Beyond the boom: have we frittered away our opportunities?

A myopic focus on short-term cyclical business cycles has meant successive governments have failed to carry much needed structural reform. Image sourced from www.shutterstock.com

No sooner had Treasurer Wayne Swan accused the Europeans of “mindless austerity” a month ago than he embarked on a resolute but most likely counter-productive search for cost savings in the coming May budget. This is a long way from the Wayne Swan who successfully steered Australia through the global financial crisis.

And it’s even further from the then-opposition Finance spokesperson Lindsay Tanner, who in an earlier budget context, justifiably complained to the Australian Financial Review in 2007 that the Howard government had been “rained with revenue by the minerals boom and it’s wasting far too much of it and it’s not building it for the future”.

In focusing its attention on a short-term deficit reflecting primarily the drop in tax revenues as the commodity price cycle runs its course, the Gillard government is in danger of losing sight of the big picture. Where are jobs and growth to come from after the commodity boom? And indeed, it has to be asked, have we squandered the boom already?

These are the key economic challenges for this and the next government. While the resources investment of recent years may well result in additional production and exports, it is becoming apparent that the contribution to our national income growth from the high commodity prices associated with Australia’s latest mining boom is coming to an end.

Unfortunately, in retrospect, it does not seem that Australia has made the best use of the windfall gains flowing from the favourable terms of trade generated over more than a decade by these high commodity prices, let alone the huge mining profits which are being returned as dividends for the most part to overseas shareholders. Despite their temporary nature, these gains have been unprecedented in their magnitude and impact and could have prepared us well for a post-boom economy.

TS Elliott once wrote that “humankind cannot stand too much reality”. The painful reality for us is that notwithstanding the global financial crisis, which it handled dexterously thanks to the sound advice of Treasury head Dr Ken Henry, the incoming Labor government in 2007 had the opportunity to capitalise on a resurgent mining boom, driven by massive demand from China. But ultimately it has failed to do much better than its predecessor.

Apart from being constantly distracted by leadership issues, the government made little headway against the prevailing economic orthodoxy that has confused short-term business cycle activity with longer term structural change, imagining that resources-driven growth had become such a permanent feature of the Australian economy that other sources of growth, such as manufacturing, were superseded.

Clearly, structural change is taking place throughout the world economy, as a consequence mainly of technology and business model innovation and the changing patterns of international trade and development. But it is equally clear that Australia has been so lulled into complacency by the resources boom that we are not taking as much advantage of such change as we could be.

Indeed, it is an indictment of business leaders and policy-makers that the contribution to growth from the terms of trade has been allowed to mask the steady deterioration in our productivity performance since the 1990s, which will become more apparent as the price effects of the mining boom dissipate. Even with the pick-up in productivity growth over the past year, it will be a huge challenge to compensate for terms of trade decline in a high cost economy with a continuing strong dollar.

To be fair, the government has taken an important step in the development of established and emerging areas of competitive advantage with its recently announced industry and innovation policy, A Plan for Australian Jobs. This policy places a welcome emphasis on deepening collaboration between industry and research institutions in new “innovation precincts”, which are intended to lead the shift to a high skill, high productivity economy.

However, the policy may be too little too late, and its credibility has already been compromised by two unnecessary and damaging rounds of cuts to research and education funding. It is all the more disappointing that a government so genuinely committed to increasing the comparatively low proportion of public expenditure allocated to higher education as a proportion of GDP should be destined to end up more or less where it started.

Australia has abundant previous experience of commodity booms, which have all ended badly, with lessons that produced considerable reflection. We have also had the benefit of observing the impact of North Sea gas discoveries in the 1970s on Dutch manufacturing, as burgeoning revenues drove up the value of the currency, making domestic trade-exposed industries uncompetitive. It took many years with very focused policies to overcome the so-called “Dutch disease” and to renew and reposition its industrial structure.

Similarly, North Sea oil and gas enabled the UK government of the 1980s to sustain itself in office through a consumption boom fuelled by tax cuts. Only gradually was there a realisation that, in the still resonant words of J K Galbraith, the price of private affluence was public squalor, as schools and hospitals bore the brunt of neglect, and key areas of manufacturing were lost, never to return.

However, even this realisation was not fully acted upon as it was followed by the elevation of the finance sector to a dominant role, one which was supposed to create wealth but which instead unravelled in the subsequent global crisis leading to a commitment on the part of a new government to “re-balancing” the economy.

All that Australian policy-makers really had to do was reflect on past mistakes and observe the current approach of Norway, which actually learnt something from the experience of other resource rich economies. This is a country which has taken a significant public stake in its mammoth oil and gas assets, imposed a 76% resource rent tax, and established a sovereign wealth fund to partially quarantine the exchange rate and provide an income stream for investment in its future research and innovation infrastructure.

Beyond the boom, for generations to come, Norway will have given itself the best possible chance to build a dynamic and competitive knowledge-based economy. Why couldn’t we?