National economic indicators series

National Economic Indicators Series
Commentary

Some thoughts from NIEIR’s economists about the Australian economy

When undertaking the 2011/12 modelling, we discussed the possibility that the severity of the so-called Dutch disease (or crowding out) effect from the current mining expansion might be so severe that the net benefit to the Australian economy from the expansion may only just be sufficient to increase net national disposable income enough to maintain the same per capita income level that would have existed without the expansion.

The latest data finds that support for the hypothesis has increased. Western Australia and its regions are clear winners from the boom, along with some of the regions in Queensland and New South Wales. However the crowding out of activity from the expansion has clearly had a negative impact in other states and regions.

Compared to a country such as Norway, Australia has failed to extract the maximum benefits from the expansion. Norway adopted a comprehensive planning process to maximise the long-run benefits of resource expansion and endowed this process with resources sufficient to make a difference. Australia did not and still has not.

A necessary first step to rethinking regional development in Australia is the setting up of an independent Commission of Enquiry into the issue. If such an enquiry concluded that:

  1. 1) There have been substantial positive benefits from the current mining expansion;
  2. 2) However, non-mining regions have been unnecessarily adversely impacted on; and
  3. 3) Among the reasons for this is ineffective planning for regional development,

it would kick-start the process for a productive redesign of regional planning in Australia.

There is also a fundamental need for regional planning for development simply based on the core proximate driver of economic growth in a region, namely non-dwelling investment or its close proxy non-dwelling construction investment. The appropriate rule of thumb is that $1 million of net investment will lead to a permanent change of just under $1 million of gross product (industry).

Investment is the driver of regional development and effective regional planning for development can lift regional performance by just increasing the total.

Read more in the State of the Regions report.

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