The Norwegian solution to Dutch Disease

If you are unfamiliar with the term Dutch Disease then read on, because Australia has it, and needs to address it for our long term prosperity. 

The phrase Dutch disease was coined to describe the process by which a resource export industry has the capacity to undermine competitiveness of other sectors of the economy by pushing up the exchange rate and wage levels.  This process occurred in the 1960s following the a discovery of natural gas in the North Sea by the Netherlands, which subsequently pushed up the value of the guilder, and decreased the competitiveness of other Dutch export industries, particularly manufacturing.

Norway faced a similar situation upon discovering vast petroleum deposits.  To address the temporary nature of the windfall gains from resource royalties, smooth out revenue streams that would eventuate from fluctuating oil prices, and to insure against impacts on other sectors of the Norwegian economy, a Petroleum Fund was established in 1990 to invest these royalties for future prosperity.   Combined with the balance of the Norwegian Pension Fund, it is the second largest sovereign wealth fund in the world, worth almost half a trillion dollars.  Australia’s Future Fund which is a pool of budget surpluses and revenue from Telstra privatisation has a mere $66 billion under management (that’s about $100,000 per person in Norway’s fund, and $3,000 per person in our Future Fund).

The Norwegians had a significant head start, but I can’t help but wonder why our mineral royalties are not expressly invest to fund future assistance during the inevitable decline of our resource-centric economy.  In Queensland we have just had a massive revenue boom from coal royalties and stamp duties, yet are essentially broke.  We have had our credit rating downgraded, and are selling government assets as an emergency response to our financial predicament - the exact opposite of a responsible financial position.

I am not the only person to suggest such a scheme. In fact just this week Bob Brown announced that the Greens party would push for a National Resources Fund for Australia to ensure the gains from our mineral wealth are shared amongst society, and that we can make a smooth transition away from our resource dependent economy in the future.  He even cited Norway’s Fund as a working example of his proposal.

In my mind, responsible financial planning for a State of country should reflect responsible financial planning for an individual – saving in the good times for inevitable future bad times.  The Greens make a solid economic argument in favour of such a fund – one even John Howard, whose legacy is a lesson in fiscal responsibility, could endorse.