From the AFR:
Colonial First State economist James White is a lone voice. While there is almost universal agreement that the Australian economy needs the dollar to be driven down, White is warning that pursuit of depreciation will make households poorer, widen inequality and hurt the economy in the long run.
“I don’t see why the RBA wants to see the global purchasing power of Australians reduced by 20 per cent in exchange for one percentage point of extra growth,” Mr White told the Australian Financial Review.
…He says companies will not regard the weaker currency as permanent as will therefore still be reluctant to invest.
“I think moving away from mining investment is a good thing but the weak $A isn’t going to get us there,” he says.
“We are still seeing high wages in the low skilled sector [as a result of the demand for labour from mining] which has a negative consequence on productivity in the non-mining sector,” he said.
…“The structure of the economy has changed. If we were a manufacturing economy, a weak currency would help us but we are not we are a service economy. We don’t have the substitution industries to take advantage of the falling dollar,” he says.
…“I worry that if we see economic activity hasn’t been stimulated to the point RBA more comfortable with monetary policy and it has to ease further, it becomes a negative spiral which leads to further AUD weakness, to cuts to demand and cuts to economic activity.”
Some good points here. The Dutch disease is right. The slowness of industry to respond will be right too, although there is some low hanging fruit to pick in tourism, education, agriculture and limit the damage in mining. It’s also true that we’ll be shifting wealth from households to tradable sectors.
But we’ll also be improving our competitiveness. That will ensure that we begin to rebuild the tradable sectors that can sustainably increase investment and employment. The alternative is do what White implies we should: reverse the increase in the household saving rate, consume more and drive up interest rates and dollar. Fair enough but that model has it’s own problems, obviously, not least being private debt ratios and the risks that they entail.
Ironically, White is a shining example of the ideology that hollowed us in the first place.
