Almost every week we hear of another thousand workers being laid off from a manufacturing plant somewhere around the country.  It's easy to blame the continued effect of the global downturn we are experiencing, but could part of the blame be attributed to the booming Australia mining sector?

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In the Netherlands in the early 1960's, their currency increased markedly after the discovery of offshore natural gas reserves and led to the demise of their exporting industries.  Similarly, the continuing Australian resource boom has contributed markedly to the strong Aussie dollar.  While this is great if you are buying high heels from eBay in Great Britain, spare a thought for our manufacturing exporters, our struggling tourism industry and our international education industry to name a few.

Whilst many economists still deny the existence of Dutch Disease in Australia, are the actual and potential impacts enough to prompt monetary or fiscal policy changes to protect our manufacturing and exporting industries?

The Dutch government responded to the 1960's crises by creating a sovereign wealth fund.  This dictated that profits from the newly discovered natural gas industry remained overseas, thus mitigating the upward exchange rate pressures of repatriated profits.  These funds enabled continued investment in their overseas operations.

The solution for the Dutch was simple and effective - unfortunately it's not so straightforward in Australia.  With a small population relative to production capacity, we already rely on foreign investment the fill the gap where our domestic savings fall short.  This is evidenced by the current account deficits we experience year after year.

However, if Australia creates sovereign wealth funds we'll have even less to invest domestically, which creates the risk of driving foreign liabilities to a dangerous and unsustainable level.  Additionally, as pointed out by leading Australian Economist Professor Max Corden, many of the profits in our mining sector belong to overseas investors who would spend these funds abroad.  By putting the funds in a sovereign wealth fund which invests abroad on behalf of the government, there will be little or no effect on the exchange rate and will not reduce Dutch Disease.

Another solution would be to lower interest rates.  Corden explains that "lower interest rates would reduce capital inflow and increase outflow, and would indeed lead to some depreciation [of the Australian dollar].  But, unless there is slack in the economy, the effect would be inflationary."

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In the end - the best solution may be to do nothing: accept the change, adapt as best we can and move into other areas.  We have seen the manufacturing industry suffer from the rise of Australia's service industry, and it is now again under attack - this time from the natural resource sector.  According to RBA deputy governor Philip Lowe, "you can make a plausible case that this adjustment we're going through is going to be very long-lasting".

"If that is the case, the economy has to go through some structural adjustment, and my sense is that we're not losing the skills that will make us competitive in the medium term."

Sources:

http://theconversation.edu.au/max-corden-on-taxing-mining-tackling-dutch-disease-and-depreciating-the-dollar-5852

http://ezinearticles.com/?Dutch-Disease:-How-One-Industry-Causes-National-Economic-Downturn&id=392418

http://www.news.com.au/business/breaking-news/no-dutch-disease-in-australia-rba/story-e6frfkur-1226272942927#ixzz1vVIxFgDT

http://www.iifunds.com.au/bristlemouth/dutch-disease-infects-aussie-exportershttp://www.time.com/time/specials/2007/article/0,28804,1720049_1722077_1722426,00.html