Don't expect a drop in the exchange rate soon
ROSS GITTINS
October 17, 2009
Soon the question on the lips of the economic cognoscenti will be: is Australia suffering from Dutch disease? Short answer: no. But that will still leave us with plenty to agonise over.
Dutch disease describes a situation where the discovery of some big mineral or energy deposit - or maybe just a surge in the world prices of resources - leads to a resources boom, a leap in mineral exports and hence a sharp appreciation in the exchange rate.
This greatly reduces the international price competitiveness of other export and import-competing industries, causing them to contract. When the boom ends, the economy is left with a decimated industrial base.
The greatest reason for the Australian dollar's strength before the global financial crisis was the resources boom. The Aussie almost always rises or falls in line with major movements in commodity prices, and our terms of trade - the prices we receive for our exports relative to the prices we pay for our imports - were at a 50-year high.
Similarly, it is likely our dollar's recent strength is explained by the realisation that the post-crisis fall in commodity prices has been limited, the continuing strength in the VOLUME of our exports, particularly to China, and the world's view that buying into the Aussie and Australian mining shares is a safe way to get a share of the action in the region of the world most likely to be prospering in the 2010s.
But if so, why wouldn't it be right to say we've got a problem with Dutch disease? It's certainly true that, up in the US90s, the exchange rate is uncomfortably high for our manufacturers, farmers, tourist operators and other ''tradeables'' industries (industries producing goods or services able to be traded internationally).
We don't have Dutch disease because that describes a situation where the resources boom soon subsides, leaving the economy marooned. In our case, the boom seems likely to run for decades because it's built on our prime position as an abundant supplier of resources to the Asian region - China, India and the rest - while those countries build the almost endless infrastructure needed to become developed economies.
So the resources boom is coming back and has decades to run. It will involve further huge expansion of our mining industry and huge growth in the volume of our mineral and energy exports.
We have a lot more investment in coal and iron ore to come, plus massive investment in liquefied petroleum gas facilities.
Treasury secretary Ken Henry said recently we were undergoing ''massive structure change'', a key cause of which was ''the re-emergence of China and India, which had reversed, in spectacular fashion, the 30-year trend decline in Australia's terms of trade''.
It had also ''exposed capacity constraints in almost all forms of economic infrastructure, attracted unprecedented inflows of foreign capital, pushed up the value of the dollar, and started raising big questions about the longer-term competitiveness of some of our non-resource-based export and import-competing businesses''.
Are you getting the message? We have entered a period of high exchange rates that could last for decades. Apart from preventing the expansion of the resources sector, there isn't a lot governments could do to stop that.
That means life is likely to be pretty tough for the rest of the tradeables sector. Those parts that can't learn to live with a permanently high exchange rate will wither on the vine.
But here's the bit that might shock you: even if there was something that could be done about the high exchange rate, the econocrats would be urging their masters NOT to do it. Why not? Because for our economy to have a much bigger mining sector will require a big transfer of labour and capital resources to the miners from other industries.
And a high exchange rate is a key mechanism by which a market economy works to bring about that change in the structure and geography of our economy.
Those industries that can't stay profitable under the high exchange rate will contract and thereby release workers and capital to be taken up by the ever-expanding mining sector.
From the perspective of the overall economy, that won't be bad, it will be good. Why? Because the economy will be shifting to the production of a more valuable combination of goods and services.
- Forums
- ASX - By Stock
- OZL
- us cash
us cash, page-88
Featured News
Add OZL (ASX) to my watchlist
Currently unlisted public company.
The Watchlist
1CG
ONE CLICK GROUP LIMITED
Mark Waller, MD
Mark Waller
MD
SPONSORED BY The Market Online