05/05/2011 - 00:00

Dutch develop resistance to their ‘disease’

05/05/2011 - 00:00

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Shouldn’t governments be saving more if we’re to avoid Dutch Disease?

Dutch develop resistance to their ‘disease’

THE nation that we call the Netherlands is responsible for two events that are often talked about as the classic examples of certain phenomena in economics.

The first goes way back to the 1600s, when the prices for tulip bulbs, for which the Netherlands remains famous, escalated beyond the wildest dreams of anyone selling them, before collapsing back to more realistic levels.

This so-called tulip mania is regarded as the first significantly documented example of a boom and bust, something near and dear to Western Australians who have learned to live with this cycle as part of being a commodities-linked economy.

The second is getting a lot more airplay these days; it’s called Dutch Disease and, in simplistic terms, refers to the negative impacts on the rest of the economy when one sector – usually natural resources – runs hot and prices out other sectors.

This phenomenon was named in the late 1970s by The Economist magazine to describe the perceived impact of the suddenly energy rich Netherlands on the rest of the nation’s economy. The rising value of gas apparently pushed up the value of the Dutch guilder to a point where other products became uncompetitive.

The Dutch Disease is being used to describe what is taking place in Australia as our currency climbs to historic highs.

While I’m not an economist or an expert on all things Dutch, I do know that the ‘disease’ has not irrevocably destroyed that country’s economy.

Today, the Netherlands sits very close to Australia on all number of measures, whether it is pure economic benchmarks like GDP per capita or more subjective measures such as the Human Development Index. In the Happy Planet Index from 2009, the Netherlands was miles ahead of us – then again, so were the Egyptians and Tunisians (who this year revolted against their oppressive government), so maybe that’s not the best measure.

The Netherlands economy is one that is heavily biased towards services, which represent about 70 per cent of GDP. Such a service weighting is often regarded as the domain of the intellectually rich, the so-called knowledge economy we all should be striving for. And those poor old diseased Dutch have it already.

So next time someone raises the spectre of Dutch Disease and how it’s going to cripple our economy, take a moment to think about the nation where the actual case study occurred and consider whether what took place in the 1970s remains in context more than a decade into the 21st century.

It is possible the drama of sudden oil wealth coincided with other global and local issues, which caused the Netherlands to experience traumatically something that may well have occurred anyway, albeit more slowly.

Like the analogy of cooking a frog, the end result is the same for the amphibian whether the temperature of the water is raised ever so slowly or if it is thrust in at boiling point.

There is an argument that the economic shock of big gas finds at a time of skyrocketing oil prices in the early 1970s hit the economy harder than most because it was a welfare-oriented state.

It took until the 1990s to conduct reforms that Britain, which had a similar-if-diluted effect from its own North Sea oil, had undertaken successfully a decade earlier. That was called Thatcherism.

Whether or not Dutch Disease is replicable in Australia is questionable, but the issue is relevant because it has been used to support the idea of syphoning off wealth from the current commodities boom into some form of sovereign wealth fund for the future.

Consistently, Norway is highlighted as a good example of this kind of thinking because it has created a big sovereign wealth fund from its North Sea oil tenements. To be fair Norway does sit above Australia on most measures I found but, generally, only just. In the Human Development Index, a measure that includes all manner of nice things like income equality, life span and standard of living, Norway is number one. But Australia is number two, which suggests we might be getting a few things right, too.

While the sovereign wealth fund is merely raised as a pretext to add another layer of taxation on the resources sector, there is no doubt that some of the Norwegian concept could be used here, whether or not it is to battle Dutch Disease.

The sovereign wealth fund is, in effect, simply delaying spending the profits of the nation’s endeavours until another time – usually a future generation that we all worry might be left with nothing by our nasty consumerism.

In the end, though, this style of investment is simply another form of saving.

We are already saving enormous wealth from resources, especially the private sector, the wealth of which has risen via investment (in property and equities) and better-paid jobs. Admittedly, the private sector was spending a lot of its wealth until the GFC dampened our enthusiasm for retail therapy.

But government hasn’t been so shrewd. It has to pay for votes to keep it in office, so it mainly spends the 30 per cent share of resources-related profits it already receives through taxes on corporations – not to mention what it earns though taxes on employees, many of whom have higher-paid jobs and therefore pay more tax.

During the GFC it went one better and spent more than it receives, splurging the surpluses built up over several years.

Despite the nanny state view that we are all irresponsible spendthrifts, the evidence would suggest that individuals, who have to think of a lifetime and consider the future of their own families, have more propensity to save than governments which have short life cycles in a democratic setting.

So if saving is one answer to avoid Dutch Disease, shouldn’t we be encouraging individuals to save more of what they earn and for governments to save something of what they already get?

This would seem a more sensible approach to me than adding further taxes, which reduces the income of local people as well as foreign investors, to raise more money for a government to spend unwisely.

• markpownall@wabn.com.au

 

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