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Mining booms & Dutch Disease

The Corden Lecture was presented last night in Melbourne by Professor Ronald Findlay on the topic of Dutch Disease.   Professor Max Corden was in fine form and gave a gracious introduction to the speaker.  Findlay is one of the world’s leading trade thinkers. Although primarily a theorist he has recently written the monumental Power and Plenty – a history of world trade over the past 1000 years – with Kevin O’Rourke.  The talk last night naturally gave a lot of weight to Max’s own seminal work on Dutch Disease issues.

The idea of the Dutch Disease is that booming natural resource sectors (currently coal and iron ore in Australia but originally gas in Holland)  cause an appreciation of the exchange rate which impoverishes manufacturing sectors both as they seek to sell output locally and in international markets.  There are ‘gains-from-trade’ but if the boom is short-lived then manufactures can be left in an impoverished state when the boom ends with significant re-establishment costs.

An interesting proposal canvassed during the discussion after Professor Findlay’s talk was then possible role of export taxes in addressing Dutch Disease concerns.  The idea is that levying significant taxes on coal and iron ore exports will reduce the price of these outputs in local markets and raise it in international markets. This would reduce the costs of using such inputs locally – firms like Bluescope would gain advantage  and extract monopoly rents from the largely foreign-owned local mineral exporters. An export tax  then provides high effective protection for local manufacturing.

Its a nice theory but there are a host of qualifications here. Foreign multinationals with monopoly power are already presumably exploiting it  so the tax cannot be given an ‘optimal tariff’ sort of rationale – if a tax is imposed on top of a monopoly price it will raise revenue but diminish social welfare.  In so far as the tax is levied on exported output it will not be neutral and will reduce the attractiveness of foreign investment in the local mining sector. And given the barbarous outcries on behalf of foreign multinationals when a sensible neutral extra- normal  profits tax was proposed by the Henry Review one can guess at the political obstacles of introducing export taxes in the current Australian environment.

To be clear I am not advocating export tax policies but want to raise the issue and think of it further.

4 comments to Mining booms & Dutch Disease

  • Richard Green

    I’m going to be thinking about this for a while…

    I still wonder about the role a rent tax would play in a dutch disease scenario. Given it wouldn’t impact the exchange rate (unlike say this export tax) it would need transfer the rents to other parts of the economy. You could theoretically use the rents gathered to support firms made uncompetitive only by the appreciation of the currency, and whom will be competitive again should the boom pass. This way they need not be re-established at great cost if the commodity price drops and the economy is not hollowed out. But identifying these firms and differentiating them from the genuinely uncompetitive (like Australian retail) isn’t an easy task, and fraught with rent seeking opportunities.

    And that’s assuming the boom will end.

    I’m yet to think of a better approach though.

  • […] too difficult to identify who, if anyone, we can directly support, what other options are there? Harry Clarke describes an idea from Ronald Findlay to tax resource exports, thus providing an effective cross subsidy to […]

  • Robert Wiblin

    Readers may be interest in this review which raises the question of whether Dutch ‘Disease’ is really harmful for growth in the long run:

    Worth a read for those following the Australian case.

  • Dear Harryrclarke,
    Thanks, on a related note, In Australia, assets booms tend to arrive and go. In a latest speech, Reserve Financial institution Deputy Governor Ric Battellino identified five major booms through the very last two hundred years – from the gold rush of the 1850s, to our latest minerals and power boom.
    Good Job!

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