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Policies Not Mining Responsible for Oz Prosperity

Good Institutions and Policies, Not Mining, Responsible for Australia's Prosperity
By Roger Kerr

Speaking on TV One’s Agenda programme recently, finance minister Michael Cullen said, “Don’t forget Australia’s wealth is very largely built on its quite crude minerals exports, particularly gas and coal.”

This is a serious gaffe for a long-serving finance minister to make, and was surely not one based on Treasury advice. It is also ironic for one who has promoted the ‘knowledge economy’ and disparaged ‘commodity production’.

A quick look at official Australian statistics reveals that the Australian mining sector is far too small to be the driving force of the economy.

In the 2006/07 June year, mining contributed just 7.1% of Australia’s gross domestic product (GDP). The definition of mining includes exploration, services to mining, extraction and the preparation of crude minerals for marketing. It covers coal, ores, petroleum and gas.

Because mining is a capital-intensive industry, its percentage share of total employment is even lower – only 1.3% in 2006/07. A moment’s reflection indicates that Australia’s economic performance can’t possibly rest on the shoulders of 1.3% of the labour force.

Mining is far from being Australia’s largest industry. Its contribution to GDP is a little over half the size of property and business services (12.2%), 70 percent of manufacturing (10.3%), similar to finance and insurance (7.2%), and a little larger than construction (6.8%).

Of course Australia has benefited recently from the strong terms of trade associated with its hard commodities. In the past five years, these have been estimated to account for around 40% of the total gains in real net disposable income per head in Australia.

However, the comparable figure New Zealand, estimated at about 33%, is not substantially lower, because of price increases in the soft commodities we export.

A breakdown of Australia’s economic growth in 2006/07 also helps put mining in perspective. The main mining states, Queensland and Western Australia, contributed 0.9 and 0.8 percentage points respectively to growth in GDP, but Victoria, at 0.7 percentage points, was not far behind and all states made positive contributions.

Moreover, mining growth in Queensland contributed only 0.1 percentage points of its GDP growth of 4.9% (ie about one fiftieth).

And for the Australian economy as a whole, the construction, finance and insurance, and property and business service industries each contributed about as much to national GDP growth in 2006/07 as mining.

The same picture is confirmed by a look at the Australian stock exchange. Only three mining companies, BHP Billiton, Rio Tinto and Woodside Petroleum are in the top 20 companies on the ASX (and the first two of these are global companies with many operations outside Australia).

Interestingly, the productivity performance of the mining industry does not appear to have contributed in recent years to Australia’s GDP growth. Indeed, measured productivity in mining appears to have declined somewhat, due in part to an investment phase (more inputs) in advance of greater outputs coming on stream, and in part to the greater mining ‘effort’ needed to extract oil and minerals that are in more marginal deposits.

Nevertheless, for the total economy, productivity improvements have been estimated to account for around 40% of Australia’s recent GDP growth compared to around zero at best for New Zealand.

It is disturbing that some people still think natural resources determine economic prosperity. Oil-rich Saudi Arabia has been an economic under-performer: its relative per capita income has declined from being over twice Ireland’s level 30 years ago to under half Ireland’s level today. It is a repressed country in economic and other ways, ranking only as the 85th freest economy in the world on one index compared with Ireland which is in 7th place.

Another striking finding by the World Bank is that New Zealand ranks ahead of Australia and only second to Saudi Arabia for national wealth per capita, partly because of the quality of our farmland.

Australia has always had minerals in the ground. Yet until its economic reforms of the 1980s, which were maintained and extended by subsequent governments, it was also an economic underperformer for many years.

The latest Global Competitiveness Report from the World Economic Forum, which ranks Australia well ahead of New Zealand, puts its standing down to financial and goods market efficiency and the quality of its institutions and education system – no mention of natural resources.

In particular, Australia is ranked 10th in the world for lack of waste in government spending compared with New Zealand which is in 44th place. It is ranked 8th for quality of education; New Zealand is in 21st place.

Some time ago, Fletcher Building chairman Roderick Deane asked the Australian secretary to the Treasury, Ken Henry, what accounted for Australia’s economic success. His answer was “good policies”. Dr Deane asked, “what else?” The answer was “good policies”.

That is the message that Dr Cullen – and any New Zealand minister of finance – needs to take to heart.

*************

Roger Kerr is the executive director of the New Zealand Business Roundtable. This article appeared in the Otago Daily Times today, 30 November 2007.


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