Australia’s mining boom: “resource curse” or resource blessing
Louise Sochacki, resource geologist for Phoenix Gold Ltd., views a milling facility as bags of soil samples are laid out nearby at the company's Castle Hill gold project, west of Kalgoorlie, Australia, on Tuesday, Aug. 7, 2012.
CFP
Recently the Australian Council of Social Service released a report entitled “Poverty in Australia” as the first of regular series of factual reports authored in partnership with Anglicare Australia, St Vincent de Paul Society, and the Salvation Army that will examine poverty and income disparity in Australia. The finding’s of “Poverty in Australia” contradict the official myth of universally rising incomes during the mining export boom in Australia, and are a devastating indictment of the Labor Party government’s pro-business economic restructuring agenda. Thus, in one of the centers of the mining boom, far from universal income growth, mining profits were predominantly concentrated in the hands of the few while inequality was further exacerbated. In an article for the Financial Times this past June, FT Australia Correspondent Neil Hume commented:
“The resources boom has pushed the exchange rate to a level where many manufacturers cannot compete. Tourism, retail and education, which support more than 3 million jobs, are also struggling…Meanwhile, wages in the resources industry have soared to levels that have left some non-mining parts of the economy unable to retain or attract staff.”
Has Australia contracted the Dutch disease, the term coined after the Netherland’s sharp currency rise and consequent decline in manufacturing exports following its discovery of natural gas in 1955? Is Australia suffering from a resource curse? What will the ramifications be for trade cooperation between Australia and China? CSST’s reporters have interviewed several scholars in the field to address these concerns.
Poor long-term management
of natural resources symptomatic of Dutch disease
Simon Ville, a professor of Economics at the University of Wollongong, stated that that “there’s no doubt there are currently elements of what we would call the Dutch disease in the Australian economy—appreciation in the exchange rate, rising wages and prices, labor shortages.” He further observed, “History tells us that Australia has been here many times before, and that experience plus a commitment to investment in human capital and a robust set of institutions will carry us through to a new equilibrium.”
Philip Lawn, an associate professor at Flinders Business School, University of Flinders, told us that “natural resources are the basis of all economic activity, [and that for a country] to possess a large quantity of natural resources is a blessing.” However, many resource-rich countries run into difficulties because of the manner in which they exploit their natural resource endowment. Lawn noted that since European settlement, Australia’s economic development has been built on short-term resource exploitation, “and therefore the poor management and use of its natural resources…As much as Australia is a large country with plentiful nonrenewable resources…the sustainability of a nation’s economic activity ultimately depends on the use of renewable resources.” As such, Australia is lacking in the fundamental resources required to sustain a large economy and a large population.
Mitigating the “resource curse”
Contrary to resource-rich developing countries, a “resource curse” is not as obvious in many developed countries. The main characteristic of resource-rich developing countries is that they deplete their natural resource stock in exchange for the manufacturing exports. In his 2007 book Untapped: The Scramble for Africa’s Oil, Dr. John Ghazvinian, a senior fellow at the Center for Programs in Contemporary Writing at the University of Pennsylvania, noted that between 1970 and 1993, African countries without petroleum experienced economic growth four times faster than that of their oil-possessing counterparts, leading Ghazvyinian to conclude that those with the fossil fuel were susceptible to the Dutch disease. Australia’s mining boom seems to indicate that developed countries are also unable to avoid this plight. In the face of its “resource curse,” has Australia found the right solution?
Along these lines, Dr. Daniel Connell, a research fellow in the Environment and Development Program at Australian National University’s Crawford School of Public Policy, observed that developed countries generally have substantial investments in large-scale resource extraction projects; however, this does not necessarily lead to negative economic consequences. The key determinant is the size of an individual project relative to the overall economy. For instance, when a developed country with a mature and well-balanced economy like Norway has a major resource-extraction project, such as a mining boom, it still comprises a small part of its total economy. Developed countries also have stronger laws and regulatory mechanisms, as well as greater economic management and planning capacity to deal with the impact of primary sector profits on the rest of the economy. Nevertheless, it is still very difficult to effectively manage mineral booms. Norway’s Future Fund is a famous example of an institution created to spread profits far into the future and prevent governmental squandering in the present. Australia is attempting to introduce similar policies.
Lawn pointed out that a strong economy is one that has vibrant primary, secondary, and tertiary sectors. To this end, he suggested that Australia should be foremost using its resource in domestic manufacturing—adding value to its natural resources—instead of just exporting them overseas. If Australia adopted a more sustainable resource-use policy, lowering its extraction rate of its natural resources, and simultaneously did more to create a strong and viable secondary sector to accompany its already strong primary and tertiary sectors, the Australian dollar would likely weaken relative to other currencies, relieving competitive pressure on all sectors of the Australian economy.
Fostering Sino-Australian economic interests in the long-term
“Australia is currently the largest exporter of iron ore, bauxite (a type of aluminum ore), coal, and liquefied natural gas to China,” Lawn informed us. “Because China is still in the process of industrialization and urbanization, it requires large quantities of energy and mineral resources, of which Australia [will likely continue] to be a major provider in the future.”
Dr. Paul Burke, a research fellow of Arndt-Corden Department of Economics at Australian National University’s Crawford School of Public Policy, said cooperation between Australia and Asian countries will continue to grow stronger. Australia is fortunate to be located near the world’s most dynamic region, and fostering links with Asia is rightly a high priority. Burke further observed that Australia has been fortunate to have China as an outlet for its resources, an arrangement that helped the former mitigate the effects of the global financial crisis. Still, mining has done little to contribute to the nation’s employment rate. To better distribute profits from non-renewable resources, the legislature enacted the Minerals Resource Rent Tax this past March (passed by the Senate in March and the lower house in November 2011), which will direct mining profits toward pensions, tax breaks for small businesses, and infrastructure projects.
Lawn said that the current extraction rate is unsustainable and not in the long-term interests of either Australia or China—in Australia’s case because it will undermine its capacity to finance future import spending and cripple its future economic activity; for China, because it will ultimately compromise an important source of material and energy resources that, given the size of the Chinese economy, will be needed to sustain China’s future economic activity.
Lawn stressed that it is in the joint interests of Australia and China to find effective ways to strengthen bilateral cooperation on investment in renewable resources and development and sharing of resource-saving and pollution-reducing technologies (particularly with respect to greenhouse gas emissions). Fortunately, Lawn observed, Chinese officials have thus far been eager to explore cooperation in these key areas; Australian officials should reciprocate accordingly. “It is in the long-term interest of China and Australia to promote economic cooperation that does not undermine that natural capital of both countries; that protects wages and conditions of employment; that leads to an equitable distribution of income and wealth; and facilitates genuinely more efficient economic outcomes. This will help to increase the economic welfare of both countries,” he concluded.
Simon Ville mentioned that there are already strong elements of economic cooperation as demonstrated by the successful trading relationship. He noted that this is reinforced in Australia by increasing of connections outside the economic sphere. Australian interest in China and Chinese culture is growing rapidly, as demonstrated by the academic exchanges between the Academy of the Social Sciences in Australia (ASSA) and the Chinese Academy of Social Sciences. These developments will in turn help foster and strengthen economic partnership.
The Chinese version appeared in Chinese Social Sciences Today, No. 374. Nov.2, 2012.
Revised by Charles Horne