Sunday, September 21, 2014

New Holland Disease

TOD ANZ has a post pointing to a SMH article on the "dutch disease" slowly destroying Australian industry - Squeezing the life out of local industry.

The cost of the mining boom is a high dollar and a desperate manufacturing sector.

WERE you among the multitudes who cheered last year when the mining industry managed to hobble Ken Henrys proposal for a comprehensive resources rent tax?

Did you begin to feel a strange sense of unease when, just a few weeks later, those same mining groups delivered earnings results that would have been unimaginable a couple of years earlier?

And are you becoming alarmed at the forces sweeping through the economy right now that are ravaging our ever diminishing manufacturing base?

At some stage, either demand for our minerals and energy will slow or well simply run out. Thats the thing about natural resources; they are finite. You only get to dig them out of the ground once.

When this boom does end, youd hate to think that as a nation we would be left with nothing more than a pile of worn out, imported flat screen televisions, a lot of empty holes in the landscape and no way of earning a crust in the future.

Yesterdays long-expected restructuring from BlueScope Steel, which will shed a quarter of its workforces at Port Kembla and Hastings, follows a similar announcement by OneSteel last week and proposed layoffs at Qantas and Westpac.

These workers arent just units of labour, as the economics textbooks would have us believe, who can quickly transfer to the mines of Western Australia. They have families and commitments and specialised skills that make them far less mobile than machines.

The simple explanation for what is happening right now is that the resources sector is squeezing the life out of our manufacturing industries. The enormous amount of money flowing into Australia - from mineral exports and in new capital to fund new projects - has pushed our dollar and our interest rates higher.

There is a way forward for Australia but it requires bold leadership, a refusal to be held hostage to opinion polls and an end to the easy capitulation to vested interests.

The fruits from the resources boom need to be harvested and invested for our future. And they could be invested in such a way as to take the pressure off our currency, thereby maintaining the competitiveness of our manufacturers. (Remember too, Henry proposed tax cuts to industry.)

Norway has done just that with its oil revenues. It has a sovereign wealth fund with accumulated assets of more than half a trillion dollars. All of it is invested offshore, thereby helping to stabilise the amount of cash flowing into the economy. That counteracts the pressure on its currency and longer term diversifies its earnings base.

Chile has a stabilisation fund while Alaska and the Canadian province of Alberta have similar funds. Thats not to mention the Gulf states that invest the proceeds of their oil revenues abroad. Countries such as Singapore and China have massive sovereign wealth funds that invest the proceeds of their trade surpluses.

But the bulk of the owners are foreign institutions. And that is where the proceeds from the biggest-ever resources boom in our history are headed.

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