Tuesday, July 31, 2012

The Future of Altona Oil Refinery

Caltex recently announced its decision to close its 57-year-old Kurnell refinery on Port Botany, south of Sydney as it is no longer competitive. It will transform the facility into a fuel import terminal at a cost of $680 million by late 2014 (Ref 1, 2, 3). However, Caltex will keep its Lytton Refinery in Brisbane as its hardware is better suited to market demands. Caltex CEO Julian Segal said the closure of Kurnell would lead to improvements at the Lytton Refinery (Ref 4, 5).

The closure marks another chapter in the decline of Australia’s oil refining industry. Shell confirmed in July 2011 that it will shut down refining operations at Clyde and convert the Clyde Refinery and Gore Bay Terminal into a fuel import facility by mid-2013. ExxonMobil stopped the operations of its Port Stanvac refinery in 2003 and decided in 2009 to dismantle the refinery (Ref 6).

This article explains why the oil refineries in Australia are not able to compete with foreign refineries, particularly the large refineries from Asia. The reasons given include:
  • Refineries need a production capacity of at least 200,000 barrels per day (bpd) in order to reach the minimum efficiency scale. As seen from the table below, the refineries in Australia are of much smaller scale, producing way below the minimum efficiency level.
  • Higher capital costs, wages and energy costs in Australian refineries. 
  • Oversupply of refining capacity in Asia depressing profit margins in the industry.
  • Australia’s oil refineries are old, with the last refinery built in 1965. Consequently, they require large investment for upgrade in line with evolving environmental standards.
  • As Australia's refining operations are smaller and more costly, transporting crude oil via large tankers (VLCCs) to Australia become more expensive than transporting petroleum products in smaller ships. Consequently, importing refined fuel from Asian mega-refineries is more cost-effective for oil companies.

Refinery State Capacity
Employ Built Close
Caltex Kurnell NSW 135,000 174 800 1956 Late 2014
Shell Clyde NSW 79,000 10 510 1928 30/09/2012
BP Bulwer Island QLD 101,000 120 340 1965
Caltex Lytton QLD 109,000 223 310 1965
Port Stanvac
SA 78,000 239 400 1963 Apr 2003
Exxon-Mobil Altona VIC 80,000 138 350 1949
Shell Geelong VIC 130,000 120 >470 1954
BP Kwinana WA 137,000 250 387 1955
Table: The 8 Oil Refineries in Australia (Ref a, b, c, d, e, f, g, h, i, j, k, l, m)

Of the remaining 6 refineries, ExxonMobil's Altona refinery is often touted by analysts as a candidate for divestment  (Ref 6, 7). This is probably due to its smaller scale of operations, as seen from its smaller production capacity (80,000 bpd), land area (138 hectares) and workforce (350). It is also the oldest refinery (built in 1949). In 2003, ExxonMobil mothballed its 78,000-bpd Port Stanvac refinery in Adelaide, leading to speculation of whether the US company would undertake the big capital expenditure at its Altona refinery for meeting the Federal Government's 2006 clean fuel standard (Ref 8). The Altona refinery survives to this day and Exxon-Mobil has continued investing in this plant, spending $250 million since 2008 to upgrade the refinery, including a temporary shutdown in 2011 to carry out long-term maintenance and to install new equipment for cutting emissions by 21,000 tonnes a year (Ref 10).

With the closure of Caltex's Kurnell refinery. attention is again drawn to the two Victorian refineries at Altona and Corio (Geelong). In February 2012, Shell spokesman Paul Zennaro said the company sees oil refining as ''challenging'' in the current climate. ''We're not going to speculate on the future of the [Corio] facility but we've invested heavily in its future, including a water treatment plant, new bitumen tanks and rather large maintenance activity,'' he said. Jessica Warne, the spokeswoman for the Altona refinery said that Mobil has no plans to review its future. ''Our focus continues to be on improving its performance and competitiveness,'' she said. (Ref 9).

In an interview with The Australian newspaper, ExxonMobil's Australian head Andrew Warrell said: "I don't think that's what my competitors are saying. So despite the very tough conditions, we're managing to make money (at Altona) and we have a very good improvement program at the site that makes me confident we can grow profitability." He confirmed Altona had also logged a 2011 loss because of poor margins and a big investment program and that profit margins this year were not large. He said the Altona refinery, through a mixture of luck and strategy, had built better add-ons or "pots and pans" than some other Australian refineries. For example, it had added a $250 million fluid catalytic cracker in 1997 that allows it to handle heavier crude oils. He said: "Some of my competitors have over-invested in some pots and pans that aren't giving them the value they'd hoped to get." The refinery has also focused on producing more higher-value fuels, like diesel and jet fuels, that attract a higher premium than petrol.

Victoria's Major Projects Minister Denis Napthine said that the closure of Caltex's Kurnell refinery in Sydney could provide opportunities for the Victorian petrochemical industry. He believed that Victoria has the capacity to increase production and that the state government would work with Mobil and Shell to maximize the benefits to Victoria (Ref 11).

Victoria's two oil refineries appear to be safe for the time being. However, analysts say that Caltex's Lytton plant and ExxonMobil's Altona refinery remain vulnerable to closure although both firms have repetitively said they will continue operating these plants (Ref 8).

Friday, July 27, 2012

The Lodge at Altona

"The transfer of the Government's headquarters from Canberra to Altona follows a long tradition of power finding its way to unlikely locales......." (Ref 1). Indeed, our Prime Minister will be spending more time at her Altona home over the next few months (Ref 2). This is due to major repairs and renovations being carried out on the Lodge at Canberra.

The Special Minister of State, Gary Gray, said building condition audits of the Lodge had revealed the roof was failing and had to be replaced urgently. "The roof repairs are essential because the slate has deteriorated to such a point that it is dangerous, with badly broken or cracked tiles and no longer safely weatherproofs the building." (Ref 3). The original 1920s plumbing is leaking, the cloth-wrapped electrical wiring is a fire hazard, there is asbestos that needs to be removed and upgrading of the fire protection and security systems are required (Ref 4).

It appears that the Lodge was only intended as a temporary residence and land has long been set aside for a better residence on the shores of Lake Burley-Griffin. But no prime minister has been brave enough to commission the building of the new permanent residence. Hence, despite ongoing maintenance, the 85-year old heritage-listed Lodge has fallen into disrepair and needs to be virtually rebuilt (Ref 5).

There is an interesting report that the Lodge is infested by possums so bold and immovable that their nocturnal activities have been known to interrupt official functions and endanger the priceless artworks studding the walls. PM Gillard loves telling this story. "We had a celebrated incident where we had a visiting foreign leader so you put dinner on for them," she says. "There was much shooing of people out of the dining room in a way that looked - it wasn't rudely done. But it was because someone had spotted that wee was making its way down the wall to one of the very precious paintings from the National Gallery." When asked by the reporters if she is moving in with Wayne Swan or staying at Kirribilli while the Lodge is being renovated, she replied: "Or Altona. We can camp out at Altona."

Last Saturday, several vehicles were parked in our street and there were diggings in her front gardens. I was asking my wife if the PM is re-landscaping her gardens. A federal police car came the following day so I thought that the PM is perhaps at home, holding her first live Google+ hangout and those vehicles here the previous day could be to set up the equipment for this social media experiment. When the vehicles continue to appear day after day, I realize that my guesses are wrong and the works are more than just landscaping. The front of the house is barricaded with black garbage bags so though I pass by the house everyday, I do not know what have been done behind this "screen" though I could have peeped inside.

My wife told me she saw a media car so a journalist must be doing some news coverage. Indeed, I later read from news sources that security work is being done on her Altona home although a spokesman for the Prime Minister said the extra security is not related to the Lodge renovation timetable (Ref 6, 7).

When my wife walked past the PM's house on her way home today, she saw a hip or waist-level fence and gate being erected. Actually, we were also looking to build a gate to increase security. Somebody had poked a hole through our windows recently and the 61-year old female owner of a second-hand book store at Harrington Square was in intensive-care at Alfred Hospital after being bashed by a thief for theft of no more than $200 (Ref 8, 9). A friend who lives in nearby Phair Court told us a young lady was being intimidated for money at the Westona train station not long ago. With the intention of building a gate in mind, my wife stopped to talk to the contractor. She asked if he does a gate for others. He replied "no" as this is not an ordinary gate. I suppose there are special security features which are not suitable for our purpose.

Wednesday, July 25, 2012

Friends of Altona

The village of Altona is surrounded by beautiful blue sea.

Altona Beach H

It has fields of green and sandy yellow beaches.

WG Cresser Reserve B

There are rivers, streams and lots of trees where the birds sing.

Laverton Creek E

There are markets, a coal mine, piers and train stations where visitors to the village arrive.

Pier St Mural Past A

The village also has a good railway line, and indeed it is called the Altona loop line.

Altona Train Station A

And now, there's something exciting going to happen, the village is getting some new visitors, some magical visitors.

Black Swan C

But they're not arriving to the village by boat or plane, they are traveling by the magical fabric of time.

Bird Flight 01

And here's where it all begins...

Pier St Mural Present A

Friday, July 20, 2012

Two-Speed Economy

Reading news is my daily staple and I have been ardently following news on our economy. I will like to know how is our economy performing, how this will affect my job security, what is the economic future of Australia and Melbourne, and how will current trends and developments impact on our future prosperity. This post will be an attempt to summarize what I have read from newspapers, primarily The Age and other online sources.

Despite a wealth of information from commentaries in the mass media, I find that I am not getting a clearer picture than what I have started with. The Age endeavors to provide balanced coverage, giving unbiased publishing space to contrasting opinions. This is a commendable approach but I find that this can also result in confusion as there appears to be no authoritative analysis and prediction that would present to the readers an unchallenged answer that is closest to the truth. The readers are taken on a roller-coaster ride - confronted with depressing statistics (such as retrenchments, busted companies, budget cuts, falling house prices) on one day and comforted by more rosy news and commentaries (such as unexpected strong economic growth figures) on the next.

There appears to be two camps of views towards the state of the economy but the division is not exactly clear-cut and static. The more pessimistic camp includes Tim Colebatch (The Age's Economics Editor), academic economists such as Professor Ross Garnaut, Bob Gregory, Peter Sheehan and business leaders such as Don Argus and Tony Shepherd (Ref 1). The more optimistic camp includes Ross Gittins (Sydney Morning Herald's Economics Editor), Professor Max Corden, the Federal Government (Ref 2), Treasury, former Treasury Secretary Dr. Ken Henry and RBA Governor Glenn Stevens. Assurances from the government and prominent public servants tend to be discounted though they have intimate knowledge of the national economy for we know that they carry a responsibility of not undermining public confidence (Ref 3).

I feel the overall sentiment of The Age is geared towards the more pessimistic camp. It has been pointed out that newspapers have the tendency to sensationalize news and to concentrate on pessimistic news, such as reporting job losses than gains (Ref 4, 5, 6). Ian Macfarlane, the former governor of the Reserve Bank, said that more frequent information about a particular thing may stop us seeing the wood for the trees. "I believe all this news tends to make us less confident, less secure and less happy than if we had less of it." (Ref 7). However, I feel that the newspapers reports in Australia are quite an accurate barometer of the public sentiment and an indication of what are going on in the background. A recent example is the reporting of the tensions between Julia Gillard and Kevin Rudd which turned out be to true despite initial denials from both parties.

Two-Speed Economy

Australia is now going through what is called a two-speed, multi-speed, two-track or patchwork economy. This refers to different geographical areas or sectors of the national economy growing at different pace. While the iron and coal-rich mining states of Western Australia and Queensland are booming, the rest of the country is stagnating. South Australia and Tasmania are in recession while Victoria is on the brink of recession (Ref 8, 9, 10). The two-speed economy even occurs within Perth where not all are benefiting from the mining boom (Ref 11).

The phenomenon is not peculiar to Australia (e.g. it is happening to Canada now due to the Alberta Oil Sands - Ref 11a, 11b) and has been known variously as the Dutch Disease, Gregory Thesis, Resource Paradox, Resource Curse and King Midas's Dilemma (Ref 12). The term Dutch Disease was coined in 1977 by The Economist magazine to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959. The economic models of the Dutch Disease and Gregory Thesis were developed respectively by two Australian economists Professor Max Corden and Bob Gregory.

The Australian economy is made up of the non-tradable and tradable sectors (Ref 13). The non-tradable sector, dominated by service industries, depends on domestic demand and supply.  The tradable sector consists of export and import-competing industries whose price depends greatly on world prices and the exchange rate. The Australian economy is now at an unprecedented position, aptly described in the following article: "The urbanization and industrialization of China and India present a once-in-human-history opportunity. There will be no more Chinas or Indias to come. Not only are there no other nations with as many people, but other nations that may pass through the same commodity-intensive stage of economic development seem likely to be exporters rather than importers of commodities." The strong demand from China resulted in the mining industry growing by 85% and its export value (chiefly iron ore and coal) doubling over the period 2005-2011.

The mining and related industries form the booming tradable sector. The large inflow of foreign exchange into the booming sector during the investment and operational phases increases Australian terms of trade, leading to an appreciation of the Australian dollar (31% from 2005 to 2011). A recent report by global consulting firm KPMG ranked Australia as the second most expensive place to do business after Japan (Ref 14). The high dollar reduces the export competitiveness of other trade-exposed and dollar-sensitive industries such as manufacturing (Ref 15), agriculture and certain service industries (tourism, education, etc). This so-called lagging tradable sector also suffers from the loss of capital and human resources to the higher-paying booming sector.

The gainers are obviously the shareholders and employees in the booming sector.  Parts of the mining revenues will go overseas to foreign investors. Funds that are not spent abroad are spent domestically in the non-tradable sector, either directly by the mining companies concerned or indirectly by the recipients of the higher incomes. With increase in revenues through mining taxes and royalties, governments are able to spend more on infrastructure, services and social programs as well as passing the benefits of the mining boom to the people in the form of reduced company or income taxes. The net spending effect of the boom would be expansionary. To counter the consequent inflationary pressures, the RBA would raise the interest rate which in turn would attract more foreign capital into Australia, leading to further appreciation of the exchange rate and hollowing out of the lagging sector.

The Dutch Disease is compounded by the capital-intensive character of the mining industries, which does not generate many jobs (2% of workforce though mining accounts about 10% of Australia's GDP, Ref 16) compared to the manufacturing industries and the resultant current account deficit making the economy even more dependent upon the commodity.

Another problem is the unequal geographical distribution of the mining boom. 77% of the trend growth in spending over the year was in WA and Queensland, which have 30% of the population while only 23% was in the rest of Australia, which has 70% of the population (Ref 17).

Is the current doom and gloom justifiable?

At least two non-politicians have questioned the pessimism that abounds. RBA Governor Glenn Stevens had issued a rousing call to Australians to start seeing the glass as half full and declared that the Australian economy is in a strong position compared with its global peers. He said that there are plenty of reasons for optimism as the rise of Asia and its surge in demand for energy and raw materials has put Australia at the centre of growth in the 21st century (Ref 18, 19, 20, 21).

SMH Economics Editor Ross Gittins attributed the gap between the feeling of gloom (as measured by consumer sentiment and business conditions indices) and objective economic indicators to the following factors (Ref 21, 22, 23, 24):
  • The public, business people and even economists getting a false negative impression of the state of the labour market due to media's selective reporting of job losses and none on job gains. The media highlights events that are interesting and are hence predominantly bad rather than representative, thereby spreading a distorted picture of reality.
  • Big companies announce redundancies in order to impress the sharemarket or pressure the government for assistance but do not do likewise when hiring.
  • Lack of appreciation of how large the labour market and its turnover rate is. For example, total job losses of say 17,000 is just an insignificant percentage in a workforce of 11.5 million people in which as many people are being hired simultaneously, thereby holding the unemployment rate steady at 5.2%. PM Julia Gillard had used the annual figures of a million workers changing jobs and 300,000 businesses closing/starting to emphasize the remarkable flux of the economy.
  • Stories of the plight of retrenched workers pulling more heartstrings and making deeper impressions than cold and impersonal statistical figures. 
  • Continuous bad news from Europe and America cannot help infecting views about the economy while news about China focus more on the threats than the opportunities.
  • Business people form subjective judgments based on their direct experience and the anecdotes they hear from other business people, reinforced by what the media tell them. Economists too are affected by the mood of the business people they associate with and are not immune to the distorted perceptions of reality spread by the media.   
  • Negative political sentiment towards the Gillard government with many people having decided that the economy is being badly managed.

Mr. Gittins thinks the worry of a diminishing job market is misplaced.  He said that the high dollar is not causing the economy to slow down and shed jobs but are shifting jobs from one industry (e.g. manufacturing) to other industries such as mining, construction and certain service industries.

Is the two-speed economy really caused by the mining boom?

It may be difficult to accurately diagnose the Dutch Disease. Though this effect is named after the Netherlands, some economists have argued that the decline in the Dutch manufacturing industry was actually caused by unsustainable spending on social services. Factors that may have led to decline in Australia's lagging sector include:
  • Debt-fueled growth in property and share prices coming to an end.
  • Declining productivity.
  • Shift of manufacturing to low-cost developing countries.
  • Effects of globalization, labour mobility and outsourcing impacting on local jobs.
  • Structural change in global economy brought about by new technology such as
    • Internet impacting on brick-and-mortar shops, media, publishers and music companies.
    • Automation and robotics, contributing to declining share of manufacturing in the job market (Ref 25).
  • Blame being put on the carbon tax.

RBA Governor Glenn Stevens said that the mining boom is not to blame for Australia's multi-speed economy (Ref 26, 27, 28, 29). He suggested the real reason for the weakness in the retail sector, the housing market and banking was not the higher dollar and the mining boom that caused it but the end of a decade-long debt binge by households. The surge in household wealth in the decade or so leading up to 2007 was driven primarily by unsustainable growth in property and share prices. He said: "I actually think that a lot of the disquiet and dissatisfaction that we see isn't really related to the mining boom at all. I think it's got a lot to do with changes of household behaviour, which come after a very unusual period of strong spending, leveraging up and saving nothing out of current income. And that was bound to end sooner or later and it has. In fact, it ended about five years ago. And we are still, I think, coming to grips with the importance of that now."

He said it was normal for some parts of the economy to be weaker than other sectors. "The economy is always a patchwork, it's never a seamlessly woven garment. It's very rare that all sectors and all regions go at the same speed at the same time. Usually, if that's happening it's a recession or an unsustainable boom. Most of the time when things are normal there are differences."

Optimistic Views of the Future

Chiefs of the RBA and Treasury are optimistic of the economy. In 2009, the then Treasury Secretary Dr. Ken Henry predicted a golden age for the Australian economy lasting to 2050 and beyond, as rapid population growth and growth in several Asian countries would give a boost to the mining boom that will see it last for several more decades. He said when handled correctly, this could set Australia up for "unprecedented prosperity". (Ref 30, 31, 32)

Current Treasury Secretary Martin Parkinson said the economy was growing at about trend pace and underlying inflation was in the middle of the RBA's target zone. ''If you look at those two macro aggregates, you would think things are tracking along in a fairly sweet spot.... Yes, there are challenges but the opportunities ahead of us are the sort we've never seen before. It's almost as if most Australians tend to think we live in Greece. We don't. We actually have an incredibly bright future in front of us.'' (Ref 33)

Treasury Macroeconomic Group Executive Director David Gruen said that Australia was enjoying the biggest mining investment boom in its history. "We and the Reserve Bank have had a look at past investment booms and as a share of the economy, it is about to be more than double the size of any previous one - and the data goes back to the 1860s and the gold rush." (Ref 34)

A May 2012 analysis by the Bureau of Resources and Energy Economics identified "advanced projects" worth a jaw-dropping $260.8 billion, "less advanced" projects worth $242.4 billion and a total investment exceeding half a trillion dollars if all the projects came to fruition. However, the vulnerability of the investment boom was underlined in its June 2012 estimate which cautioned that the number of resource projects under construction will drop from 98 now to just 13 by 2015 if the worsening global outlook prevents further projects going ahead.

RBA Deputy Governor Philip Lowe declared he saw ''a chain that links the investment boom in the Pilbara and in Queensland to the increase in spending at cafes and restaurants in Melbourne and Sydney.'' (Ref 35)

PM Julia Gillard likened the job losses being just growing pains that come with building a new Australian economy that would be more adaptable, flexible and able to seize new opportunities than before (Ref 36).

SMH Economics Editor Ross Gittins wrote in an article that much of the manufacturing worldwide is moving from the developed to the emerging economies such as China and India, where labour is more abundant and thus cheaper. This is a trend affecting manufacturing in not just Australia but everywhere. But what makes Australia stand out from most other developed economies (that depend heavily on manufactured exports) is the great demand of its primary commodities (minerals, energy, food) by the emerging economies, which by virtue of their economic immaturity, are driving most of the growth in the global economy.  This results in a long-lasting change to the global trade structure, with the demand for primary commodities and hence their prices and quantities, growing faster than the demand for manufactures. With China and India having much more economic development to run and a pipeline of developing countries following in their footsteps, the increased global demand for commodities relative to manufactures is likely to last a long time. The improvement in Australia's trading position leads to appreciation of the exchange rate. This inevitably makes it harder for trade-exposed manufacturers and currency-dependent services such as tourist operators and education providers to compete on international markets. However, the higher dollar is helping to shift resources (e.g. labour) out of manufacturing into mining and elsewhere. Proceeds from the mining boom will be paid to employees, foreign owners, local shareholders, local suppliers and Australian governments (as taxes and royalties). As this income is spent, it creates jobs around the economy, particularly in the services sector which accounts for about 85% of all employment and all the net jobs growth for the past 40 years.

The Risks and Pessimistic Outlooks

Professor Bob Gregory made this advice: "If it's a permanent boom, you can behave as if it is permanent and you don't need to do much. But if it's temporary, you want to store as much money as you can for the future." Indeed, we know that our natural resources are finite so what do we do when they run out? Since the booming mining sector is feeding the non-tradable sector which is the largest employer, its demise will mean that alternative sources of growth need to be found to sustain the employment level. It will be difficult to re-establish manufacturing industries that have shifted elsewhere as the supporting infrastructure, skills and logistics chain would have been lost. Technological growth is much faster in the non-booming tradable sector so it will be difficult to later return to the same level-playing field as overseas competitors who would have accumulated an unassailable advantage during the period you are away from the technological battlefield.

Retail mogul and a former RBA board member Solomon Lew attacked the RBA for mishandling the mining boom saying its board lacked an understanding of the broader Australian economy: "I have a view that they are not in touch with the market and don’t understand where the economy is at the moment, there is a big danger in the amount of jobs being lost and that has put a dampener on the economy." He said the eastern seaboard economy was in a state of paralysis: "When you look at the eastern seaboard as far as I’m concerned its completely frozen, there are no new jobs being created; the only jobs are in the west basically and that’s the mining sector." (Ref 37).

Deloitte Access Economics has predicted the two-speed economy would worsen in years ahead, with a rapid acceleration in resource investment alongside further weakness in industries such as home building and retail. (Ref 38). If the economy is over-reliant on one particular sector, then there is less room for maneuvring and nothing else to fall back upon if this does not work out.

The mining sector is vulnerable to the volatility and unpredictability of both the demand and prices for commodities. Unlike Australia's Treasury and RBA, the IMF (International Monetary Fund) is not convinced that commodity prices will stay high. It warns that long-term prices are "even more unpredictable" and their future direction has "unusually high uncertainty". It urges governments to take "a cautious approach ... building buffers to address cyclical volatility." (Ref 39)

The well-being of the Austalia's economy has become hostage to the performance of the Chinese economy. Australia's fortunes become intertwined with that of its benefactor. There is less autonomy and control over the destiny of our economy. Due to a slump in China's manufacturing activity and India's slowest growth in 9 years, Australia's trade has sunk into deficit due to falling demand for its most-traded commodities and slumping of their prices by 10% in the past year (Ref 40). Moody's has predicted the price for iron ore and coal (two of Australia's largest revenue earners) could drop by 40% in the event of hard landing in China (Ref 41). It is no wonder that our political leaders and media were perturbed. Recently, after meeting two of China's top economic policymakers on expectations of stimulus measures, Trade Minister Craig Emerson expressed renewed confidence about the outlook for Australian exports. He said: ''I just remain optimistic that China's growth will be sufficiently strong to sustain economic growth in Australia. I mean the Chinese government knows what it is doing." (Ref 42)

A number of economists think that Australia's mining boom has already peaked. Economists Professor Peter Sheehan and Bob Gregory warned in the Australian Economic Report that although the resources boom continues, its net benefits have peaked. "The boom is no longer boosting growth in the economy nor contributing to improved welfare for Australian citizens. Australia must find new sources of growth and adjust to a new reality of a high exchange rate but without further stimulus from mining. The positive effects of the boom have ceased or become more muted while the negative effects are becoming more pronounced." The study says many new mining projects have limited local content and are effectively 100% foreign owned, giving little direct benefit to the Australian economy. The economists say the high exchange rate has left local industries such as manufacturing, tourism and education vulnerable, threatening jobs and slowing the economy (Ref 43, 44 , 45).

Westpac's chief currency strategist, Robert Renniethe said that the belief that Australia's unprecedented investment boom would go on and on - seemed to have disappeared. ''We've reached the peak.'' AMP Capital chief economist Shane Oliver said the investment pipeline was at or near its limit. HSBC Australia chief economist Paul Bloxham said not all of the projects that were still under consideration would necessarily proceed (Ref 46). Treasury Secretary Dr. Martin Parkinson said that he has sympathy for mining companies as the peak of the resource boom has probably passed and the "golden bit" is over (Ref 47).

Professor Ross Garnaut, Australia's leading climate change and China expert, stressed that the Australian economy was already ''a long way'' into the resources boom. He said: ''We've got a lot of growth in the economy coming from a record level of business investment, which is overwhelmingly the resources sector. Even if that stayed that high, it ceases to be the source of growth that it has been." He said export prices were likely to settle well below their peak, leaving future governments in a difficult position. ''The macro task in the future may very well be managing the dreadful problem of lowering expectations.'' (Ref 48)

In a paper titled The Contemporary China Resources Boom, he warned that Australia faces years of economic instability due to the mining sector's reliance on China's sustained demand for iron ore and coal. His paper challenged Treasury's forecast that China may repeat the experiences of Korea and Taiwan, which had high levels of metals and minerals consumption in the early years of their economic growth and that Chinese demand for resources is likely to be robust until the early 2020s (Ref 49).

Professor Garnaut warned that the Chinese demand for Australian coal could decline as it moves to a more energy-efficient economy. He said: "Coal use in China has hardly increased at all despite the growth in the economy. That is contributing to a surplus of coal in China and internationally, and putting big downward pressure on prices, with implications for Australia." The Chinese government has approved an ambitious plan to reduce its coal consumption by 670 million tonne and its energy use by 21% by the year 2015. It has ordered its steel industry to phase out inefficient mills, shut down  old, low tech furnaces and encourage better recycling of steel and iron products. These radical efforts to tackle climate change and an ageing workforce had shown early signs of success, leading to a potentially dramatic impact on coal, Australia's second most important export earner  (Ref 50, 51).

We should be mindful of technological changes that could wreak havoc on current assumptions, like what the digital revolution has done to Kodak's fortunes. An example most relevant to Australia is the ironic decision of John Hancock, the son of mining magnate Gina Rhinehart, to invest in a business venture developing revolutionary R9 wall panels that would render obsolete the need for reinforcing steel rods in traditional brick houses, where iron ore is a key ingredient in steel (Ref 52, 53).

With growth easing in China, Professor Garnaut, Max Corden and Bob Gregory stressed the need to plan for lower export prices. Professor Corden said that while there was a natural tendency to think booms would go on forever, prices probably had further to fall and the best way to be prepared was to run tighter budgets. Professor Gregory, a former RBA board member, said the huge number of new mines being constructed elsewhere - which could lead to falling prices - was being overlooked (Ref 54).

Policy Options

Economists suggest there are ways (Ref 55, 56) to lessen the impact of the Dutch Disease. Professor Max Corden described in this paper possible policies to deal with the Dutch Disease problem. I think he is discussing more specifically on ways to reduce the harms to the lagging sector. I have expanded the sections below to include more general discussions on boosting employment, keeping skill levels, preparing for the post-mining era and alternative growth areas.

1. Do Nothing

Professor Corden said that the exchange rate appreciation is an inevitable result of the terms of trade boom and capital inflow, both of which have benefits. Some industries rise and some decline, which may be temporary. The government can help in the adjustment process but should resist pressures to prevent or slow the decline of particular industries. This is precisely what the Treasury is doing. Treasury Secretary Dr. Martin Parkinson told a Senate committee the best way to help manufacturers is to improve education, workplace relations, management skills and infrastructure (Ref 57).

On the other side of the globe, the University of Ottawa Economist Serge Coulombe fears that little or nothing can be done to protect Canadian consumers and manufacturers from the effects of Dutch Disease. He said: "I don’t think the manufacturing sector will come back. I think we have to accept that. The growth of China is like a big train. Canada will be more and more a country that will live on its natural resources." (Ref 58)

2. Piecemeal Protectionism

Professor Corden said that helping the manufacturing sector through subsidies or import tariffs is "highly undesirable" and "based on questionable economic thinking". Firstly, how can a government judge which industries have good future prospects justifying special help?

Federal Minister Kim Carr said the government needed to ''ensure manufacturing remains a key part of our economy for generations to come.'' (Ref 59). He argued for protection of the Australian car industry: "What we seek to do is to preserve the capabilities in the bad times, so that we can expand when conditions improve." The protectionist policy will reduce imports of cars, leading to extra appreciation of the exchange rate. If all manufacturing industries were significantly protected, there would be a substantial appreciation (Ref 60), which would worsen the Dutch Disease effects on other lagging sector industries that did not receive the assistance, notably agriculture, tourism and education exports.

Doubts have been casted on the effectiveness of government subsidies.  A $100 million government aid early this year to keep Ford's Victorian operations going until at least 2016 could not prevent Ford from laying off 440 workers (Ref 61). This came after the retrenchment of 350 Toyota workers (Ref 62) and 200 Holden workers (Ref 63) early this year, despite an annual government subsidy of more than a billion dollars to prop up the ailing car industry (Ref 63a). Treasury Secretary Dr Parkinson attacked government intervention to support industries, instead the task should be to transform the car industry and the rest of Australian manufacturing into "something sustainable" with a high Australian dollar (Ref 64).

Another kind of piecemeal protection is the suggestion of requiring the mining industry and governments to source their supplies and services domestically rather than importing or outsourcing them. Likewise, this would lead to greater exchange rate appreciation, benefiting some industries but damaging others and increasing costs due to less efficient sourcing options. A recent case is the backlash over the Federal government's approval for 1700 foreign workers on Gina Rinehart's Roy Hill project and PM Gillard's subsequent move to set up a Jobs Board that will consider Australians first before foreign workers (Ref 65, 66).

Many people had questioned the wisdom of the American government in bailing out its auto industry. However, the US car industry is now dubbed ''The Phoenix" for turning things around so quickly, with GM and Chrysler both having paid back the bailout money, turning record profits and helping to reduce US unemployment rate by rehiring 300,000 workers who lost their jobs during the bailout. Professor John Heitmann, auto industry expert at the University of Dayton, believed the bailout of Detroit has been proved to be the right decision though it was widely unpopular at the time (Ref 67).

3. Encourage Advanced Manufacturing

Dow Chemical's CEO Andrew Liveris has called on Australian governments to scrap their hands-off policy towards the embattled manufacturing sector (Ref 68). He said that ''passivity is not a strategy for growth'' and Australia should change policies to aim for ''a balanced, sustainable economy that adds value to resources'', rather than one dependent on minerals and energy.

He added that Australia has "all the building blocks of a global leader, including a vast quantity of natural resources and a highly skilled, talented workforce'' but it ''has the ingredients, but no recipe". He said: "We believe the government has a big role to play, not by protectionism, but through focused public policies. The current environment does little to address the challenges associated with commercializing new concepts here, and driving the creation of new markets."

He suggested:
  • creating the right environment to encourage export-competitive, innovation-dependent "advanced manufacturing''.
  • increasing investment in innovation by lifting incentives for venture capital, co-operative research centres and R&D commercialization.
  • requiring gas producers to reserve a big share of new gas fields for domestic use at well below world prices, making Australia's huge gas reserves a feedstock for value-added industries.
  • new initiatives to increase the focus on science and mathematics in schools, and partnerships between business, universities and government to develop advanced manufacturing.

What he has suggested is not new. For example, the Singapore government has been actively doing this. Singapore had started with a textile industry but realizing that it cannot compete internationally on labour costs and a strengthening currency, it had since diversified and rapidly moved up the value chain from a labour-intensive to a knowledge-based and innovation-driven one. The manufacturing sector now contributes 20-30% to Singapore’s GDP annually and employs about 20% of Singapore's workforce across vast sectors such as electronics, aerospace, precision engineering, biomedical technology, pharmaceutical, logistics, process, marine, engineering & environmental services and general manufacturing (Ref 69, 70, 71, 72, 73).

Singapore's philosophy is "don't put all your eggs in one basket" so to lower the nation's risks, it has been actively diversifying its economy, identifying and nurturing new growth sectors. This runs counter to Professor Corden's belief that Australia should direct its limited resources to the booming sector to maximize the advantage that can be extracted from it, even if this means the country ends up with one predominant industry driving the economic growth.

Professor Corden also thinks that the government could not and should not determine which particular industries have brighter prospects for the nation. In other words, let the free market decides. This line of thought also vastly differs from that of the Singapore government, which has been very proactive in identifying and developing strategies for Singapore's economy, including mapping out which industries have promising futures and that the nation could develop a competitive advantage in. A good example is the decision in recent years to develop the biomedical industry, for which the Singapore government has mobilized all its resources from implementing life sciences curriculum in secondary schools, to attracting investments from multi-national corporations to building research hubs such as the Biopolis (Ref 73a). Government intervention, initiatives and leadership are in fact a common characteristics of successful Asian economies.

4. Run a fiscal surplus combined with lower interest rate

The threat of Dutch disease can be reduced by slowing the appreciation of the real exchange rate. This can be achieved by reducing large capital inflows through increasing national saving in the economy (Ref 74).

The best way is for the government to cut spending to achieve or increase a budget surplus. This would have a contractionary effect on demand in the economy. Taking pressure off inflation would allow the Reserve Bank to ease its monetary policy and lower the official interest rate which would reduce the net capital inflow into Australia. The government can also encourage individuals and firms to save more by reducing income and profit taxes and increasing superannuation (Ref 75). By increasing saving, the government can reduce the need for loans and hence capital inflows to finance deficits and foreign direct investment.

The advantage of this option is that it benefits all lagging-sector industries evenly and is more efficient than piecemeal protectionism (Ref 76).

5. Exchange Rate Control/Protection

The most draconian approach is to adopt a fixed exchange rate at a level to enhance export competitiveness (Ref 77). However, this will remove the central bank's ability to control the interest rate. Interestingly, unlike many other central banks, the Monetary Authority of Singapore (its central bank) does not regulate the monetary system via interest rates. Rather, it does so via the foreign exchange mechanism - the Singapore dollar is allowed to float within an undisclosed bandwidth against a concealed basket of currencies of Singapore's major trading partners and competitors. This ensures that Singapore's exports remain competitive while allowing more control over imported inflation. This strategy appears to work - its inflation rate averages 2.8% from 1962 to 2012 (Ref 78) despite many years of strong double-digit GDP growth (Ref 79, 80). Its headline CPI inflation averages 3.5-4.5% in 2012 and core inflation is projected to average 2.5-3% (Ref 81).

In previous Australian commodities booms, the nominal exchange rate was either fixed or managed very tightly against a trade-weighted index of currencies. The real exchange rate could therefore only adjust through inflation and the past three commodities booms ended with a burst of high inflation followed by recession (Ref 82, 83). Opposition Deputy Leader Joe Hockey said it was impractical for the RBA to intervene to lower the value of the Australian dollar which is now the fifth most widely traded currency in the world (Ref 84).

Professor Corden described exchange rate protection as any policy that will depreciate the exchange rate through either:
  • imposing controls/taxes to reduce capital inflows.
  • encouraging capital outflows e.g. via superannuation regulations or tax concessions.
This strategy creates winners and losers. All tradable industries (including the miners) benefit evenly from the lower exchange rate but the much larger non-tradable sector loses by having to pay more for imports. The discouragement of investment at home may lead to underinvestment.

6. Establish a Sovereign Wealth Fund (SWF)

One approach is to sterilize the boom revenues, that is, not to bring all the revenues into the country all at once, to save some of the revenues abroad in special SWFs and to bring them in slowly. Sterilization will reduce the spending effect. Another benefit of letting the revenues into the country slowly is that it can give a country a stable revenue stream rather than not knowing how much revenue it will have from year to year. By saving the boom revenues, a country is also saving some of the revenues for future generations and for future adverse events, especially the end of the mining boom (Ref 85). The sovereign wealth fund would also give Australians an internationally diversified nest egg, reducing any risk that may apply to investments at home.

Countries that were said to be successful in preventing Dutch Disease include Norway, Singapore, and to a lesser extent, Russia. These countries set up SWFs that would pull in capital inflows and then pay out over a longer time period, allowing the countries to avoid the boom-bust cycle (Ref 86). Norway was successful chiefly because it quarantined the proceeds of its big oil discoveries into a SWF, the Petroleum Fund, for long-term investment. This fund, founded in 1967, not only reduces the upward pressure on the krone and protects the country’s exports but has also now grown to $400 billion, roughly the size of Norway's total GDP.  It saved, invested and prospered. After a century of lagging behind its neighbours, it pulled ahead of Sweden and Denmark because of the smart stewardship of its new wealth. (Ref 87, 88, 88a)

However, IMF is unimpressed by the case for SWFs (such as those by China investing in foreign government bonds offering low returns), saying the money would deliver a bigger return if it were invested in physical and social infrastructure to lift future productivity (Ref 89).

While South Australia and Western Australia were taking steps towards establishing their own SWFs, the federal parliament (both the Labour and Coalition parties) voted against establishing a national fund (Ref 90). Minister for Employment and Workplace Relations Bill Shorten claimed that Australia already has a SWF in the form of superannuations. He voiced concerns of potential conflicts with the government acting as both a regulator and investor in key industries and the potential for such a fund to have a destabilizing influence on markets (Ref 91). Treasury Secretary Martin Parkinson queried the fiscal benefits of a SWF and a series of reports and articles cast doubt on the appropriateness of these investment vehicles for Australia.

Australian journalist Paul Cleary said that "Australia risks failing to maximise its long-term gain from the boom by not capturing a larger share of the profits made by resources companies (through tax), due to the unwillingness of either side of politics to establish a sovereign wealth fund." (Ref 92)

Future Fund Chairman David Murray had argued the case for a SWF to prepare for and lessen the burden of known future liabilities. He said that "Australia remains a savings-short nation and suffers a considerable infrastructure investment gap" despite an average 3.3% annual GDP growth in the past 20 years. He noted that cynics tend to downplay the finite nature and inherent risks of Australian resources. SWFs would "focus governments on priority areas for long-term investment by ring-fencing portions of public capital for specific needs and quarantining these funds from the politicised budget cycle." (Ref 93)

Former Treasury Secretary Dr. Ken Henry dismissed the idea of a SWF as ''purely fanciful'' as Australia does not have the mining taxes of countries with SWFs, such as Norway (Ref 94).

7. Mining Tax

IMF advised that governments earning revenue windfalls from commodity exports should adopt counter-cyclical policies, that is, stash away windfalls and increase taxes in boom years to keep the economy on an even keel, then spend the windfalls and cut taxes when the boom goes bust (Ref 95).

Professor Corden argued that the mining tax would not greatly reduce the Dutch Disease effect. Connolly and Orsmond estimated about 4/5th of the Australian mining industry is foreign-owned. The mining tax would reduce the aftertax profits and dividends paid to foreigners but not the industry’s output and spending effect (demand for domestic goods and services). Although the tax can be used to finance a fiscal surplus, which is then paid into a SWF, it has no effect on Australia’s exchange rate and would not help struggling manufacturers. A mining tax rate that is high enough to reduce the industry's output and spending effect would have "killed the goose". (Ref 96)

Opposition to the original Resource Super Profits Tax (RSPT)  was said to have triggered the coup that led to the downfall of the former PM Kevin Rudd. This was replaced by the much watered-down Minerals Resource Rent Tax that Julia Gillard negotiated with the three biggest miners, BHP Billiton, Rio Tinto and Xstrata after she took over as the PM (Ref 97, 98).

(Minerals Resource Rent Tax)
(Resource Super Profits Tax)
Headline Rate 30% 40%
Taxable Minerals Iron and coal All minerals including sand, gravel and limestone
Trigger Point 10-year bond + 7% return on assets
(currently 12%)
10-year bond
(currently 5%)
No. of tax-liable companies About 320 About 2,500
Forecasted Tax Revenue Feb 2011 forecast:
$38.5 billion (2012-2021)
Feb 2011 forecast:
$99 billion (2012-2021)
Start Date 1/07/2012 1/07/2012
Tax Depreciation Investment made from 1/7/2012 can be written off immediately rather than depreciated over a number of years. -
Superannuation Guarantee Rate Raised from 9 to 12% Raised from 9 to 12%
Company Tax Rate Lowered from 30 to 29% by 2013-4
Scrapped - unable to get support from Opposition and the Greens, replaced by family payments and schoolchildren's bonus (Ref 99)
Lowered from 30 to 29% by 2013-4
Further to 28% by mid-2014

Table showing MRRT vs RSPT (Ref 100, 101, 102)

Disappointments were expressed over the diluted backdown tax. The Age's Economics Editor Tim Colebatch said that the original 40% tax on superprofits in all mineral sectors would have sharply slowed growth in the mining industry, slowing the appreciation of the Australian dollar and allowing other industries more room to grow (Ref 103). The Greens' former leader Bob Brown was unhappy with the scope of MRRT and had pushed for the inclusion of uranium, gold and rare earths in the tax. He was against refunding of state royalties to the mining companies (Ref 104, 105). He said: "I am worried that the revenue won't be as good as the government is indicating....It should indeed go across all minerals....I would like to know a lot more too about why it is that the federal government wants to return state royalties back to the mining corporations....I think that is daft and I think it should be dumped."

The argument against the mining tax is that this will discourage mining investments. However, this article shows that reports of the mining industry's death have been much exaggerated. It said: "The mining industry has invested some $104 billion in new equipment, building and machinery since RSPT was first announced...The miners are again struggling to find enough workers due to the unprecedented investment boom." The 40% Petroleum Resources Rent Tax (PRRT), introduced by the Hawke government in 1986, has not deterred a single cent of foreign investment in the quarter of a century since it was introduced, so there is no reason to suggest the MRRT will either (Ref 106).

SMH's Business Columnist Ian Verrender gave a summary of the aggressive steps taken in Indonesia and across Africa over the past three years to ensure the one-off windfall gains from the resources boom are not lost forever. He concluded that the MRRT is much lighter than these proposed new tax regimes and hence is likely to be a big attraction. Coupled with "a sophisticated and independent legal system, an advanced democracy, modern infrastructure and an open policy on foreign investment, Australia wins hands down as a place to dig for minerals".

The government's estimate of the mining tax revenue (Ref 107) has been challenged by doubts that this revenue source is reliable (Ref 108) and warnings that much less tax would be raised in the initial years (Ref 109). "The federal opposition has claimed for some months that the mineral giants - BHP Billiton, Rio Tinto and Xstrata - have told it in private that they will pay next to no mining tax in the first few years." (Ref 110)

8. Increase the Domestic Value of the Mining Industry

One concern is the high foreign ownership of mining companies and how to keep as much of the benefits of the mining boom to within the country.

Indonesia enacted a new law No. 24 on 8 Mar 2012 that requires foreign mining companies to gradually divest their ownership down to a maximum of 49% within 10 years of starting production. By 2014, miners must also process minerals such as iron, nickel and coal into value-added products before export.  Simon Sembiring, the man who wrote the controversial mining law, defended the decree. He said foreign companies, through the mines' ownership and contracts with mining service companies, had kept much of the value of Indonesia's raw materials. However, Indonesia had the skills and workforce to value-add through smelting all the mining outputs so that more of the profits would stay in Indonesia. It appears that this new rule has not deterred global companies such as Vale and Newmont Mining. Edward Rochette, chairman of Vancouver-based East Asia Minerals, said: "Indonesia is, without a doubt, one of the top three places for current investment in mineral projects." "There's a little concern about what's happening", he said, adding that companies can't dismiss the opportunity for mineralization in the country. Australia's ambassador to Indonesia, Greg Moriarty, said that ''the cost of not being in Indonesia far outweighs the cost of being there.'' (Ref 111 , 112, 113, 114, 115, 116, 117)

Many Australian mining companies, particularly the high-grade iron ore miners in the Pilbara, dig ores that are sent overseas almost immediately without any processing or beneficiation (Ref 118). Billionaire miner Clive Palmer suggested that the federal government could mitigate the nation’s two-speed economy by enacting policies that encouraged more stages of the mining process to occur within Australia, particularly in the south-eastern states, rather than overseas. He said: "We should be taking the resources that we have in this country to the states that don’t have the resources and setting up downstream processing."  (Ref 119)

9. Raise the productivity

Treasury's Head of Macreconomics Dr Gruen said the terms of trade could work against Australia in the future, which meant productivity gains would have to become the main driver of national income growth (Ref 120). He said that Australia suffered from poor management practices compared with the US and other markets, and that the problem was hurting Australia's productivity (Ref 121).

RBA Governor Glenn Stevens said that boosting national productivity is the only way Australians will improve their standard of living now that resource prices have peaked and the key to unlocking productivity gains was in adapting to the high Australian dollar.  He said that for businesses, it is about "people everyday doing a thousand different things better than yesterday" and for governments, it is about "making sure there are no impediments in the way to that process".  (Ref 122123, 124).

Areas that have been cited for raising productivity (Ref 125, 126, 127) include:
  • Improving infrastructure (e.g. high-speed broadband, roads and rails, removing level crossings, etc.) Australia has an estimated backlog of $700 billion of infrastructure projects which could raise productivity significantly if they were built.
  • Tax reform
  • Education and skills
  • Encouraging innovation and startups
  • Cutting bureaucratic red tapes and raising governance standards
  • Labour market policies
  • Deregulation - reducing regulatory barriers
  • Improving foreign investment rules
  • Encouraging workforce participation e.g. through boosting childcare arrangements
  • Improving state and federal relationships which remains politically difficult

Former BHP Billiton Chairman and NAB CEO Don Argus said the lack of productivity has been Australia's Achilles' heel. He said for the past decade, Australia's productivity had been falling relative to other countries but was camouflaged by the unprecedented boost to the terms of trade that has occurred because of China's rapid economic development. He highlighted the IR (Industrial Relations) laws and the carbox tax as major risks to productivity (Ref 128). His call for a renewed focus on productivity had received support from prominent business and union leaders such as Business Council of Australia President Tony Shepherd, ACTU assistant secretary Tim Lyons and former RBA board member Hugh Morgan. These business leaders think that low productivity is the result of over-regulation, taxes, skills shortages and pro-union IR laws (Ref 129, 130). Productivity Commission Chairman Gary Banks also entered the debate by calling on the Federal Government to open the IR system and unions to greater scrutiny (Ref 131, 132, 133, 134)

Amid growing business calls for a focus on productivity, former Treasury Secretary Dr Ken Henry said that it was simplistic to imagine the country's problems could be solved by ''another round of productivity reforms''. He said business leaders battling the high dollar must adopt a ''new mindset'' if they are to survive, rather than assuming old policy prescriptions will be enough.  He suggested ''offshoring'' as one option that had been used effectively by some Australian companies (Ref 135).

10. Learn from the Germans - the Mittelstand Model

Germany's Mittelstand companies are SMEs (small and medium sized enterprises) which form the backbone of Germany’s economic success, contributing to 50% of Germany's GDP and employing 70% of its workforce.  They possess the following characteristics:
  • Typically privately-owned and often based in small rural communities.
  • Owner-managers often show a "love for the business" and rub shoulders with workers.
  • "Job for life" employment approach (employees are part of the family).
  • Benefit from Germany's apprentice system, which supplies qualified workers in 344 recognized and guild-controlled trades.
  • Harmonious industrial relations.
  • Focus on innovative, high-value, niched products selling into global markets.
  • Focus on long-term profitability rather than quarterly or annual pressure to meet expectations.
  • Modern/innovative management practices e.g. employ outside professional management, lean manufacturing practices and total quality management.
  • Work closely with universities and researchers and cluster themselves around big manufacturers.

The Mittelstand approach of constant innovation, doing things faster and smarter than competitors, enables these businesses to offset the disadvantage of a cost base that is higher than their Asian competitors. Mittelstand is also a philosophy and way of living/working that is not dependent on size. BMW, for example, views itself as a Mittelstand business despite its global scale. This is reflected in the strength of inter-personal relationships and short decision cycles that characterise its operations (Ref 136).

SMEs are important to Australia because they are both the largest contributors to GDP and the largest employers, employing 38% of the workforce or some 4.8 million Australians (Ref 137).

11. Slow down the mining boom

The blessings of nature usually turn out to be a curse almost all the time. Many resource-rich developing countries do not have a happy ending. Even the few successful countries, like Australia, are still under threat from nature's bounty. When the treasure under the soil surges in value, it can destabilize a country and throw it into economic turmoil. This is such a well-established phenomenon that Economics Nobel Laureate Joseph Stiglitz recently asserted it as a general principle that "the extraction of resources lowers the wealth of a country". The record is so bad that Stiglitz advised: "If a country is unable to use the funds well, it may be preferable to leave the resources in the ground." (Ref 138)

Dr Richard Denniss, Executive Director of the Australia Institute, has put forwards a macro-economic case for slowing down the mining boom (Ref 139). He said that a huge amount of mining activity in a  short space of time will inevitably create "macro-economic externalities" - adverse spillover effects on the rest of the economy in the form of skilled labour shortages, wages pressure and probably a higher-than-otherwise dollar. He asked: "if a profit-maximizing monopolist owns all of Australia's mineral resources, would he build as many new mines as possible and as quickly as possible in response to the current exceptionally high world prices? Would he bid against himself for scarce labour and infrastructure capacity or would he invest in training and infrastructure before expanding production?"

Knowing that Australia would not lose if the commodities stay in the ground a little longer, he proposed that new mining projects be required to bid at auction for a set number of development permits. This would ensure the most profitable projects proceed first, the maximum benefits will be extracted over a longer period of time and the economic activity will be under control to prevent overheating and competition for scarce resources. This strategy reminds me of Singapore's Certificate of Entitlement (COE) system designed to control road congestion by limiting car ownership. It requires drivers to bid for the right to buy a motor vehicle from a fixed number of COEs per month. A bidding system for mining permits may turn out to be a sizable source of revenues for the government.

12. New Growth Frontiers

Australia has been called the "lucky country" as it is endowed with natural resources. Two other resource booms are around the corner even before the current commodities boom has ended its run.

A study by Deloitte Access Economics shows that Australia is headed for a ride on a massive natural gas boom that will propel the nation to a new level of economic heights. It says over the next few years, substantial additions to capacity will drive Australia towards becoming the world's second-largest exporter of LNG. Of the 14 gas liquefaction plants under construction or firmly committed around the world, 8 are in Australia. If all the planned investments are realized, they will comprise more than 64% of all Australian investments. The oil and gas industry which presently contributed 2% of Australia's GDP would contribute 3.5% in 2020. By 2016, GDP is expected to be 2.2% higher than it otherwise would have been. The report says the boom will depress the economies of NSW and Tasmania while dramatically boosting those of Western Australia and Queensland (Ref 140, 141, 142).

Dongyi Hua, the head of a $7 billion Chinese mining project in the Pilbara, told PM Julia Gillard and Perth business leaders that soaring demand for Australian food, particularly beef, among China's 100 million wealthy people could buffer Australia's economy from the effects of an end to the mining boom. He said that Australia has a golden opportunity to meet China's soaring demand for high-quality food and he would prefer to invest in agriculture rather than iron ore, given the risk of falling prices for the steel making ingredient (Ref 143).

Western Australia and Queensland are booming while Victoria and other non-mining states are suffering massive manufacturing job losses. What could be done to address this imbalance?  Victoria Premier Ted Bailieu has the answers. A plan to boost brown coal mining in the Latrobe Valley was announced in March 2012. State Resources Minister Michael O'Brien said: "The Victorian government believes that brown coal can, and should, play a key role in our energy future. Encouraging new investors and the right technologies could deliver a new generation of industry in the Latrobe Valley, boosting the local economy and creating new jobs." (Ref 144). Federal Resources and Energy Minister Martin Ferguson said that new technologies have the potential to allow Victoria to export brown coal and to transform the Latrobe Valley into a mining export hub on the scale of the Pilbara (Ref 145).

While brown coal mining is dependent on yet unproven clean coal technologies, Victoria has been an important food-growing region for a long time. Premier Bailieu said: "We hear a lot about the mining boom, but not so much about another boom that's just around the corner - and that's the food boom. The rise of Asia, fueled by a prosperous and growing Asian middle class is quite extraordinary. And it presents huge opportunities for Victoria." (Ref 146)


There is much research on the Dutch Disease and there is no lack of suggestions of how to deal with it.  I believe a combination of the policy options will help to mitigate the problems of the two-speed economy. I hope that there will be an initiative for a discussion between the government, politicians, economists, industry leaders and the business community on what are the best ways forward.

The measures taken should achieve the following outcomes:
  • A long-lasting and sustainable economic prosperity.
  • Full national employment - anyone who wishes to seek a job should be able to get one.
  • More balanced distribution of economic growth throughout the country.

The government is proud of an unemployment rate of 5.2% which it considers an achievement envied by other countries (Ref 147, 148, 149). Treasury Macroeconomic Group Executive Director David Gruen said it had been ''a longstanding practice'' to regard full employment as 5% (Ref 150). Treasury Secretary Dr. Martin Parkinson said: "The Australian economy is growing solidly and our expectation is for it to grow close to trend over the next year. Importantly, this growth has not been accompanied by signs of emerging economic imbalances. We have close to full employment and aggregate wages and prices are in check." (Ref 151)

The official view by the Treasury and RBA that a 5% unemployment rate means full employment was ridiculed by Brian Redican of Macquarie Bank. He said: "Many other economies have been able to get unemployment below 4% without generating higher inflation. Australia also achieved this in the 50s and 60s." If it were true unemployment could not fall below 4.75% without generating inflation, as officials imply, "it reflects a failure of policy to equip the unemployed with the skills demanded by the economy". (Ref 152)

Indeed, many economies have an unemployment rate of below 5.4% (Ref 153). For example, Singapore and South Korea have unemployment rates of 2.1% and 3.2% respectively.

Greg Evans of ACCI (Australian Chamber of Commerce & Industry) was particularly critical. He said: "The rate of labour force under utilisation stands at 12.2% of the workforce, implying that roughly 1 in 8 in the labour force or 1.44 million people are unable either to find work or sufficient hours of work. There are a further 1.3 million people who want work but are not classified as part of the labour force. It is difficult to reconcile supposed 'full employment' with the fact that the labour market is not meeting the needs of 2.7 million Australians."  (Ref 152)

In its annual Employment Outlook report, the OECD pointed out that under-employment in Australia is well above the OECD average, with 875,000 workers or 7.2% of the workforce wanting more work. Although the report says that underemployment is better than unemployment, it ''can have long-term consequences for career progression, earnings potential and retirement income''. (Ref 153)

Hence, if you add in the number of people not actively looking for jobs, those under-employed and those on part-time and casual jobs rather than full-time jobs, then the situation will be much less optimistic. It may be time to debate whether 5% unemployment represents an adequate target for the country.