First sign of the resource curse for the Aussies

Today the Melbourne manufacturing plant of Toyota laid off 350 workers – the cause is the high Aussie dollar. It recently traded at US$1.05.

“Toyota Australia is facing severe operating conditions resulting in unsustainable financial returns due to factors including the strong Australian currency, reduced cost competitiveness and volume decline, especially in export markets,” Toyota spokesman

This is the first sign of the resource curse that has plagued so many resource-rich countries. The strength of the exchange rate and higher interest rates is already putting pressure on some industries, particularly the tourism, manufacturing, education exports and retail industries.

Aussie minerals are a potential ‘curse’ as it is mainly dependent on the Chinese economy. So what can the Austalian government do to minimise the impact of the resource curse?

1. Like Norway, it could put export revenues into Sovereign Wealth Funds (SWF).
2. Greater subsidies into non-commodity industries
3. With greater income from commodity industries it should develop domestic demand when international demand is subdued.
4. Investment in infrastructure and training/education is essential so that the entrepreneurial environment is vibrant. Avoid inertia and use the good times to plan ahead
5. Be prudent with borrowing and avoid exposure to debt because commodity prices might be high. Just like the sub-prime crisis – using your property as security.

They might be beating India at cricket but the economy is showing the first signs of the dreaded Dutch Disease – DDD.


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