Resource-Based Economy: Australias Development Experience - Example

Resource-Based Economy: Australia’s Development Experience Introduction The purpose of this essay is to discuss the important factors that can be used to describe Australia’s development experience as that of a resource-based economy and to identify the reasons provided for the country avoiding the ‘resource curse’ problem. To achieve this, the essay will first define the meaning of a resource-based economy. Based on the definition, the essay will illustrate Australia’s development as a resource-based economy. This will be followed by an analysis of the ‘resource curse’ and how Australia has managed to achieve growth over time without experiencing this problem, which is common in many countries that have a significant proportion of natural resources. Definition of a resource-based economy Resource-based economies are often – albeit rather subjectively – defined as economies whereby natural resources account for over 10% of the gross domestic product (GDP) and 40% of exports (Ahrend 2006a, p. 6). This is to say that in resource-based economies, natural resources such as minerals, products from forests, agricultural produce and so forth account for a significantly large portion of the country’s GDP. In addition, such countries rely on natural resources as their main sources of exports, accounting for over 40 per cent of what they export. Many low and middle income economies in the world have their industrial produce or exports, and in most cases both categories of commodities (industrial produce and exports) biased towards natural resources (Ahrend 2006a, p. 6). That is, such countries will often be involved in the production of items derived from natural resources such as minerals ores, timber, oil and natural gas among others. Ahrend (2006a, p. 6) cites examples of countries in Africa, Latin America and the Commonwealth of Independent States (for instance Azerbaijan and Georgia) which are indicated to be highly reliant on exporting natural resources. Although the examples given by Ahrend (2006a, p. 6) as indicated above refer to low and middle income economies, there is evidence that some of the economies that are advanced today, such as Australia, Canada and the Scandinavian countries have been regarded as resource-based economies (Cooper 1994, p. 82). This is largely due to the fact that their development and growth in the course of time has been contributed significantly by exports of natural resources (Cooper 1994, p. 82). Evidence that Australia’s development experience is that of a resource-based economy The defining features of resource-based economies often include the existence of industry structures with a bias towards agriculture, a less developed manufacturing sector with a significant proportion of production achieved using low- and medium-level technology, and a large service industry that encompasses a large social and community services component, particularly health and education (Smith 2007, p. 7). In such countries, natural resources may represent a notable proportion of output, but in most cases, such natural resources represent a large section of the country’s exports. Such countries also usually have a balance of payments deficit in terms of technology, meaning that they import most of their technology. More importantly, resource-based economies have a significant share of their gross fixed capital met by imports. The natural resources that are commonly offered by such economies include forests, timber, mineral ores, oil, gas and agricultural land (Smith 2007, p. 7). Australia’s development experience falls in the category of resource-based economies because the country is one of the countries that have continued to depend a great deal on their resource-based industries (Ville & Wicken 2012, p. 7). Although Australia is at present a relatively wealthy economy, its development has historically been pegged on natural resources which accounted for a large part of its export, as well as related service industries that include mining, primary production, shipping, mercantile trade and energy (Ville & Wicken 2012, p. 13). Specifically, Ville and Wicken (2012, p. 15) indicate that Australia’s resources proportion of production or employment has risen and fallen over time in the range of 10-25 per cent. As well, there has been rise and considerable decline of local manufacturing and expansion of the services industry. However, one of the most critical aspects of the Australian economy is that resources have dominated the country’s exports over the last century, with a proportion generally a greater than 70 per cent, sometimes escalating to over 90 per cent (Ville & Wicken 2012, p. 13). Mining is one of the natural resource industries that have historically made a significant contribution to the Australian economy (Power 2002, p. 17). However, this contribution has been irregular. The country had two gold booms between 1860 and 1905. Gold accounted for 16 per cent of Australia’s GDP in 1861, but this proportion declined to under 3 per cent by 1890. Starting in the 1960s, the country discovered other natural resources including coal, iron, natural gas, petroleum and bauxite, which arguably expanded its natural resource component of its GDP as well as exports (Power 2002, p. 17). Australia’s economy was further boosted by growth in the pastoral and agricultural sectors in the late nineteenth century and the first half of the twentieth century. In essence therefore, Australia’s agriculture and related industries were also at the heart of developing the country’s economy (Power 2002, p. 17). Despite the transformation of Australia from a resource-based economy to a high-income diversified economy in the present day (Gelb 2010, p. 3), there is a still evidence to support the country’s development as a resource-based one. For instance, in 2009 the agriculture and mining industries accounted for 42 per cent of the country’s total exports (Gelb 2010, p. 7), which is in line with the definition of a resource-based economy as indicated in this essay. ‘Resource curse’ problem and how Australia avoided it Reliance on natural resources to support a country’s GDP and as the main source of exports can be linked to problems commonly referred to as a ‘resource curse’. The ‘resource curse’ problem is defined in literature as the socio-economic shortcoming, political disturbance or environmental destruction that arises due to reliance on extractive industries (Goodman & Worth, p. 202). In essence, a resource curse exists when the use of natural resources by a country becomes detrimental to that country’s economic development (Holden 2013, p. 1). The implication of this is that countries with vast natural resources will generally tend to experience lower economic growth compared to other countries (Holden 2013, p. 2). This is because the presence of resources such as natural gas, copper, oil, coal, gold and others is more likely to be associated with negative impacts when local elites and foreign investors interact in the exploitation and utilisation of those resources since such interactions are likely to involve corruption, autocratic rule and disregard for the environment (Moran 2013, p. 1). Australia is however one of those countries who experience shows that having natural resources does not necessarily translate to a ‘resource curse’. One of the ways to avoid the resource curse is that countries that have significant natural resources need to develop appropriate policies and institutions that guide the exploitation, use and exportation of these resources (De Rosa & Iootty 2012, p. 4). Such countries also need to pursue a diversified economic structure, meaning that they need to venture into new resource industries and products (Ahrend 2006b, p. 121; Ville & Wicken 2012, p. 1). Australia appears to have adopted both strategies of economic diversification and having quality institutions that guide the use of its natural resources to avoid the negative externalities associated with natural resources. This is discussed in the following sections. To start with, in regard to the diversification strategy, Australia is one of the countries which have repeatedly established and promoted the growth of new resource-based firms that utilise new parts of the environment (Ville & Wicken 2012, pp. 15). That is, new products have created more diversity in old and established industries, and the same products have become the basis for the creation of new industries that are important for future growth and which offer new prospects of specialisation. For instance, the worldwide development of nuclear energy structures during the second half of the twentieth century created new demand for uranium sourced from Australia. Similarly, whereas natural gas was produced in Australia since the 1970s, demand for it in Australia was low because its large volume implied very high transportation costs. However, new technological developments have enabled Australia to process the gas for export to populous countries in Asia such as Japan where demand is high (Ville & Wicken 2012, pp. 17-18). Australia has also transformed extractive industries such as the mining sector from being labour-intensive to knowledge-intensive through investment in research and development (Wright & Czelusta 2003, p. 22). Turning to the quality of institutions, it has been noted that low quality institutions have low probability of attracting entrepreneurs to venture into productive activity in any country compared to good institutions. That is, good institutions are perceived to be a cure to the ‘resource curse’ (Bakwena et al. 2014, p. 3). In its development history, Australia, unlike many developing economies, had quality institutions in the form of a free press, an independent judiciary, and democratic form of leadership among others (McLean 2010, p. 5). This ensured that the country avoided negative aspects such as corruption, totalitarian rule and disregard for laws such as those governing the environment and human rights – which are common in many countries that are rich in natural resources but which lack quality institutions. Conclusion In conclusion, resource-based economies are loosely defined as economies that rely on natural resources as key components of their GDP and exports. Australia’s development experience is regarded as that of a resource-based economy because the country is one of the economies that have continued to rely significantly on their resource-based industries. Australia’s key natural resources are in various sectors, the most noticeable ones being agriculture and mining. Even as recently as 2009, agriculture and mining accounted for 42 per cent of Australia’s exports, thus confirming the country’s status as a resource-based economy. However, the country has not experienced the ‘resource curse’, or the problems associated with dependence on natural resources to support the economy. This is because it has diversified its economy by using products created in the extractive industries as a basis for the development of other industries that can promote further growth. Australia has also invested in the knowledge economy through research and development to support the extractive industries. More importantly, the country has had reliable institutions, which have ensured that negative aspects such as corruption, poor governance and disregard for areas such as the environment – which are common in other countries that rely on natural resources – are avoided. References Ahrend, R 2006a, ‘How to sustain growth in a resource based economy? 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An Investigation of the Dynamic Effects of Resource Dependence on Institutional Quality’, The Word Bank Policy Research Working Paper 6151, July 2012, viewed 12 May 2014, Gelb, A 2010, ‘Economic diversification in resource rich countries’, Paper presented at the Natural Resources, Finance, and Development: Confronting Old and New Challenges, seminar organized by the Central Bank of Algeria and the IMF Institute in Algiers, on 4-5 November 2010, viewed 14 May 2014, Goodman, J & Worth, D 2008, ‘The minerals boom and Australia’s ‘resource curse’, Journal of Australian Political Economy, Vol. 61, pp. 201-219, viewed 12 May 2014, Holden, S 2013, ‘Avoiding the resource curse: the case Norway’, Paper prepared for presentation at the Conference Oil Revenue Management in Ghana, April 26-27 2011, viewed 12 May 2014, McLean, I W 2010, ‘Responding to shocks: Australia’s institutions and policies’, The University of Adelaide School of Economics, Research Paper No. 2010-30, viewed 14 May 2014, Moran, T H 2013, Avoiding the “resource curse” in Mongolia’, Policy Brief, No. PB13-18, viewed 14 May 2014, Power, TM 2002, ‘Digging to development? A historical look at mining and economic development’, A Report Prepared for Oxfam America, September 2002, viewed 14 May 2014, Smith, K 2007, ‘Innovation and growth in resource-based economies’, Australian Innovation Research Centre, University of Tasmania, viewed 14 May 2014, https://www.mef.gob.pe/contenidos/pol_econ/documentos/ID_Australia.pdf. Ville, S & Wicken, O 2012, ‘The dynamics of resource-based economic development: evidence from Australia and Norway’, Department of Economics, University of Wollongong, Working Paper 04-12, viewed 13 May 2014, Wright, G & Czelusta, J 2003, ‘Mineral resources and economic development’, Paper Prepared for the Conference on Sector Reform in Latin America Stanford Center for International Development November 13-15, 2003, viewed 14 May 2014, Read More