RDP 2011-08: The Mining Industry: From Bust to Boom 6. Conclusion

The rapid growth in Asia – especially China – is having a significant effect on the structure of the global economy, and on the Australian economy in particular. The strong global demand for energy and other commodities has led to rapid growth in the mining industry, both in the value of commodity exports and the level of mining investment, especially for iron ore, coal and LNG. At the same time, oil and metals processing exports have contracted, as Australia's oil fields have been depleted and Australia's comparative advantage has shifted towards the export of basic commodities.

The rapid growth in mining receipts has also had an impact on the directly affected industries and regional areas, as well as the rest of the economy. Activity within the mining industry has spilled over into domestic activity through its demand for labour, intermediate inputs (especially services) and investment, its payment of taxes and royalties, and the boost to Australian incomes through the ownership of mining equities. Overall, the available data suggest a little over half of the total receipts from current mining operations accrued to Australian residents, with around half the value of mining investment also spent within Australia.

Although the associated rise in spending has been a benefit to the Australian economy, it has also led to pressure on the price of non-tradables, and a large increase in the real exchange rate. While this has clearly had an impact on some activities – especially those affected by the exchange rate appreciation – overall the structural changes in the 2000s were more noticeable in investment patterns in the national and state economies rather than on unusually large changes in the industry composition of employment and real output. Nonetheless, there is evidence of changes within different industries, such as manufacturing, construction and accommodation.

Looking ahead, the increase in mining investment still in prospect is likely to see the mining industry having a larger effect on the economy, both in terms of the availability of the factors of production for the non-mining sector and its income effects. The economy is now closer to full employment and hence additional demands for labour and other inputs from the domestic economy and the distribution of mining revenues have the potential to spill over into further changes in input and non-tradable prices.

This is likely to be a challenging environment for policy as it attempts to ensure continued containment of overall demand and inflation pressures. In this regard, examination of past mining booms with the current one shows the benefits that have been derived from flexibility in both relative prices and allocative efficiency to help smooth these changes to input usage and domestic spending patterns.