A more productive argument

China might be central to our prosperity, but we need a more strategic approach to reaping the rewards of our resources boom.

In my lifetime, there have been three resources booms. In the 1960s and early 1970s Japanese and, later, South Korean demand drove the rapid expansion of the mining and energy sectors. The short-lived boom of the early 1980s was propelled by buoyant world demand for energy. And for the last 15 years, the motive force has been the rise – and rise – of China.

Each time, as it gathered strength, the boom has imposed major structural pressures on the rest of the economy. The transmission mechanism, of course, is the exchange rate. As the dollar rises, import-competing industries, like manufacturing and tourism, find it more difficult to keep their customers, and their employees.

When the boom comes to an end and the dollar falls, these sectors begin to recover. But the recovery takes time, and where importing becomes the norm, many activities fail to re-establish. The effects are particularly severe for manufacturing, as each successive boom removes the incentive to produce locally. Labour-intensive forms of manufacturing, like Australian clothing production, have long since disappeared. This time, it is firms (like CSR and BlueScope) that produce more capital-intensive goods that are closing significant parts of their operations. No matter how efficient you are, it is difficult to stay competitive when the dollar has risen so high, so rapidly. At the beginning of 2009, the Australian dollar was worth US70c – now it is worth 106c.

The more mobile and more skilled of the displaced manufacturing workers will find jobs elsewhere – some of them, no doubt in the resource-based industries in the West. But the communities they have left will face tough times. Some will never recover.

What should public policy do about this situation? The general consensus among the policy elite is that – apart from restructuring and retraining assistance – nothing should be done.

Indeed one of the few issues on which both Labor and the Liberal parties agree, is that to do anything at all to help these workers keep their jobs is ”protectionist”. And we all know that protection is bad karma. On the other hand, many Australians are wondering why, despite the cost pressures they face, the resource-based industries could not be induced to source more of their inputs in this country. On the face of it, they could certainly afford to do so. BHP Billiton’s recently announced profit was one of the largest in world corporate history. And it is not as if the resources sector is over-taxed. Indeed, many would argue that the scaled-down minerals resource rent tax does a poor job of ensuring that all Australians benefit appropriately from the nation’s natural wealth.

Insofar as we do have a policy response, it lies in the macroeconomic realm – chiefly in monetary policy. But interest rates are difficult to use well, particularly when we start on the downhill side of the resources roller coaster. We don’t know when the China-fuelled boom will come to an end. When it does, the impact could well be messy. In the 1980s, as the Fraser-era resources boom died away, the Hawke-Keating government was faced with falling terms of trade, a falling dollar and a pressing need to prevent wage rises from undermining recovery. (Remember Paul Keating’s famous ”banana republic” warning?) The government used wages accords to try to contain cost pressures. Finally, the recession we had to have purged the economy of the consequences of its previous excesses.

Times are different now, at least to the extent that the economy is more deregulated than previously. Wages are no longer collectively determined. Monetary policy is shaped, not by politicians, but by the Reserve Bank. Unfortunately, in fighting inflation, the RBA is caught between a rock and a hard place. If it raises interest rates in order to combat inflation, it forces the dollar even higher, increasing the pressure on both import-competing and exporting businesses. But if it does nothing, or reduces interest rates, inflation will continue to rise.

What other options are available? It seems most unfair that if you can’t drive a mining truck, operate a hydraulic fracturing rig or weld a gas pipeline, your chances of profiting from the resources boom are minimal. Many commentators (and some politicians) have pointed out that, if we want to be paid more, or even just keep our jobs, we have to become more productive.

So, is improved productivity the answer? It’s a difficult concept to measure. There is productivity of capital, and productivity of labour, and productivity that comes from a combination of the two. Essentially, higher productivity means getting more from your inputs: improving your efficiency. The problem is, most of the padding has been purged from Australian organisations. There are no longer relatively easy productivity gains to be had.

In any case, most of us work in services, where there are limited opportunities for productivity growth. Your local restaurant can reduce the numbers of waiters but diners will have to wait longer for their meal. Teachers can teach bigger classes, or put students online. But obviously, the quality suffers.

In an international marketplace, high standards and high skills may not be enough to hold the line, as the case of Qantas demonstrates. Qantas pilots and maintenance engineers are fighting Qantas management to keep the airline’s international operations staffed by Australian-trained and remunerated pilots and engineers. Management replies that Qantas’s international business is struggling to compete against airlines whose workers are more lowly-paid, and whose owners have deeper pockets. This is the message of globalisation – if your job can be done more cheaply by someone somewhere else, then that is where your job will go.

Nevertheless, where we have the opportunity to do so, we should leverage our advantage. We should not neglect the need to better integrate our patchwork economy.

The mighty engine of the resources boom produces great wealth, but also leads to great problems. When the boom subsides, as it inevitably will, on past form, we won’t have much to show for it. If we want this time to be different, we will have to learn to take a more strategic approach to the transnational companies that are shaping our future.

First appeared in the Canberra Times – click link: http://www.canberratimes.com.au/opinion/editorial/a-more-productive-argument-20110912-1wqmk.html#ixzz2BnHB76zs

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