Sunday, May 2, 2010

Case Study – Australia: The Riches and Challenges of Commodities

The case study discussed Australia’s history of the economy especially commodities. It showed that Australia was traditionally a protectionism economy, with large tariffs compared to other OECD countries. Australia only changed its protectionism policies in the last quarter of the 20th century. Since then it can be seen very easily that economic growth has sky-rocketed especially once The Howard government signed free-trade agreements with many nations. It makes sense for Australia to be open to free trade, as it has large mineral deposits, Australia should be focused on generating the largest benefit from those deposits, and import goods and services it cannot produce cheaply. The case study describe Australia “as the richest country on the planet,” however, Australia really only have recently started to take advantage of this in a major way.

Australia did not have a bustling economy in the late 70’s to 80’s, several governments, along with the central bank of Australia tried to control inflation. However, with a decrease in inflation increased the amount of unemployment and inhibited economic growth.

Yes Australia has had a large current account balance, for many years. However this is not a significantly bad thing. The negative current account balance has created a large amount of investment in Australia, in which Australia has benefited greatly from in recent times. This investment overall would likely be one of the major causes of why Australia has a relatively high average income. It is likely that the investment has raised income greater than any effects it has had on raising taxes.

Now China is investing into Australia in a significant way. Chinalco (a Chinese company) are have looked at investing $19.5 billion into Rio Tinto, which they would gain control of some of Australia’s iron ore mines. Along with many other investments from Chinese companies.

However, the issue is they are investing into the mines which would be great for the mines total production, however the case study did not mention whether if the investments from Chinese countries would improve the current bottle necks of Australia’s mineral exports which are train lines and ports. If Australia wants to increase their quantity of outputs of minerals, these bottle necks would have to be improved before production at mines goes up. If Australia can get the Chinese investors to invest into the transportation side of the infrastructure, there should be no reason why the Chinese cannot invest more into Australia, as it would likely help increase net exports, the average wage of Australians, create jobs lowering unemployment.

As Australia has a lot of mineral wealth the revenue the Chinese will take back to China will be a very small portion of the total mineral wealth. The more Australia can extract now the better, as there is a very high chance that sometime in the medium to long term future the new technologies will be invented making some of Australia’s minerals worthless. For example, it is quite possible in the future, new efficient, clean and cheap forms of energy will be produced which will eliminate the demand for Australia’s coal reserves, which could drastically slash Australia’s mineral returns.

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