The Mining Boom: Is it making us richer at the cost of dumbing down the economy?

We hear a lot about the mining boom and how it is making Australia richer.

But we also hear concerns that our economy is becoming less diverse and less sophisticated – that we are we becoming a nation which just digs stuff out of the ground.

Is this a valid concern?  I’ve recently had a look at some fascinating papers which cast some light on this question (full list below.)

To start with the easy bit: the mining boom is playing a big role in making Australia richer.  According to a recent paper by consulting firm Port Jackson Partners, Australia’s GDP growth sharply outperformed other OECD countries over recent years: “GDP increased by an average of 5.3% per annum from 2004 to 2009 versus an average of 3.6% per annum across other OECD countries in nominal purchasing power parity terms.” In turn, over half of the growth in Australia’s GDP over this period came from the rise in gross commodity exports.

The Reserve Bank’s Connolly and Orsmond write that the mining industry’s profit (measured as ‘gross operating surplus’) was around $15 billion in 1999-2000; nine years later it was over four times larger, at $65 billion.  In 2000 the industry invested $10 billion a year; the most recent estimate of annual investment is $58 billion.  Mining investment as a share of GDP has risen from less than 2 per cent to around 4 per cent – and with various LPG projects coming on stream it is expected to be above 6 per cent in coming years.

The boom has delivered significant benefits to the nation. While mining is a relatively low employment industry, the sector now employs a significantly bigger proportion of the workforce – rising from under one per cent of total employment in 2000 to 1.7 per cent today.  The mining sector is also generating huge tax and royalty payments to state and federal governments – these have risen from around 0.5 per cent of GDP in 2000 to about 2 per cent in 2008-09.

And much of the money spent by the mining industry flows through to other Australians.  The RBA’s Connolly and Orsmond concluded that “Australian residents accrued a little over half of the total receipts earned from current mining operations.”

A clear consequence of the boom is that mining revenues are a more important part of Australia’s overall economic performance. For example, resources exports revenues were 35 per cent of Australia’s total exports in 2000; by 2010 this had risen to 55 per cent, according to Connolly and Orsmond. 

Some people argue that Australia’s growing reliance on resources is a big problem, and our economy is ‘hollowing out’ as we replace sophisticated value added manufacturing with simple low technology businesses which dig stuff out of the ground. 

The papers I have looked at suggest this picture is far too simplistic.  Mining is a highly technical sector where there is extensive research and innovation occurring, much of which is the basis for Australian companies to obtain a competitive advantage and operate in global markets. 

Sabine and Fischer of BAEconomics point out that Australia is a global leader in research into mining automation.  As one indicator, Rio Tinto funds three Australian research centres, including the Rio Tinto Centre for Mine Automation.  They also describe the growth of an Australian mining technology services and equipment sector and cite estimates of over 30,000 people employed in this sector and export revenues of around $2.5 billion. 

 The growth of the mining services sector is also highlighted by Port Jackson Partners.  They say the growth of what they call the ‘commodity industry support sector’ is driven by domestic resource growth – and by Australian commodity producers expanding offshore.  Port Jackson Partners comment, ‘Given the right policy settings, the opportunity for the service cluster may prove to be larger than the underlying commodity sector growth.’

Port Jackson Partners estimate that there are around 450,000 employees in the commodity sectors –and another 240,000 in the support sectors. They mention major companies in this sector including Orica and Incitec Pivit (explosives), Worley Parsons (engineering services), Leightons (construction) and Campbell Brothers (testing services.)

Some things about the mining boom are not in dispute.  The numbers make it very plain – there has been an enormous expansion in the resources sector over the past ten years, and this is generating remarkable prosperity for Australia. 

But some things are more contentious – such as whether the mining boom is hollowing out and dumbing down our economy.  The evidence suggests this fear is greatly overblown.  The mining sector is more diverse and complex than most people realise; so too are the sectors which support it.  That is good news for the Australian economy – and for our nation.

The papers are BAEconomics (Brian Fisher and Sabine Schnittger), ‘Autonomous and Remote Operation Technologies in the Mining’; Port Jackson Partners, ‘Earth, Wind, Fire and Water: Economic Opportunities and the Australian Commodities Cycle’; Reserve Bank (Ellis Connolly and David Orsmond), ‘The Mining Industry from Bust to Boom’’; Reserve Bank (Jonathan Kearns and Philip Lowe), ‘Australia’s Prosperous 2000s: Housing and the Mining Boom.’