We just discussed Australia as a candidate for being the latest housing bubble candidate. And we have previously discussed the curses of the Dutch Disease in Argentina and the Soviet Collapse (part1, part2). The Dutch Disease is when a countries commodity has an commodity export that is so large that it begins to dominate the country economies. It’s countries money goes up in value, making imports cheaper, but its own exports more expensive. It tends to injure not only other export businesses, but also businesses working within the local market that will have to compete with the cheap imports.
Peter Smith, Financial Times, 24 August 2011 (ht: MR) Note that FT website links do not always work well- using their search box and the article title will often get you where you need to go.
[T]he breakneck expansion – and an accompanying surge in the Australian dollar, seen in world financial markets as a proxy for the commodities boom – has forced painful structural change on the non-mining parts of Australia and led to a fierce debate about the “dark side” of the [iron ore] boom. Paul Cleary, author of the recently published Too Much Luck: The Mining Boom and Australia’s Future, says it is irreversibly changing the country – and not necessarily for the better.
“Surging demand for our dirt and gas has revived the euphoria of the ‘rush that never ended’,” says Mr Cleary. “But unless we manage this extraordinary boom more effectively, our good fortune will curse future generations.” …
The [iron ore] boom has also exposed the mixed blessing of Australia’s China addiction. The Asian powerhouse’s insatiable demand for iron ore has made it Australia’s dominant trading partner, accounting for 26 per cent of all exports. But in the words of Saul Eslake at the Grattan Institute, a Melbourne think-tank, no other nation in the developed world is at greater risk from a China slowdown.
Spurred by China, Australia may be entering a particularly dangerous resources trap known as Dutch disease, from the effects of the Netherlands’ 1960s discovery of North Sea natural gas: a surging exchange rate propelled by a commodities boom leads to other parts of the economy becoming hollowed out.
So Argentina is simultaneously hollowing out its economy through over developing an export resource, and overdeveloping its housing market through a self reinforcing bubble. Likely the bubble is helping to conceal some of the problems caused by the Dutch Disease.