AFR. Portrait of James White Economist at Colonial First State Asset management. For story by Pip Freebairn. Pic by Nic Walker. Date 12th October 2010.

Colonial First State economist James White says that a lower dollar will hurt households and won't necessarily spur the business investment the RBA is hoping for. Photo: Nic Walker

Colonial First State economist James White is a lone voice. While there is almost universal agreement that the Australian economy needs the dollar to be driven down, White is warning that pursuit of depreciation will make households poorer, widen inequality and hurt the economy in the long run.

“I don’t see why the RBA wants to see the global purchasing power of Australians reduced by 20 per cent in exchange for one percentage point of extra growth,” Mr White told The Australian Financial Review.

The RBA has pinned its hoped on a falling Australian dollar currency boosting corporate activity in export dependant industries such as manufacturing education and tourism, but Mr White isn’t sure the broader economy will benefit.

He says companies will not regard the weaker currency as permanent and will therefore still be reluctant to invest.

Mr White says “targeted deprecation policy” amounts to “a transfer from households through imported inflation to firms through higher profitability,” pointing to rising food and fuel costs as a result of the weaker currency.

“The bottom 50 per cent of income earners have the highest proportion of imported products in their spend,” says White.

“The data would suggest at least 80 per cent of that 50 per cent work in domestic services so they won’t benefit from the increased competitiveness but they will suffer from [things like] higher petrol prices.

“I think moving away from mining investment is a good thing but the weak $A isn’t going to get us there, it will just make Australian mining more competitive,” he says.

Mr White believes there have been fundamental changes in the composition of the economy that should force a rethink in conventional application of policy.

“The structure of the economy has changed. If we were a manufacturing economy, a weak currency would help us but we are not we are a service economy. We don’t have the substitution industries to take advantage of the falling dollar,” he says.

The Australian Financial Review