Effect of the mining boom on the economy of Australia
Discuss about the Trickle?down Effect of the Mining Boom in Australia.
The mining boom in Australia is considered a significant event for the economy of the country. In terms of the absolute impact it had on the economy, it is often compared with other influential events such as the great depression of 1929. Any kind of boost in the economy influences the other sector as well through the chain effects. This has also been the situation in case of the mining boom in Australia. The aim of this paper is to discuss the economic impacts and the role of the government following the mining boom that the economy of the country experienced. The study encompasses the macroeconomics principles associated with the event and theories which best explain the spread of the influence of the big event.
The official boom in the mining sector of the country started when iron ore was found near Pilbara, Australia in the year 2003. Since then the economic map and the contribution of each of the sectors on the GDP of the country have changed significantly. Before the mining booms in the economy of Australia, a part of the manufacturing sector and the whole service sector got benefitted. Dwyer et al. (2016) stated that the rising national income of the country following the boom resulted in the overall economic activities of the service industry. However, it is important to note that the whole manufacturing sector of the economy did not get benefitted from the mining boom. This is due to the fact that, the mining boom also increased the value of the currency of Australia.
Figure 1: the increase in the value of the Australian dollar
(Source: Siva et al. 2016)
Figure 1 clearly shows the increase in the value of Australian dollar following the mining boom in the country. This increased value of the Australian currency negatively affected sectors that relied mostly on export. For example, agriculture sector of the Australian economy was severely affected following the boom as the demand for the agricultural product of the country fell due to the increased actual prices of the products. Apart from that, a part of the manufacturing sector that had a goal to substitute the import also faced problem due to the boom. The manufacturing of textile, clothing, footwear experienced a reduction in the production and economic downfall. McLennan, Becken & Moyle (2017) commented that in general parts of the economy that did not rely much on the import got severely affected by the mining boom.
Nevertheless, in terms of economic volume, the positive impacts of the mining boom on the economy were huge compared to the negative negligible impacts. The immediate impacts of the mining boom were the increasing wages of the workers in the mining industry that got transferred to the other sectors of the economy. The high-profit margin and hence the high investment rates increased the performance of the service sector thereby benefiting the service sector of the economy as well.
Impacts on the components of GDP
The interest rate of the economy of Australia did not get impacted hugely as was predicted immediately after the boom hit the country in the year 2003. However, interest rates kept on increasing steadily since the year 2003 to 2008. Powell, Ryan & Lamb (2017) commented that this is due to the increased investment demand in the country. However, during the booms which lasted till the year 2008, it faced a drop in the interest rates due to the global financial crisis. The wealth of the country and the savings rate increased exponentially following the mining boom of 2003. Therefore, the interaction in savings market increased the interest rate a little.
In addition to that, impacts have also been there in case of exchange rates of the country as well. As discussed above the value of the Australian dollar rose sharply following the mining boom till the year 2009. According to Pham, Nghiem & Dwyer (2017), the mining boom in the economy saved the economy of Australia from the adverse effects of the global financial crisis of 2007. However, aftershock of crisis affected the economy of Australia as well through the reduction in the interest rates and the exchange rates.
Figure 2: the interest rate of Australia
(Source: Bashar, 2015)
IS-LM model of economics determines the equilibrium both in the money and the product market of the economy. The situation of the Australian economy and its impacts can also be explained through the model of “Investment savings- Liquidity money” model. As per the theory of this model, there is a relationship between the interest and the production in the economy.
Y= C+I+G+(X-M)
Where Y= production
C= consumption
I= Investment
G= Government spending
(X-M) = Net export
Now as the investment demand went up due to the mining boom in the economy of Australia, the IS curve shifted to the right. That means at any given interest level the output of the product is now increased. In this case, the increase in the investment is exogenous and hence the interest rate remains the same in the short run.
Figure 3: The money market
(Source: Basu et al. 2015)
Again from the perspective of the money market, the boom in the mining industry increased the income of the people of the country. Additionally, the money supply remained the same and hence the interest rate in the market went up. However, there were no exogenous changes in the money market that could shift the LM curve altogether. Therefore, the LM curve stayed still while the IS curve shifted to the right.
Figure 4: IS-LM model
(Source: Koitsiwe & Adachi, 2015)
The rightward shift, in this case, was due to the boom in the mining industry of Australia. Therefore, the new equilibrium at point 1 of figure 4 shows the increase in the interest rates and the output of the economy of the country. This can also be supported by the empirical data that was recorded around this time. As per analysis above, the interest rate increased along with the overall production of the company following the boom in the mining industry. The GDP of the country started increasing after the year 2003 following the increase in the investment in the country (Lenzen et al. 2017). The mining boom in Australia made the economy a safe and attractive place for the global investors. The figure 5 shows and justifies the theories of IS-LM model as discussed in the study.
Impact on the other macroeconomic variables of the economy
Figure 5: The GDP of Australia
(Source: Eaton, 2017)
The government immediately responded to the boom in the mining sector thereby increasing the tax rate. Pham, Nghiem & Dwyer (2017) highlighted that the motive of the government was to increase the income of the government and make use of the boom in the infrastructure development of the country. The increased tax rate curbed the purchasing powers of the consumers of the country. In addition to that, the government also increased their spending in order to stabilise the economy so that it can distribute the benefits to all the sectors of the economy ensuring a sustainable and robust growth of the economy of Australia. However, this action of the government to increase the tax has been extensively criticised stating that higher disposable income could have continued the after-effects of the mining boom.
The boom in the mining industry had resulted in a sharp increase in the interest rate. However, the government through the central bank of the country controlled and kept the interest rates low. This is also the reason why, with the sharp increase in the GDP of the country, the interest rate did not increase. The increased interest rates could have decreased the liquidity of money at that point that in turn could have been fatal for the economic transaction and growth of the economy. Apart from that, the money supply was increased between the year 2003 and 2008 which further controlled the interest rates of the market. Bashar (2015) highlighted that this step from the side of the government has always been praised as increased interest rates could have further affected the sectors that were already facing problem due to the mining boom such as the agriculture sector.
Conclusion
Therefore, mining boom in Australia which happened in the year 2003 is considered as a significant event for the economy of Australia. It increased the overall output of the country which in turn helped in tackling the later stages of the global financial crisis of 2007 as well. This period brought about changes in the component of GDP of the country causing a severe problem for the agriculture sector. Nevertheless, the overall economy started to perform better after the boom that the country experienced in the mining sector. However, the after effects have started to slow down and economists often criticise the fiscal policies of the government for the short lasting positive impacts of the mining boom.
Reference
Bashar, O. H. (2015). The Trickle?down Effect of the Mining Boom in Australia: Fact or Myth?. Economic Record, 91(S1), 94-108.
Basu, P. K., Hicks, J., Krivokapic-Skoko, B., & Sherley, C. (2015). Mining operations and corporate social responsibility: A case study of a large gold mine in regional Australia. The Extractive Industries and Society, 2(3), 531-539.
Dwyer, L., Pham, T., Jago, L., Bailey, G., & Marshall, J. (2016). Modeling the impact of Australia’s mining boom on tourism: a classic case of Dutch disease. Journal of Travel Research, 55(2), 233-245.
Eaton, S. (2017). Second Rush: Mining and the Transformation of Australia, The [Book Review]. Institute of Public Affairs Review: A Quarterly Review of Politics and Public Affairs, The, 69(2), 60.
Hales, R., & Larkin, I. (2018). Successful action in the public sphere: the case of a sustainable tourism-led community protest against coal seam gas mining in Australia. Journal of Sustainable Tourism, 1-15.
Junankar, P. N. (2015). Book review: Ross Garnaut, Dog Days: Australia after the Boom.
Koitsiwe, K., & Adachi, T. (2015). Australia mining boom and Dutch Disease: analysis using VAR method. Procedia Economics and Finance, 30, 401-408.
Lenzen, M., Geschke, A., Malik, A., Fry, J., Lane, J., Wiedmann, T., … & Cadogan-Cowper, A. (2017). New multi-regional input–output databases for Australia–enabling timely and flexible regional analysis. Economic Systems Research, 29(2), 275-295.
McLennan, C. L. J., Becken, S., & Moyle, B. D. (2017). Framing in a contested space: Media reporting on tourism and mining in Australia. Current Issues in Tourism, 20(9), 960-980.
Pham, T. D., Nghiem, S., & Dwyer, L. (2017). The determinants of Chinese visitors to Australia: A dynamic demand analysis. Tourism Management, 63, 268-276.
Powell, R., Ryan, M., & Lamb, S. (2017). The impact of the mining boom on the dining industry in Western Australia. Australasian Journal of Regional Studies, 23(2), 243.
Siva, S. P., Coall, D., Petersen, I., & Quinlivan, J. (2016, October). Anxiety and depression levels in expectant Fly In, Fly out (FIFO) fathers as the WA mining boom ends. In AUSTRALIAN & NEW ZEALAND JOURNAL OF OBSTETRICS & GYNAECOLOGY (Vol. 56, pp. 59-59). 111 RIVER ST, HOBOKEN 07030-5774, NJ USA: WILEY-BLACKWELL.
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