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Beyond the Boom

25 Jun 2014 12:01

The Lowy Institute is, first and foremost, a research institution. We publish research that is accessible to policy-makers and non-specialist readers. Often this will mean writing succinct, pithy analyses for readers who are short of time. But the biggest issues require deeper exploration: this is where the Lowy Institute Papers come in.

Since our establishment eleven years ago, the Institute has published over thirty of these monographs. Past Lowy Institute Papers have addressed topics such as the rise of India as a economic power, the growing role of diasporas in the world, the relationship between climate change and security, and Islamism in Southeast Asia.

COMMENTS

25 Jun 2014 14:58

In widely reported censures by business leaders and economists, in warnings by politicians, public servants and journalists, we often encounter grim themes about the Australian economy. The mining boom accounted for Australia's apparent economic success in recent times, they say. But Australians wasted the boom through fecklessness and complacency, they continue, and the boom is now over. It follows that Australians face a bleak future as they adjust to falling commodity prices, falling mining investment, and a backlog of painful but necessary economic reform.

In Beyond the Boom I dispute all four propositions.

COMMENTS

27 Jun 2014 11:56

Unemployment remains fearfully high in much of Europe, growth in the US is tepid and China may be on the verge of an unprecedented slowdown. In the midst of all this unpleasantness, Australians look around their bountiful land and ask, Can our luck last?

In Beyond the Boom, John Edwards, says it can. More precisely, Edwards argues that significant reforms in product and labour markets and in social policy in the 1980s and 1990s led to strong growth in the decade before the export boom. Moreover, with a few exceptions, Australians used the boom to make appropriate investments in physical and human capital. Speaking as an admirer of Australia from afar, I agree with a great deal of Edwards' analysis.

COMMENTS

30 Jun 2014 10:34

There are two phrases that sum up John Edwards' new book, Beyond the Boom, a Lowy Institute Paper released last week. They are:

  • Mining boom? What mining boom?
  • She'll be right, mate.

While I disagree with both propositions, I am in heated agreement with Edwards' dismissal of the pessimism of two eminent Australian economists, Ross Garnaut and Bob Gregory. Both predict tough economic times ahead for Australia based on a difficult transition from a mining-investment-led economy to something else.

Should we accept Edwards' assertion that the mining boom was overrated? Of course, he accepts that mining investment shot to close to 10% of GDP – something which is almost without historic parallel – and that pre-2008, mining company profits were making a massive contribution to the ramp-up in company tax receipts.

His two main point of defence are that mining is just not big enough and national income was growing as strongly, if not more strongly, in the decade before the mining boom commenced.

COMMENTS

1 Jul 2014 17:03

'We'll all be rooned,' said Hanrahan, 'before the year is out.'  

Pessimism is a key part of the great Australian tradition, reflecting a history of booms and busts. It has infected the debate on the mining boom of the past decade. But how does it make sense to treat a once-in-a-century windfall of astonishing export prices as if we would have been better off without it? John Edwards' Beyond the Boom provides a much-needed antidote to this pessimism.

It's one thing for business leaders and journalists to put forward attention-grabbing gloom. But the hand-wringing has been shared by high-profile economists with rigorous analysis to back their views. John Edwards addresses this group with a detailed deconstruction of what the minerals boom has brought.

COMMENTS

2 Jul 2014 13:30

The 'end of Australia's mining boom' is one of the most anticipated developments in geo-economics. The writing has been on the wall for a while: in the next few years China's metal consumption will peak and then decline, and all the while Australian mines have expanded aggressively. There will not be another customer to replace China. It may all end badly.

COMMENTS

4 Jul 2014 09:37

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.

COMMENTS

7 Jul 2014 08:14

Judith Sloan sums up my Beyond the Boom paper in two propositions: 'what mining boom?', and 'she'll be right, mate'.

Those who have read the paper will recognise these propositions as gross caricatures. For those who haven't got round to reading the piece, I should explain that I argue that the mining boom is by no means over and in some respects has barely begun, and that it has had substantial effects on both output and income. I also point out, however, that in the ten years before the boom Australia had higher real income and output growth than it has had since, and that the income and output gains from the boom have been more modest than widely believed.

COMMENTS

11 Jul 2014 10:05

John Edwards' Beyond the Boom is a welcome follow-up to his 2006 Quiet Boom, which I reviewed at the time in conjunction with Ian Macfarlane's Boyer Lectures.

I agree with the argument that economic reform should not be sold on the basis of a faux crisis or economic failure narrative. If proposed reforms are worth doing they are worth doing regardless of where we sit in relation to the business cycle or the budget outlook.

John notes that households saved the Howard Government's tax cuts and that household saving would have been lower in their absence. This is an important observation, because it demonstrates the private saving offset to changes in public saving. Possibly to spare his readers the jargon, John didn't mention this as an example of Ricardian equivalence, but it is clearly relevant here. I made much the same argument at the time.

COMMENTS

14 Jul 2014 10:07

Growth in HALE index, Intangible GDP, net national income and GDP, 2005-2014.

John Edwards' Beyond the Boom tilts effectively against Australia's congenital Hanrahanism. It points out the extent to which we managed to finance the wild ride of the boom (the massive surge in mining investment, from 2% to 7% of GDP) without blowing out our current account deficit and foreign debt or setting off an inflationary spiral as we've done in the past. 

We did it with a floating exchange rate, superior macro-economic policy and higher savings. How many people are aware of these facts as recited by Edwards?

COMMENTS

14 Nov 2014 13:40

In a paper published recently on the Minerals Council of Australia website, Adelaide-based economist Jonathan Pincus takes issue with some of the calculations I make in my Lowy Institute Paper Beyond the Boom. He makes a number of criticisms, but the big one is of my estimate of the income gain from the first decade of the mining boom. I put this gain at 3% of nominal GDP, comparing 2002 to 2012.

Essentially, Pincus claims that the gains from Australian mining exports should be calculated in US dollar prices rather than Australian dollars. If they are calculated in this way, the gains are bigger because over this period the Australian dollar appreciated. He then 'corrects' my estimates with his.

COMMENTS

27 Nov 2014 17:12

Senior economic policy makers, economic analysts, academics and commentators have been concerned about the daunting challenge of structural and budget adjustment facing Australia due to the decline in mineral prices from the levels reached in the boom period of 2003-04 to 2011-12.

In Beyond the Boom, John Edwards estimates that the mining boom contributed 3% to GDP: 'Three per cent of real GDP is big, but as a change over eight years it is not that big'. This estimate of 3% is central to Edwards' strong dissent from the widespread belief that Australia is facing a formidable challenge. Because of Edwards' profile and appointments, including on the Board of the Reserve Bank of Australia (RBA), his assessment carries weight in the policy debate.

COMMENTS

23 Dec 2014 12:00

In a post here a few weeks ago, Adelaide economist Jonathan Pincus claims that my Beyond the Boom book confuses output and income. Fair readers will find that Beyond the Boom is painstaking in making exactly this distinction. It is central to understanding the mining boom, which is why I wrote quite a lot about it.

In the book I calculate the effect of the mining boom on real GDP comparing the years 2012 to 2002, and quite separately – indeed, in another chapter, with the distinction and its importance explained – I calculate the income gains. In yet another chapter I discuss a different way of calculating the income gain.

COMMENTS