Boon or Curse? Australia’s resource abundance effects

“All in all, I wish we had discovered water.” Sheik Ahmed Yamani (as cited in Ross, 1999)

What could prompt the Oil minister of Saudi Arabia to prefer water to ‘Black Gold’? The answer lies in a hypothesis claiming resource rich countries are at risk for a ‘resource curse’, where states can be wealthy in resources, but still be outperformed by resource poor states. This concept of a resource curse is highly contested, with a range of contradictory results. Researchers form on three fronts; those that claim the resource curse does not exist, those that agree with the hypothesis, but claim Australia has escaped these effects, and those that claim the existence of a resource curse, and consider Australia to be cursed by an abundance of resources.

While proving the existence of a ‘resource curse’ is outside the scope of this paper, it is considered to be a useful conceptual tool to investigate the effects of resources on the Australian nation. To that end, the primary concern here is with the last group, who consider that Australia has not escaped the resource curse. Through an operationalisation of the ‘resource curse’, and investigation into the main themes raised by these researchers, it will be shown that while Australia has managed to avoid some of the biggest issues within the resource curse hypothesis, there are significant reasons to consider that Australia is at risk of contracting this ‘curse’, and that these objections are likely to be exacerbated in future. We cannot become complacent on the basis of past success.

Firstly, due to the disparity of these competing claims, it is necessary to understand what the ‘resource curse’ is. As with the hypothesis, the definition is also highly contested, however for the purposes of this paper, the term is used to describe a causal relationship between a states’ level of natural resources and social, political, ecological and economic issues (Sachs & Warner, as cited in Ross, 1999, p. 300, see also van der Ploeg, 2011).

While there may have been periods where Australia was ‘episodically cursed’ (Robertson, 2008), it is widely considered that Australia has escaped this ‘curse of natural resources’ (Leveille, 2009, Robertson, 2008, Bakwena et al., 2009). These approvals stem from macroeconomic factors like the ‘terms of trade’ – the ratio of export prices to import prices – which reflect the quantity of imports that Australia can buy with its’ exports. Australias’ terms of trade are high, which implies as a nation, Australia is better off. This has led some to discount the ‘resource curse’ hypothesis, and see Australia’s resource abundance as the main ‘driver of growth’ (Wright & Czelusta, 2004), even though we may have lagged in exploration and development of technology (see David and Wright, in van der Ploeg, 2011). Advocates of the ‘resource curse’ hypothesis, who consider Australia ‘free’, have compared nations, and designated Australias’ ‘good’ institutional base inherited from Britain as the key to success. They claim this has encouraged the use of resource wealth for nation-building and development, rather than for consumption. However it would be imprudent to become complacent on this basis, as this is not a complete picture of Australias position.

For presently rich countries natural resources have been a boon and a curse. (Greasley & Madsen, 2010)

Many reasons have been cited for why Australias’ resource abundance is a curse for Australia, including social, economic, political and ecological issues surrounding the primary sector (Goodman & Worth, 2008, Stiglitz, in Langton, 2010). These issues are acknowledged by advocates of the resource curse thesis, but also recognise that they may not be captured at a macroeconomic level with available statistics (Hajkowicz et al., 2011).

Resource-rich Australia experiences strong social divisions and income inequality. Davis and Tilton acknowlege that ‘few would dispute’ that local communities are impacted most by the ‘environmental and social costs of mining’, while the money generated essentially flows out of the community (2005, p. 239). This can be seen within regions within the same state, as seen between the Pilbara region, and the Western Australian (WA) capital city, Perth. Pilbara locals often claim they are not provided with their fair share of the royalties paid for mining, and that due to localised inflation caused by the mining industry, they are facing embedded disadvantage, and are unable to entice essential services to the region (see Goodman & Worth, 2008, Langton, 2010, Pick et al., 2008). Inflationary pressures caused by the resource sector can lead to reductions in social spending, not affecting the mining sector, but impacting on all others. While the Australia Institute finds that ‘some workers’ in ‘directly affected’ industries experienced high increases in income, other ‘wage earners generally did not benefit’ from recent ‘resource booms’. (Richardson, 2009, p. 14). Langton illustrates this well: informing that “Anyone who lives in a mining province but does not work for a mining company is disadvantaged in important ways: their income is much lower, yet they must pay the same exorbitant housing, food and services costs” (2010). These divisions are translated to the national level; there are common disputes between resource dominant and manufacturing dominant states, such as those between Western Australia and New South Wales. With increased interest and investment into mining, WA benefits. However, as its collorary, this increased investment in resources generally means a reduction in investment to manufacturing, leading to significant divisions and uneven impacts (Goodman & Worth, 2008, p. 209).

Political institutions set the rules. While it is generally acknowledged that Australia has good institutional support, and so have avoided the resource curse (Davis & Tilton, 2005, p. 237, Torvik, 2009, p. 250), others claim evidence of Australia being a ‘rentier’ state (Goodman & Worth, 2008, Davis & Tilton, 2005), with governments engaging in patronage, rent seeking activities (Davis & Tilton, 2005, Langton, 2010) and ‘politically rational but economically inefficient decision-making’ (Stevens & Dietsche, 2008, p. 59) evidenced by large ‘tax breaks’ through the Howard era (Goodman & Worth, 2008, Cleary, 2011). There are also claims that the politics of resource management is skewed disproportionately towards mining magnates and their companies, instead of the community, with claims of property rights being usurped, or coerced (Langton, 2010).

Further economic issues are found in industrialised nations, where the resource curse commonly presents itself through a form of ‘Dutch disease’. A sudden increase in resources, or demand, can lead to the ‘crowding out’ of other income activities in non-mining sectors (Papyrakis & Gerlagh, 2006, p. 118) and artificially raise exchange rates (van der Ploeg, 2011), which causes products from local manufacture to become more expensive, and uncompetitive in comparison to imports. The Department of Treasury is concerned about this, since “when commodity prices normalise or when resources are depleted, tradable sectors that have disappeared might not simply reappear” (Department of Treasury, 2010, pp. 4-14). Effects like these are being seen in the realm of higher education, with international students claiming it is no longer economical to study here (Cleary, 2010). Demand is volatile If this boom continues, it may cause further issues (Robertson, 2008), because while primary products are a small proportion of GDP, secondary and tertiary sectors are also largely based on the ability of the primary sector to generate foreign exchange for imports (Conley, 2009, p. 115, Hajkowicz et al., 2011, p. 32).

Perhaps most importantly, a reliance on resources creates ecological issues, which are highlighted in Australias’ ‘resource curse’. These extracted resources are inherently non-renewable, and so have a significant impact on both current and future viability of policies and expectations of continuous growth (Robertson, 2008). This effect is compounded by the geographic distribution spread of these resources, since local exhaution leads to wastage when new operations begin in another area. This can also lead to significant degradation of the land, affecting its feasability for future use. Related to this is the impact of climate change, which is considered to be impacting on Australia with significant weather events like droughts and floods, resulting in problems with current economic activity in other industries. Mining is considered to be a major culprit in exacerbating these effects through emissions from extraction and processing; domestic energy use; and manufacturing and subsequent consumption, either domestically (through local or imported manufactures) or through Australian exports consumed overseas (Goodman & Worth, 2008).

Even success may arguably breed failure (Robertson, 2008).

These significant factors will have a bearing on Australia’s resource wealth in the future, and will influence whether this wealth is made a blessing, or curse.

Our economy, while diversified, is still heavily reliant on resources, and this has been cited as a major risk factor for the ‘resource curse’ (Karl, as cited in Angius, n.d, p. 1). In fact, Australia is considered by the World Bank to be ‘at risk’ of the resource curse (Stevens & Dietsche, 2008, p. 58). The future economy is expected to change, with current expectations of a ‘long term boom’. It is claimed that this will necessitate ‘structural adjustment’ to the economy, expecting the mining sector to expand, with a ‘relative decline’ in manufacturing (Department of Treasury, 2010, pp. 4-12). While this may be seen as pursuing Australias’ ‘competitive advantage’ (Wright & Czelusta, 2004, p. 7), it may lead to significant issues with employment, because secondary and tertiary sectors employ a larger number of personnel.

Large scale macroeconomic effects of resource abundance have been beneficial for Australia, avoiding many of the political, social and economic problems associated with the resource curse. However, when looking at the issues at the microeconomic scale resource curse effects become salient. These themes, outlined here, are indicating the increased risk of Australia becoming a victim of the ‘curse of natural resources’. Australia will be in a significantly vulnerable position if these problems further inflate, then compound the negative effects of mining on the environment. For this reason, policy action is necessary to address these issues before they become worse, since without direct action, these problems are likely to be exacerbated in future, and will lead to some of those more damaging effects of the resource curse.

Bibliography

Angius, R. (n.d) Slackening Growth, Fuelling Politics: Introducing the Resource Curse,
University of Oslo, unpublished.

Bakwena, M., Bodman, P., Le, T. & Ki Tang, K. (2009) Avoiding the Resource Curse: The Role of Institutions, in No 3209, MRG Discussion Paper Series University of Queensland, Australia Econpapers.

Cleary, P. (2010) ‘Treasury tries to tame the ‘resources curse”, The Australian, available: http://www.theaustralian.com.au/politics/treasury-tries-to-tame-the-resources-curse/story-e6frgczf-1225866679354.

Cleary, P. (2011) ‘Riding our resources ‘dumb luck’ to ruin’, The Australian, available: http://www.theaustralian.com.au/national-affairs/riding-our-resources-dumb-luck-to-ruin/story-fn59niix-1226108572586.

Conley, T. (2009) The Vulnerable Country: Australia and the global economy, Sydney, NSW:
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Hajkowicz, S. A., Heyenga, S. & Moffat, K. (2011) ‘The relationship between mining and socio-economic well being in Australia’s regions’, Resources Policy, 36 (1), 30-38.

Langton, M. (2010) ‘The resource curse’, Griffith REVIEW, 28.

Leveille, E. (2009) ‘Natural Resources: unavoidable curse or manageable asset?’, Journal of Politics & International Affairs, 108-125.

Papyrakis, E. & Gerlagh, R. (2006) ‘Resource windfalls, investment, and long-term income’, Resources Policy, 31 (2), 117-128.

Pick, D., Dayaram, K. & Butler, B. (2008) ‘Neo-liberalism, risk and regional development in Western Australia: The case of the Pilbara’, International Journal of Sociology and Social Policy, 28 (11/12), 516 – 527.

Richardson, D. (2009) The benefits of the mining boom: Where did they go?, in Technical Brief No. 3, The Australia Institute.

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Stevens, P. & Dietsche, E. (2008) ‘Resource curse: An analysis of causes, experiences and possible ways forward’, Energy Policy, 36 (1), 56-65.

Torvik, R. (2009) ‘Why do some resource-abundant countries succeed while others do not?’, Oxford Review of Economic Policy, 25 (2), 241-256.

van der Ploeg, F. (2011) ‘Natural Resources: Curse or Blessing?’, Journal of Economic Literature, 49 (2), 366-420.

Wright, G. & Czelusta, J. (2004) ‘The Myth of the Resource Curse’, Challenge, 47 (2), 6-38.

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