Mining boom could bust us
http://www.theage.com.au/news/busine...329562546.html

Business Day - The Age
November 11, 2007

THE big lie being peddled by both major political parties in this election is that Australians can spend the proceeds of the resources boom like there is no tomorrow.

As both parties announce tax cuts and goodies for grey voters and those of other hues, neither party has addressed the fact that the resource boom is doing more to reduce Australia's long-term prosperity than to enhance it.

As Australians plan for even more expansive overseas sojourns this Christmas, or an even bigger splurge on imported luxuries, all courtesy of the high dollar, ask yourself this simple question: Can a country that has racked up more than half a trillion dollars in foreign debt since the float of the dollar in 1983 really afford to have an exchange rate approaching parity with its US counterpart?

The warning signs are starting to emerge, though few are taking notice. The demise of what is left of Australian manufacturing is being accelerated by an exchange rate at US90c and rapid appreciation against other major currencies.

It was only a few years back that HSBC economist Dr John Edwards produced a paper which said that collapse in the Aussie to around 50 US cents was a necessary adjustment to deal with Australia's massive foreign liabilities, and this was likely to be the reality for many years to come.

The long-term challenge facing Australia is variously called the "resource curse", the "paradox of plenty" or the "Dutch disease". This is when an influx of income from resource wealth drives up the exchange rate and inflates the domestic economy, making the country less internationally competitive and thereby crippling its long-term prosperity.

The opening of the fiscal floodgates by the Howard Government in recent years, and by both major parties in this election, follows the resource curse script to the letter. This has led to higher inflation and interest rates, in turn driving up the exchange rate and making the country less competitive. And the fiscal stimulus rolled out in this campaign can be expected to do more of the same.

The resource curse is usually found in developing countries, but as former US Federal Reserve Board chairman Alan Greenspan explained in his recent book, The Age of Turbulence, the phenomenon was first identified in Holland, when revenue from North Sea oil flooded into the country.

"How is it possible that a super-abundance of natural resources — oil, gas, copper, iron ore — would not significantly add to a nation's production and wealth? Paradoxically, most analysts conclude that, particularly in developing countries, natural resource bonanzas tend to reduce rather than enhance living standards," he writes. "[It] takes the form of an economic affliction nicknamed the 'Dutch disease'. Dutch disease strikes when foreign demand for an export drives up the exchange value of the exporting country's currency."

Despite Australia having such an abundance of natural resources, few policy analysts or private sector economists have sought to draw attention to the resource curse, which has hampered Australia's development from the very beginning. The Federal Treasury, for example, does not attempt to measure the stock of Australia's natural resources subject to development plans — which could in fact be measured — when putting together the national balance sheet.

The absence of any policy response to the resource curse is all the more surprising when there are practical models that have been implemented in other countries, most notably Norway, which in 1995 established a "Petroleum Fund" (now known as the Government Pension Fund). More recently, East Timor adopted the model in full — with some additional transparency measures — for the management of its revenue from the Timor Sea. In Norway's case, all the tax revenue from its North Sea oil resources flows directly into the offshore fund which invests in government bonds and blue-chip equities. The government then draws on the fund.

Essentially, the country can spend the real interest on its natural resources long after the oil resources have been exhausted. The fund is designed so that Norway can transform a non-renewable resource into a financial asset that will last forever. Importantly, Norway avoids the pitfalls of natural resource wealth by parking the money offshore. Instead of driving up the exchange rate and making the country less competitive, the revenue simply drives up the value of the fund.

Former prime minister Paul Keating recently referred to the floating exchange rate as the "shock absorber" for the economy; a sudden inflow of export earnings was absorbed by the exchange rate rather than flooding the domestic economy. But Norway has taken a quantum leap forward; its shock absorber is the petroleum fund and it reaps the benefit of oil wealth by increasing the nation's assets rather than diminishing competitiveness.

After launching in 1995, Norway's fund is now worth 1800 billion krone ($A363 billion), and expected to double by 2010.

Australia's much vaunted Future Fund cannot be compared with the Norway fund, although it could be transformed to help Australia deal with the "curse". At present the Future Fund is only designed to address future liabilities from unfunded public service pensions. Its recent annual report shows that about half of its new investment went into Australian shares. In effect, the Future Fund is also helping to bid up the exchange rate.

The Future Fund should be collecting the proceeds of the resources boom and putting this money offshore. This could be achieved by imposing a levy on all resource projects which would be deducted from the tax already paid by resource companies.

But if Australia was really serious, all resource-based taxation would be paid into the fund and then drawn down by the Government at a sustainable rate.

This way, Australia could truly benefit from the resource boom without crippling the rest of the economy and undermining its long-term prosperity.

Paul Cleary was an adviser to the East Timor Government on the introduction of its petroleum fund. His new book, Shakedown — Australia's grab for Timor oil, is published by Allen & Unwin.

Nice one.

The interest rates and bad exchange rate from the UK mean I probably wont move my money accross and get a mortgage. Australia is feeling like a 3-year deal to me since I got here, and then I'll return to the UK.

At least The Age has woken up to what's going on.

Not good to have all your eggs in one basket.
We'll keep the house in the UK and wait to see what happens to exchange rates and house prices over here for 12 months.

Do not agree with the article. Some points:
AUD strength is the result of USD weakness. Nothing we can do about.
It's tough for manufacturers - but again, no ones fault. If the only way we can keep car makers afloat is to protect them with tariffs and subsidies then it's not worth it. The Commodore and 380 are shite anyway. We can drive better Toyotas made in Asia instead.
The iron-ore/gold/nickel/gas etc is under our ground and in our sea - may as well dig it up and sell it. It's making us more prosperous. Just get on with it.
Without WA and Qld (especally WA), NSW, Vic, Tas would be f**ked. The prosperity that these states bring is propping them up.
The Age is a Vic paper - they are jealous that they have no resources.

I say keep on digging it up and selling it. The prosperity that flows from it is making this a better country. Do more of it and the rest will sort itself out.

And when the Indian Ocean fills the hole and laps the dividing range - that's it....

I guess it will be.

"News flash: resources won't last forever!" Well, duh.

But he makes no mention of the uranium market; a glaring omission. The sooner we start selling this stuff, the better. That'll keep the money flowing in for a while.

In the meantime, investors should be looking to expand our secondary and tertiary industries. We can't afford to be primary producers forever.

[QUOTE=Amazulu;5545074
The Age is a Vic paper - they are jealous that they have no resources..[/QUOTE]

Just all the talent and brains of the country

So why are you th...... never mind, as you were

you cheeky

And 25% of the country's GDP.

Tis true what they say about a strong Aus dollar....
It's never good to have a currency that is too strong in the global market....

The UK manages the exchange rate so that it is as low as possible compared to the Euro.... it keeps wages higher, and exports ticking over. I'm not an economist but I remember the suffering of exports when the £ was too strong a few years ago... esp. when the price that we sold at was fixed in Euro's all that happened was we ended up with less money for our goods.... which squeezed some of the smaller company's out of business....

Remember that although resources are abundant at the moment... if it costs too much to make, then the price will be too high and in simple terms people will go elsewhere to buy....

A good point to be taken from the article is that Australia has set up the Future Fund. It has only been going a few years so it not going to be anywhere near the size of the Norwegian fund.

Another good point is that Aus got this idea from somewhere else (NZ I think). This shows that Aus is prepared to try good ideas from other countries. I'm hoping that the govt will soon latch onto ISAs as a better way of returning excess tax. Also it might be better for the Future Fund to invest in the Aus market first before looking overseas. A well managed portfolio of Australian shares could be used to reduce volatility in the local market.

Another good point is that the Aus govt is prepared to set up this type of fund and not just return the excess as tax cuts (ala UK and US) which would fuel inflation. Admittedly that prudence is taking a bit of a battering through this election.

Another thing to note is Australia IS spending big on infrastructure. $140billion extra over the whole country. Gov can afford both tax cuts and extra spending.