The Grattan Institute is in the news again with another timely and policy-savvy piece of work – this time on the benefits of the mining boom (http://theconversation.com/how-we-learnt-to-stop-worrying-and-love-the-boom-16431 and http://grattan.edu.au/publications/reports/post/the-mining-boom-impacts-and-prospects/ ).  The report finds that we have all benefitted, and that the prospects for a post-boom bust are not as dire as the worry-warts amongst us think.

The premise that we are all doing better is based on measuring income growth from 2000 to 2011 and finding that incomes for most of us (most skill levels and in most parts of Australia) grew in that period.  This is presented as a good thing, and the spread across skills and regions is presented to make us all feel better.  But the regional differences are underplayed, with real wages growth three times higher in mining states as in non-mining states. 

Aggregating to state level impacts is a start but does not do justice to Australia’s dispersed regional economies.  More careful research on the regional impacts of the boom shows a more polarised picture again. 

As an aside, though, using income growth as the poster child for the boom benefitting all of us is a bit one-sided.  If the boom raises wages without raising productivity or value-added, then isn’t there a squeeze on profitability?  This has been the story in many boom-connected regions where wages seemed to grow ‘too fast’, and prices for other ‘in demand’ services like hire cars and motels rooms also seemed to jump – undermining tourist industry profitability.

And these wage and price jumps have been exacerbated by the high exchange rate and its negative impacts on agricultural prices received, manufacturing prices obtained and tourism (as Aussies headed overseas and inbound visitor numbers slowed due to the high dollar and GFC impact in some of our major source markets).

The more careful regional research I mentioned above was done by National Economics for the Australian Local Government Associations annual State of the Regions report.  This research also finds that income growth has been widespread, but raises some regional distortions to qualify the rosy glow left after the boom.

Australia’s mining boom has indeed seen economic gains in terms of capital inflows, investment, construction work at all skill levels from labourers to CEO engineers, consequent additional tax receipts and contributions to GDP growth. But National Economics’ analysis of the costs and benefits of the boom show that the costs have also been significant.

1. Economic growth in Australia’s regions

Overall, the regional pattern of growth is consistent with the framework of strong resource growth where the benefits to the non-resource regions have been blunted by the significant economic damage being inflicted by the so-called Dutch Disease[1]. (p ii)

 1.1 Regional economic growth

Compared with 1998-2010, 2010-13 saw the highest regional economic growth rates shift to WA and to a lesser extent Queensland’s mining regions.  Former high growth areas in Southeast Queensland have slowed considerably.  And the other big cities have also seen slower growth rates.  Sydney had a similar modest level of growth in 2010-13 as it had in the 1998-2010 period, while Melbourne metro’s growth rates were also lower in the latter period than the earlier period. (paraphrased from p i)

At the regional level, those regions which have clearly lost regional competitiveness from 2005 to 2013 compared to the 1998-2005 average are the metropolitan and non-resource based nonmetropolitan regions of New South Wales and Victoria. These losses have reduced their growth in resident income from work per capita of working age population. (p v) 

1.2 Regional income growth

While incomes across the country have continued to grow, the pattern of income growth has shadowed the regional growth pattern, with the highest rates of income growth in the mining areas (up to 7% pa, compared to 1-2% pa in the major cities). (paraphrased from p iii)

 1.3 Regional construction growth

Residential construction expenditure has been strongest in the Knowledge-intensive regions and the Resource-based regions, although the results for Knowledge-based regions are increasingly patchy. Construction in the Lifestyle and rural regions declined. Residential construction activity continues to be muted. (p iv) 

Engineering construction, in contrast to the residential and non-residential construction sectors, remains at a very high level of activity and this is likely to continue for the next 18 months or so before dropping back to previous levels. High levels of engineering construction in Independent Cities and Resource-based regions types are related to the mining resources boom, with infrastructure such as ports, storage and distribution centres and plant being developed in the mining ports or in at the mines themselves. Engineering construction was also higher in major cities, particularly in central areas.(p iv) 

2. Mining boom phases

Australia has seen a boom in mining investment (construction) since 2005 driven by a spike in prices of key commodities like iron ore and coal.  Several large-scale new construction projects have been shelved this year and it is likely that this construction phase is at its peak.  As the construction peak passes, the boom will shift to production volumes which will increase (taking advantage of the increased capacity bought by the construction phase).  With other resource exporting countries going through a similar cycle, metal and coal prices are likely to fall as global production ramps up.  Mining industry profitability will then be driven by volumes and economies of scale rather than by peak commodity prices. (paraphrased from pp 44-45)

4. What happens as the construction boom passes?

National Economics makes a strong case for re-directing post-mining-boom engineering and construction labour and expertise into infrastructure investment, especially transport infrastructure, financed through public sector funds (bonds) linked to increased tax returns from higher economic activity levels. 

 National Economics’ analysis shows high rates of return to regional economic product from investment in transport infrastructure.

 Australia would be well served by a campaign to restore the stock of transport infrastructure (that is, roads, rail lines, ports and airports as distinct from transport equipment) to the level achieved, in relation to GDP, in the 1970s and up to 1985.(p vi)

5. What harm can a boom do?

For developed countries like Australia, the factors which produce poor economic outcomes from elevated periods of mining expansion can include:

• High commodity prices are the essential catalysts for triggering an episode of elevated mining investment and subsequent production expansion. Unfortunately high commodity prices generate high exchange rates which discourage investment, capacity augmentation and eventually production outside the mining sector;
• Skilled labour shortages and cost pressures during the mining construction phase having the same effect as (i);
• High foreign ownership of the mining industry which limits real income gains to residents and reduces taxation receipts;
• Negative consequences from the import of additional population to provide resources for the construction phase; and
• Negative sentiments, especially the view in international investment circles that Australia is not the place for non-resource activity. (pp 67-68)

And the real winner is ….

 There have been winners and losers in the mining boom game, and as usual with neoclassical economics, there are not many ways in which the winners get to compensate the losers, or in which pathways are identified which help in the transitions from a losing situation to a winning one.  It’s pretty much ‘hands off’ and the market will take of things … eventually.

 In this policy environment, both the Grattan Institute and National Economics emphasise the need for wiser investment by governments to embed boom benefits in long term productivity gains and improvements in regional growth prospects across Australia.  And both bemoan the lack of progress on these scores during the boom decade.