Australia's Resource Curse: Social Division, Political Capture & Ecological Crisis

Resource abundance in Australia is often presented as an asset, waiting to be exploited. Reflecting this, the recent resource boom is unquestioned – in fact celebrated – as a great windfall for the Australian people. But how far should it be welcomed? In the context of accelerated climate change, and a continuing rural crisis in Australia, it is salutary to be reminded of what Sheik Ahmed Yamani, long-time Oil Minister of Saudi Arabia, said in regard to their major resource asset: "All in all, I wish we had discovered water."

This article was written by James Goodman, for Friends of the Earth Australia's Chain Reaction magazine #103, September 2008. It is reproduced here with permission.

The Resource Curse

The resource curse may be defined as the socio-economic division, political capture or environmental degradation that results from dependence on extractive industries.

The resource curse thesis did not emerge fully-fledged until the aftermath of the 1970s resource boom, when many of the countries that benefited from high commodity prices simultaneously experienced surprisingly low economic growth rates. Discussion of the issue waned with the depression in commodity prices in the 1980s, but debate has since renewed with the resource boom from the late 1990s.

Three sets of factors are cited: 

• First, socio-economic impacts arise from changing terms of trade, weakened non-resource sectors, income volatility, dominance of foreign-owned resource companies, lack of local linkages and enclave formation in what become sharply dualised societies, divided between locally-affected populations and resource elites.
• Second there are political aspects stemming from the ready availability of the resource windfall, especially in terms of patronage, clientelism and corruption, along with cross-national inter-state and corporate dynamics that inter-mesh local structures with geo-economic pressures for resource access.
• Third, there are ecological impacts, which are visited upon living environments in the first instance, but extend far beyond immediate sites of extraction, through the commodity's life cycle.

The debate is not whether these curses exist, but how they can be avoided.

Dutch Disease

While most discussion of the resource curse focuses on non-industrialised countries, it does reach beyond this category. The main mechanism here is what is referred to as the 'Dutch disease' whereby mining hastens deindustrialisation, with the primary driver being a rising exchange rate that makes the exports from local manufacturing industries less competitive.

The term was first used in 1977 by The Economist to describe the impact of Dutch dependence on its newly-discovered natural gas reserves, which led to an appreciation in the Guilder, a reduction in manufacturing exports, and accelerated deindustrialisation. The UK experience with the influx of North Sea Oil from 1979 is also cited, where Sterling appreciation contributed to a range of deflationary policies and the decline of UK manufacturing industries.

The reorientation of early industrialisers such as the UK is now paralleled by the experience of later 'Newly Industrialised Countries'. The emergence of China as the world's manufacturing workshop has had a direct effect on late industrialisers in East Asia. Much of the region has greatly increased its resource exports to China, creating a regional resource boom (including Australia which accounts for nearly 40% of China's iron ore imports).

But the 'China effect' differs from the earlier Dutch and UK experiences in under-cutting existing labour-intensive manufacturing sectors as well as creating a resource boom. In terms of comparative advantage such transformations may be welcomed as producing a regional restructuring. But in terms of class dynamics the shifts pose a major challenge to livelihoods and living environments, signalling a regional 'race to the bottom'.

Dutch Disease in the Australian Context

In 2002, there were 57 countries whose exports of fuel and minerals accounted for more than 30% of merchandise exports. Only three of the 57 were industrialised countries – Australia, Norway and Canada. Given the recent rise in Australia's minerals and fuel exports to account for more than 40% of merchandise exports, we may speculate that Australia now holds a special status even among these three countries.

For some, Australia's anomalous international status – both prosperous and resource dependent – is proof of the potential benefits of resource dependency. The dominant account of the impact of mining on Australia emphasises its beneficial multiplier effects: mining is seen as attracting foreign investment and providing export earnings that supplement domestic savings rates, allowing a long-term deficit in manufacturing trade, and heightened prosperity.

The complementarity between mining and prosperity is demonstrated by the Australian experience: for example a 2007 World Bank report specifically cited the Australian experience since the 1970s mining boom as demonstrating that 'expansion of a country's mineral base can go hand-in-hand with economic growth and technological progress'.

Against these optimistic accounts, other assessments of the 1970s minerals boom have emphasised the extent to which mining displaces other activities. In 1976 the economist Bob Gregory predicted the process in Australia would disadvantage non-mining sectors, especially the rural sector. The principal mechanism for this Australian version of the Dutch disease was the exchange rate, which would appreciate with the mining boom, leaving non-mining sectors disadvantaged. The minerals boom was seen as directly undermining Australian efforts to maintain agricultural exports and strengthen its manufacturing.

Today, with the onset of a resource boom that in many respects out-booms the 1970s experience, these concerns should be revisited, and updated.

The Boom and Its Three Curses

Three broad dimensions of the resource curse can be identified – socio-economic, political and ecological. There is evidence of all three in the Australian context: sharpening social divisions due to mining, increased dependence of political elites on mining corporates, and systemic mining-related ecological degradation.

Curse 1: De-industrialisation and Social Division

Mining income as a proportion of Australian national income is higher today than at any time since the early twentieth century. The recent boom is export-led, with the value of mining exports rising one-third from 2002-07 to more than 40% of the total, twice that of manufacturing exports. By 2006, mining attracted almost one-third of all capital investment (up from sixth in 2004), yet the sector accounted for less than 2% of total employment.

The influx of investment has stoked inflationary pressures, driven up the Australian dollar, and put pressure on interest rates, further damaging the rest of the economy. With mining incomes concentrated in specific enclaves, the spatial impacts are highly uneven. At the local level mining creates sharp divisions between displaced communities and mine operators. Local divisions are replicated at the national level, with sharp divides between mining-dependent and manufacturing-focussed states and territories.

In Australia's 'two speed' dual economy, mining sets the pace: the tail, as it were, wags the dog.

Curse 2: Regulatory Capture and 'Energy Security'

Government policy during the minerals boom has been deliberately facilitative, and has paid off politically as windfall tax income from the sector has enabled recurring tax cuts, extending the shelf-life of the Howard government. The 1998 Resources Policy Statement affirmed the capture of Australian federal policy by the mining industry, to the detriment of other sectors and subordinates, including mining-affected communities. The Statement set the framework for the up-coming boom, offering an emphasis on certainty in terms of property rights, especially in relation to native title rights, and competitiveness in terms of offering tax incentives, promoting a self-regulatory approach to environmental protection, and acting internationally as an industry deal-maker at bilateral and multilateral contexts.

The government used its diplomatic leverage to negotiate regional resource supply agreements, and used military force and police contingents, departmental officers and international aid providers to intervene in mineral-rich neighbours, shoring-up Australian 'energy security'.

Meanwhile, the boom created a win-win situation for Australia's privately-owned, low-taxed, oligopolised and transnationalised mining sector, which has retained much of its windfall profit: with the rise in commodity prices, pre-tax mining profit more than doubled yet the total tax-take for minerals and oil and gas actually fell between 2001 and 2006.

Curse 3: Ecological Degradation and Exhaustion

Finally, and perhaps most importantly, the ecological curses. Extracted mineral and fuel resources are unique in the sense that they cannot be replaced: they are a non-renewable endowment rather than a renewable asset. Once extracted they are lost. The process of extraction necessarily affects current and future generations, whether through its impact on ancestral domain, community patrimony or the global commons.

The unique character of mineral resources, and of the living environments in which they are deposited, renders their value incommensurable, effectively priceless. They cannot therefore be reduced to the cash nexus – which can never adequately reflect their value. As one observer has put it, resource extraction 'goes beyond typical debates over the relative merits of different economic models, reaching to the heart of the long-term viability of life on earth'.

For these reasons alone, governments are under a special responsibility to manage mineral resources for the good of the peoples and the environments in which they live. These qualitative aspects of mining are played out in multiple dimensions, but perhaps the most important is the dimension of climate change.

The Minerals Curse and Climate Change

The impacts of climate change, predicted for more than three decades, are already rendering existing economic activities unviable. Clear examples are already evident in Australia, and include tourism on the Great Barrier Reef, winter skiing in the Snowy Mountains, and farming communities directly affected by drought and rising temperatures.

The booming mining sector is today the principal culprit and, indirectly, the primary beneficiary of climate change.

Domestically, and over the long term, the availability of cheap coal and gas has locked Australia (and regional importers of Australian coal), into carbon-intensive energy production. From 1973 to 2000, emissions per unit of output in the Australian mining and energy sector increased by 3.5%, in contrast with all other sectors which either reduced or stabilised their emissions intensity. Meanwhile, reliance on coal for electricity increased from 48% to 55% of total output, ensuring that the rate of emissions per unit of electricity remained hardly changed in 30 years. In 2003 the government's own research agency, ABARE, investigated the issue and found total greenhouse emissions from fossil fuel combustion had increased at much the same rate as energy consumption levels. Their conclusion – important given the large-scale improvements in energy production technologies over the same 27 year period – was that 'the carbon intensity of energy use was unaffected overall by energy sector developments'.

Any assessment of the overall impact, though, must extend beyond this domestic context. There are, in broad terms, at least three types of mining-related emissions sources.

• First is the impact associated with the process of extraction and processing.
• Second is the impact felt through the domestic consumption of minerals and fuels.
• Third is the impact of greenhouse emissions released as a result of the consumption of energy exports or the upstream processing of exports such as iron ore.

This third aspect accounts for the bulk of mining-related emissions, none of which are attributed to Australia. The Australian economy sells increasingly lucrative mining commodities in return for cheap manufactures from the region: in neither respect are the greenhouse emissions associated with the lifecycle of the exported minerals attributed to the Australian economy.

Nonetheless, we can estimate overall mining-related greenhouse emissions. Emissions directly released through extraction and processing are relatively easily calculated, at 31 million metric tonnes (mmt), or about 5% of Australia's total emissions of 559 mmt in 2005. Emissions directly associated with the burning of fuels for energy in Australia stood at 278 mmt, or 50% of total emissions.

Emissions produced from the offshore burning or processing of Australian minerals – notably coal, iron ore, gas and oil – are harder to calculate. Under the Climate Change Convention greenhouse emissions are attributed to the country of emission, not to the country of extraction, so Australia's 'offshore' emissions are not calculated. Figures can be developed though, for individual commodities such as coal, especially significant as Australia – with 30% of global exports – is the world's largest coal exporter.

Estimates of the average ratio for emissions from one tonne of coal vary from 2.4, as calculated by the Australian Greenhouse Office, to 2.1, as estimated by the US Environment Protection Agency. Taking the more optimistic US EPA estimate, Australia's coal exports in 2005 produced 490 mmt of greenhouse emissions. Limiting the estimate to domestic mining and energy, and adding coal exports, the industry produces a total of 780 mmt, or about 140% of the Australian total.

We may justifiably say that for the climate, and thus for society as a whole, cheap minerals supply in Australia is truly a curse.

Conclusion

The resource curse appears to be alive and well in Australia's latest resource boom. Socio-economic dimensions of displacement and de-industrialisation are evident, with socio-spatial divides deepening at local, inter-state and international scales. Likewise, there are powerful political dynamics at play that favour rentier corporate elites, especially through tax minimisation, and encourage concomitant forms of political patronage, along with international rivalries and conflicts.

Finally, the Australian resource curse forms part of the broader global 'curse' of climate change, which threatens now to erode the viability of not simply other sectors of the economy but of the entire society. If we are to address these systemic dynamics then we must seriously question the current resource boom. 

Author James Goodman researches global political economy and social movements at the University of Technology Sydney. This article was originally published in Chain Reaction Magazine in September, 2008. See the original article here. A longer, referenced version of this article appears in the June 2008 editition of the Journal of Australian Political Economy. See the article here. 

Published three times a year, Chain Reaction is the national magazine of Friends of the Earth, Australia. Published since 1975, Chain Reaction has built up a loyal audience and earned a reputation as a progressive magazine at the forefront of environmental and social debates in Australia. Find out more about Chain Reaction.