Since the Aussie dollar was floated in 1983 its value closely followed that of its commodity exports – see graph from The Economist. However since 2003 commodity prices have increased 400% but the dollar rose by much less and no longer had a direct relationship to commodity prices. There are 3 possible reasons for this:
1. The deregulation of financial markets which facilitates the ease of currency trading
2. The current account deficit in Australia which got to 6.2% of GDP in 2007
3. Interest rates in Australia up to the GFC were realtively low compared to other developed countries
2011 saw commodity prices drop but the Aussie dollar has remained strong. As most economies employed a lose monetary policy and proceeded to drop interest rates aggressively after the GFC, the Aussie economy didn’t in fact go through a recession and its interest rates remained relatively strong – see below.
Although a weaker exchange rate could help the Aussie economy especially as it has been susceptible to the resource curse – the strength of the exchange rate and higher interest rates is already putting pressure on some industries, particularly the tourism, manufacturing, education exports and retail industries.
One cannot underestimate the importance of copper to the Chilean economy. Copper provides 20% of Chile’s GDP and makes up 60% of its exports. Chile’s economy is growing at approximately 6% per year while inflation is at 1% and unemployment 6.4%. Although Chile does have a productive agricultural sector and tourism, the price of copper does have a significant impact on the economy.
Chile has done very well out of the shift of China’s rural population to the more urban areas – new homes with copper wire and pipes are needed. Furthermore Emerging markets everywhere are using vast amounts of copper to put in bridges, cars, fridges and more or less anything that uses electricity. However China’s recent slowdown has caused copper prices to slide by 15% since the beginning of the year.
The Economist reported that in 2000-05 the government’s income from mining averaged $2.1 billion a year. As Chinese growth accelerated, that rose to $11.5 billion a year between 2005 and 2011. But the boom owed almost everything to the copper price. Chile’s output of the red metal has hardly grown in a decade.
The biggest threat to Chile’s copper boom comes from China. If the country that buys 40% of the world’s copper slows further, the price of the metal will fall again and Chile will have rely on something else. Is this another resource curse waiting to happen? Below is a short report from AlJazeerah which also looks at the positives from lower copper prices – lower currency value, the peso, and ultimately more competitive exports.
I have mentioned the ‘resource curse’ in many postings since starting this blog. It affects economies with a lot of natural resources – energy and minerals. The curse comes in two forms:
1. With high revenues from the sale of a resource, governments try and seek to control the assets and use the money to maintain a political monopoly.
2. This is where you find that from the sale of your important natural resource there is greater demand for your currency which in turn pushes up its value. This makes other exports less competitive so that when the natural resource runs out the economy has no other good/service to fall back on.
In 1995 Jeff Sachs, then a Harvard Professor, co-authored a paper with Andrew Warner in which they stated that countries with a higher proportion of resource exports had experienced a slower rate of economic growth. However, The Economist recently noted the research of two Swiss-based economists which draws different conclusions. They basically say that it is crucial to distinguish between the following:
Abundance – having lots of resources
Dependence – having a high proportion of exports in resource-related industries.
They found that greater resource abundance leads to better political institutions and more rapid growth. Those with poor political institutions – Zaire, Nigeria etc – are unlikely to develop other sectors of the economy to reduce dependency on natural resources. The chart below from The Economist shows that the recent growth of OECD countries that are energy exporters against other members that are neutral or oil importers. Although they have grown more over the years with an increasing oil price, their strengthening currency hasn’t affected their economy’s that much. The key test is when the resource runs out – have countries reinvested in areas that they can fall back on or has this investment gone into the energy industry itself. For the Aussies this is very important especially if China has a hard landing. Time will tell.
Full-time doctor but part-time artist, Ahmed Matter creates some very interesting art. Using x-rays and magnetism the art he produces is a critical voice against the insanity of oil dependency and the oil production that has had a decisive impact on the region as a whole. The petrol pump below is gradually transformed into the body of a human being – in blue-tinted x-ray pictures of the head and upper body. And the pump nozzle itself becomes a pistol, which the spectral human figure holds to its head – a portent and probably also a criticism of the Saudi government, which places reckless emphasis on oil exports. Do we have another case of a classic resource curse?
Today the Melbourne manufacturing plant of Toyota laid off 350 workers – the cause is the high Aussie dollar. It recently traded at US$1.05.
“Toyota Australia is facing severe operating conditions resulting in unsustainable financial returns due to factors including the strong Australian currency, reduced cost competitiveness and volume decline, especially in export markets,” Toyota spokesman
This is the first sign of the resource curse that has plagued so many resource-rich countries. The strength of the exchange rate and higher interest rates is already putting pressure on some industries, particularly the tourism, manufacturing, education exports and retail industries.
Aussie minerals are a potential ‘curse’ as it is mainly dependent on the Chinese economy. So what can the Austalian government do to minimise the impact of the resource curse?
1. Like Norway, it could put export revenues into Sovereign Wealth Funds (SWF).
2. Greater subsidies into non-commodity industries
3. With greater income from commodity industries it should develop domestic demand when international demand is subdued.
4. Investment in infrastructure and training/education is essential so that the entrepreneurial environment is vibrant. Avoid inertia and use the good times to plan ahead
5. Be prudent with borrowing and avoid exposure to debt because commodity prices might be high. Just like the sub-prime crisis – using your property as security.
They might be beating India at cricket but the economy is showing the first signs of the dreaded Dutch Disease – DDD.
The Chinese government are no longer satisfied with buying iron ore and coal from Australian miningcompanies, Rio Tinto and BHP Billiton. China is now funding its own operations on Australian soil by leasing land in the Pilbara region in the north-west of Australia. China expects to mine at least 2bn tonnes of ore from this region in the next 25 years and with it comes royalities and taxes for the Australian economy. It seems that China is the only country that is able to invest such large amounts of money in the mining industry and infrastructure – they are currently funding a port with a 1.6km-long breakwater protruding into the Indian Ocean.
But as I have mentioned in previous posts there is the resource curse issue and here are indicators that economically the Australians should be worried:
* the windfall from mineral exports has strengthened the Aus$ which has made manufacturing exports uncompetitive.
* In Perth restaurants and farms are struggling to find labour as unskilled workers are attracted to the high earning potential of the remote mines- average yearly wage is Aus$112,000. A truck driver can earn more than a surgeon.
Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil (minerals in the case of Australia) is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.
Below is a clip about China’s demand for Australian minerals taken from AlJazeera early last year.