Mining digs a deeper hole for manufacturing

Over the past decade, mining exports have climbed by around 5 per cent of gross domestic product; non-mining exports have slid by around 5 per cent of GDP. The relationship has been almost exactly one-to-one.

That's not to say the ratio won't improve. Mining exports might one day do more than simply replace non-mining exports. There might one day be few other exporters left to crush - the massive investment in new mines and mining machinery under way might pay off in much higher earnings, as it is meant to.

But what's important are the directions of change. As the mining industry does better, other trade exposed industries do worse.

The main mechanism is straightforward. Higher minerals push up the Aussie dollar, which makes exports harder to sell and imports much cheaper.

There's also a secondary mechanism. The mining boom (particularly the mining construction boom) gets the Reserve Bank worried about inflation. It talks up the possibility of higher interest rates - until this month, that's exactly what it has been doing - and consumer and business confidence stalls.

Step three is when our relatively high interest rates and talk of higher ones draws more money from overseas, pushing up the dollar further.

It's bad for steelmakers, bad for any trade-exposed industry, and to a lesser extent, also bad for industries with no competition from trade. If consumers and businesses are wary of spending - as the Reserve Bank has tried to ensure they are - they will be wary across the board.

There's a view about that this is a reasonable price to pay. Our record mining investment should pay off big time. By throwing far more than ever before at mining, we are pushing ourselves out "further along the risk-return frontier", as Reserve Bank assistant governor Philip Lowe recently put it.

The high dollar has positives for all of us, even as it makes it harder for some of us to compete. It increases the buying power of each dollar we earn and also the buying power of those we've saved. It is one of the ways in which the proceeds of the boom are shared more widely.

And jobs will take care of themselves. It is not carelessness that makes Treasury assume full employment in its modelling of tax and other changes - it is reality. Employment is usually close to full.

The ratio of working-age Australians to dependent-age Australians is set to shrink from two to 1.5 in coming decades, making workers even more prized.

So should we be worried? It might mean we will never return to making steel. Former Treasury secretary Ken Henry dismissed this in his final appearance before the Senate this year, saying we might not want to.

As he put it: "Let's suppose that in 20 years' time commodity prices come off, quite significantly. I would say to you then that the best industrial structure of the Australian economy then, in 20 years' time, would be quite different from the one we had 20 or 30 years ago.''

But something else would be lost with the ability to make steel or cars apart from flexibility - our manufacturing capacity.

Other nations subsidise those industries precisely because they think they are worth having - for defence reasons, for security of supply and also for emotional reasons. While much of my generation deals with intangibles in white-collar jobs, we know our fathers made real tangible products in factories. We think it matters.

What can be done to make sure we continue to make things? Getting behind the originally-designed mining super profits tax would have helped. It would have taken money from the miners and given it to manufacturers and other non-mining companies in the form of a 2 percentage point tax cut - enough to offset the effects of the higher dollar for a while. Some may be regretting not getting behind it.

And staring down the Reserve Bank would help.

It's been saying it'll eventually have to push up rates because wage growth is running ahead of anaemic productivity growth.

It is, but the measure of productivity growth relied on to make the claim is bogus. Australia Institute research to be released this morning shows non-mining productivity growth is a very respectable 2.5 per cent. Mining productivity is plummeting, pulling the average way down. As mineral prices get higher, more and more resources are being thrown at mining and less and less productive mines are opening.

The gross value added per mining worker has almost halved since the start of the mining boom eight or so years ago. This shouldn't surprise us, and it's not a bad thing.

But it isn't a reason to punish the non-mining economy even further. That'd be adding insult to injury.

Authors: mining - Yahoo! News Search Results

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