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Last year, Dr. Ken Henry, Secretary to the Treasury, described the Australian economy as a “three speed economy” in which:

1.    The mining and mining-related sectors grow strongly;
2.    Other trade-exposed sectors (like many parts of manufacturing) grow more slowly; and
3.    Non-traded sectors grow at a rate somewhere between those two, depending upon the relative strengths of negative supply and positive demand shocks.

Henry’s turn of phrase was a variation on the popular metaphor of a “two speed economy,” which divides Australia geographically into a “fast lane,” consisting of the resource-rich states of Western Australia and Queensland, and a “slow lane” which included the rest of the country. By focusing on the distinction between economic sectors, Henry was not identifying a new condition of the Australian economy. Rather, he used the “three speed” phrase to describe a trend that had begun in 2003 with the mining resources boom. Today we summarise several perspectives on that trend:

1.    David Gruen, Executive Director, Macroeconomic Group, Australian Treasury

Although there has been strong employment growth in mining and construction, service sectors have together accounted for far more of the economy’s employment growth since the beginning of the mining boom than have mining and construction.

A development that is likely to be relevant over the next 15 years is increased direct competition in the non-resource parts of the Australian traded sector from China and India, with flow-on effects to employment in those sectors of the Australian economy. The most obvious parts of the Australian traded sector likely to be subject to this increased direct competition are manufacturing – especially as Chinese and Indian production moves to increasingly sophisticated manufacturing goods (for example, automobiles) as their real wages rise, but also parts of the IT sector, where lower costs, especially in India, provide a continuing incentive to outsource.

2.    Steve Keen, Assoc. Prof. in Economics and Finance, Univ. of Western Sydney

I expect Australia to resume deleveraging during 2011, leading to recession-like conditions in sectors that are not major beneficiaries of the China Boom.

My advice to the optimists is to take their eyes of China for a few minutes and take a good hard look at the direction credit aggregate data is moving – it’s down, and unfortunately that’s where two thirds of Australia’s “three-speed economy” will move next year.

3.    Julia Gillard, Prime Minister of Australia

Commodity exporters have served our country tremendously well, raising the living standards of every Australian, but an economy that becomes too dependent on any one sector takes too big a risk.

Even while demand for commodities remains strong, we face the risk of a ‘patchwork economy’ – an economy where some parts of the country boom while others go backwards, where some regions cry out for skilled labour while in others, Australians live aimless lives without skills, work or hope.

And if demand for commodities moderates over time, then we will only remain strong if we have ensured that our economic growth is broadly based: growth across all sectors – in services, manufacturing and agriculture, not just mining and resources; growth across the whole country – not just in a few states, and not just in a few cities or regions; growth through our whole society – so everyone who is doing the work shares in the gains; and growth sustained over time – without putting upward pressure on inflation and interest rates.

4.    Moody’s Investor Service

The three-speed economy will, in our view, see conditions develop strongly for tier-one corporates in 2011 such as those directly involved with selling goods to China and India.

Among them, many of the large resources houses and those directly linked to those entities through commercial and contractual arrangements such as engineering companies and the transport sector stand to benefit most as they produce at capacity output in order to take advantage of peaking commodity prices and high demand.’

Companies whose fortunes depend more heavily upon the recovery in the US and Europe will continue to languish relative to tier-one corporates but progressively recover as those economies healed.

5.     Glenn Stevens, Governor, Reserve Bank of Australia

Since mineral resources are not found in abundance in every region, some areas would be expected to receive more of a boost than others. For example in Western Australia, mining accounts for a quarter of production; it is only 2 per cent of production in Victoria. So it would seem obvious that the impact of an event that increases the demand for minerals is likely to see, in time, the output of WA given more of a boost than that of Victoria.

But as usual, the picture gets more complicated when we think further. The headquarters of some major mining companies are in Melbourne. Those companies will be putting additional demand on various service providers around the nation. There will be effects on economic activity around the country. It may well still be the case that the effects are most obvious and most pronounced in WA, but there will be substantial spillovers as the economy responds.

6.    Neil Warren, Professor, School of Taxation, UNSW

The issue of whether to slow down a booming mining sector to boost the manufacturing or services sector is a real dilemma if we’re not competitive in the latter. It’s bad policy for a government to intervene and pick winners in inefficient sectors or hobble efficient industries.

Taxing profits greater than the bond rate, and stripping out the 5% risk premium afforded to the petroleum industry, assumes mining companies invested risk capital just to earn the long-term bond rate. The point is these mining companies wouldn’t have invested in Australia [for that rate]. Moreover, they cannot borrow at the long-term bond rate. The mining industry is intensely cyclical, the risks are substantial and the capital is absolutely locked in long term. They want a very substantial return for the risk they take.

7.    Kim Carr, Minister for Innovation, Industry, Science and Research

Some have portrayed the mining sector as an insatiable beast.  A beast whose demand for resources, labour and capital must be fed – whatever the consequences for the rest of the economy.
According to this school of thought, the mining sector is so central to our livelihoods that we should sacrifice everything to it.  And the beast, in exchange, will carry the nation into a leaner, meaner future. We’ll rip our scarce capital and labour from the so called ‘inefficient’ industries, and somehow thrive as little more than the world’s quarry.

It would be bold and naive to think that the income we currently enjoy from the resources sector will continue unabated.  Putting all our eggs into one basket simply doesn’t make sense.

One of the reasons we have weathered the global financial crisis so well is the depth and diversity of our economy.  We cannot afford to become so focused on mining – or any one sector – that our economy becomes unbalanced.

As the rich (mining & energy) get richer and the poor (manufacturing etc.) get poorer, the debate intensifies over whether to subsidize or otherwise promote the interests of “slow lane” sectors at the expense of the speedy commodities sector. Next week we will consider one proposed approach to the issue: the Mineral Resource Rent Tax.