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Our resources boom: Good news for all? |
The Federal Treasury is arguably the post powerful economic institution in the country.
It frames the Federal budget and helps set the major economic directions for the country as a whole.
It is chock-a-block full of economists – only the Reserve Bank comes close. So when the senior Treasury bureaucrat, the Secretary of the Treasury, gives a talk, people tend to listen.
On the day after the release of the last Federal budget the current secretary, Ken Henry, gave a talk to the gaggle of business economists about fiscal policy, the resources boom and what it might all mean in the future.
It makes interesting reading.
What would it mean, he mused, if the resources boom was permanent? What would happen to the Australian economy if the prices of iron ore, coal, gold, gas, nickel and the rest remained high for 10 or 20 years?
In the past, resource booms have been short-lived and ended with a nasty bang.
Even past jumps in the oil price have been temporary – mainly because they were based on restrictions in supply from the oil producers in OPEC.
Over the medium to longer term, cartels have not been terribly successful. But he believes there are grounds this time for believing that commodity prices could stay reasonably high, even if new producers enter the field.
The current surge in prices is being driven not by restrictions in supply but rapidly growing demand. As we all know, this set of circumstances is due almost entirely to the rapid economic growth of China. The good news is that there is apparently no reason to believe that China will stumble.
India too, is on the move.
There will be setbacks of course, but there is no reason to believe that a permanent setback is any more likely than the continued growth scenario.
The current boom has seen a huge improvement in Australia’s terms of trade – the highest since the early 1970s (see attached graph).
The terms of trade reflect the relationship between the prices we pay for imports and the prices we pay for exports. Over the past two to three years import prices of manufactured goods have fallen while export prices have soared.
This of course is good news. Australia becomes a wealthier country. But as Secretary Henry points out, there will be consequences. Should the boom continue, resource-based industries will grow at the expense of the manufacturing industry.
According to economic theory, investment capital will flow from manufacturing industry into mining and other resource based industries as investors follow the profits.
This in fact is already happening and it has implications for employment.
Unemployment will likely be higher because resource industries are capital intensive and employ fewer workers. For example a $1 million investment in the manufacturing industry might employ say 100 people while in the resource sector only 50.
In theoretical terms, $1 million moving from manufacturing to resources would see the loss of 50 jobs. In practice all this will not happen immediately, but over time it is likely to be true. Jobs will flow from the south east of the continent to Western Australia and Queensland.
This is already happening. Unemployment in Western Australia for example is 3.9 per cent compared to 5.6 per cent in NSW. As this occurs property prices in the growing areas are likely to rise while prices on the south east could fall. Again this is happening. House prices in Sydney have been falling while in the west house prices are up 26 per cent on a year earlier.
Because unemployment is higher, real wages likely will fall while company profitability will rise as a proportion of total national income. Just how high unemployment will go will depend on the flexibility of the labour force. Are they prepared to move? Are they prepared to train for new jobs?
Importantly, Secretary Henry says, governments should be careful in the way they respond to the changes.
In his view they should not adopt industry policies that hinder the change, but rather complement it by introducing policies that make the transfer of resources from one sector to the other as painless as possible. This would include more workforce education and policies that increase the competitiveness in industries such as transport, energy and water.
But there are risks. What happens if we adjust to the new order only to find that commodity prices then collapse? Won’t we have lost large sections of our manufacturing industry? Won’t there be regrets? Well, yes there will, but how do you persuade businesses and financiers to stop withdrawing capital from manufacturing and putting it into the resources sector?
Governments too will be hard to persuade.
Of course none of this is absolutely certain. Global warming, population growth, the ageing of the population, and the productivity of labour will all have an effect. And in the end, the recent rise in our terms of trade could be just another short-lived spike.
David Tomlinson is a freelance finance journalist based on the Northern Rivers.
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