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?

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

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

... (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.

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.

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

The missing element in this analysis is what is taking place in the regions that should have their own state but don't. Why should a boom in the Pilbara be funding house price inflation in Perth? Why should the central Qld coal fields be subsidising more and more unsustainable urban sprawl and congestion costs in SunBrisGold?

Clearly, if more of the funds were retained in their regions then the jobs and the populations will follow. Congestion costs and growth pressures in the major cities will be reduced and environmental impacts will be dispersed.

And if it is appropriate to devote a paragraph on the economic trends for 200,000 Northern Territorians then why not a paragraph for 600,000 North Queenslanders or 900,000 New North Welshmen?

All we got was the usual, boorish, metrocentric myopia.

PK get a grip.Exploitation of Chinese workers? Chinese workers are flocking to the cities in droves to work in factories so they can earn three times what they can earn on farms.

Wages in China are rising rapidly.It may take many years before they reach ours.

There are other reasons why much of our industry is moving off shore.It is the poor work ethic of many Australians,Govt regulation,litigation,insurances and red tape,particularly from our Labor States.

I'm shutting down my manufacturing and will hopefully have my first container from China at the end of July.Manufacturing will cease to exist in Australia and I hope we can find real jobs for our future generations.The really sad story is that we are losing all the knowledge and skills that will never be easily replaced.Many English speaking Chinese are now going back home to export to Australia and they will be the new business class in Australia.

You try starting a business in NSW at the moment and see how hard it is.Our two biggest foes are big business and slothful big Govt since they conspire to enslave the individual who seeks a better life.

Congratulations, Arjay, I hope you are very happy importing cheap stuff from China to flog to us. May I suggest you visit China and look at the factories that produce the stuff? If they will let you that is. See how self-satisfied you are then.

PK,has it sunk in?They are better off slaving in a factory for three times the money than starving on a farm with almost nothing.

Do you want to take their jobs like a good doer or perhaps shoot them to put them out of their misery.

Things are changing rapidly in China and working conditions will improve.Just do a tour of Indonesia or any third world country and you'll see far worse.You are being very selective about which poverty you want to observe.

We are giving them something far more useful than aid,we are giving them our jobs,which is making China very rich and powerful.

Arjay, 2 grateful nations, Australia & China, applaud your generosity, you an fellow modern capitalists. Semi=skilled workers in Australia are no doubt glad that their jobs have been exported to people who do not insist on safe, decent working conditions. The rest of us are so glad that easy credit allows us to go into unprecedented levels of national debt so that we can gorge on cheap Chinese (and yes, other 3rd world countries) goods. We will, no doubt, not regret the binge when the inevitable hangover sets in.

The west has successfuly exported capitalism to China, and the agrarian poor flock to the cities to be exploited for a pittance, but it's better than their former rural lives? I think that the jury in China is still out on that one, based on some recent Chinese movies I have seen and reports I have read. Pollution may destroy the country before much more of its emerging affluence can be enjoyed. And you say that there may be countries where exploitation is worse? Well, perhaps you can import from there too, Arjay. Your posts are not opinion, Arjay, but self justification.

PK,the Labor party instigated the reduction in tarriffs and the Coalition just continues that policy.The reality is that we cannot compete in manufacturing where there is a significant labor component that is ten times that of our competitors with no comparable Govt regulation and red tape,not to mention taxes.

It won't be long before all manufacturing moves off shore.You seem to have a socialist's mental block.No business can operate without making a profit since there will be no money to update plant and machinery in the future.Private enterprise just cannot tax at will like Govts.Private enterprise is the engine that produces the surplus that can tbe taxed.Govts don't produce efficiencies that can effect profits or dividends that can be taxed because they are by their very nature wasteful and inefficient.

If you read between the lines I have great reservations myself about the direction Australia is going with this unfetted free trade philosophy.In the long run it could weaken our country but we also have to compete in high tech and scientific areas to remain a viable nation.

It is all about maintaining a balance and it takes very astute leadership in Govt to strike it.I don't think that either of the major parties have done so.They mostly just cross their fingers and hope for the best.

Arjay, I am not a socialist. I was ready to dismiss your most recent post after the 1st 2 paragraphs then I saw a resonance in the final 2. I'd like to see you expand on them - i'm not good at reading between lines.

I do not hold you or capitalism generally responsible for the direction that we are going in. I only know that it is not a sustainable direction and I worry for the world that we are leaving for later generations- after all, what else really matters? I feel sometimes that we are on a runaway train heading for a wreck, all fuelled by our greed, selfishness and shortsightedness. Who will save us if not ouselves?