Wednesday, October 28, 2009

The Lucky Country?

This post follows my previous post that was considering the question of how much influence agricultural resources influence New Zealand's economy. This post considers the influence of mineral resources to Australia. Both posts are in reaction to a speech by Dr Don Brash available at:

In looking at the Australian statistics differences to Statistics NZ are interesting. Australia's GDP is better broken down into component industries but New Zealand has more imformation on the contribution to manufacturing and trade categories. The statistics only seem to be broadly comparable. ABS (Australian Bureau of Statistics) seems to be partial to nominal dollars while Stats New Zealand seem highly partial to their 95/96 real dollars which can also make things tricky.

The first obvious thing is that Dr Brash had incorrect information in his speech. He claimed that mining is about 5% of Australia's GDP but it is closer to 8%. It will be no surprise to anyone that Australia's mining industry is very much larger than New Zealand's, so big in fact that it would be fair to say that (compared to Australia) New Zealand doesn't have a mining industry. If we add agriculture, forestry, fishing and mining together to arrive at a ball park number for the current annual value of developed natural resources then New Zealand has about NZ$37billion (nominal) and Australia about A$133billion (nominal). Using an exchange rate of 84c and with population estimates of 4.3million for New Zealand and 22million for Australia then New Zealand currently has natural resource wealth of roughly NZ$8,600 per capita and Australia NZ$6,100 per capita. So Dr Brash seems to be correct. If anything New Zealand has the natural resource advantage in wealth per capita. But does Australia's mineral wealth leverage greater wealth overall?

Another obvious factor in Australia's GDP is their construction industry. Compared to New Zealand it is massive, approximately 12 times New Zealand's (way more than can be explained by population). The Australian electricity, gas and water contribution is also significantly higher than New Zealand's. Australia also seems to perform better in personal and community services (education, health, recreation, culture, etc). Most other parts of the economy seem to be broadly comparable.

I don't have the time or energy to put much more effort into investigating the leverage of mineral wealth in the Australian economy; and I still have to look at exports. If my assertion holds from my previous post; that it makes sense that an economy would naturally become expert in industries surrounding its natural resources then perhaps it shouldn't be a surprise that Australia does so much construction. In theory developers should consider the opportunity cost of minerals (ie compare their internal use to what they could sell the resources for). In practice, however, people (and politicians) will want to use cheap resources to their personal direct benefit. Perhaps this is why there is so much construction in Australia. Some forms of energy are not easily transported great distances. Electricity and natural gas have, effectively, far lower opportunity cost than easily transported oil and coal. This gives Australia very cheap access to energy and this must stimulate significant output leveraged value adding activity in Australia.

I am not going to put much effort into exploring the input industries for Australia's mining activities. Mining is a resource intensive activity and it must drive significant levels of economic activity to supply. Australia's mineral exports are A$140billion compared to a GDP mining value add of A$85billion. Therefore, without even considering internal consumption, mining must generate at least A$55billion of other economic activity in Australia. New Zealand's whole economy (in GDP terms) is currently NZ$180billion. It seems intuitively obvious (my empirical analysis isn't comprehensive enough to be conclusive) that Australia's mineral wealth does translate to relatively more financial wealth than New Zealand's agricultural resources.

In the area of personal and community services these are not, as a rule, stimulated by resource availability. They tend to be, predominantly, luxuries (there is of course a basic level of need in health and education but I suspect that Australia's health system is supported by far more elective procedures than New Zealand's). Luxuries (especially imported luxuries) are funded by cash surpluses and cash surpluses generally come from exports. Not surprisingly Australia's exports are much larger than New Zealand's. For the purposes of this debate I will only look at goods, although services also seem to be consistent with the export story in goods. Australia has A$230billion of goods exports compared to New Zealand's NZ$43billion. Normalised for currency and population this gives Australia about a quarter more export dollars than New Zealand. Not massive but significant. Interestingly mineral and metal exports contribute 60% to Australia's exports but agriculture only contributes something in the order of a quarter of New Zealand's exports.

On the face of it Dr Brash is correct but I think he is wrong. Australia's mineral wealth does give it a large advantage over New Zealand in terms of financial wealth. How does this resolve to New Zealand's greater natural resources per capita? It does because financial wealth is different to the total consumer benefit (the totality of health, wealth, well-being and happiness). Australia's financial wealth directly affects their consumer benefit. Money can't buy you happiness but it sure can buy you a lot of things that make you happy. New Zealand, on the other hand, has a lot of things that make you happy. This is why New Zealand regularly features at the top of lists of desirability to live despite relatively low first world levels of financial wealth.

This will make it very hard for New Zealand to grow financial wealth. Our natural resources seem to be fully leveraged with only marginal opportunities available. We don't appear to have any other strategic international advantages. We are still wealthy in a consumer benefit sense and we are a lucky country in that sense. However, if we want to increase our GDP per capita comparably to other first world countries (and avoid diluting our consumer benefit) then increasing the GDP bit probably isn't going to work. It's time to look at the per capita bit.