Bloomberg reported that America became great because it transformed its vast natural resources Iowa farmland, Mesabi iron, Texas crude into human capital, equipped with skills to succeed in the Information Age.
Now, when human capital is king, some look toward Texas and North Dakota and sees natural resource extraction as a path to economic rejuvenation. But if we look at Australia, the model of a major mineral producer, we see that widespread prosperity comes not from the stuff beneath the ground but from the stuff between our ears.
Yes, the US would be fortunate to exchange its painful 8.2% unemployment rate for Australia's healthy rate of 5.1%. According to the International Monetary Fund, at current exchange rates, Australia had the highest per capita gross domestic product in the world in 2011, among all countries with more than 10 million people.
Australia's extremely high per capita nominal GDP of AUD 65,000 reflects high exchange rates more than outsized GDP growth, but by any measure Australia has had some good years. From 2006 to 2011, its real GDP increased almost 13.8%. Over the same five years, real GDP in the US grew only 2.75%.
The popular explanation for Australia's economic success is that it is Wyoming with good weather, and has the luck to be China's energy supplier. In this view, fortunes are made by billions of tons of coal and iron ore, carried from the Pilbara mines in Western Australia by mile and a half long trains to cargo ships headed for the factories of Shanghai.
The country's iron ore and coal exports are certainly vast. In 2011, it exported AUD 64 billion worth of iron ore and AUD 47 billion worth of coal. Together, iron ore and coal represent 42% of Australia's total exports. The three largest recipients of total Australian exports are China, Japan and South Korea, which got 27%, 19% and 9% of shipments, respectively.
The Pilbara region produced more than 400 million tonnes of iron ore in 2011, which is about 125 pounds for every person on the planet. Giant mining companies use 215 tonnes shovels to fill an endless line of trucks that carry the dirt to 3,500 tonnes crushers. The scale and logistics are daunting and so are the profits.
Yet mining plays a relatively modest role in the overall Australian economy, and employs a positively tiny share of its people. The Australian Bureau of Statistics shows that mining and mining services together contribute less than 10% of the country's GDP. Only 2% of Australians work in the mining sector.
In Western Australia, which produced more than AUD 62.8 billion worth of iron ore in 2011, iron ore companies employed only 33,345 people. Iron ore producers, as a whole, spent less than one tenth of their total earnings on wages and salaries; 42% of those earnings became pretax profits.
Mining does little for Australian employment because mining is profoundly capital intensive. Ore is pried from the Earth by computer controlled blasts. One insightful article reminds us that mining is not men wielding pickaxes, but sitting in prefab offices with keyboards, watching on video monitors. Even those 1.5 mile long trains will soon be driverless.
The Australians themselves seem to think their economy is far more mining intensive than it is in reality. One recent survey found that, on average, Australians believe the mining sector employs nine times more workers than it actually does and accounts for three times as much economic activity as it actually does. Australians may prefer to see themselves as a nation of rugged extractors, rather than as a conventional service based economy, but overestimating the importance of natural resources can lead to faulty public policy.
Australia is lucky to have its mining revenue, but that cash has a cost. For decades, economists have fretted about the Dutch disease, which can occur when natural resource exports push up exchange rates. Australia has experienced a steady increase in the value of its dollar, and a high exchange rate makes it more difficult to export other products. The really dangerous dynamic occurs when high exchange rates crowd out more innovative industries that employ more typical Australian workers.
Dr Edward Glaeser, a professor of economics at Harvard, is the author of "Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier."
Source - Bloomberg
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