Australia, the Lucky Country, Risks Economic Implosion

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Macroeconomics

Few would expect Australia to be facing any problems. The country was one of very few to avoid a recession over the last 18 months and one of the first to raise interest rates with five rate increases since last October and two in a row in February and March as the economy has powered ahead of other OECD markets. Indeed so strong has growth been that inflation has gradually risen but even so it is still modest at 2.9%, according to an Australian Investment Review article. The currency is strong, too strong some would say and commodity exports at least are robust with virtually all energy and mineral extractive industries posting near record export revenues. So what’s the problem you say? Well a national daily newspaper, The Australian, reports that the country is a victim of its own success. So strong has investment been in the north and western mining sectors that it is creating a skills shortage that is driving up labor costs potentially damaging the economy and its ability to compete on the world stage.

Interestingly for an essentially right wing Murdoch paper the Australian is calling for a relaxation of immigration rules to allow the temporary 2 years 9 months is proposed (probably because three years qualifies for some form of permanent residency?) employment of low cost Asian construction workers in the often harsh northern and western mining districts. Although Australia has enjoyed high levels of Asian immigration for years it has been very much on its own terms. Contrary to the more relaxed (and many would say naive approach of European governments) Australia has benefited from a more rigorous screening process allowing in those with skills and education. As a result, although the country is thoroughly multicultural it enjoys high levels of literacy, fluency and tax generation from its new countrymen in a way that the UK does not.

The paper is calling for a special “northern economic zone” stretching across the north of Western Australia, Northern Territory and northern Queensland, where companies can bring in temporary labor to relieve the pressure the mining boom is having on the jobs market in the rest of the country. The problem is two fold. On the one hand, labor scarcity is driving up costs for businesses elsewhere in the country and at the same time rising labor rates are driving up the cost of developing new investments in the “northern economic zone deterring investment that could create long term employment opportunities for Australians over the next 25 years. Typically there is a surge of initial labor demand as a new mine is opened up and infrastructure is laid down. Then labor demand settles down to a steady state as mechanization facilitates the actual extraction process. The idea is to bring in temporary labor for this initial development period.

In an attempt to address the long term demands for workers in these regions the paper is further suggesting people living in the north, who have to endure conditions not faced by people in the south of Australia – excessive heat for long periods of time, cyclones, a multitude of snakes, distance from city life and amenities and usually their families – should receive additional incentives, such as reduced personal taxation, to encourage more people to permanently live in the north.

Although trying to present their proposal as a positive long term solution, the paper also warns that failure to address this issue risks an economic implosion as rising wages push up inflation, forcing further interest rate rises to add to business labor cost woes. This will ultimately result in a severe loss of competitiveness by a wide spectrum of the Australian business community. It would seem even in the lucky country you can have too much of a good thing.

–Stuart Burns

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