Ideas for Australia: Let's retire the idea that Australia 'depends' on digging up coal and other resources

The Conversation has asked 20 academics to examine the big ideas facing Australia for the 2016 federal election and beyond. The 20-piece series will examine, among others, the state of democracy, health, education, environment, equality, freedom of speech, federation and economic reform.

Here’s a question that, in one form or another, has been asked repeatedly over the years: how long can Australia carry on its reliance on coal, gas and resources, in the face of looming economic and environmental pressures?

This problem has become increasingly acute with the sharp decline in world prices for fossil fuels, particularly coal. Coal is, on some measures, one of Australia’s biggest industries. But many analysts warn that it is facing a permanent structural decline, with a zero-carbon world economy as the end point.

So, the question posed above, while it applies to almost any major mineral commodity, is of most relevance to the decline of coal, because it is already well under way.

The wrong question

Unfortunately, the question is almost impossible to answer because it is badly posed. The problem is with the idea that Australia is a coherent economic entity that can be said to “rely” on particular commodities.

In economic terms, Australia is not like a household in which the entire family depends on the same total income. Nor is it like a business enterprise with a total profit to be split among the shareholders.

Instead, the Australian economy is an aggregate of many households, businesses and governments. They have vastly disparate interests and concerns. Some interests are common to all Australians, some are in conflict, and some are unrelated.

In particular, some Australian households and businesses rely on coal, but most do not. In fact, as I will argue below, large groups of Australians are likely to benefit from the decline of the coal industry. This calls into question the amount of political capital that ministers are willing to spend on propping it up.

A dominant player?

First, though, let’s address the perception that coal plays a dominant role in the Australian economy. That’s not true in terms of jobs. According to the industry’s Little Black Rock website, set up to push the benefits of coal, coal mining directly employs 41,000 people. That’s about 0.4% of the nation’s workforce.

Even factoring in “supporting” jobs (a way of making almost any industry look bigger) only raises the total to 111,000, or 1.5% of the workforce. The industry’s claimed wage and salary payments of A$6 billion a year are more impressive. This reflects the prevalence of high-wage, full-time jobs in the mining sector, but overall it’s still less than 5% of Australia’s total earnings.

To the extent that Australians in general share in the benefits of mining, it is through the industry’s payments of company tax and royalties to Australian governments. On this score, the Little Black Rock website, citing various state budgets in support of its claim, states that “over the four years 2015-16 to 2018-19, total coal royalties are projected to sum to A$15 billion”.

That’s about A$4 billion a year, or less than 1% of total taxation revenue. Given the fiscal difficulties of Australian governments, every little bit helps, but this is small beer.

Limited exposure

Moreover, most of the impact has already been absorbed. A recent study shows that the cost to the Australian government budget of a cessation of future thermal coal projects would be only A$290 million over four years.

How can it be that our second-largest export industry (after iron ore) has such a small impact on the welfare of the average Australian?

The answer is that mining is a highly capital-intensive business, as are the associated supporting industries like rail and ports. Much of the capital is imported, with finance provided by global banks and by export finance agencies such as the US Export-Import Bank. Equity capital (investments in company stock, rather than loan finance) also mainly comes from overseas; the Reserve Bank of Australia puts the figure at up to 80%.

Mining is, in effect, an “enclave activity” (to borrow a concept from former unionist Howard Guille) – it happens here, but most of the costs and benefits accrue to foreign investors rather than the host economy.

As a result, the vast majority of export earnings from coal and other minerals flow to the owners of capital, either as interest and debt repayments or as returns on equity. Even the proportion that stays within Australia is not spread evenly: a handful of wealthy individuals account for most of the direct ownership, while Australians in general hold interests mainly through superannuation funds.

Busted boom

For all of these reasons, most Australians saw very little benefit from the mining boom. Wage growth barely outpaced inflation. While unemployment remained relatively low, this was a reflection of successful macroeconomic management by the Reserve Bank rather than of a jobs boom in the mining sector.

The flip side of this is that, now that the boom is becoming a slump, the effect on the average Australian has been quite modest.

Moreover, as mentioned above, many Australians will actually benefit from the decline of coal. Two groups are particularly relevant.

The first is the renewable energy sector, previously hobbled by the investor uncertainty engendered by the Abbott-Turnbull government. But in the long run, employment in renewables is likely to exceed coal-mining jobs, as has already happened in the United States.

Second, export industries other than mining suffered from high exchange rates driven by the mining boom. As the exchange rate has depreciated, these exporters have gained. Examples include wine and services such as education and tourism.

Change the mining mindset

Overlaying all of this is the fact that the Australian economy, like all modern economies, is dominated by the provision of services rather than the production of physical goods.

The idea that Australia as a whole “relies” on commodity exports is a relic of the industrial economy of the middle of last century. Facing the future will mean focusing on education and on future-orientated research and innovation, rather than on extractive industries.

In this respect, the Turnbull government has made all the right noises. Unfortunately, in terms of policy, it has gone backwards, with cuts to the Gonski schools program and research priorities focused on white elephants like coal-based diesel engines. It would be smarter to look forward than back.

You can read other articles in the series here.