We took the view in the 1970s – it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through … In the 1970s … we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems … … Then you are gone. You are a banana republic.
Revisiting then-Labor Prime Minister Paul Keating’s infamous 1986 warning should remind us how economic conditions change and how they keep changing: how new “realities” are quickly replaced by even newer “realities” masquerading as permanent changes.
Resources have been good for Australia, unlike for some other countries where there really has been a resource curse. However, with the end of the boom it is likely that we will revisit some earlier concerns about Australia’s over-reliance on resources.
Another quote from Bob Hawke, Paul Keating and John Button in 1991, taken from Building a Competitive Australia also seems particularly relevant at the moment.
This tough, increasingly competitive world of five and a half billion people does not owe, and will not give, seventeen million Australians an easy prosperity. The days of our being able to hitch a free ride in a world clamouring, and prepared to pay high prices, for our rural and mineral products, are behind us. From this fact flows everything else.
This sentiment was true for the 1980s and early 1990s, but less so for the 2000s where rising prices for resources and increases in national income provided an easier prosperity than Hawke could have imagined.
In 2000, Keating was still arguing against the resources as saviour view of long-term Australian prosperity:
The global terms of trade will not suddenly flow back in the direction of commodity producers. So even if we wanted to, we can never again rely on export wealth generated by Australian farmers and miners to pay for the preservation of tariff walls to protect our manufacturing and services sectors from competition.
China changed everything. Its voracious appetite for resources pumped up the prices Australia received for its exports – particularly coal and iron ore. Australians promptly forgot the warnings of the past, as resource wealth became the new reality masquerading as a permanent change.
Increased prices then led to a huge investment boom, with gas the major recipient in recent years. The scale has been remarkable, as a recent report from Australia’s Bureau of Resources and Energy Economics (BREE) shows.
This boom has now peaked and Australia must now find new sources of growth. According to BREE, the “likely scenario” is that
the value of projects currently at the Committed Stage is scheduled to moderate after 2013 as a result of the completion of mega projects currently under construction. In 2014 the stock of committed investment is expected to decrease by $8 billion, and then by a further $63 billion in 2015. From 2017 onwards, the stock of committed investment in the mining sector is projected to revert back to levels comparable to 2007.
While some commentators, including the Reserve Bank Governor Glenn Stevens, argue that we are now entering the third – export – stage of the boom, it is likely that just as the boom surprised us on the way up, so will the crash on the way down. Australia will no doubt export more for at least a few years, as recent data shows, but with increased global supply and lower prices, it is likely that we’ll start worrying about our dependence on resources once again.
Over the past year, the index has fallen by 8.6% in SDR terms. Much of this fall has been due to declines in the prices of coking coal, iron ore and thermal coal. The index has fallen by 9.9% in Australian dollar terms over the past year.
Australia is a lucky country, but it is also vulnerable. Australia’s historical vulnerability to declines in international resources demand is about to re-emerge, which will make economic management a difficult task after the September election.
Things have been tough for the Rudd and Gillard governments, but they will be even tougher for an Abbott government constrained by their rhetoric of the dangers of public debt. Labor was helped by the investment revitalisation of the Chinese economy, but should they win the election, the Coalition will come into office at a time of Chinese economic consolidation and rebalancing.
In the late 1980s, when some commentators were eulogising about the end of the industrial revolution and touting the beginning of the information age, Australia appeared to be doomed unless it weaned itself off a reliance on resources. This new reality was superseded by an even newer one – the remarkable rise of the Chinese economy. Not only did Chinese demand increase the price of Australian exports, but it also decreased the price of Australian imports. The terms of trade – the average price level of exports in relation to the average price level of imports – is a ratio (or fraction) and so can be affected by both the numerator and the denominator. Rising costs in China are likely to constrain further reductions in the price of manufactured goods.
The terms of trade improved remarkably from the early 2000s, it then declined as commodity prices fell in the immediate aftermath of the global economic crisis. To the surprise of many, including myself, it then ascended again to new heights as China embarked on one of the biggest investment booms in history, a boom that required many of the things that Australia exports to support it.
There can be no denying that Australia has been lucky to be in a position to take advantage of China’s industrialisation and recent Asian economic exceptionalism in the face of a slow American recovery and continuing European crisis. Similarly, however, any downturn in China and other Asian economies will now negatively affect Australia.