Australians Should Be Careful of Dutch Disease

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By William Pesek

Australia is on roll -- the kind of which crisis-wracked Europe, employment-challenged America and deflation-plagued Japan can only dream.

Steering around the worst of the post-Lehman Brothers crash was impressive enough. Returning Australia's national budget to surplus, as Prime Minister Julia Gillard says will happen within a few months, is nothing less than jaw-dropping in a world awash in credit downgrades and market turmoil.

Yet for all the great news, one factoid is costing some sleepless nights for Gillard and her economic team: the 44 percent surge in the Australian dollar since the end of 2008.

That's the biggest gain among more than 150 currencies tracked by Bloomberg. Fueling it is voracious demand from China, India and other developing-nation powerhouses for coal and iron ore. So is the perception that Australia's economic challenges are enviable ones in today's global environment, one that bestows a "safe haven" label on the nation of 22 million people.

The trouble is, the dollar's ascent is accelerating a hollowing out of sorts that's imperiling Australia's future. The mining industry is thriving, but other industries -- most of the nation, actually -- is struggling. This dynamic puts pressure on Australia to reinvent itself to avoid "Dutch disease," whereby the benefits of exporting natural resources lead to the neglect and atrophy of other sectors.

Gillard and her predecessor, Kevin Rudd, tried to impose resources taxes to share the benefits of the nation's mining boom more broadly. Mining companies have been remarkably successful in scuttling these efforts. Now, the risk is that Australia remains all too happy to be a mining site for China and fails to focus on a more diverse and innovative economic future.

Australia should be investing more in infrastructure, education and training. It also should review its tax system, one that encourages many of the nation's brightest and most productive people to seek jobs abroad.

Safe haven status has it benefits. Yet Australia may have too much of a good thing in its hands.

(William Pesek is a Bloomberg View columnist. Follow him on Twitter.)

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-0- May/10/2012 22:22 GMT