Why Australia’s non-mining sector will continue to struggle

Australia’s geographic location and abundant natural resources have been key determinants of its economic structure since human settlement. For as long as any of us can remember, Australia has been a significant exporter of agricultural products and bulk commodities, especially iron ore and coal, a feature that has distinguished us from most other countries at similar stages of economic development.

Trends in the international terms of trade have not always been favourable to Australia. Indeed, in the last few decades of the 20th century the popular view was that Australia’s particular natural endowments had consigned it to ever-falling export prices and ever-falling terms of trade.

That prospect helped motivate the policy reforms of the 1980s and 1990s. And those reforms paid substantial dividends in economic performance.

Even so, by the turn of the century, with the world in awe of impressive developments in information and communications technologies and the advent of electronic commerce, Australia’s natural resource endowments were considered by many to be a curse. Australia was being described, in disparaging terms, as an “old economy”, producing things that the rest of the world was increasingly finding ways of doing without. People were talking about the emergence of a so-called ‘weightless economy’ – an economy developing in the major European and North American centres of economic activity, drifting ever further away from Australia.

Today, in the Asian Century, Australia is often described as being “in the right place at the right time”, its geographic location and abundance of natural resources being seen as valuable assets.

Australia’s terms of trade are some 80% above their level at the turn of the century. In contrast, the real prices of information and communications technologies have continued to fall at a rapid rate. Both of these things can be explained, to a large extent, by the extraordinary growth of China as a manufacturing powerhouse, with a thirst for raw materials that Australia has in abundance.

Abundant as they are, Australia’s natural resources will not last forever.

Even if it turns out, in the broad sweep of history, to be transitory, this terms of trade boom, which really kicked off in late 2003, has been with us for a while; long enough for it to have prompted a number of serious debates. Most obvious is the concern that the associated appreciation of the nominal exchange rate is producing a multi-speed economy in which mining and mining-related construction activities grow strongly while the rest of the economy stagnates or recedes.