Busting myths about the mining boom
We’ve been here before. Amid all the breathless commentary about the end of the mining boom, it pays to recall some economic history. Australians are no strangers to the boom and bust cycle of our “golden soil and wealth for toil”.
In an excellent speech delivered two years ago, but still relevant today, then Reserve Bank deputy governor Ric Battellino recounted the full story.
The gold rush days of the 1850s marked Australia’s first adventure in mining frenzy, following a similar gold rush in California in the late 1840s. Gold was discovered first near Bathurst in New South Wales, but discoveries were also made in Victoria shortly after.
Such was the frenzy, by 1852 mining output made up about 35 per cent of Australia’s total economic output, compared to about 7 per cent today. Workers streamed to the gold fields. In three years, wages in Victoria rose 250 per cent. Meanwhile, the male population of Tasmania shrank 17 per cent and 3 per cent in South Australia. The number of manufacturing establishments in NSW shrank from 165 to 140.
In the 1890s, further mineral discoveries were made in Western Australia and western New South Wales. WA’s population more than trebled. Exports of wool and grain stagnated. Costs rose. Inflation reared its ugly head again. Eventually the boom petered out.
The 20th century saw two distinct mining booms, in the 1960s and early 1970s thanks to higher prices for coal and iron ore, and again in the late 1970s and early 1980s.
Both booms ended in an inflationary puff.
History shows mining booms have brought great increases in living standards but also great upheaval for people and jobs.
Large-scale structural change can happen quickly.
The present mining boom, which began in 2005, has been no different.
But the Australian economy today has several important advantages in managing mining booms compared to previous booms. And these policy strengths stand us in good stead should the recent drop in commodity prices be sustained.
First, the deregulation of the Australian workforce and the end of centralised wage fixation means very high wages in the mining sector have not been automatically transferred across the economy. Instead, rising wages in mining have acted as a good relative price signal to encourage workers to transfer to more high-value jobs.
Second, Australia’s floating exchange rate has acted as a safety valve for inflation pressure. A higher dollar has made imported goods such as TVs, clothing and cars cheaper. And by putting the squeeze on manufacturing, tourism and education industries, the high dollar has freed up labour, capping upward pressure on wages.
While economists have sympathy for the people who lose their jobs in this “structural change”, the harsh truth is that if the high dollar hadn’t led to job losses, inflation would have been higher. Inflation raises the cost of living and erodes wages.
Third, the Reserve Bank has been free politically to adjust interest rates to both constrain the boom and, if needed, to ease the bust. At 3.5 per cent, the official cash rate has plenty of room to fall to stimulate growth if China and the mining boom fade.
Armed with this policy ammunition, there is less cause to fear the end of the mining boom. It is true an end to the boom would be felt acutely in the mining-rich regions of Western Australia and Queensland which have for most of their history keenly felt mining booms and busts.
But nationally, only 2 per cent of Australians are employed directly in mining. The majority of us make a living buying and selling to other Australians.
There will be life after this boom.
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