26 Mar 2010

It's Called 'Dutch Disease' But We're A Textbook Case

By Ben Eltham
This week Martin Ferguson was in China to oversee the signing of our biggest ever gas deal. As Australia becomes increasingly reliant on mineral wealth, Ben Eltham warns that it comes at a price
It's Australia's biggest ever gas deal. Worth some $60 billion, the deal between the UK's BG Group and the China National Offshore Oil Corporation will see millions of tonnes of liquefied natural gas exported from the coal mines of central Queensland.

Resources and Energy Minister Martin Ferguson was predictably pleased. In China to witness the signing of the deal, Ferguson told the ABC that "the coal seam methane industry potentially means about $50 billion in investment over time, tens of billions in exports and tens of thousands of jobs". Queensland Premier Anna Bligh was equally happy, lauding the "9500 jobs" expected to be created in Gladstone and the Surat Basin.

It's not surprising that politicians like Ferguson and Bligh are such strong proponents of expanding the mining industry. Ever since the Victorian gold rush of the 1850s, mineral wealth has been one of Australia's greatest natural endowments. The coal, iron ore, gold, uranium and natural gas we sell to overseas trading partners are a key part of the Australian economy. Equally important for our governments are the taxes and royalties levied on those resources. Mining and energy taxes contribute tens of billions to state and federal government revenues, eventually paying for roads, schools and hospital beds.

But resource wealth is not a uniform blessing. The consequences of mining booms include costs as well as benefits, and the downside of resource riches can include serious dislocations for the rest of the economy. Paradoxically, nations owning tremendous mineral wealth have often been burdened by authoritarian regimes and endemic civil strife: Nigeria's Niger delta, for instance, or the oil states of the Persian Gulf.

One of the key problems of huge resource developments is that they drive up prices, as anyone trying to rent a house in boom towns like Port Hedland can tell you. In 2008, 4 Corners sent reporter Matthew Carney to Port Hedland to report on the boom there. He found significant social issues had developed in combination with the huge minerals boom. Carney reported modest four bedroom houses renting for $1500 a week and talked to workers with high-paying jobs who were sleeping in their cars because they couldn't afford housing.

This phenomenon, spread across the entire economy, has been much studied by economists and political scientists. They call it the "Dutch disease" or the "resource curse". It refers to the tendency for mining and resource booms to drive up prices and increase the value of the local currency, damaging non-resource export industries. The "Dutch disease" term was coined in the 1970s after the Netherlands experienced significant inflation and low growth in manufacturing after the development of that country's massive North Sea oil fields. As prominent economist Jeffrey Sachs wrote in a 2001 paper that examined the history of resource-rich nations, "resource-abundant countries tended to be high-price economies and, perhaps as a consequence, these countries tended to miss out on export-led growth".

There is now mounting evidence that Australia may be suffering from the same ailment. Australia's exchange rate is at a 30-year high in real terms, and economists like Saul Eslake are warning of the consequences.

"One of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education," Eslake told the ABC's economics correspondent Stephen Long, who has been writing on this issue a lot recently.

"Although the mining industry is generating a lot of prosperity for Australians at the moment, and will do in the foreseeable future, nonetheless the mining industry can't possibly guarantee prosperity for the vast majority of Australians given that it accounts for less than 3 per cent of total employment."

BIS Shrapnel economist Frank Gelber is worried too. He spoke to Long on the ABC's PM last week. "We're running down the rest of the economy, we're specialising in minerals and this is all very nice when we've got very high minerals prices and very strong demand," Gelber cautioned. "But minerals prices don't always boom and demand isn't always strong."

Senior members of the government are aware of the issue. Finance Minister Lindsay Tanner recently warned that Australia risks becoming too dependent on natural resources. He pointed out that Australia had developed significant export industries like tourism, pharmaceuticals and higher education in the 1990s, but that these success stories were beginning to fade. Tanner nominated financial services as a potential new export growth sector, and also claimed his government's "strategy of improving infrastructure and skills and lifting our productivity very much has in mind the need to revive our performance in some of our other aspects which have been languishing". Translation: the Rudd Government is going to push ahead with industry policies in areas like innovation and manufacturing.

But who will buy from our manufacturers if the Aussie dollar remains sky-high? And can industry policy even work? Many economists, including those at the Productivity Commission, are sceptical of governments "picking winners" in particular sectors or industries. Successive Australian governments have poured billions into Australia's auto industry, only to see car makers like Mitsubishi and Ford close plants, retrench workers and wind back local operations.

Australia doesn't save the proceeds of our mining boom for a rainy day either. Mining taxes go straight into state and federal treasuries, where they are spent on public services. In contrast, Norway quarantines much of its mineral revenue in a giant sovereign wealth fund that locks up the proceeds for future generations. Norway's fund is now worth a staggering US$445 billion and owns 1 per cent of the world's equities. Australia's Future Fund is tiny in comparison.

Of course, Australia is not running out of minerals any time soon. As our Treasury Secretary Ken Henry has argued, the mining boom and the rise of Asian giants such as China and India are undoubtedly good things for the Australian economy. Henry thinks the fundamentals are so sound that Australia's new golden age could stretch until 2050 but history suggests that predictions that far into the future are next to worthless.

If commodity prices do crash, then Australia will face significant economic challenges. In the meantime, the problems we face are largely those of prosperity. Skills shortages, rising home prices and increasing environmental despoliation are ongoing costs of Australia's addiction to mineral wealth.

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Dr David Horton
Posted Friday, March 26, 2010 - 13:21

And then, Ben, there is the tiny matter of global warming - are we really going to be able to continue selling carbon to the rest of the world when that world finally understands the effects of climate change?

ben.eltham
Posted Friday, March 26, 2010 - 13:26

David, of course. Space prevented me from examining climate change as an issue, but it is certainly the case that Australia's coal and gas exports are going to lead to more global warming.

ejanea
Posted Friday, March 26, 2010 - 14:10

I suppose you mean Pt Hedland.

GeoffRussell
Posted Friday, March 26, 2010 - 14:29

It's not just the coal exports that are the problem, plenty of the geologists involved
in the boom have been trained by Ian Plimer in Adelaide, and more than
a few of these will have swallowed his pontifications ... as young students are
want to do ... and won't believe in global warming anyway.

Atheistno1
Posted Friday, March 26, 2010 - 15:12

Anyone that checks the government policy may find a clause which discusses the issue of using, "gas" as a means to reduce emissions. Just as it has taken time to create the industry we have, it will take some time to revert the system back to a viable level of satisfaction.

Australia needs local produce & trade because it is a resource rich country & it constantly faces risk of the "Dutch Disease".

mbolan
Posted Friday, March 26, 2010 - 16:09

There's also the little matter of whether there's going to be anything left for our kids in the future.

LifeMasque
Posted Friday, March 26, 2010 - 16:37

Skill shortages are a matter of Australian businesses not giving new apprenticeships a go, and easing youth unemployment.

Mineral Policy ...
Posted Friday, March 26, 2010 - 19:00

It is rare to see an article questioning the impacts of mining. Thanks Ben.

Maybe its time for Australia to move from its unquestioning 'mining is great' position and actually acknowledge that the industry does have a down side, be it the dutch disease, environmental damage, land alienation, climate change or a host of over issues.

Whilst the need for metals/energy in our society is acknowledged - it is a rare moment indeed when corporations or politicians are actually honest about the effects of mining. Preferring to present mining as Australia's own Father Christmas, all presents and no impacts.

Rationalist
Posted Friday, March 26, 2010 - 23:39

I sure am loving the mining boom, it is bringing a fantastic amount of personal wealth to me and the community in which I live.

Saffron
Posted Saturday, March 27, 2010 - 21:31

Saffron

"It’s not surprising that politicians like Ferguson and Bligh are such strong proponents of expanding the mining industry"

Let's not forget megalomaniac and Premier of WA (Barney Rubble) and his maniacal "drill baby drill!"

Jonah Bones
Posted Sunday, March 28, 2010 - 11:15

The Monthly Essay "Quarry Vision" by Guy Pearse is a great read.
In the world of rubbery figures resource companies are king.
$60 billion in revenue for the companies involved , how much is that in royalties and taxes, how much does the government contribute in transport infrastructure and town infrastructure to house the workers.
How many workers in total compared to the mainstays of the economy like the retail sector ?
How much more could be earned by valuing adding to these resources , or restricting supply to raise prices ?
Resource companies seem to be following a high supply volume low price model , for short term gain.

This user is a New Matilda supporter. jnightin
Posted Tuesday, March 30, 2010 - 22:42

Value adding is certainly worth analysis, but to extract value for society, as the Norwegians have done, a substantial resource rent tax is needed. I believe the Henry tax review recommends such a tax, but cannot also recommend that the revenues be hypothecated to a national 'superannuation' fund - the Future Fund writ large. Like Maggie Thatcher's north sea oil bonanza, we might just blow the lot. In her case it was welfare benefits to the millions she threw out of work to destroy and rebuild (so her advisors hoped, and sort-of worked) the UK economy. We will probably blow it on what should be financed by progressive income and wealth taxes, such as an inheritance tax to replace long lost death duties.
We are under-taxed and over-consume (regard consumption as a god-given right) and consequently will need the Future Fund or equivalent to look after the retirement of the generation following the end of the resources boom. But can we accumulate the fund AND overconsume??

Atheistno1
Posted Tuesday, March 30, 2010 - 23:45

jnightin, I think a rent tax is going a little bit too far. I got a letter yesterday from the Department of Housing, saying my rent has gone up for the fifth time since I've lived here & they didn't need a rent tax for that. One should start thinking outside the politicians mind set, if one wishes to be original and/or different.

A future fund was frivolously thrown away by the Rudd government & to listen to Wayne Swann on nine news at 11am yesterday, his answer to the aging population is a bigger population. It would be wise to not get caught up in their sleazy argument's, unless you have access to the same financial documentation they do.

They lie through their teeth in order to get you to vote for them.

Ken Fabos
Posted Monday, April 12, 2010 - 12:34

Ben, I'll look forward to your article that considers expansion of coal and gas mining and export with regard to it's implications for climate change. The gleeful support this boom gets from political leaders who are (or should be) fully aware of the expected impacts of climate change suggest that climate science denialism in the form of "yes it's real but it's too hard, too expensive and future costs of failure to act, no matter how large, don't really count" is thoroughly entrenched in the thinking of all our mainstream political parties.

Far from worrying about the costs and consequences of entrenching more global dependence on fossil fuels, we have 'leaders' who have no qualms about promoting a boom that's certain to go bang in people's faces - just as long as it's not within their term of office. Isn't it Minister Tony Burke who wants us exporting coal power stations as well as coal as a form of 'value adding'? And gas, which can't ever successfully replace coal and reach the required emissions targets, is being sold as well as, not instead of coal.

It does worry me that so much of our 'success' as a nation is reliant upon the vagaries of geography, the luck inherent in having natural resources to exploit and a blinkered vision that fails to consider the downsides and future costs.