Apr 4, 2012

Australia Should Learn from Brazil in Fighting the Resource Curse

Australia continues to suffer from the "Dutch disease" with export revenues from the resource extraction industries pushing up the value of the local currency and thereby making manufacturing and the services (such as tourism) uncompetitive. This is a theme we have discussed before - see for example Australia's Two Speed Economy. The situation continues worsening, with an anticipated return to trade surplus failing to materialise in the Feb trade data released today (deficit of AUD -480mm, relative to consensus for a surplus of  AUD 1.1bn).

It should be quite clear that the strong currency is hurting many non-resource sectors of the economy. Yet other than including in their Monetary Policy press release a boilerplate statement to the effect
that the AUD is somewhat overvalued, the RBA has not attempted to address the situation in any way. Stevens just says

The exchange rate has remained high over recent months, even though the terms of trade have declined somewhat.
Brazil is also a large exporter of natural resources (also mainly to China, a fellow member of the BRICS block) and has been suffering from a similar appreciation of its currency and its detrimental results on manufacturing. The only difference is that Brazil is proactively trying to level the internal playing field. As Reuters reported yesterday in Brazil tax cuts, credits throw lifeline to industry :

The government said it will cut payroll taxes to spur hiring in sectors as varied as textiles and plastics to the automotive industry... and inject 45 billion reais ($24.6 billion) into the coffers of state development bank BNDES, which provides subsidized loans for Brazilian companies
This is in addition to having aggressively cut rates from 12.5% in Jul 2011, to 9.75% now and intervened in the foreign exchange market to weaken the Real. There are clearly many differences between the economies of the two countries, but Australia can definitely take a page of Brazil's book in rebalancing the economy away from resource extraction and over-dependence on China.

(For other WhatIf Economics posts, click here)

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