Archives for posts with tag: dutch disease

In order to preserve my sanity I’ve shaken the habit of watching Q and A, but I gather last night’s episode featured a bit of┬ádiscussion of the mining boom and its effect on the WA and national economies.

I was reminded recently of the timelessness of the ‘resource curse’ when I came across this passage by Richard Cantillon, written in 1730, presaging the Gregory Thesis (later to become known as ‘Dutch disease’) by two and a half centuries:

If Mines of gold or silver be found in a State and considerable quantities of minerals drawn from them, the Proprietors of these Mines, the Undertakers, and all those who work there, will not fail to increase their expenses in proportion to the wealth and profit they make: they will also lend at interest the sums of money which they have over and above what they need to spend.

All this money, whether lent or spent, will enter into circulation and will not fail to raise the price of products and merchandise in all the channels of circulation which it enters. Increased money will bring about increased expenditure and this will cause an increase of Market prices in the highest years of exchange and gradually in the lowest….

Mr. Locke lays it down as a fundamental maxim that the quantity of produce and merchandise in proportion to the quantity of money serves as the regulator of Market price….but he has not considered how it does so.

If the increase of actual money comes from Mines of gold or silver in the State the Owner of these Mines, the Adventurers, the Smelters, Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume in their households more Meat, Wine, or Beer than before, will accustom themselves to wear better cloaths, finer linen, to have better furnished Houses and other choicer commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses: all this increase of expense in Meat, Wine, Wool, etc. diminishes of necessity the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The altercations of the Market, or the demand for Meat, Wine, Wool, etc. being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more Land to produce them in another year: these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others.

Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support their families on their wages. All these must diminish their expenditure in proportion to the new consumption, which will compel a large number of them to emigrate to seek a living elsewhere. The Landowners will dismiss many of them, and the rest will demand an increase of wages to enable them to live as before. It is thus, approximately, that a considerable increase of Money from the Mines increases consumption, and by diminishing the number of inhabitants entails a greater expense among those who remain.

Some things never change.

The Australian has a story today on page three about the plummeting fortunes of Australia’s tourism industry. It highlights figures that show that at the start of this decade, Australia gained $3.6b more tourist dollars from overseas than we lost from our own travels abroad. Now, Australian tourists spend $9b per year more overseas than foreign tourists spend here.

The obvious explanatory factor isn’t the efficacy of our tourism ads or the deficiencies of our tourism industry. Other things being equal, Australia hasn’t become less attractive as a travel destination over the past decade. But one very big thing has changed: the value of the Australian dollar. The article does mention the soaring exchange rate as a factor, but quickly glosses over it.

Why has the dollar soared? Soaring commodity prices have driven mining investment, pushing up demand for our currency from investors. It serves to hollow out other sectors that rely on international trade, like manufacturing, education and tourism, as our tradable goods and services become unaffordable to the rest of the world. It’s known to economists as ‘Dutch disease’.

Funnily enough, the Government and the wonks at Treasury have recognised the problem, and tried to do something about it. Their solution was a resource rent tax that would flatten out the disparities in our two-speed economy and put downward pressure on the exchange rate (particularly if some of the revenue was invested off shore). But, as we all know, the initial form of that tax was shouted down by wealthy vested interests, aided and abetted by a complicit media, led by the Australian newspaper. Now the Australian is wondering why sectors like tourism are contracting.

If the Australian is looking for reasons why our non-mining export industries are struggling, it should look back at its front pages over the past few months. Its anti-Labor and anti-resource rent tax campaign has not only sunk the more robust version of that tax, but imperilled the entire cause of economic reform.