’re about a 100 times more resilient. Given the same opportunuty, they’d run rings around us for productivity. When you’ve had it easy for too long you get soft. Don’t rely on the achievements of our former generations who did it the hard way. We’ll have to learn to get fit again and it won’t be pleasant..

      • When you’ve had it easy for too long you get soft.

        Twenty years without a recession, followed by a once-in-a-century terms-of-trade bubble, isn’t exactly character building.

        We are the fat, dumb, rich trash of Asia.

  3. “more important, and overlooked by Parko, is the point that Dutch disease is a not much of a problem until after the boom is over”

    Spot on.

    I hope his comments are not representative of the government’s attitude to what is currently happening in the Australian economy. I hope he is doing the job of talking down risks, while behind closed doors serious discussions are taking place.

    To promote economic stability, the high currency, caused partly by the mining boom, needs addressing on multiple fronts. Although perhaps markets will soon bring our dollar down to size quicker than governments could (the instability of the currency itself also causes problems).

    • I hope his comments are not representative of the government’s attitude to what is currently happening in the Australian economy.

      Sadly, I think that is a false hope. The idea that manufacturing and other trade exposed sectors should “make room” for the mining boom is a core belief amongst senior policymakers.

      You only have to read something from Bloxham (recently ex-RBA) or Peter Martin (direct line into Treasury) or any speech from Boom Boom Battellino, and you realise this is not something they’re going to abandon in a hurry. The data will have to be dire — seriously dire — for senior policymakers to change course.

    • Yes, I think the Aussie is mid-tank on the forthcoming Western recession.

      But, the net cycle will still rely on QE a weak $US and emerging market growth.

      The dollar will be back above parity in my view, until the supply response in commodity markets finally kills iron ore and the financialisers…

  4. Also, Parko supposed to have said that Australia shouldn’t consider establishing a sovereign wealth fund until it returns its budget to surplus.
    But Peter Costello said the other day that we already have a SWF called Future Fund.
    Conflating the two statements and paraphrasing Parko, I think he meant:
    We can’t have an SWF until the budget returns to surplus OR the sole purpose of the SWF is to fund my cushy and generous retirement

  5. One thing the Dutch did NOT have, during the period discussed, was inflated and uncompetitive urban land prices putting additional pressure on their business sector, increasing running costs, increasing workforce cost pressures, eroding productivity, reducing household discretionary spending (after the bubble peaks) etc etc etc.

    The Dutch manufacturing sector was wiping the floor with the British just across the channel, because Britain DID haveall these problems (and still does) and the Dutch didn’t – in spite of the fact that Holland is even more “overpopulated” than Britain.

    Australia definitely has a disease much worse than what the Dutch had in the late 1900’s.

  6. There’s nothing like a good SWF to raid when you want to fund yet another Roof Batts for All scheme. The easier it is for government to get their hands on the money, the more wasteful the scheme they come up with.

  7. Given the more pronounced effects of this phenomenon on Australia, ‘Aussie affliction’ would be a better term for it than ‘Dutch disease’

  8. I posted this link down on the mining tax thread – not the most appropriate place for it, and it may have become buried in the pile of commentary on that thread.

    So, I’ll put it in again, as it seems very relevant to what is being discussed here:

    Professor Goran Roos
    World expert in manufacturing and currently the South Australian government’s ‘Adelaide Thinker in Residence’, focussing on Manufacturing into the Future.

    • Ha, heard this on the radio yesterday and was just typing up a comment when I saw this. Great interview, definitely worth the 15 minutes.

  9. Here’s something for Houses and Holes to aspire to:

    Chavez Decrees Nationalization of Gold Industry Amid Surging Bullion Price

    By Nathan Crooks and Corina Rodriguez Pons
    Bloomberg News
    Monday, September 19, 2011

    CARACAS, Venezuela — Venezuelan President Hugo Chavez today ordered the nationalization of the gold industry and gave companies 90 days to form joint ventures with the state as he seeks to boost control over the nation’s metals producers.

    The government will hold at least 55 percent of any joint ventures, according to a decree in today’s Official Gazette. The decree sets a royalty rate of 10 percent to 13 percent and says that all Venezuelan gold production will be sold to the state.

    Chavez first announced the nationalization of the industry and plans to repatriate Venezuela’s foreign gold reserves on Aug. 17. Petroleos de Venezuela SA, the state oil company, is forming joint ventures with both state and publicly traded companies to operate mines, including Las Cristinas, which Chavez confiscated from Canada’s Crystallex International Corp.

    “The government will have a monopoly of gold production and sales,” according to the decree. “All the gold that is produced from mining operations in national territory will be turned over to the Republic.”
    Rusoro Mining Ltd., a Vancouver-based company that produces 100,000 ounces a year of gold, said on Aug. 30 that it would transfer its assets to a joint venture controlled by PDVSA, as the Caracas-based company is called.

    Venezuela produces 11 metric tons of gold a year, and illegal miners extract an additional 10 to 11 tons a year, Chavez said in May.

    Chavez, who is currently in Cuba being treated for an undisclosed type of cancer, on Sept. 17 approved $130 million of new funding for the country’s state mining holding company, Corporacion Venezolana de Guayana.

    The funds will be used to pay salaries and overtime owed to workers, many of whom have been participating in strikes in recent months, the ministry of mining and basic industries said in a statement today.

    “It’s clear that the mining industry is not producing any dividends for the state at the moment,” Chavez said on Sept. 17.

    Of 18 arbitration cases pending against Venezuela in the World Bank’s International Centre for Settlement of Investment Disputes, at least three of them are mining ventures, including Crystallex’s claim for almost $4 billion. Gold Reserve Inc., a Spokane, Washington-based mining company, is seeking $2.1 billion in damages after its Las Brisas gold and copper project was seized in May 2008.

    The South American country, in an effort to boost stalled production and take advantage of rising prices, last year relaxed restrictions on gold exports to allow some companies and joint ventures with the government to send as much as 50 percent of their output abroad.

  10. “…unlike the Dutch, Australia has a great abundance of natural mineral and energy resource wealth.”

    Parko, STOP IT… or you’ll go blind!!!

    -Max Gillies

  11. Velociraptor…….. We once made Nomads, but then it was decided we should make or own rifles (second hand production facilities), our own submarines (second hand ideas) and now our own awacs system (stand alone and nothing like our allies)…….

    Um, what was your question,lol !