Thursday, November 3, 2011

Sovereign Wealth Fund as a Solution to the Dutch Disease?

Yesterday, Max Corden gave a public lecture on the topic "The Dutch Disease in Australia: Policy Options for a Three-Speed Economy". A working paper is available here. Corden was a pioneer in the analysis of the Dutch Disease. This is where a booming mining sector leads to an appreciation of the exchange rate and a negative impact on other tradables sectors of the economy. "Dutch" refers to the natural gas boom in the Netherlands in the 1950s. Australia is currently suffering from this Dutch Disease.

He laid out three potential policies:

1. Do nothing
2. Protect the suffering industries
3. Sovereign wealth fund invested overseas

The idea of the SWF is that the outflow of capital will put negative pressure on the exchange rate. Of course, he didn't like policy #2. But in the end Corden was ambivalent between options #1 and #3. However, he recognizes that there is a push for option 2 and, therefore, promoting an SWF might help head-off that push.

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