Tuesday, March 13, 2012

Corden on Dutch disease. The MRRT won't help

It’s the most often talked-about fix for manufacturers and other victims of the high dollar - hit the mining industry with a bigger super-profits tax to take pressure off the dollar.

It’s intuitively appealing, and it might very be worthwhile for other reasons, but a pure super-profits tax won’t take pressure off the dollar and so won’t help struggling manufacturers according a new research paper to be released this morning by the Melbourne Institute.

Max Corden is one of Australia’s leading academic economists and a specialist in so-called Dutch disease; the phenomenon by which a resources boom pushes up the currency and harms non-resource exporters and import-competing industries.

He says a mining tax could dent the dollar if it “killed the goose” and harmed mining, but not it if was a true super profits tax of the kind to come before the Senate this week.

By design a super-profits tax doesn’t remove the incentive to mine, it merely eats into excess profits.

Professor Corden quotes a Reserve Bank finding that four fifths of Australia’s mining industry may be foreign-owned. If it is, he says the extra tax will fall on mainly on offshore taxpayers. If it is brought on shore it would push the dollar still higher... If it was kept offshore in a sovereign wealth fund it would leave the dollar unchanged.

He stresses this “surprising result” does not invalidate all of the arguments for the tax, just one of them. Collecting money from foreigners for use by Australians is worthwhile in its own right.

Another proposal for dealing with Dutch disease is almost pointless. So-called piecemeal protection in which a sector such as the car industry is given a leg up would actually harm other import-competing sectors.

“Suppose extra protection is provided for the motorcar industry,” Professor Corden says. “This reduces imports of motorcars as intended. But, given capital inflows and other factors, the lower imports will lead to extra appreciation of the exchange rate.”

“The losers would thus suffer not only from the effects of the mining boom but also from the political success of their industry colleagues in extracting protectionist measures from the government.”

Professor Corden finds the best way to reduce the impact of Dutch disease is to run a budget surplus which the Reserve Bank would offset by cutting interest rates, bringing down the Australian dollar. But the surplus couldn’t be funded by a super tax on miners. It would have to be funded by broader tax increases or spending cuts that would slow economic activity more generally.

In today's Sydney Morning Herald


The Dutch Disease in Australia: Policy Options for a Three-Speed Economy - Max Corden

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