Speaking on the recent release of Australia's GDP figures, the shadow treasurer, Joe Hockey said 'The economy is increasingly, obviously, reliant on the mining boom, and the evidence out of today is clear: that if there's a cough in the mining boom, the rest of the economy catches pneumonia.' Hockey was right about one thing; the mining boom is infecting the rest of the economy. But he has misdiagnosed exactly what the problem is.
In Hockey's interpretation of events, the resources boom is the engine of Australia's growth, propping up the flagging sectors elsewhere in the economy, and the recipe for success is to grant the mining industry special privileges and hope that it keeps us all afloat.
Unsurprisingly that is a policy judgement the industry endorses, and it has spent considerable time and money trying to convince the government of it. They have been largely successful judging by Prime Minister Julia Gillard's recent reassurances to a mining dinner that 'What I really want you to take away tonight is an understanding of just how central your industry is to the Government's economic agenda.'
The problem with this view of the mining sector as being central to the welfare of the economy is that it's a total furphy. The mining industry is not supporting other sectors of the economy, it's holding them back.
While the big mining states of WA and Queensland are booming, in other parts of the country like Tasmania and regional Victoria the economy is sluggish. Areas that rely on manufacturing are suffering from rising interest rates and the effects of the strong Australian dollar on terms of trade.
The Reserve Bank could offer relief on this by lowering interest rates, which would ease credit for small businesses and help to rein in the dollar, but it is loath to do so because of inflation fears largely caused by runaway growth in the mining sector.
That is the essential problem of the 'two speed' economy; decisions on monetary policy that would benefit the rest of the country are being held back because of the mining states. The boom is driving growth in the resource rich areas, but it is impeding growth everywhere else.
Even in the states where mining dominates, the positive effects of