This is a direct copy from an email I received from a student last night. It would be great if you could comment on what she has to say and the questions she asks.
– The Australian economic situation is extremely threatened by the lack of security resulting from the mining boom. Increased growth of the mining sector, estimated to be that of greater than 3 per cent, i expected to encourage economic growth for the economy over the next few years, resulting in a redistribution of resources towards mining based industry. This is good on the surface as it promotes Australia’s comparative advantage of commodity based exports; however what if this is Australia’s primary source of growth. If other sectors of the economy, such as tourism and manufacturing for example have relatively small or limited growth in comparison to these mining giants, we are left with a two speed economy.
This means that:
– Excessive growth from the mining sector places upwards pressure on inflation, as a result of demand pull inflation.
– Increases of real incomes also results in greater spending thereby increasing inflationary pressures.
– Global confidence in the Australian economy promotes an appreciation of the Australian dollar, therefore imports become less expensive as purchasing power increases and greater inflationary pressure is generated from the exchange market.
So generally there is alot of inflationary pressure as a result of this mining boom, and this isn’t a problem when you consider that small amounts of inflation 2-3% are considered healthy. BUT: How do you control inflation.
In the two speed economy, consisting of the mining related sectors and pretty much the rest of the country, the substantially different growth rates will both be affected by any anti-inflationary measures.
– If you increase interest rates, you are potentially damaging the less-profitable sectors of society, undermining the basic necessities and thereby standards of living of communities and causing greater cost-push inflation within these sectors.
Therefore: the customary tools of controlling the economy become nullified. We need new measures to control this economy that is leading to gross discrepancies in the distribution of income and wealth.
The Labor Party suggested we impose a super-tax on the mining industry’s profits, however this is equally useless in providing stable economic growth as it undermines the industry in which Australia has the greatest comparative advantage. Royalties however, do need to be redirected from the states to national government unless income inequality is to grow even further. How do you promote stable economic growth throughout all of Australia to ensure that the government’s instruments of economic management remain useful? Microeconomic reform is perhaps the most likely answer, thereby encouraging the other sectors of the economy to catch up to the growth experienced in the mining sector, but this may take up to 20 years to take effect? By that stage the disparity between the mining sector and other sectors growth could be astronomical! Perhaps we should adopt protectionist measures to ensure the growth of domestic businesses in conjunction with the mining boom? But this has! proved to in fact stunt economic growth in the past. What is the answer? How do you maintain economic growth in an economic climate as geographically dominant as Australia, without waving the white flag to inflation and the two speed economy??