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The Wealth Of Australia

February 26th, 2008

Currently the political discussion about the Wealth of Australia has been revitalised, in particular about the ongoing mineral boom in Australia. The argument to maintain this extraordinary economic growth and the related benefits to the wealth of Australia is based on the present improvement of the terms of trade. In international economics and international trade, the terms of trade are the relative prices of a country’s exports to imports. Terms of trade are at this time used as a substitute for the relative well-being of Australia. An improvement in Australia’s terms of trade is politically declared as worthy for Australia in the sense that it has to pay less for the products it imports, that is, Australia has to give up fewer exports for the imports it receives.

The strong growth in Terms of trade over the past six years reflected over 24.3% growth in Export prices and a fall in Import prices of 12.3%. In 2006-07, the Terms of trade increased by 6.7%, the lowest increase in the past three years. (Source: ABS, cat. no. 5204.0, Australian System of National Accounts, 2006-07) 

Nevertheless the terms of trade should not be used as synonymous with the wealth of Australia. This is where a movement from one allocation of the resources of Australia to another that can make at least one person better off without making any other person worse off. The terms of trade calculations do not provide us with the volume of Australia’s exports; it indicates only relative changes between Australia and our foreign trading countries. To understand how Australia’s wealth has changed, it is essential to consider for example changes in the volume of trade, changes in productivity and resource allocation, changes in capital flows, changes in the provision of the skilled labor force, changes in health care, education and safe environment. Furthermore it has to be taken into consideration whether changes to the so called Safety Net of Australia; that is a sufficient amount of industrial and agricultural production as well as services being still located in Australia, as a countervailing measure if the world market does not require a commodities boom in Australia. Globally over 200 nations trading millions of products and services at present, and therefore the terms of trade calculations become extremely complex. However, the concept of terms of trade is nonetheless technically questionable and should be used only with extreme carefulness

The continuing Australian mineral boom has all the features of the “Dutch Disease”. This term was invented in 1977 by “The Economist” to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s. The Dutch Disease is an economic concept that attempts to explain the seeming relationship between the exploitation of natural resources and a decline in the manufacturing sector. The hypothesis is that an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which results in the manufacturing sector becoming less competitive in the world market. However, it is extremely problematical to argue definitively that the Dutch Disease is the sole cause of the potentially decreasing manufacturing sector in Australia, including the possible decline of Australian owned companies, since there are many other factors engaged in shaping the process of the Australian economy. While this concept most often refers to natural resource discovery, the Dutch Disease may also refer to any development resulting in a large inflow of foreign currency, including a sharp surge in natural resource prices, and foreign direct investment.

One consequence of the Dutch Disease looming in Australia might be seen in the contemporary increased inflation. Typically for a widespread inflation is the progress of inflated assets, which creates an improvement of the wealth of Australia just on paper. Australia’s wealth would be much more comfortable with the steady increase of tangible assets in all Australian sectors of products and services including the improvement of the infrastructure and provision of basic needs for people living in Australia’s regional and remote areas. Maintaining this path of improvement of the wealth of Australia requires of all actors in the social economic arena a very fine tuning of the relevant policies. Even considering to “re-discovering” measures, which had been given up by the dominance of privatisation as much as possible, free market extension and deregulation that is the overvaluing of the market forces? An example of “old” procedures could be the introduction of statutory reserve position from financial institutions to the Reserve Bank of Australia. Essential to achieve an improvement of the wealth of Australia would be among others the commitment of the Australian Federal and State Parliaments and Governments to act in foresight on behalf of the next generations to come and not merely focused on the election term with the intention to regain majority in Parliament. This would involve reinvestment of surpluses in the infrastructure and productive capacity of Australia which would leave assets when the current commodities boom comes to an end.

Professor Dr.rer.pol. Wolfgang Fischer
Patron of Ausbuy

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