Australia’s economic challenges

In: Uncategorized

25 Mar 2012

This is my Perspective column for 19 March.

G’day from Newcastle, New South Wales. Coming to Australia must be a slightly weird experience for most first-time British visitors. In some respects it is unnervingly like Britain and in others almost unrecognisable. That general rules holds true for economic comparisons.

British visitors will recognise most of the cultural references. Television programmes include the Stephen Fry BBC series on the history of language, Jeremy Paxman on the British empire and Law & Order (the British version rather than the American original). The English Premier League is available on television although, because of the time difference, live matches are on at strange times of the day.

It also seems to be away from home for famous and once-famous Britons. While I was in the country Jamie Oliver was touring Australia and John Cleese was evidently doing three nights at the Civic Theatre in Newcastle, although I did not see his familiar tall, spindly figure during my walks around town. Dani Behr – that is one for those readers who are old enough to have watched late night television in the early 1990s – has even settled in the country.

On the economic front there are similarities too. Manufacturing has suffered a long-term relative decline in its share of economic output while services have remained static in that respect.

The big shift is the huge surge in the mining sector in recent years with exports, including copper, gold, iron ore, natural gas and uranium. Companies such as BHP Billiton and Rio Tinto, both dual listed in Australia and London, are feeding a huge global resource boom and China’s surging economy in particular. The Asian giant alone accounts for about a quarter of Australia’s exports.

Newcastle, a town of about 645,000 people and 162km north of Sydney, is an excellent vantage point to view this resource boom. It is the world’s largest coal port with a harbour full of huge bulk carriers, giant piles of coal and other enormous structures. I can even see a massive floating dock from my hotel window as I type this article. All these contraptions serve the purpose of moving coal from the Hunter river region through Newcastle and on to the rest of the world.

It is an example of a symbiotic relationship. Australia benefits from the export revenues from selling coal to world markets. China and other nations gain from having the energy to drive their growing economies. Western consumers enjoy cheaper goods than would otherwise be the case.

But the mining industry is being blamed for other problems in the Australian economy. There are many Australians who argue that the resource boom is hurting other sectors.

Although it is acknowledged that the mining boom helped insulate Australians from what they call the “GFC” – the global financial crisis – the longer term consequences are often viewed as negative. The main complaint relates to what is called “the Dutch disease” in economic parlance: the resource boom is pushing up the Australian dollar which in turn is making the country’s manufactured exports more expensive.

There are good reasons to question this argument. One is the high level of protectionism in the Australian economy. Coles, one of Australia’s supermarket chains, boasts in its stores that: “96% of our fresh produce is Australian grown”. No doubt the statistic is true but it at least partly reflects tough Australian restrictions on imports to protect domestic agribusiness. Australian consumers have to pay more than is necessary for many basic products. At the same time foreign exporters are often blocked from entering the Australian market.

Some import restrictions are justified on grounds of biosecurity: defending Australia against foreign diseases. But Oliver Hartwich, the chief economist at the Centre for Independent Studies think tank in Sydney, argues that in many cases they are a disguised form of protectionism.

Another of life’s necessities – books – are also expensive thanks to restrictions on imports. Secret River by Kate Grenville – one of Australia’s most popular novelists – costs A$22.45 or about £15 in a local Newcastle bookstore compared with a list price of £8.99 in Britain. The store manager tells me that on average they are two and a half times more expensive in Australia than in Britain.

A more fundamental objection to the Dutch disease argument is that a dynamic manufacturing sector should be resilient in response to a strong currency. Although some firms may suffer it should be possible to expand stronger areas of production and to create new ones.

Many Australian politicians seem to be following their British counterparts in making excuses for the poor performance of certain sectors. No doubt the strong currency does make life more difficult for many businesses in the short term but there should be ways for the country to adapt to the challenge.

Although Australia, like Britain, is a developed economy, it has its own peculiar features. It has a huge base of resource materials for which there are many willing clients. This resource economy is a substantial boon for the economy as a whole but it does create challenges for other sectors. The challenge facing Australia’s leaders, in both politics and business, is to ensure the economy overall remains balanced. It would be a mistake to allow it to become as over-reliant on natural resources as Britain became on financial services.