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The Forum > Article Comments > State of the states > Comments

State of the states : Comments

By Saul Eslake, published 30/5/2006

The resources boom has sparked a major shift in Australia's economic landscape.

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I don't dispute any of Saul's pronouncements, but a lot of questions are raised not raised in the article but could be.

Isn't the high dependence on a resources boom a type of risky exposure for the Australian economy generally and the resource-rich states in particular? Although NSW is doing relatively poorly now, isn't it more economically resilient over the long term? And, if the (un-named) poor economic decisions of the Carr Government to blame , isn't that letting the Howard Government off the hook? If NSW is over-mortgaged in property, isn't this largely the result of the property bubble triggered by Howard/Costello's decision in 2000 to slash capital gains tax (this could have quarantined property investment instead) and to introduce the 1st home buyer's grant? And what have any of the governments, state or federal, done to preserve diversity in our economy? We seem to be nothing much more than the world's quarry at the moment. We are sending our raw materials to China and then spending the proceeds over-consuming on cheap Chinese luxury items. Has anyone ever considered whether this is a sustainable future for Australia?
Posted by PK, Tuesday, 30 May 2006 5:21:55 PM
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I note Saul Eslake's conclusion:-

"For resource-rich states, the key challenge is to ensure that the fruits of the boom are not dissipated in wasteful spending. For the rest, a key issue is dealing with the consequences of an exchange rate that will undermine the competitiveness of their traditional strengths."

I'd say that the "Key challenge/issue" issue facing everyone is the unprecedented landscape we're entering, that of Global oil depletion. Here's a quote from the 2005 "Hirsch Report" (Dept of Energy, US Government):-

"The peaking of world oil production presents the U.S. And the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking."

Wikipedia link here for further info:-

http://en.wikipedia.org/wiki/Hirsch_report

And here's what ex-USA President Bill Clinton said (28th March 2006, London Business school):-

"We may be at a point of peak oil production. You may see $100 a barrel oil in the next two or three years."

Strangely, the financial institutions in Australia - and some media institutions - seem to be engaged in an almost psychotic denial of this "Elephant in the living room," as my questions to Q Super, QIC and "The Courier Mail" (Qld), may illustrate:-

http://www.kimspages.org/qsuperletter.htm

And:-

http://www.kimspages.org/couriermail.htm
Posted by KimB, Tuesday, 30 May 2006 10:35:28 PM
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In response to 'PK', of course there are lots of questions that could have been raised in the article but weren't - because there was a word limit both for the original article and for the version posted on OLO. There are, to be sure, risks inherent in any economy which is dependent on a narrow range of economic activities.

In WA's case, while it is more dependent on resources than any other State - and it experienced a recession in 2000-01 partly due to weak demand for resource products while the eastern States did not - at least is resources industry is reasonably well diversified and not dependent on a single mineral (like, eg, Chile).

Queensland's resources industry is more dependent on a smaller number of minerals (particularly coal and bauxite) but its broader economy includes a larger agricultural sector and tourism.

The poor decisions of the Carr Government were listed in the fuller version of the article (for which there is a hyperlink at the foot of the page), including an unnecessary fixation on eliminating State debt, an unfriendly disposition towards property development which exacerbated the shortage of housing and thus magnified the upward pressure on house prices, the vendor tax (not a bad idea in principle, but very badly timed) and the anti-growth bias exemplified by Bob Carr's arrogant "Sydney is full" mantra. All of which, incidentally, have been reversed by Morris Iemma.

I've written elsewhere that the Howard Government's decision (which was supported by the Opposition, incidentally) to halve the rate of capital gains tax was the worst economic decision they've made. I see no reason at all why income from speculating should be taxed at half the rate of income from working or saving. And yes, that decision added to the subsequent upward pressure on house prices.

... continued
Posted by Saul Eslake, Wednesday, 31 May 2006 6:35:50 AM
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... (continued)

But there's nothing wrong with capitalizing on China's growing demand for commodities that nature happens to have blessed this country with, and for which they are willing to pay high prices. And there's nothing wrong with us availing ourselves of their capacity to produce a growing range of increasingly sophisticated goods at cheaper prices than we can ourselves. Indeed it would be ethically wrong, I believe, to try to prevent the Chinese from improving their economic circumstances by erecting tariff walls around Australia's domestic market

And I wouldn't deny "KimB's" assertion that global oil depletion is (at least potentially) a more important global issue than the ones I identified for individual Australian State governments. But there's not much Australian State governments can do about that, and they will serve their constituents better by focussing on the things they can influence.
Posted by Saul Eslake, Wednesday, 31 May 2006 6:36:31 AM
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Well, Saul, now you have made some pronouncements in your 6:30 post on May 30th that I can dispute.

You say that there is 'nothing wrong' with capitalising on trade with China. That is the case only if a narrow, short-term view is taken of the benefits and if certain 'ethically wrong' features of it are ignored. Like: exploitation of Chinese workers, many of whom work 13 hours per day, 7 days per week in appallingly dangerous, Dickensian conditions to produce our cheap, non-essential goods that we are trading our futures for. Like: some of the world's worst environmental pollution in China that produces air that you can hardly see through let alone breathe safely, and toxic rivers and acid rain. Like: one of the world's most beautiful rivers, the Yangtze, dammed to produce hydro electricity to keep the factories churning out junk for Western consumption. Like: Australia selling its non-renewable mineral resources for the production of these consumer goods such as flat screen TVs many of which replace perfectly functioning TVs that are now filling Australia's landfill tips. Like: the inefficiency of shipping all these minerals halfway around the world and then shipping back the goods they produce.

It seems that some economists never get the fact that we are eating our future to keep our wasteful lifestyles going.
Posted by PK, Wednesday, 31 May 2006 8:30:09 AM
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Actually Saul, there's a lot individual State Governments can do to mitigate the effects of global oil depletion. What would you wish them do? Just sit back and watch it happen? How about (for a start), them not spending my pension fund on things like the planned Brisbane North South Bypass Tunnel. And how about convening (like Queensland), an "Oil Vulnerabilty Taskforce." Just Google "andrew mcnamara"+"peak oil" Should give you all the info on that you need. I also think this article in "The Age" (Tuesday 30th May 2006), is of crucial importance:-

http://www.energybulletin.net/16575.html
Posted by KimB, Wednesday, 31 May 2006 10:02:12 AM
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