SYDNEY, Australia — For years, Australia has been sitting pretty while the fiscal albatross of toxic debt and sagging demand dragged down its allies in the developed world.
While the global financial crisis had people from New York to Nuremburg tightening their belts, surging demand from China for iron ore and coal was fueling the flash cars that clog Sydney’s throughways at rush hour — and boosting the Australian dollar to unimagined heights.
But there is danger in relying too heavily on natural resources — ask Russia or even Canada.
There is a growing fear among Australian analysts and politicians that the country could find itself trapped by a first world version of the “resource curse,” the paradox that explains why countries with great reserves of natural resources tend to be less stable and prosperous than those without.
Australia, despite its highly educated work force and world-class infrastructure, is increasingly becoming the world’s quarry, they warn.
A trio of top Australian bank chiefs even recently went so far as to caution that the strength of the super-powered mining sector was masking serious structural flaws in sectors as varied as tourism to retail to commercial property.
In short, it’s a nice place to visit to pick up your coal and steel, but not the kind of place you’d want to invest in.
A clearly frustrated Sen. Kim Carr, the innovation, industry, science and trade minister, sounded the alarm bells late last year in a what could prove to be a prescient posting on his website.
“Mining is 8 percent of GDP and 1.4 percent of employment. Manufacturing is 10.2 percent of GDP and 9.2 percent of employment. Mining is growing fast, but nothing lasts forever, no matter how welcome it is today. It would be bold and naive to think that the income we currently enjoy from the resources sector will continue unabated. Putting all our eggs into one basket simply doesn’t make sense,” he said.
“Can we really celebrate the concept of a two-speed economy — where some parts of the country are prosperous and other parts are left to wither on the vine? Do we genuinely believe that the workers and communities we sacrifice will be reborn without cost?”
Some accuse Australia's Labor-led government of just such economic naivete, and in the interests of short-term political gain, using as an example the decision taken last week by Treasurer Wayne Swan to block a much-hyped bid by the Singapore Stock Exchange to take over the Australian Securities Exchange (ASX). Opponents say the Labor-led coalition government is more interested in playing populist politics than encouraging its further integration into rapidly developing Asian markets.
Matt Robinson, senior economist at Moody's Analytics, blasted the deal, saying it risks discouraging foreign investors at a time of unprecedented consolidation in the world’s exchanges.
"Rejection on the grounds of loosely defined national interest generates a potentially toxic degree of sovereign uncertainty regarding future [mergers and acquisitions] activity involving Australian companies," he said in a written commentary.
"The decision has likely damaged Australia's reputation as a destination for foreign capital and will discourage foreign investors from considering future opportunities in Australia."
The ASX-SGX takeover, which would have created one of Asia’s largest stock exchanges, was seen as just the kind of welcome move that would have strengthened the financial services sector, already a top performing non-resource sector of the economy and one upon whose strength a more diverse economy could be hoisted.
Tony Naughton, head of economics at Melbourne's RMIT University, says the decision to block the merger was driven at least in part by the government’s sagging poll numbers, which have plunged to historic lows over their proposal to launch an emissions trading scheme as early as next year.
“The justification [to block the takeover] is on economic reasons but I suspect there’s a lot more to it than that… there appears to be a political dimension to it where the government of the day is putting across its image as a tough operator,” he said.
The decision could have the unintended consequence of scaring off foreign investors, he said, and must be seen as a missed opportunity for Australian markets.
“Here was an opportunity for greater integration in the financial system of Australia and Singapore, two major markets of course, which could have benefited all around, with very clear benefits in terms of ease of access of capital and transacting across borders, and it was knocked on the head. Whether it was political or just because it was Singapore is yet to be determined.”
Not everyone thinks the surging resource sphere is such a bad thing, however, provided it is managed correctly.
Australia has always relied on commodities exports to the exclusion of other sectors of the economy, said Adam Boyton, chief economist for Deutsche Bank AG. In reality, far from being a drag on the economy, it is an advantage that most developed economies wish they had. The best thing at this point is not to repeat the early mistakes made during the current boom such as returning the surpluses in the form of tax rebates.
“I think it’s a reality of our comparative advantage. And it has been a reality of our competitive advantage for a long time. I mean, jump back 10 years ago when Australia was old economy. People were making those same comments, you know ‘why would you invest in Australia? It’s old economy. It’s not high-tech. It doesn’t do this and it doesn’t do that,’ and as it turns out that was about the time that China started to emerge, and in very dramatic fashion.”
“It’s always been a country dependent on commodities: 150 years ago, putting the first gold rush to one side, it was largely agricultural commodities. Now it’s a different set of commodities. And that’s just the nature of Australia’s competitive advantage.”
Investors will just have to wait for the next drop in commodities prices to see if that proves true.