Impact on Living Standards
Since the gold rush of the 1800s there has not been such a huge boom in Australia as there has been in recent years related to mining. It originated in the cola fields of Bowen Basin or in the iron ore mines of Pilbara(Philips, 2016). This boom started in 2003 when the prices of all the raw materials like iron ore and coal began rising and has been able to maintain its high prices for a long time thus thoroughly transforming Australian society as we know it (Perry, & Rowe, 2015)
The price of the exports of Australia that has been obtained through mining has increased by more than three times globally in the ten years till 2012. This is while the investment spending of this particular sector has extended from around 2 percent of the GDP to 8 per cent in 2012. This is one of the most significant shocks that have been experienced by the economy of Australia in recent years. Because this is such a positive shock it would only make sense that this has been able to influence the standard of living in the country and helped improve the standard of living for the poor and the women in specifically Western Australia (Sharma, 2010).
A good way to see the results of the mining boom on the economy with would be to see what would have happened if the boom did not take place that is to believe if there was a counterfactual scenario (Downes, Hanslow and Tulip, 2014). The effect of the mining boom on overall living standards can be gauged by the difference in real household disposable income per capita, which is estimated to have been about 13 per cent higher in 2013 than it would have been without the boom. This effect is such that it might be broken down into two parts- the increase in the volume of output and the increase in the purchasing power(Downes, Hanslow, & Tulip, 2014). High prices of the commodities mean that there are higher terms of trade and thus this translates into boosting the purchasing power of the economy of the domestic country (Brueckner, Durey, Mayes, & Pforr, 2013). This mining boom has also boosted the Gross Domestic Income of the country by 6 percent in 2013. There has also been an increase in the volume of trade due to this mining boom. Also higher purchasing power on a national level helps to boost the consumption and other spending components of the economy. It is seen that an increase in the mining investment would ultimately help increase the aggregate supply of the economy. The most appropriate model to explain this phenomenon would thus be an Aggregate demand aggregate supply model. This is believed to have increased the Gross Domestic Product of the country by about 6 percent. A lot of the effects of the change in the economic situations of the country is represented by the changes in the change in the exchange rate. The real exchange rate is estimated to have been about 44 percent higher due to the mining boom in the country. That is there has been a huge appreciation in the exchange rate that would not have happened had the boom not taken place and would have remained to about the same levels it was before. The mining boom has also been able to provide employment and has been able to reduce unemployment by 1.23 per cent. Lowered unemployment coupled with higher energy prices made it seem like there would be inflation but inflation actually reduced in the first few years of the boom due to the counteracting pressure created by the appreciation of the currency. However as known the change in the exchange rate creates a temporary change in the inflation but not so with a change in employment which has a more robust effect. So, by the time 2008 rolled around, the unemployment reduction effects were stronger and inflation in the economy began to rise. This mining boom has also been unhelpful in the sense that the huge appreciation if the Australian dollar has weighed down on the industries exposed heavily to trade such as agriculture and manufacturing (Hajkowicz, Heyenga, & Moffat, 2011). There had also been lower nominal interest rates in the start of the boom.
Impact on GDP
The economic model best decrying the situation would be an aggregate supply aggregate demand model. Let the initial position be in A in fig.1 where the economy was before the mining boom. After the mining boom since it was a positive shock the full employment level of output of the economy increases. To accommodate this the AS curve now shifts outward. As this is a supply shock there isn't much change in the aggregate demand of the economy. The situation now becomes such that the economy is at the GDP Ye and thus has higher employment and lower unemployment and has a lower price level at PL2.
The monetary policy in the 2000s consisted of medium term inflation target, cash rate being the instrument for controlling the monetary policy and the Reserve Bank of Australia had a Board which was setting the monetary policy separate from the government. They moved to raise the interest rates in the economy in the early 2000s. The monetary policy at this time was tight. Thus they raised short term interest through policies. This would curb money supply in the economy.
This is shown in figure 2. The AD curve shifts inwards and then the GDP becomes less than the full employment GDP so the expected price level is higher than the actual price level. To adjust this the AS curve moves till it comes at an equilibrium at C which is lower price level but at the same level of output and employment.
The Australian economy is such that it has no budget deficit and by 2006 it had no debt which is in stark contrast to other OECD countries. He main fiscal policy ideas were To use the resources gained from the mining boom appropriately, use the fiscal policy as a countercyclical tool and the role of public debt to finance public infrastructure. Due to strong increase in the income of the public there was a strong growth in the tax receipts. Thus was then used to slash the income tax of the individuals and as sued to significantly give transfer payments to the household and also to build up assets in a number of funds. New efforts were also made to increase the Foreign Direct Investment in mining. All of this makes the AD curve shift outwards and the AS curve also shifts till there is an equilibrium at D but at a higher price level as illustrated in Fig. 3.
Structural deficit differs from cyclical deficit in that it always exists no matter what is the point in the business cycle mainly as it occurs due to underlying imbalances in the government expenditures and the revenues collected. Australia was able to maintain budget surpluses till 2007-2008 after which obviously there was an effect on the economy due to the Global Financial Crisis. It was also able to clear its debt. As seen in Fig. 4, with the increase in the reserves of the nation due to getting more taxes due to increased income from the mining boom the budget line of the country has shifted outwards.
However, there were also increases in government spending with the government putting out more direct transfers to households and also with cutting the income tax rate. Many people have gone on to believe these measures were wrong and the government had squandered away the the gains from the boom.
Even though the mining boom has been a blessing for the country there is a downturn presently with the growth numbers in Western Australia where the boom mainly took place being abysmal (Haeney, 2016). The main thing to do now would be for the government to invest in infrastructure and make policies to continue this boom.
Brueckner, M., Durey, A., Mayes, R., & Pforr, C. (2013). The mining boom and Western Australia’s changing landscape: Towards sustainability or business as usual?. Rural Society, 22(2), 111-124. https://dx.doi.org/10.5172/rsj.2013.22.2.111
Downes, P., Hanslow, K., & Tulip, P. (2014). The Effect of the Mining Boom on the Australian Economy. SSRN Electronic Journal. https://dx.doi.org/10.2139/ssrn.2701080
Haeney, R. (2016). How Western Australia is handling the end of the mining boom. The Conversation. Retrieved 3 May 2017, from https://theconversation.com/how-western-australia-is-handling-the-end-of-the-mining-boom-69217
Hajkowicz, S., Heyenga, S., & Moffat, K. (2011). The relationship between mining and socio-economic well being in Australia’s regions. Resources Policy, 36(1), 30-38. https://dx.doi.org/10.1016/j.resourpol.2010.08.007
Perry, M., & Rowe, J. (2015). Fly-in, fly-out, drive-in, drive-out: The Australian mining boom and its impacts on the local economy. Local Economy, 30(1), 139-148. https://dx.doi.org/10.1177/0269094214564957
Philips, K. (2016). The mining boom that changed Australia. Radio National. Retrieved 3 May 2017, from https://www.abc.net.au/radionational/programs/rearvision/the-mining-boom-that-changed-australia/7319586
Sharma, S. (2010). The impact of mining on women: lessons from the coal mining Bowen Basin of Queensland, Australia. Impact Assessment And Project Appraisal, 28(3), 201-215. https://dx.doi.org/10.3152/146155110x12772982841041
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