RDP 2014-08: The Effect of the Mining Boom on the Australian Economy 2. Previous Research

Our analysis builds on a large body of research, much of which is by Australian academics, on the ‘Dutch disease’. Prominent papers include Gregory (1976), Corden and Neary (1982), Corden (1984) and Cook and Seiper (1984). This work emphasises that a boom in commodity exports often affects the broader economy by inducing an appreciation of the real exchange rate. This tends to raise general living standards by reducing the relative cost of imports. However, the appreciation also weakens the competitiveness of other exporters and of import-competing industries such as manufacturing.

Later studies have explored how the effects of a resource boom depend on its cause. Bean (1987) notes that the discovery of oil in the 1970s and the consequent increase in investment had different effects on the UK economy than the increase in oil prices following the second oil price shock in 1979–1980. In Bean's modelling both booms lead to an exchange rate appreciation. However, in the first boom, driven by new discoveries, the expansion of demand for manufactured goods due to higher investment more than offsets the effects of the exchange rate on manufacturing. In contrast, in the second boom, which was driven by higher prices, the negative impact on the exchange rate is larger than the positive impact on investment and manufacturers are worse off.

Cagliarini and McKibbin (2009) look at the impact on Australia of a rise in energy and mining commodity prices relative to manufacturing prices driven by: (1) rising productivity in China; (2) a reduction in risk; and (3) monetary easing in the United States. One surprising result is that an increase in commodity prices driven by an increase in manufacturing productivity in China reduces income and GDP in Australia by drawing capital away from OECD countries and increasing global real interest rates. Jääskelä and Smith (2011) examine effects on the Australian economy of changes in the terms of trade arising from: (1) an increase in world demand; (2) developments in individual commodity markets; and (3) globalisation and the rise of Asia, where rising commodity demand and prices are accompanied by lower manufacturing prices. The estimated impacts are markedly different for output, inflation and the exchange rate.

There have been numerous applications of these general principles to recent Australian developments, including Connolly and Orsmond (2011), Sheehan and Gregory (2012), Minifie et al (2013), Plumb, Kent and Bishop (2013), Edwards (2014) and other references we cite below. Although we use a similar analytical framework to most of these papers, our work differs in that we quantify the timing and magnitude of economic responses. Specifically, we construct a counterfactual for how the economy would have evolved without the boom; comparisons with this scenario distinguish the effects of the mining boom from developments that would have occurred anyway. Our empirically grounded counterfactual lets us discuss effects in greater detail.

Like us, Rayner and Bishop (2013) use input-output tables to estimate how the mining boom has affected different sectors of the economy. Our approach extends this work by including effects working through the greater purchasing power of national income, the exchange rate and other effects working through relative prices. Our estimates suggest that such ‘indirect’ effects have been larger than the direct effects of demand on upstream industries.

A set of papers with close parallels to ours has analysed the mining boom with the Monash Multi-Regional Forecasting (MMRF) model. This includes McKissack et al (2008), the Productivity Commission (2009) and Thompson, Murray and Jomini (2012). We discuss these papers in Appendix B, where we also compare the two models.