Caught between a rock and a hard place, Australia can’t just dig its way out

Is the resources boom good or bad for Australia? It is hard to argue the latter when Australia is among a handful of major developed economies still growing.

But the rarely contested notion that the resources boom is Australia's saviour deserves serious critical scrutiny.

While Australia appears to have so far escaped the ravages of the deep economic and political crisis now afflicting Europe and the US, the resources boom creates massive problems domestically and externally.

Domestically, the resources boom means that more than ever the wealth of the few comes at the expense of the many – a situation all-too-familiar in the US and parts of Europe. This is partly because of the usual pitfalls inherent in resource-led growth, but largely to do with the historical processes of social and political change that took place in Australia and around the world in the decades leading up to the current boom – whereby in the name of comparative advantage, precarious employment and rising inequality were tolerated.

As the vast academic literature on the 'resource curse' and the popularisation of terms like the 'Dutch disease' show, resource-led growth is often associated with a decline in other parts of the economy, erratic growth patterns, highly uneven economic development geographically, deepening wealth and income disparities, and in many poor countries, even conflict and war. Indeed, on this last point, in the undeveloped world, natural resources are often central to the rise and consolidation of pernicious elites and bitter contestations over elite power.

While Australia has of course been spared internal conflict it has not avoided many of the other by-products of intensive resource exploitation. For one, the rising value of the Australian dollar – whose fortunes have for some time been linked to the market value of Australia's main export commodities and, not unrelated, considerable speculative activity – has placed significant pressure on non-resource exporting sectors.

Notably, sectors that are both big export earners and big employers, such as higher education (our number 3 earner), tourism (number 5) and manufacturing, are made less competitive internationally by a strong dollar. For example, this is reflected in the declining rates of enrolment by foreign students in our universities.

In contrast, the booming resources sector – which is now overwhelmingly our biggest export earner, generating $135 billion or just shy of half all of our export earnings in 2010 – employs no more than 2 per cent of the Australian workforce.

Yet it is not only existing jobs in, and the profitability of, non-resource sectors that is at stake, but how to develop an economy that is economically sustainable and which adds social value. The latter is important in terms of maintaining a high quality of living based upon social cohesion and obviating vulnerabilities; the former is crucial given that our economy is heavily dominated by the simple exploitation of exhaustible bulk commodities.

And for those that think that in Australia, endowed with 7.5 million square kilometres, talking about the exhaustion of mineral resources is a tad dramatic, think again. Journalist and researcher Paul Cleary, among others, has suggested in his recently published book, Too Much Luck,that our national resource wealth may well be spent within as little as forty years.

All of this demands that we rapidly harness the resources boom towards the development of more sustainable industries, which will provide broad employment opportunities with decent pay. Otherwise, the rundown shells of Macmansions in sprawling, largely deserted, suburbs (a scene now readily apparent in the US) will be all that is left to tell the story of Australia's riches.

Although the government's much diluted mining 'super profits' tax – the Mining Resource Rent Tax – has recently been passed in the House of Representatives, it is obvious that it will not do much to correct the imbalances generated by the boom, not least because of the federal government's scandalous agreement – indicative of the incommensurate clout of the mining lobby in Canberra – to compensate mining companies for increases in State royalties.

But the specific – and largely negative – social outcomes of Australia's resources boom are not pre-determined. If we look at Norway, perhaps the only country to tame the 'resource curse' over time and the world's sixth-ranked in terms of income equality, we can see that more equitable growth is possible in Australia if the political will to socialise the benefits of resource extraction existed.

This said, processes of political and social change that have been in train since the 1980s, but which elsewhere in the world are currently being brought into question, militate against such a progressive shift in Australia.

From the Hawke government onwards, Australia mirrored political and economic tendencies in the US, Britain and Europe towards 'freeing up the market', instilling competition and shifting risk and responsibilities to individuals. This variously took place through processes of deregulation (of banking for instance), the privatisation of government-owned companies and utilities, the liberalisation of trade and the floating of national currencies. The liberation of the market also manifested in a push to wind back collective bargaining and the entitlements and gains won by workers.

In essence, this process entailed a massive restructuring of the state and state-society relations. The interventionist welfare states that rose to prominence in the post-World War II period – in particular to smooth out big economic dips and spikes and avoid the sort of poverty accompanying the Great Depression and its political effects – were derided by politicians and their economic advisors as unsustainable and, indeed, a burden on entrepreneurialism and, ergo, society.

Concerns of equity, social justice and full employment, gave way to the logic of comparative advantage, sending the 'right incentives', profit and GDP. As a result of these changes, the share of wages in Australian GDP has dropped from a peak of 62.4% in 1974-5 to 53.4% in 2007-8 – not as drastic a decline as witnessed in the US in the same period, but a substantial drop nevertheless. At the same time profits' share has risen exponentially.

The focus upon comparative advantage, corporate profit and GDP – to the exclusion of almost everything else – is now, of course, being blamed for what we see in the northern hemisphere.

In Australia, however, the apparent shelter provided by the resources boom from events in Europe and the US, has been perversely used by the wealthiest, employing the same old language of 'free markets', to argue against state intervention and, in particular, against the redistribution of wealth generated from the massive growth in commodities.

The implications are clear, however. Unless Australian governments, pressured by citizens, take meaningful steps towards redressing rising income and wealth inequalities and harnessing the resources boom towards a better future for the majority of Australians, tensions between the runaway resources sector and everybody else will only rise.

But there are no signs of a serious policy shift at the moment, or of any social movement rallying around these issues. In Western Australia, for example, the State government's development plans seem to indicate that the development of infrastructure for further growth in resource exports is the top priority. In other words, the majority of West Australians, who essentially lose out from the resources boom, watching the real value of their wages decline, are being asked to subsidise future growth in a sector that will likely do considerable damage to their livelihoods.

But the problems of the resource boom are not simply contained within our borders. The resources boom also creates problems for Australia internationally. The recent Obama visit brought into sharp relief the contradictions between Australia's military alliance with the US and its dependence on China as the main market for Australian mineral exports.

Despite persistent denials from Gillard government ministers, it is clear that the decisions to upgrade US military presence in Australia and sell uranium to India are part of a broader containment strategy towards China. And it remains to be seen how the Chinese government chooses to respond, once the issue goes through its prolonged internal decision-making process. All this suggests that Australia cannot necessarily eat its cake – yellow or otherwise – and have it too.

But even if these tensions will not lead to a worsening strategic environment in the region in the near future, major questions remain over whether Chinese demand is sustainable. The Australian economy has all of its eggs in the China basket, but there are worrying signs that the chickens are coming home to roost.

In an effort to stave off a serious decline in economic activity, many Chinese provincial and municipal governments have borrowed heavily to finance a construction boom. There are whole cities in China that have been built that remain uninhabited, pointing to a massive bubble. If the current crisis taught us one thing it is that construction booms can turn to bust spectacularly and very rapidly – witness the demise of the Irish 'Celtic tiger', now a whimpering pussycat.

Australia is a Lucky Country. However, now is not the moment to bask in the solace largely derived of geographical, geological and historical fortune. Australians need to reengage politically in fostering a new path for the coming decades. To do otherwise will leave us and subsequent generations to grapple with an unfortunate legacy that could have been avoided.