Australia’s Resource Boom: From Blessing To Curse

 

Over the last decade, the Australian economy has experienced a boom on the back of the rise of Asia – with Chinese demand for Australian commodities in particular spurring economic growth. Yet, with emerging market growth in Asia having now slowed down, Australia’s abundance of resources is transforming from being a blessing to a curse.

 

 

Over the last decade, the Australian economy has experienced a boom on the back of the rise of Asia – with Chinese demand for Australian commodities in particular spurring economic growth. Yet, with emerging market growth in Asia having now slowed down, Australia’s abundance of resources is transforming from being a blessing to a curse.

The Paradox of Plenty, or the Resource Curse, as it is also known, refers to the conundrum posed by the fact that historically, countries blessed with abundant natural non-renewable resources such as mineral wealth or oil, tend to have stunted economic growth and to lag behind in value added production.

There are any number of reasons given for this depressing outcome from what should have been beneficial beginnings: There is the difficulty other sectors have in competing with the resource sector, which tends to be privileged and which soaks up the lion’s share of inward investment; There is the fact that resource exporting countries tend to see a marked appreciation of their currencies, which sucks in imports and makes value added exports uncompetitive; and of course there is the swings and roundabouts that characterize commodity markets, with price volatility being part of the course.

Australia’s economy has boomed on the back of the rise of China over the last decade or so. In a recent paper, three members of the Reserve Bank of Australia, Michael Plumb, Christoper Kent and James Bishop, state unreservedly that growth in Asia has been very positive for the Australian economy. By driving up commodity prices, investment demand from Asia has supported a very significant increase in the considerable productive capacity and export capabilities of the resource sector. Asia has also boosted jobs, income, tax revenues and wealth generally in Australia, the three admit.

[quote]Australian citizens have also benefited from the lifestyle effects that come from having a strong currency and being able to import manufactured goods from elsewhere. As the paper puts it, “the purchasing power of the average wage has risen in all major indices since the terms of trade begun to rise in 2003/4”.[/quote]

Growth in household disposable income was even stronger that wage growth since the government has been able to make tax cuts thanks to stronger tax receipts from the resource sector.

Australia has also seen a huge influx of FDI (foreign direct investment) with some estimates now putting the foreign ownership of Australia’s resource sector as high as 80 percent.

[quote]”The combination of the high exchange rate, a record of low and stable inflation and a relatively flexible labour market means that while demand for labour, and the growth of wages, has been higher in the resource and resource-related sectors, this has not led to a significant increase in wages in Australian dollar terms across the economy as a whole.”[/quote]

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The Resource Curse

On the down side, industries outside the favoured resource group have seen their costs go up, unless they happen to be importing from overseas suppliers in which case a strengthened currency would have helped them. And there has indeed been a steady drain of people away from jobs in the other sectors and towards the resource intensive section. Moreover, the boom in emerging market growth across Asia has now slowed and there is continued talk of a possible hard landing for the Chinese economy. Many sectors in the Australian economy are now performing under their potential and on October 2, the Reserve Bank took the decision to cut rates.

Announcing the rate cut RBA Governor, Glenn Stevens sounded a warning for companies relying on China.

[quote]”Growth in China has … slowed and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe,” he warned.[/quote]

Already this slowdown is impacting the Australian economy. The country’s terms of trade with the rest of the world declined by over 10 percent through 2012, by comparison with the peak in 2011 and further declines are anticipated. The RBA rate cut also saw the Australian dollar pull back sharply against the US dollar, from over US$1.06 to the Australian dollar to US$1.01 five days later, with parity with the US dollar briefly seeming like a real possibility (the Australian dollar has since improved somewhat).

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Any weakening of the Australian dollar though still has its up side for Australian exporters, who are also being helped by the fact that inflation is currently down around 2 percent. The economy too, should benefit from a slightly more accommodative monetary policy. Until the recent rate cut, the RBA had been trying to damp down the potential for the recent commodity price boom to ripple through into spiraling inflation, by raising interest rates.

This seems largely to have succeeded and the risk now is that a mild slowdown in Asia could cause the Australian economy to catch a severe cold, hence the shift back to a more accommodative rate policy. By mid October inflation in Australia was down below the RBA’s target rate of 2-3 percent, again signalling that a looser economic policy would not be likely to stoke inflation in the short to medium term.

By Anthony Harrington

Anthony Harrington is an award-winning business and energy journalist, writing regularly for the Scotsman newspaper, the Glasgow Herald newspaper, Financial Director magazine, Pensions Insight magazine, CA Magazine, and a number of other publications. He won Business Finance Journalist of the Year 2006, Institute of Financial Accountants, and Journalist of the Year, State Street 2006 Institutional Press Awards, and was runner up in 2007 and 2008.

The “Resource Curse”, the Australian Economy and the growth of Asia is republished with permission from the QFinance Blog. Get the QFinance Dictionary of Business and Finance iOS app for a comprehensive guide to financial terms and expressions.