THE Reserve Bank has surveyed 160 years of Australian mining booms and concluded that this one could be the mother of them all. "It's a very big boom," says Reserve Bank deputy governor Ric Battelino.
Australia's economy, built on a vast land mass rich in mineral deposits, has experienced five big mining booms, and these have generated periodic surges of export-based wealth from local discoveries or global demand.
The booms have forced abrupt economic and social change and generated inflation pressures that have been difficult to contain.
lThe 1850s gold rush was Australia's biggest mining production boom. At its peak, mining accounted for 35 per cent of colonial output. As fortune seekers from around the world flocked to the Victorian goldfields, the population almost trebled in a decade.
Typical of such booms, the gold rush squeezed out other industries such as wool, in part through labour shortages that pushed up the wages of shepherds. The boom ran ahead of local infrastructure but provoked a fatal insurrection -- the Eureka Stockade -- against taxes on the diggers.
lThe late 1800s mineral boom extended to new gold and metal mines, particularly in Western Australia, Queensland and NSW, including Broken Hill. It was financed by British money. And, as Battelino suggested in a speech to the Sydney Institute this week, the squeeze on urban manufacturing fed into the political pressure for Federation import protection that lasted for generations.
lThe mining boom of the 1960s and early 70s was driven by Japan's industrialisation and its demand for iron ore from huge mines in Western Australia and coal from Queensland. Bauxite mines were developed and oil was discovered in Bass Strait.
This boom provided two important lessons. First, one of the key ways that the economy naturally digests a mining boom is through a "real" appreciation of the exchange rate. This encourages labour and capital to move to the booming sector by making other industries less competitive. "There is only so much activity that can take place," Battelino notes.
Partly due to the political influence of the farming lobby, however, policymakers resisted allowing the "nominal" fixed exchange rate to rise. This meant the mining boom overheated the economy and fuelled inflation, which delivered a "real" appreciation through other means.
The second lesson was that Australia's centralised wage fixing system just made inflation worse by spreading big mining pay rises through the rest of the economy.
lThe second oil shock of the 70s generated by the Organisation for Petroleum Exporting Countries fuelled foreign demand for Australian coal, oil and gas, while our cheap fossil fuels encouraged electricity-intensive aluminium smelting. But the lessons of history were yet to be learned. Battelino notes that this boom stoked euphoria over Australia's economic prospects, leading to a resurgence of pay demands and shorter working weeks that again spread through the centralised industrial relations system. And inflation was further fuelled by official resistance to allowing the managed exchange rate to rise.
It took a global recession in the early 1980s to end the oil shock. Australia's economy fell even harder as our resources boom collapsed.
lThe China boom began about 2005, was interrupted by the global financial crisis but is now picking up strongly again. Led by iron ore and coal, mining production has already increased to its highest share of the national economy in more than a century. Mining investment has risen to its highest level ever at 4 per cent of gross domestic product, and Battelino says the new wave of liquefied natural gas projects could lift this to 6 per cent of GDP in a few years.
This development boom is the result of the soaring mining and energy prices produced by the demands of China's massive industrialisation. Battelino notes that Australia's terms of trade -- the ratio of export prices to import prices -- has risen higher than in any previous mining boom. As in previous booms, this is generating strong immigration-fuelled population growth, overloading our infrastructure and encouraging a "two-speed economy".
The scope for China's industrial catch-up means that this boom could last a couple of decades, if only we heed the history lessons.
Battelino argues that the key difference this time is the market-based float of the Australian dollar. The Reserve Bank is perhaps the only central bank not resisting, but even encouraging, a stronger exchange rate in order to accommodate a mining boom and so relieve inflation pressures.
Compared to 30 years ago, the economy is more deregulated and more flexible while the industrial relations system is less centralised. And, says Battelino, today's monetary and fiscal policy frameworks are "more soundly based". That's code for the Reserve Bank won't be shy about lifting interest rates to keep an inflationary mining boom in check.
Source: www.theaustralian.com.au