Dutch Disease is the classic economic model describing two sectors of the economy; one booming (often resources) and the other lagging (not booming) and the effects on the economy:
- The resource boom increases demand for labour and takes labour and other resources from the lagging sector.
- The Spending effect related to the extra revenue brought into the nation, increase $$ in residents pockets who spend it in the non tradeable services sector, which increases the cost of services
Australia’s economic history includes examples such as the 2000’s boom and the Cairns Gold Rush of the late 19th century. Another example is The North Sea oil in the 1970’s for the UK and Norway to the detriment of the manufacturing sector.
Dutch Disease can cause many economic issues in an economy. Natural resources are finite and become depleted and resource demand is cyclical creating volatility in the price and the human and capital resources required. Lagging industries may be dismantled to some extent when they become uncompetitive during a boom and cannot be easily reinstated.
The effects can be minimised by investing and education in the lagging sectors, reducing the revenues flowing into the country from the boom or slowing the boom. Minimisation can be achieved by taxing the booming industry on their use of these resources; the tax increase the price and slows demand and the tax revenue can be used to assist lagging industries and/or put into a sovereign fund for the benefit of current and future generations.
As Australians energy prices soar partly due to supply issues it was recently reported that the Japanese Government collected more tax revenue from their import of Australia’s LNG than our Government did on its export; this is crazy!
This may appear removed from small and medium enterprise (SME) and their owners… Though the less the tax collected from Chevron, BHP and other multinationals the more TAX they will collect from SME and associated individuals.