Dutch Disease Down Under

When the dollar hit parity we declared a celebration. Now it appears the par(i)ty has gone on too long and a mind numbing headache has taken its place. We’ve fallen ill, and its called Dutch Disease. Pray please tell me what does this mean? Why, with such fun to be had with affordable overseas travel and cheap online shopping, is a strong Aussie dollar such a bad thing?

First things first – what is Dutch Disease, and how did we catch it down under? It could be reminiscent of so many things…but no, it’s not related to clogs, dykes or the legal use of marijuana. When I first heard the term I wondered if it had anything to do with the historic Dutch economic event know as “Tulipmania” which unfolded in the seventeenth century. Huge interest in the beautiful tulip bulb led to prices becoming stratospheric – at their peak, more expensive than a house in Amsterdam. Locals, terrified at missing out, sold their business, homes, livelihoods to participate, only to lose it all when the inevitable happened – the bubble burst: ‘Tulip Crash”! And we thought bubbles’ bursting was a modern phenomenon.

So, not related to tulips, but Dutch Disease is an economic term, and was coined by The Economist in 1977, well within living memory. The concept attempts to describe the relationship between the rising exploitation of natural resources in a country, and a falling significance of its manufacturing sector. When the Netherlands was experiencing a natural gas boom following the discovery of natural gas in 1959, its currency soared in tandem, which negatively affected the attractiveness of Dutch exports. Sound familiar? Australia has fallen victim to Dutch Disease.

You may also have heard talk of Australia’s two-speed economy - maximum revs on the autobahn for mining versus country roads for other industries. As for tourism – more like the breakdown lane it appears, as the strong dollar keeps overseas visitors at bay, and we all head offshore for exotic breaks. But as we can now see, whilst fun for us, a high dollar is not good for our export industries.

Some argue that now is a chance for those industries in the slow lane to carve niches as truly competitive businesses, to focus on innovation, to seize opportunities provided by free trade agreements and create new growth areas that are less reliant on the resource sector. Achievable perhaps if we divert portion of the mining riches to invest in non-boom areas of the economy (sorry, did someone mention a Mining Tax?). Investing in innovation to build internationally competitive industries will diversify Australia’s economy and reduce risk – if and when the resource boom slows, there will be a healthy manufacturing sector to fall back on.

Who’s to know how it will eventually play out, but with a bit of imagination and political vision it seems recovery is possible. We may even emerge with a stronger disposition, a more robust immune system. No sympathy flowers required yet thanks!