“Dutch disease” effects could be unwinding rapidly as dollar plummets

There are indications that
the effect of “Dutch disease” in Australia is more pronounced than that in
Canada.

Dutch disease – coined by
The Economist in the 1970s to explain the Dutch manufacturing slump after a
natural gas boom – describes the boom in a country’s raw materials at the
expense of trade-exposed industries due to a stronger currency.

Bloomberg reports that both
Australia and Canada have seen raw materials booms in the last decade, which
are unwinding, and the Australian dollar is dropping faster than Canada’s.

The Aussie dollar closed at
$US 82.93 cents in New York yesterday, and this represents a decline since June
30 that is nearly twice the rate of the Canadian dollar.

“If you’re looking for
evidence of Dutch
Disease
, the shrinking of manufacturing and other sectors outside of energy
and mining, Australia has suffered a lot more than Canada over the last 15
years,” Greg Moore, a
senior currency strategist at RBC, told Bloomberg.

Whether Australia is or isn’t
affected by Dutch disease has been debated in recent years, especially in terms
of the local automotive sector’s collapse.

Dr Janine
Dixon, a
Senior Research Fellow at the Centre of Policy Studies at Victoria University, wrote last month in The Conversation that there could be positive news, especially in
Victoria, for manufacturing.

“As the boom unwinds, the
effects of Dutch Disease will also unwind,” wrote Dixon.

“A large fall in the
Australian dollar will revive the competitiveness of manufacturing, more than
compensating for the loss of the motor vehicle plants.”

Image: http://www.start-a-new-life-in-australia.com