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


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.

Ben Eltham is New Matilda's National Affairs Correspondent.