Sunday, June 6, 2010

Mining on a pedestal?

The proposed Resource Super Profits Tax (RSPT) has received both scathing criticism, and reserved admiration. Critics proclaim that the mining industry is almost a fundamental necessity, without which Australia would grind to a halt. Otherwise respected firms are making contradictory claims of social benefits, including increased wages, while also arguing that there is little impact on wage rates in other parts of the economy, and denying that other investments are being 'crowded out', as most capital is raised abroad. They indirectly state that foreigners are reaping the most benefit from Australia’s resources providing an intangibly small flow-on effect to other sectors of the Australian economy.

Such is the confusion about the true social and economic benefits from mining and the likely impact of the RSPT on Australia's welfare.

This type of confusion in the debate over the RSPT and its likely impact is widespread, possibly even within the government itself, which is still to make decisions on exactly how to implement the proposed tax. While I agree with the principle of the tax, which has the same theoretical basis as the Petroleum Resource Rent Tax, certainty of the details is required – particularly the rate at which the RSPT will begin to apply (currently 6%).

But one thing we can examine is the claim from miners that their industry brings great benefits to your average Australian. A recent report by David Richardson from the Australia Institute does just that and makes surprising conclusions:

The mining boom would have had a major stimulatory impact on the Australian economy but for two factors. First, the Gregory effect saw the exchange rate appreciate, which caused a contraction in the rest of the economy. Secondly, the Reserve Bank of Australia increased interest rates in an attempt to offset the stimulatory effects of the boom.

Anyone owning resource stocks would have benefited from the enormous paper gains, which peaked in May 2008 but had largely disappeared by the end of 2008. However, to the extent that the gains persisted, the benefits would have gone to the top 20 per cent of wealthy households where share ownership is concentrated.

Overall, it is hard to identify the benefits to ordinary Australians of the mining boom. The estimated nine per cent increase in real incomes from the terms-of-trade changes do not appear in the figures for wage earners or recipients of government income-support payments. It seems that the benefits of the boom barely went beyond the mining industry itself.

Further, in Ken Henry’s Senate testimony he claims that the mining industry is not a source of economic stability, but a highly speculative and cyclical business that did not contribute to Australia’s economic stability in recent years, having dropped 15% of their workforce in response to the financial crisis.

Just because mining is a large industry when compared in terms of dollars of investment, does not mean that it is more productive than other forms of investment. Only improvements in productivity lead to broad social gains.

We can plod along happily talking about number of people employed in mining, the dollars invested into mine projects, or any such figure, but unfortunately any number is rather meaningless without an alternative with which to compare.

One could be tempted to brag, for example, about the contribution their farm makes to the regional economy by stating how many people they employ, how much the invest in capital works, and how much food they produce. But if their next door neighbour employs more people, invests in more capital works, and produces more food per hectare, the first farmer is performing poorly and is a burden to the nations’ productivity.

The contribution of mining to Australia’s welfare is determined by its productivity gains, and simple investment numbers say nothing of the opportunity costs of labour, land and capital.

All comments/criticism welcome.

2 comments:

  1. http://en.wikipedia.org/wiki/Dutch_disease

    Does Australia already have some sort of government pension fund or is this the beginning? I reckon this can only be good for Australians, perhaps minimising the boom-bust tendencies. Maybe we should also investigate more regulation to limit the amount of resources extracted much like China and their rare earth magnet industry. Anyway, I reckon something needs to be done, Australia seems to be used like a whore, and we all know what happens to whores when they get too old.

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  2. I like the idea of placing the funds into the future fund - gov't doesn't know how to invest wisely.

    They deny the effect of this policy - it is effecting projects - pity they have chosen to make the fight so public and not deal with this behind closed doors. The world is watching and judging - sovereign risk in Aus is real!

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