Australia's Resource Curse Case - Current and Sustainable Economic Performance

Australia’s management of its natural resource wealth is ineffective as the country is currently suffering from Dutch disease, heavily reliant on China’s imports and capital, facing negative labor productivity growth rates, and possible political instability due to its fiscal strategies.

Current and Sustainable Economic Performance

With regards to current economic performance, Australia had a stellar GDP growth rate even throughout the financial crisis with its GDP growing at a CAGR of 6% since 2005. The bulk of this growth has been accounted for in household consumption as it historically averaged at more than 50% of GDP. This is followed by investments at an average of 27%. Its real GDP growth rate is also great at 2.4% CAGR since 2005. Although the demand-side GDP is exemplary, the supply-side is worrying as the country’s TFP in the mining and utilities industries is -6.3% and -5.5%, respectively. These 2 industries are the most important industries to Australia and as TFP is the sustainable driver vs. what I assume are the current growth drivers, labor force and capital, the country should focus on increasing its productivity to ensure sustainable growth. To ensure that Australia continually has low unemployment rates (5.1% currently) and high standards of living, the focus should be on capacity utilization of its mining industries as the wedge between its potential and current output is very wide. An issue that has haunted Australia for a long time is its fight against inflation, which led it to historically raise interest rates to 18%. Current inflation is growing primarily due to the housing bubble, leading the central bank to raise interest rates to 4.5% amidst a global climate of interest rates close to 0%. With a AAA rating, the relatively high interest rates will cause foreign investors to flow money into the Australian economy, leading the currency to further appreciate, and worsening the Dutch disease.

Looking ahead to the sustainability of its economic performance and particularly at the country’s debt levels, 80% of net foreign debt is held privately and 20% is held publicly. The rising debt levels are used to fund the current account deficit, which is in a vicious cycle as the deficit is primarily caused by the extremely high Income Debits as Australia is paying interest on loans to foreigners (on the debt it is taking to fund the deficit) and is giving profits on FDI in the country as dividends and returns. Additionally, Australia’s net foreign liabilities exceed its net foreign assets by a factor of 1.6, further worsening the deficit. As the country holds most of its debt in its own currency, the exchange rate levels do not affect its interest payments. However, the ever strengthening Australian Dollar is leading the non-mining industries to become less competitive as exports become expensive for other countries. The predominant issue with the