Two-speed economic theory a walk on the dark side

The Rudd Government's argument for a super profits tax on mining is based on a flawed proposition striking at the heart of economic aspiration.

The basic idea is that the tax is necessary to correct a two-speed economy separating those states with a mining industry from the rest of Australia.  As the theory goes, improvements in global commodity prices, fuelled by Chinese and Indian demand, lead to an expansion of the mining sector.

The resources states will gain from the commodity boom at the expense of non-resources states.

In other words, Queensland, Western Australia and the Northern Territory up;  New South Wales, South Australia, Tasmania and the ACT down.  The two-speed economy is the latest in a long line of arguments attempting to highlight the alleged dark side of mining.

In the 1960s, as Australian mining reached critical mass following iron ore discoveries in Western Australia, fears were raised that mining activity would benefit foreign companies and their shareholders at the expense of ordinary Australians.

In the late 1970s Australian economist Bob Gregory developed a theory that a commodity-driven strengthening of the dollar makes imports cheaper, affecting the competitiveness of import-competing sectors such as agriculture and manufacturing.

But is the two-speed economy, now the basis of the Rudd Government's planned mining tax, an accurate depiction of economic reality?

The notion that the Australian economy only has two trajectories or speeds of growth is incorrect.

There are eight states and territories, so why don't we hear about the eight-speed economy?  Within state borders there are about 670 local governments across the country, each with their own industry structures.

So is Australia in fact a 670-speed economy instead?  ABS data shows there are more than 3 million businesses selling goods and services to 22 million Australians.  Is it not more appropriate to talk, then, about the 3 million-speed economy?  Portraying the non-resources states as the victims of mining's success also overlooks the role of higher taxation and public spending, and prescriptive regulations, as roadblocks for growth in those jurisdictions.

It is important to put into perspective the substantial benefits of mining sector expansion as accrued by Australians.

An improvement in the terms of trade because of mining lifts aggregate national income, while growth in mining provides attractive jobs and helps absorbs those previously unemployed.  There are also substantial links between mining and other sectors of the economy, such as manufacturing and financial services, located in non-resources states.

The movement of labour and capital to more highly valued uses in a market-based economy helps to underpin economic prosperity.

There is no clear market failure rationale justifying a new super profits tax to prevent the labour and capital moving to Queensland, Western Australia and the NT.

As the proposed tax starts to flow through to the cancellation of projects and job losses in Queensland and other regions, the Government must urgently rethink its reasons for penalising our comparative economic advantage in mining.

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