Any opinions on this article? Perhaps some areas to discuss could include how prices create incentives for different economic agents, how risk should be dealt with in discount rates, and how best to consider the welfare of future generations in a traditionally short-sighted economic environment.
This is a slightly edited version of a response I made to this post in our Economics Internship forum last semester.
ReplyDelete________________________________________________
High investment has a positive effect on aggregate income and, therefore, the welfare of our nation. High commodity prices mean that mining investment and exports have a more significant influence on our GDP. Our impatience and fear of the unknown has seen mining companies capitalise on these prices by expanding production. Assuming the appropriate economic analysis has been conducted (taking into consideration negative externalities such as pollution) then this impatience is actually efficient as resources are allocated to those who value them most highly.
The logic of the price mechanism suggests that the recent slowdown in mining activity would be attributable to falling commodity prices. Thus, maybe the mining boom (or the availability of resources) isn't ending at all – it is just the producers’ response to falling prices for their output?
In this sense, perhaps the price mechanism is actually helping to balance society’s goals of economic growth and sustainable resource use. The extent of the environmental damage caused by mining will always necessitate some form of government intervention and regulation, but it would be naïve to ignore the beneficial effect of fluctuating prices. The RBA seems to be happy with the price mechanism too – the inflationary pressures from the mining boom have not materialised to the extent that Gittens fears, and the cash rate is expected to be cut further this year.
Ultimately, the decisions that individuals make today take into consideration (to some extent) the effect on the future generations. High economic growth today is beneficial for future generations. We just need to ensure that the source of this growth is sustainable.
With commodity prices as high as they are (currently higher than pre-GFC levels), miners cannot be blamed for "hijacking the economy."
ReplyDeleteThe business of mining requires large capital investments today to reap the rewards of tomorrow. (In essence, providing inter-generational equity to future generations.)
As such, laggard areas of the economy (i.e. manufacturing) will continue to be drained at the expense of the sectors of the economy which maintain a comparative advantage (i.e. mining). (The reason I say comparative advantage is that Australia is seen as a 'safe' place to do business, as opposed to places in Africa, for instance. But we also have a competitive advantage in that our resources are of a high quality/grade - more luck than anything else.)
As the world population continues to grow, countries such as India, China, Mexico, Indonesia, etc., will continue to demand a large proportion of these commodities. Hence, we could see a prolonged period of heightened commodity prices.
The investments of today will benefit Australia in the future and in fact if they were not made today, in the future we would have wondered why we missed this golden opportunity.
The real question is what plan do we have to prevent an onset of the 'Dutch Disease'? Can Australia 'artificially' create an area of the economy (i.e. green energy technology) which maintains the same/similar traits of mining so that we may export something to the rest the world.
Good point about the Dutch Disease, I agree that this is something Australia must try to avoid. I did a quick Google search and I found that Ross Gittins (who wrote the article at the start of the thread) also wrote about the Dutch Disease earlier in 2012. It would be interesting to see if anyone has any views on this issue. http://www.smh.com.au/business/dutch-disease-no-way-to-bust-booms-20120325-1vsfz.html
DeleteThanks for being the first commenter! :)
I would be inclined to point out that Australia is only doing what every "start-up" (in terms of the global economy) economy has done in history... and that is exploit their natural resources. The question is not that miners are hijacking the economy, they are merely doing exactly what other advanced economies have done "in the beginning..". The real question lies in what will provide the plateau of Australia's output in the future?
ReplyDeleteI agree with you Brett, and I like the way you put it. Maintaining steady economic growth and avoiding the Dutch disease are going to be some big issues facing the Australian economy in the longer term.
DeleteI saw growth figures released today that were in line with the expectations of economists (http://www.smh.com.au/business/the-economy/public-spending-drives-economic-growth-20130306-2fk92.html). Interestingly, public investment was one of the major drivers of growth last quarter. It will also be interesting to see whether a potential change in government later this year will impact growth (will a coalition government reduce public investment, for instance?).