Tuesday, June 03, 2008

If America is the new India, what is Australia?

A while back, a friend of mine in the IT industry learned that a job he was about to start had been downsized before he even began. Evidently the company decided that with the current labor and currency markets it would be cheaper to hire offshore Americans to do the coding. The Australian dollar was at US$0.50 in 2001. Now it is US$0.95. And borrowing money here is also more expensive.
As American has been cutting interest rates to fight its liquidity crisis, the Australian fed has been raising them, trying to curb an economy that it considers to be overheating. The Australian economy is being fueled by high world commodity prices, which have created the biggest resource boom in a generation. But as my friend discovered, the rate rises that the fed has instigated aren’t biting the overheated resource industry- they are hitting service and domestic industry jobs, as vastly higher mortgages (US fixed rate mortgages don’t really exist down here- out repayments have doubled in 3 years) cut into homeowner’s disposable income.
The obvious problem here is that these rate rises don’t really effect the geoeconomy, as domestic consumer demand is not what drives the resource sector. Demand from Asia does. And as the Australian rates rise, making local money more expensive, mining companies respond by courting overseas investors. Some state (not federal) resource departments have even started Chinese language sections of their web pages to encourage investment. This flow of foreign capital into Australian businesses further increases the value of the Australian dollar, making non-geological exports less competitive.

The trouble with this situation is that even in a land as vast as Australia, mineral resources are not infinite. Ideally, non-renewable resources are best used to build a technologically advanced society that can move from extractive-based economies into manufacturing, service, and technology. Unfortunately, the opposite seems to be happening here in Australia. If your main goal is to preserve the good life for heavily unionized extractive industries, then the status quo may seem pretty good at the moment. But cooling the economy by squeezing out the more advanced industries at the expense of mining doesn’t make a whole lot of long term sense.

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