Home > Aus Economy > Will The Commodities Boom Crowd Out Australia?

Will The Commodities Boom Crowd Out Australia?

During the height of the commodities boom mania, prior to “the great crash of 2008”, the Reserve Bank of Australia made an interesting, though not much discussed, point.

Namely, the RBA argued that although rising commodity prices were great for Australia’s terms of trade the affect of the commodities boom was to crowd out Australian manufacturing. Our commodities were being used by low wage industries in China to outbid Australian manufacturers in global markets. This fed back into the two-speed nature of the Australian economy.

It was a perverse side effect of the commodities boom. Notice that the neoliberal reforms were instituted in order to change Australia’s structural profile from a commodities exporter to an exporter of high tech based goods and services.

It didn’t. We ended up with a two-speed economy, following the deep recession of the early 1990s.

Now towards the end of the pre 2008 resources boom a very important driver of Australian GDP growth was private investment. This was not because of the neoliberal reforms, but because cashed up resource corporations were investing big in an effort to pump out more lucrative commodities.

We are told by Ken Henry, and just about everybody else, that we are in for another commodities boom, to be fuelled by Chinese demand, well into 2050. Putting aside little quibbles such as Chinese Premier Wen Jiabao’s comment that China’s growth is irrational and unsustainable, we might discern another crowding out effect.

Ok, so commodity prices are rising again. Putting aside the extent to which this relies on public stimulus in China and the actions of speculators, we note that again the resource exporters are spending big on investment.

As investment increases given rising commodity prices so export volumes will increase, leading to a greater match between supply and demand. This effect would lead, all things being equal, to a dampening in commodity prices.

When we talk about commodity prices the affect on the terms of trade is much discussed. But I would like to focus on something else.

The problem with this little scenario is that it could lead to supply outstripping demand, especially if the global recovery starts to fade on the backdrop of either another financial crisis or the withdrawal of fiscal stimuli not being backed up by a sustained increase in private activity. Speculation in commodities prior to 2008 did play an important role in the rise of commodity prices.

In this case we won’t have the much vaunted capacity constraints that we hear so much about in Australia. Rather we will end up with excess capacity in Australia’s resources sector, the effects of which on the broader economy won’t be too pretty. If we are in the midst of a commodity prices bubble the affect will be multiplied. For a country highly exposed to commodity prices for economic well being risking excess capacity, given increasing speculation in commodities markets, a hallmark of neoliberal deregulation, is not a wise long term economic strategy.

The idea here is that we should aspire in Australia to be the masters of our own destiny. Take that very same RBA bulletin that I alluded to at the start. It showed that higher education is turning into an important little export earner for Australia. That’s good, but it also has a crowding out effect. Our universities are educating our future competitors.

If we truly had a program designed to build high tech industries in Australia we would instead be more interested in investing in skilling Australians for the type of interesting work that “makes things” at high wages.

Instead we have an education system increasingly tuned to foreign investors (foreign students are making a type of investment) and a labour market policy increasingly tuned to importing migrants. Both aspects of policy come at the expense of the broader domestic population.

It’s corporate Australia, in league with the politically correct intellectual-cultural classes, that are most fond of the idea of a “big Australia.”

Of course, under the vile maxim why invest to educate Australians when the masters of mankind can just import the type of labour they want and when they can make more money by educating full fee paying foreigners rather than ordinary aspiring Aussies?

How many young Australians missed out on a university place this year? How many of them won’t be able to afford a home because of the investor centric, including foreign investors, property market that is leading to an acute housing affordability crisis? Investors are crowding out home buyers, especially first home buyers.

Under the vile maxim we are not supposed to care about such questions. The only crowding out effect that you are allowed to focus on is whether public spending crowds out corporate Australia. These other types of crowding out in a future big Australia are better left unsaid.

Categories: Aus Economy
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