It's a classic case of Dutch Disease, discussed with economist Steve Keen on a BTalk podcast this week. When the Netherlands started exporting North Sea oil in the 1960s the influx of foreign money pushed their exchange rates up, making all non-oil products far less competitive. The same thing happened in the UK in the 1970s, driving the country into recession. Some might argue that it's never fully recovered.
So, is it happening here? Exports last year totalled AU$231 billion. They have more than doubled in the last decade --- a combination of inflation and the resources boom. US exports over the same period grew by just 70 percent.
The influx of foreign money is happening in a big way and, just like in Holland and the UK, it's mineral exports that are creating this situation. Last year 62 percent of our export earnings came from minerals; ten years ago it was just 40 percent. Over this time there was more than a threefold increase in the earnings from mineral exports.
The strength of the Aussie dollar, of course, inflates the value of these exports. If we translate the value of exports into US dollar values, then mineral exports have doubled (not trebled). That doesn't seem quite so extreme.
The US$ comparison also helps us see the impact this is all having on our manufacturing industry. As the chart shows, manufacturing exports in US dollars are where they were back in the nineties --- so they've slipped markedly in real terms. In other words, overseas they're buying less of what we have to sell because it's just too expensive. Over the same time the value of imports has basically trebled so we can assume demand for domestic goods is also on the wane because we can buy the same stuff cheaper overseas.
The phenomenon has not gone unnoticed in Treasury circles. Dr David Gruen, the executive director of their Macroeconomic Unit, raised the spectre of Dutch Disease in a presentation to CEDA (the Committee for Economic Development of Australia) in February this year. So it's got the attention of the people who look after the economy, but what can they do about it? In the BTalk podcast, Steve Keen suggests the only answer is to introduce import tariffs. He reckons we have been too eager to embrace unbridled free trade. That'll help domestic demand, but will it fix the issue of demand for exports?
- ABS Balance of Trade Data
- Historical exchange rate data - used to convert income to US Dollars
- US International Trade Figures