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Australia's economic growth secret: It's not mining, and it's not micro reform...

Australia's economic growth secret: It's not mining, and it's not micro reform...

Reading John Edwards Beyond the Boom, I am struck by how easy it is to take the same facts, and treat them as good or bad news. The factual core of Edwards' argument is that the importance of the mining boom to the living standards of ordinary Australians has been greatly exaggerated. 

I entirely agree. To quote my own evidence to a Senate Committee inquiry the Minerals Resource Rent Tax in 2013:

The mining boom has already reached or passed its peak, and most Australians have seen little or no benefit as a result. Employment in the mining sector peaked in 2012 at a little over 2 per cent of the workforce. Mining-related activities, particularly construction, have generated more jobs, but are also at or near their peak. Employment gains in mining have been offset by the adverse effects on other industries of the sustained overvaluation of the Australian dollar. 

Income flows from mining have been dominated by profits, mostly accruing to overseas corporations, and to a handful of wealthy Australians, whose gains have primarily been the result of successful speculation, rather than any contribution to the discovery of mineral resources or their efficient extraction.

Edwards gives the numbers on this: for every $100 in value added by the mining industry, state governments get $6 and employees get $20. This leaves a profit of $74. Of that amount, the federal government gets $14, foreign shareholders get $48, and Australian resident shareholders get $12.

From one viewpoint, this is a bad news story. By virtue of the failure to secure an adequate return from our publicly-owned minerals, Australia missed the benefits of the boom. And, given the near-certainty that the (already heavily compromised) Minerals Resource Rent Tax will be repealed in the near future, it seems likely that this experience will be repeated.

Fortunately, the one element of the Rudd Government's response to the boom that seems certain to be retained is the extension of the Petroleum Resource Rent Tax which will apply to the LNG projects that look set to be the primary source of future growth in the resources sector.

On the other hand, the fact that we derived little benefit from the boom can be seen as a good news story. [fold]

As Edwards points out, most of those who suggest that we squandered the boom take this to mean that we dissipated the benefits of the boom on wasteful private and public consumption, or by relaxing the pressure for unremitting economic reform that is taken to be the essence of good public policy. 

It follows, in this view, that the end of the boom will produce a painful readjustment to reality. The usual end of such an analysis is a sermon on the need for a renewed round of micro-economic reform, essentially consisting of 'the list' of proposals remaining from the agenda of the 1980s.

But this analysis makes sense only if we (Australian governments and ordinary households) received the benefits of the boom in the first place. In reality as Edwards points out, households in particular have seen hardly any benefit from the boom. Ever since the 'wake-up call' of the global financial crisis, Australians have been busy tightening their belts and paying down household debt.

Edwards is similarly effective in his critique of the ritualistic calls for more reform, criticising the 'black armband' view of Australian economic history and noting that such rhetoric 'very often disguises as imperative reforms in the general interest proposals that in reality merely benefit one group of Australians over another.'

The kinds of reforms we really need are those that enhance human capital and encourage innovation. These reforms have been almost entirely neglected by the advocates of 'the list', who have maintained their focus on the issues of last century, and their focus on reducing public expenditure. Again, as Edwards observes, the real problem with fiscal policy in Australia has been the damage to revenue caused by the tax cuts of the Howard Government.

If I have one major point of disagreement with Edwards, it is his failure to discuss macroeconomic policy. Australia has experienced more than two decades of steady growth since the recession of the early 1990s. This is not, as is commonly claimed, the result of microeconomic reform. New Zealand implemented much the same reform agenda, and its economic performance has been miserable. Rather, it is because Australia's macroeconomic policymakers have made the right calls when it mattered most.

In the Asian crisis of 1997, the Reserve Bank kept interest rates low and allowed our currency to depreciate against the US dollar, in line with those of our Asian trading partners. And, when we were threatened by the GFC, Australia undertook more substantial and effective stimulus than the US or Europe.

Unfortunately, there is no guarantee that such good sense will prevail in the event of a future crisis. The rhetoric of the Abbott Government has been based on demonisation of the stimulus that saved us from the GFC, and on absurd alarmism about public debt. Fortunately, its actual fiscal policy has been far less contractionary than its rhetoric would suggest. Still, it is easy to imagine that a future macroeconomic shock would be met with policies of austerity, with predictably disastrous results.

But this is a minor issue. Edwards offers a welcome critique of the dominant rhetoric of the Australian public policy debate, which echoes the apocalyptic tones of those who warned, a generation ago, that we would by now be the 'poor white trash of Asia'. We are, as Edwards says, well placed to prosper in a future where the mining sector has returned to more its more normal role as a substantial, but still relatively minor, driver of economic activity.

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