21 Jul 2013

Why is Australia a wealthy country? Current conventional wisdom is that the key ingredient is our “luck” in being geographically close to Asia’s resource-hungry markets.

The Clean Energy Council recently voiced this view, saying: “Australia’s mining boom is a combination of hard work and pure luck. Hard work because it’s tough to be a miner. And luck because our mining boom is being fed by a once-in-a-lifetime growth being experienced in China and India.”

This attitude is a hangover of a view first formed at the turn of the 20th century when Australia was for a time the world’s most prosperous country thanks to having prime grazing land for sheep and plenty of gold.

Of course, even then, it wasn’t all luck.

The colonists built a sound legal system and secure property rights that supported risk-taking and profit-seeking. Their cultural attributes – including valuing hard work and fairness –underpinned good governance. And they developed sensible policies in the form of openness to international trade and, eventually, to immigration.

But by the 1980s the “lucky country” had fallen to 18th on the list of prosperous nations (as measured by per capita GDP), largely because of poor choices such as protectionism and seeking “import-substituting” industrialisation as well as more diversified rural activities.

As more emphasis was placed on regulation, the government sector accounted for a rising share of employment and policymakers even placed embargoes on mineral exports (notoriously iron ore) in the belief that Australia was not well-endowed with resources.

This reduced living standards and increased unemployment. Thankfully, a new generation of policymakers and businesspeople combined to re-invent Australia.

Amid great controversy, tariff protection for manufacturing was cut, the dollar was floated, many government-owned enterprises were privatised, the independence of the Reserve Bank was established and the labour market was reformed.

After a quarter century of reform, Australia has benefitted enormously from global demand for its resources – including coal, iron ore and natural gas – and our living standards have risen.

This open, competitive economy enabled Australia to withstand the tornados of financial problems that have afflicted the global economy since the middle of the past decade.

But this period of national success amid global turmoil was seen by some people asbeing due to mere “luck.” There are increasing signs that Australia is backsliding towards a new phase of inefficient regulation and of increasing government intervention in business. Veteran manufacturing sectors have returned to calls for protectionism in some areas.

Exacerbating this change in the business climate is the rise of a radical environmental movement that despises market economics and is strongly aided by the online communications revolution.

The liquefied natural gas (LNG) story is an excellent example of what some insist on labelling “luck” but others understand is a combination of wisdom and good fortune.

We have large natural gas fields, proximity to Asia (but not close enough to insulate us from overseas competitors), new enabling technologies and a strong appetite for risk on the part of investors (including many thousands of ordinary Australians willing to take their chances on the share market).

The LNG industry is a major local success story, but genuine threats are now emerging to its plans for further investment and development.

Policymakers have failed to create a stable, predictable and competitive taxation regime. Regulatory processes for approving projects are becoming increasingly inefficient. And there are serious weaknesses in the development of a skilled workforce and support industries’ supply capacity.

But most worrying of all for investors is the thought that we may be reverting to the mindset that characterised the second phase of Australia’s economic development, driven by a view that – despite strong evidence to the contrary – we can integrate with the global economy on our own terms.

Many commentators insist that industries like mining and gas supply should not be valued as highly as manufacturing and their outputs are the simple result of “quarrying.”

But the level of science, innovation and technology involved in finding, developing, producing and transporting mineral and petroleum resources is superior to making fertilisers, explosives, clothes or cars.

Building, financing and operating an LNG plant involves long-term planning and high-end project management, engineering and financial skills for some of the most complex projects ever undertaken in Australia.

Petroleum taxes and royalties, the taxes paid by the people employed by these industries and by the other companies servicing resource companies in their construction and long-life operating phases, pay for the community’s ever-growing needs for services and infrastructure such as rail services.

Too few Australians understand what a billion dollars of resource sector tax payments buy them in government investment in, say, schools or hospital beds.

Too few understand that Australia’s periods of strong prosperity – at the start of the 20th and 21st centuries – have been due to much more than luck. They have resulted from policymakers making the right choices, investors taking substantial risks and cutting-edge technologies being put to very good use.

Australians would do well to reflect on as they head to the ballot box.

This blog post was first published in the Weekend Australian on 20 July.