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August 24, 2011
As we know, the high Australian dollar is caused by the mining boom and it means decline for manufacturing. This relationship is known as the "Dutch disease" and the symptoms of the "disease" are mass job cuts and the loss of skilled and semi-skilled employment in manufacturing and other industries to the booming resource sector.
Conventional economics holds that a country ought to specialise in industries in which it has a comparative advantage, so a country rich in natural resources would be better off specialising in the extraction of natural resources. Thus Treasury, in its submission to the Inquiry into the state of Australia's manufactured export and import competing base now and beyond the resources boom, explicitly says:
Governments are no better placed than firms and investors, responding to signals in the market, to determine whether a shock is temporary. Instead, the government can more effectively help the economy achieve its productive potential by allowing the market to operate unimpeded and allow resources to flow to their most efficient use. This will achieve improved productivity, economic growth and expanded national income in the long term.
The wisdom is that attempting to resist this natural decline in manufacturing’s share of the economy would be a mistake, just as it would have been a mistake to try to have preserved Australia as a predominantly agricultural country. Australia's economy is primarily a services economy.
In the short term that means firstly, the money that we earn from the rivers of cash flowing from the mining boom can be spent on cheaper imports of steel, cars, solar panels--ie., the tradable goods sector; and secondly, that we don't need to continue to make things.
It's called structural adjustment as mining the mining industry becomes a larger share of the economy. and there is a decline in manufacturing, tourism and education exports. Australia's place in the global economy is to be a quarry, and that means ever greater dependence on China and commodities.
What is increasingly clear is that the benefits of the mining boom are not being shared across the population. So what happens to the displaced workers who cannot relocate to work in the mining operations in Western Australia?
What is not being suggested yet are measures to sterilize the boom revenues into a sovereign fund, or investment to boost the competitiveness of the manufacturing sector. What is surfacing is a rise in protectionism in manufacturing along with the expansion in the mining industry. Secondly, Australia is not investing in developing the skills and knowledge base that would help Australia to make makes things that are different tomorrow than the tradeable goods made yesterday.
So the non-mining parts of the economy are being run down, or hollowed out , by the mining industry that only employs around 3% of working Australians. This puts the breaks on the reform programmes because of slower growth in productivity and the economy's growth driving up inflation.
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We've already been told that one-third of our department is going to get the chop. As usual, the "structural adjustment" has a real human cost. I suspect that most of the over 50's (yeh g'day) are going to end up on the scrap heap.
But that's the price of progress, right?