Australia is, by most accounts, experiencing what may well turn out to be the largest and most prolonged commodities boom in our history, driven largely by our capacity to meet many of the resource requirements associated with the industrialisation and urbanisation of the two most populous nations on the planet, China and India.
These two nations are now passing through a stage of economic development during which, as economic activity shifts away from agriculture towards manufacturing (and before it becomes increasingly dominated by services), and as the population moves from rural areas into cities, the demand for commodities of all types rises strongly.
On plausible assumptions (which entail some slowing from the growth rates it has recorded over the past two decades) China will remain in this stage until some time between 2019 and 2024. While India, which has only recently entered this stage of economic development, is likely to remain in it until at least 2037.
In recent years, and at least for the years immediately ahead, the China and India commodity story is essentially one about steel and energy – which in turn means it is about iron ore and coking coal, and about thermal coal, oil and natural gas. We don’t have any oil (or at least, none for export); but we are already the world’s largest exporter of iron ore and coking coal, the second largest exporter of thermal coal (after Indonesia), and on present indications we will by the end of this decade be the largest exporter of LNG. Australia is the only major commodity-exporting nation to have all three of these commodities (iron ore, coal and LNG) in such large quantities, as well as a wide range of base and precious metals, other energy sources (such as uranium) and a broad spread of agricultural commodities.
Hence we are experiencing the most sustained upswing in what economists call our ‘terms of trade’ (the ratio of export to import prices) in at least 140 years, and the biggest expansion in resources sector capital investment in at least 160 years.
The experience of previous ‘commodities booms’ in Australia suggests that there is a high probability that this one will also end in a burst of double-digit inflation followed by a recession – as occurred after each of our last three ‘commodities booms’, the Korean War wool boom of 1951, the mining boom of the late 1960-70s, and the rather briefer resources boom of the early 1980s (prompted by the second oil shock).
To be sure, since the end of the last resources boom there have been a number of important structural and institutional changes in the Australian economy which lessen the probability that we will repeat that history during the present episode:
• Since shortly after the collapse of the last resources boom we have had a floating exchange rate, which in the current boom has allowed the A$ to rise significantly, thereby helping to contain inflationary pressures by lowering prices of imported goods and services, and by putting competitive pressure on other trade-exposed sectors of the Australian economy has helped to reduce cost and price pressures associated with competition for increasingly scarce labour and materials. In previous commodities booms, when the exchange rate was fixed, governments under pressure from manufacturing and farming interests were reluctant to let this happen.
• We no longer have a highly centralised system of wage fixing which more or less guarantees that the large wage gains procured by workers in the resources sector (where employers can afford to pay them) are also obtained by employees in sectors such as retailing, manufacturing or hospitality (where employers can’t afford them).
• We have an independent central bank, with the clearly articulated objective of keeping inflation at between 2 and 3 per cent ‘on average over the course of the business cycle’, and both the means and the will to achieve it. This is in contrast to the situation prior to the early 1990s when the Reserve Bank needed the express permission of the Government of the day to raise interest rates, or tighten monetary policy in other ways, and that permission was never given enthusiastically.
Even so, during what the Government now calls ‘Mining Boom Mark I’ – the period from about 2004 up until the onset of the global financial crisis, which initially appeared to have terminated the boom – the underlying inflation rate rose to a peak of 4.7 per cent over the year to September 2008. Had it not been for the economic slowdown induced by the financial crisis, the inflation rate might well have been headed for – who knows? – 6 per cent by now.
So the resumption of the resources boom – ‘Mining Boom Mark II’ as the Government calls it – raises some important challenges: How do we ensure that we don’t repeat our history of squandering the potential benefits of our good fortune? What sort of legacy will we leave to future generations of Australians as a result of what is potentially the largest and longest such boom we have ever had, or will ever have?
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