Return to Australia: The ANU, 1977-1986

In late 1976, Corden left Oxford to return to Australia to take up the post of Head of the Economics Department in the Research School of Pacific Studies at the ANU in Canberra. Family reasons motivated this move: his mother and Dorothy's mother were both elderly and living in Melbourne and they also felt that their daughter Jane would benefit from the move.

After his return to Australia, Corden was much engaged in public policy debates. In his position as President of the Economic Society of Australia, he became very active in the debate on wage inflation and unemployment which followed a wage explosion under the Whitlam Government in 1974-1975 and later under the Hawke Government. In his Presidential Address, he argued that, under the centralised wage determination system in Australia, the main driving force behind inflation was unions pushing for a target real wage which, in turn, led to higher unemployment.^[194] Subsequently, Corden and Dixon (1980) argued that a way out of the dilemma was to aim for an agree­ment under which unions would moderate their nominal wage demands in return for the government cutting taxes so as to maintain real after-tax wages. This argument had some impact on the so-called Accord which the unions struck with the Hawke Government in 1983.

During this period in Australia, Corden wrote what was to become one of his most influential papers dealing with the phenomenon of Dutch Disease. His interest in the topic went back to his days in Oxford when he became involved in the heated debate about the impact of the discovery of North Sea oil and gas reserves on the UK economy, notably on the tradeables sector.^[195] Corden (1981a) was his first published paper on the topic and it dealt explic­itly with the British case.

Their basic model is a variant of the Salter model with an economy produc­ing two traded goods (energy and manufacturing) and one non-traded good (services). They assume a small, open-economy framework for the traded goods; the price of the non-traded good is assumed to be flexible and deter­mined by domestic demand and supply. Two further simplifying assumptions are made: (1) trade is always in balance overall; and (2) there are no distor­tions in goods or factor markets. The paper then considers a sequence of mod­els characterised by different degrees of intersectoral factor mobility. It begins with the case of a Ricardo-Viner model in which each of the three sectors uses a single specific factor in production as well as a factor which is perfectly mobile between sectors. This particular assumption is relaxed later in the paper.

The paper highlights two key effects of a boom: (1) a resource movement effect; and (2) a spending effect. The former occurs when a booming sector (say energy) draws in mobile factors from other sectors in response to higher mar­ginal productivity of factors. The spending effect results from the higher real income due to the boom. This raises the demand for services, increasing their price and leading to a real exchange rate appreciation, the latter being the rela­tive price of traded to the non-traded good. In the Ricardo-Viner model, the boom leads to a decline in manufacturing (deindustrialisation).

Corden and Neary's study has proved to be an extremely influential paper. For both authors, it is by far their most cited paper according to Google Scholar: it records not far off 4,200 citations for it.^[196] Part of its success comes from the clever mix of methods it uses: neat diagrams in the Corden manner together with a detailed mathematical presentation of the various models and derivation of the main results by Neary. The paper is a prime example of the principle of comparative advantage being put into practice by two of the pro­fession's leading trade theorists.

Over and above the neatness of the methods used in the paper, its popular­ity owes much to the enduring nature of the topic. Booming sectors arise continually in different settings and they are not just tied to the discovery and extraction of natural resources (e.g. the financial sector in the UK). They give rise to significant resource shifts between sectors, shifts in sectoral income distribution and changes in real exchange rates. Corden and Neary's analysis remains a key reference for all those interested in the many possible impacts of a booming sector on the real economy.^[197]

Corden (1985b) was another notable output during the ANU years. It sur­veys the normative side of trade theory and updates and extends the discussion in Corden (1974) to take account of key developments since that was written.

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