It was a devastating blow for the Illawarra. The closing of blast furnace 6 at BlueScope Steel’s iconic Port Kembla steel works brings to end steel exports from Wollongong and means 1,100 job losses.
Last week it was Qantas, announcing 1,000 job cuts despite a $250 million dollar profit.
Both companies blamed the high Australian dollar and fierce overseas competition for their decisions. And what’s causing the high Australian dollar? It’s the mining boom, stupid.
All of a sudden, the so-called "Dutch Disease" has moved from an obscure topic of debate for academic economists to the forefront of Australia’s political discussion. As New Matilda readers will know, we’ve been warning of the threat of a high Aussie dollar to Australia’s export industries for some time. So has the ABC’s Stephen Long. As long ago as March last year he interviewed BIS Shrapnel’s chief economist Frank Gelber, who warned that "we’re setting ourselves up for a huge fall if at some stage we see falls in minerals prices".
The crux of the issue is of course those sky-high commodity prices. With Australia’s terms of trade (the ratio of the price of our exports to the price of our imports) at their highest levels since the gold rush of the 1850s, Australian consumers have never found it easier to buy overseas goods. The Reserve Bank’s boss Glenn Stevens has a nifty analogy. He likes to compare how many flat-screen televisions can be purchased with the proceeds from a tonne of iron ore. As Stevens put it in a speech last year, "to put it in very oversimplified terms, five years ago a ship load of iron ore was worth about the same as about 2200 flat-screen television sets."
By December last year, Stevens observed, that ship load of iron ore was worth "about 22,000 flat-screen TV sets — partly due to TV prices falling but more due to the price of iron ore rising by a factor of six".
Those terms of trade are driving up Australia’s currency, and making it desperately hard for export industries like BlueScope’s steel exports or Australia’s universities and English-language colleges to compete. The disease affects not just pure exporters, but also businesses that compete with imports, like manufacturers of solar cells for the domestic market. As Tim Colebatch observed pointedly today in The Age, the resources boom forces Australians to confront the question "does it matter to Australia if we have a steel industry or not?"
In point of fact, our key economic policymakers have already made up their minds. Their answer is no, Australia does not need to keep making steel, or cars, or anything else. The wealth of the mining boom means we can buy those things from Asia more cheaply than we can make them here.
In his speech last year, Stevens went on to argue that "the general point is that high terms of trade, all other things equal, will raise living standards, while low terms of trade will reduce them". This, in a nutshell, is the dominant view of Australia’s economic boffins. In other words: relax, the mining boom is a good thing for most of us.
The Treasury, for instance, devoted a considerable amount of space in this year’s Budget Papers to the issue of the Dutch Disease. The Treasury economists examined the economic data and literature — including of the Netherlands itself — and concluded that "there is no evidence that Dutch disease reduces overall economic growth". Yes, some sectors of the economy do suffer. But other sectors can actually piggy-back on the resources boom to improve their prospects, for instance by selling advanced mining engineering skills and technologies to other countries. "Resource sectors in advanced economies tend to be highly skilled and generate their own spillovers — stimulating other industries as well as driving opportunities for long term economic growth," Treasury wrote.
The Reserve bank agrees. As the RBA’s deputy Ric Batellino said at a conference yesterday, "people understand that basically overall the boom is good for the economy, but there’s parts of the economy that do suffer as a result of it because of the structural changes that take place."
Looked at from the perspective of economic orthodoxy, the restructuring taking place at BlueScope right now is simply an inevitable result of the uncompetitive nature of trying to export steel when other parts of the world can make it much more cheaply than we can. Perhaps this is why the government appears to have been caught so off guard by the BlueScope announcement, which any sensible government should have long been preparing for.
The announcement of a smallish $30 million package for the Illawarra economy, plus $100 million in cash for BlueScope, appears to be a hasty and ill-considered response to a serious economic shock for the region. As the Australian Financial Review’s Chanticleer column pointed out yesterday, the so-called "Illawarra Region Innovation and Investment Fund" appears to ignore the main driver of employment in the region, the University of Woolongong, which should surely sit at the centre of any integrated regional plan for the local economy.
But perhaps that’s because the government’s main policy response to the mining boom was throttled at birth. Treasury’s answer of what to do about the mining boom was the original Resource Super Profit Tax, which the mining industry so effectively attacked last year. The RSPT as it was originally put forward would have been a very broad tax on the super-profits of mineral resources, and would have used the proceeds to give non-mining industry businesses a tax cut, as well as boosting Australian retirement incomes through superannuation.
What you think of the merits of the RSPT is essentially irrelevant now, because of the devastating campaign against it by the mining industry and its cheer-leaders in the Coalition and media. As a result, the Gillard government is still trying to legislate for a paler, weaker version called the Minerals Resource Rent Tax. This will bring in far less revenue and accordingly direct far fewer of the proceeds of the mining boom into national investments. It was a massive win for the big multinational miners, and a loss for the Australian community at large. Mining profits, meanwhile, continue to soar.
The consequences of the mining boom are in fact felt most keenly in those parts of the country which play host to huge mining developments. It’s not just the crazy rents and incipient social problems of places like Port Hedland, or the difficulties that nurses and ambulance drivers have finding affordable accomodation in Perth. Australians are also beginning to realise that the mining boom will necessarily involve a level of economic restructuring that few of us were ever asked about.
As a result, many of us are waking up to the fact that the huge resources projects going ahead in Queensland and Western Australia may mean real pain ahead for the many workers and small businesses caught in the cross-fire of a soaring dollar and uncompetitive local industries. As Mark Bahnisch blogged yesterday, "what we will no doubt continue to see is far from some sort of painless and necessary ‘structural adjustment’ — unless our destiny in a globalised economy is indeed to be a quarry. That’s very far from the vision of value-added manufacturing, innovation and smart services that accompanied the opening up of Australia’s economy by Labor in the 1980s and 90s."
One thing’s for sure: when push comes to shove, ordinary workers will miss out long before any executives are forced to walk the plank. BlueScope CEO Paul O’Malley, for instance, received a $720,000 bonus for the year to June — the same year that BlueScope lost a billion dollars in the run up to the decision to lay off 1,100 workers. A BlueScope spokesperson told the Illawarra Mercury that one reason for O’Malley’s bonus was "the retention of cost reductions achieved in 2010". Rewarding a CEO for "cost reductions" is a nice way to spin a bonus for retrenching workers.
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