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right wing economics « Previous | |Next »
December 29, 2010

Tony Makin in Dutch disease no excuse for poor productivity in The Australian says that the Australian economy is exhibiting worsening symptoms of a phenomenon known internationally as the Dutch disease. Makin is referring to what is also known as the Gregory Thesis.

MoirApolitcal xmas .jpg

Makin says that by contributing to the high Australian dollar, the booming mining and resources sector here continues to squeeze profitability in non-mining sectors. The macro-economic gains from a sudden expansion of commodity production for export are partially offset by costs borne by traditional industries elsewhere in the economy.

Thus the appreciation makes imports cheaper and hurts the competitiveness of the import-competing sector (often manufacturing and services and farmers if they are 'price takers' on world markets). Therefore, the export boom in one sector, 'crowds out' the other sectors via the appreciation.

Makin, who is a professor of economics at Griffith University, states that:

Between 2000 to just before the GFC downturn in late 2008, when commodity prices surged, Australia's average annual GDP growth rate was 3.3 per cent.This was below the economy's 3.6 per cent average growth rate during the past half century, a long-run rate that mainly reflects growth surges in two intervals: the 60s and the economic reform era from the mid-80s through to the end of the 90s...In other words, economic growth this decade has actually been lower than the long-term average, at the same time as export commodity prices have been well above their long-term average.

The reason for this subnormal growth he says is has been the sharp productivity slowdown that has occurred since the turn of the century. The mining boom has not compensated for this poor productivity performance and is in no way an excuse for suspending economic reform efforts.

Makin says that genuine productivity-enhancing reform remains as important as ever for restoring economic growth to at least its long-term average rate. Now the main cause of increased productivity is working smarter, or being cleverer. It is crucial that effective measures be adopted to ensure that the revenues from the project are spent in ways that produce direct benefits for the Australian population as a whole, and not just those in the mining sector.

This refers to technological change, organisational change, industry restructuring and resource reallocation, as well as economies of scale and scope. Over time, other factors such as research and development and innovative effort, the development of human capital through education, and incentives from stronger competition promote the search for productivity improvements and the ability to achieve them.

What does Makin suggest? Surprisingly none of the above. He focuses on exchange rate over-evaluation ---what is hindering output in the non-mining sector is an overvalued currency. He says:

the most obvious macro-economic antidote for exchange rate overvaluation is a drastic cut in government spending that would take pressure off interest rates. A spending cut in next year's budget of the same order as the 2008-09 squander in response to the GFC might be a start ... Public spending cuts could be accompanied by measures that boost the intake of labour and capital from abroad ... Increased immigration would augment the labour force, and further liberalisation of foreign investment policy would facilitate faster capital accumulation

So the government intervention to counter the global financial crisis was a squander and the proper economic policy is the slash and burn of austerity economics. How does this IPA-style economic policy increase productivity? Makin makes no argument that it does.

Presumably, it is increased capital flows into Australia does, as well as cheaper labour from abroad.

| Posted by Gary Sauer-Thompson at 1:03 PM | | Comments (3)
Comments

Comments

There doesn't seem to be a column headed Human Cost on Makin's balance sheet. Or one for Electoral Cost either.

There never is with them, Lyn.
They see us as subjects, not fellow citizens.
The economy is not something that benefits a community of cooperative, conscious and interactive equals and collaborators, engaged in a common project.
It only exists for those self-appointed "guardians" who think the rest exist for their exclusive convenience.

the mining industry wants a lot more 457 visas.