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

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  • W. Max Corden

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: Do nothing, piecemeal protectionism, and establish a Sovereign Wealth Fund. The costs of any measures that successfully moderate real appreciation of the exchange rate "exchange rate protection" are noted. 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. Finally, the implications of direct intervention by the central bank in the foreign exchange market are explored, and (when combined with appropriate fiscal policy) are shown to have certain similarities with the effects of a Sovereign Wealth Fund.
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Suggested Citation

  • W. Max Corden, 2012. "Dutch Disease in Australia: Policy Options for a Three-Speed Economy," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 45(3), pages 290-304, September.
    • Handle: RePEc:bla:ausecr:v:45:y:2012:i:3:p:290-304
    DOI: j.1467-8462.2012.00685.x
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    More about this item

    JEL classification:

    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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