Australia’s mining boom is not something to be taken for granted, writes AustCham Hong Kong & Macau Chairman, Richard Petty.

The size of Australia’s natural resource sector in terms of investment, employment, and wealth creation makes it a natural focus for robust discussion regarding Australia’s economic future.

In a speech titled, “Australia’s mining boom: what’s the problem?,” former Productivity Commission chairman Gary Banks stated that the “pressures” felt were because Australia had become wealthier than it had been, which was a good thing, and that the adjustments that had taken place had simply amplified underlying trends and that the result was an overall expansion of employment across the economy.

The resources boom has been good for Australia; the challenge is how the boom has been and will be managed, and going forward that can play out in one of several ways.

Recently I co-authored with Michael Enright “Australia’s Competitiveness: From Lucky Country to Competitive Country,” in which we considered both positive and negative scenarios for Australia’s future depending on how Australia’s resource wealth gets managed. Our positive scenario for the future of Australia as a resource-rich country is a scenario in which resource wealth gets reinvested into building a broader, competitive economy.

In this scenario, the wealth generated is reinvested in ways that build upon Australia’s strengths in education, a relatively advanced innovation system, and a strong financial system. Investments are also made to improve infrastructure, develop stronger management systems, and facilitate the development of clusters of innovative companies. In this scenario, resource companies form a vanguard and a bridgehead that allows the formation of international relationships that other Australian companies then leverage to internationalise and access wider markets. At the same time, significant portions of the resource revenues eventually get recycled into the capital markets, creating a deeper pool of angel investment and equity capital. This in turn allows for increased opportunities for Australian start-up companies and entrepreneurs to obtain the capital they require without necessarily having to go offshore.

This scenario postulates that a substantial portion of the gains from the resource boom get recycled into the Australian economy through increased tax payments (either directly from the resource sector, or from the personal and corporate incomes that arise from the expansion of the resource sector). The rewards to entrepreneurship in Australia and Australia’s potential to build businesses both increase. The wealth generated allows a shifting of the tax burden away from other forms of economic activity, which when combined with improved quality of living in Australia attracts larger numbers of capable individuals and reduces the incentives for talented Australians to emigrate.

In this way, Australia builds a more diversified economy that is better able to support a high currency and high wages. Eventually, these investments allow Australian companies to penetrate growing Asian markets in a wide range of industries and make the Australian economy more resilient to commodity booms and busts.

A negative scenario for the future of Australia as a resource-rich country is one in which resource wealth is enough to drive up the Aussie dollar, make other forms of economic activity uncompetitive, reduce incentives to develop other economic engines, and fund just enough of a social safety net so that enough people feel satisfied that more active development does not take place. In this scenario, Australia’s resource wealth bids up the wages in low-skilled occupations, at least on a temporary basis, skewing incentives towards short-term paydays and away from more schooling and joining more knowledge-intensive industries.

In this scenario, the knowledge-intensive service sectors, such as the accounting and legal sectors, account for, distribute, and argue over existing wealth rather than working to create new sources of wealth. The proceeds from the resource boom, either go to shareholders outside of Australia, go toward short-term consumption, are reinvested in new projects outside of Australia, or go into bidding up asset prices within Australia rather than being reinvested in ways that enhance capabilities within Australia.

This could happen either because there is no mechanism to obtain and redeploy some of the proceeds for the public goods, or because companies and individuals choose not to do so.

Investment in Australia might occur, but it is largely in the real estate sector, pushing up the price of existing assets rather than creating new assets. Political battles ensure over how the wealth is to be divided, rather than over how it can be increased and invested. The result is more rent seeking and less productive investment.

Meanwhile, efforts to ensure equal outcomes create a tax system that drives many who do not have resource or real estate wealth to emigrate to seek opportunities in emerging Asian markets. While the resource boom fuels growth in incomes, in this scenario it does not result in the sort of investment that builds a more diversified and innovative economy. The result is that the international portion of Australia’s economy, with the exception of the resource sector, narrows significantly. Domestically-oriented Australian companies are able to make reasonable livings at home, at least for a while, but face additional disadvantages in trying to go abroad, and see no reason to try to build the capabilities to internationalise. In this scenario, any negative movement in commodity prices immediately translates into changes in domestic asset prices and substantial dislocation within the country.

However, as Australia has not improved its infrastructure, sharpened its skills, and built its international competitiveness in other sectors, the only thing that can be done is to wait for the next resource boom. ■ 

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