First day back in the Economists at Large office, so a good time to think about the year gone by and the year ahead.  In 2011 the word “fracking”, was added to the Australian vernacular.  My prediction is that 2012’s mineral-related new term will be “Dutch Disease”.

Dutch Disease refers to the adverse effects on other industries (especially manufacturing) of having a booming industry (especially minerals).  It is named after the “disease” that Dutch manufacturing caught after the discovery and export of large natural gas deposits there in 1959.  Due to the sudden increase in gas exports three things occurred:

• The exchange rate appreciated, making other exporting industries like manufacturing less competitive.
• The demand for skilled labour went up, making it more expensive to employ people in manufacturing.
• The influx of money from the gas developments fuelled demand for non-tradable goods and services, further taking labour away from exporting sectors.

I’m basing my bold, linguistic prediction on the work we did looking at coal expansion in Queensland and NSW late last year and a couple of articles in today’s Age, which suggest that some of our non-mining export industries, tourism, education and manufacturing are taking a “battering” and are “in reverse”.   The modelling of one Queensland coal mine, the China First project, quantified that mine’s effect on manufacturing and agriculture – declines in output of up to $1.2 billion and $38 million respectively.

The Australian recently published an article based on a Minerals Council submission to a senate inquiry, saying:

MINING companies have attacked the national discourse on the “patchwork” economy, declaring it flawed and confused in presenting the success of the mining industry as coming at the expense of other sectors.

I agree – its high time we replaced this confusing term “patchwork economy” with the more proper term, Dutch Disease.

Before I end this first-day-back procrastination, a less bold prediction and a new year resolution:

• I predict there will be more work for Economists at Large helping community groups assess mining proposals in 2012.
• I resolve to read up on the work of Australian economist, Max Corden, who contributed greatly to the economic literature on Dutch Disease.