Curse of bountiful resources

History shows that boom times contain the germ of their own downfall.

It's possible to have too much of a good thing.  Individuals can consume too much chocolate.  Governments can collect too much revenue.  Countries can have too many natural resources.  What at first glance appears to be positive might have long-term negative consequences.

This is hardly a new insight.  In the 18th century, in his book The Wealth of Nations, Adam Smith discussed the paradox of China.  Even though it had land that was more fertile and more easily cultivated than in the West, its population lived in a poverty worse than in "the most beggarly nations in Europe".  Smith speculated that a reason for this was that because of the ease with which livelihoods could be sustained, albeit at a low level, there was no incentive for improvement.

In the 20th century a similar phenomenon was given the name the "resource curse".  Nations rich in natural resources experienced growth rates far below others that appeared to have few inherent advantages.  It is the story of Africa compared with Asia.  In countries with access to effortless wealth, there is no imperative for political or economic reform.  Nor is there any concern to ensure that growth is sustainable.  Elites concentrate on distributing income rather than on generating it.

It might be that in 2006 Australia is experiencing its own resource curse.

Surging Asian demand for our energy and minerals has generated billions of dollars of additional tax receipts for the federal government.

As ANZ Banking Group economist Saul Eslake pointed out in these pages on May 2, total tax revenue for the next fiscal year is likely to be at least 10 per cent higher than when it was first estimated three years ago.  Next Tuesday when he delivers the budget, Treasurer Peter Costello might provide tax cuts, but it appears unlikely that the additional funds will be devoted to tax reform.

One of the symptoms of the resource curse is the tendency to assume that conditions will continue as they are indefinitely.

It was such a belief in an unchanging world that led Labor and the union movement to oppose Work Choices.  Their argument was that if the present industrial relations system has given the country its current record levels of employment there's no reason to change that system.  What they ignored was the possibility that, with reform, unemployment might be even lower than it is now, and that the legislation was as much about the future as the present.

Some of this same sort of thinking is reflected in the Coalition's approach to welfare spending.  It is taken for granted that we'll keep being able to afford the existing high level of transfer payments to the middle class.  At a time when private income for the middle class is growing, the Coalition is providing it with ever-increasing government support.  The government should be doing the opposite of what is happening.  In the midst of unparalleled prosperity, middle-class welfare should be withdrawn, not increased.

There is a precedent for what is occurring.  Although Australia has had similar resource booms in recent times, none of them created the kind of structural change now taking place as the federal government's high-taxing, high-spending regime becomes entrenched.

The parallel with today lies in the middle of the 19th century when natural resources, primarily gold, produced unprecedented riches.  By 1870 Australia's per capita gross domestic product was the highest in the world, 15 per cent higher than Britain's, and 50 per cent higher than in the United States.  Within a few years the twin disasters of industry protection and centralised wage fixation were established, and in the following decades the country's economic performance plunged.  Wealth produced bad policy:  a resources curse, indeed.

Colonial politicians believed they would always have enough money to fund any policy decision they chose to make.  It's taken more than a century to unwind the damage created by the discovery of gold, and in the case of industrial relations the task even now is not complete.

The question of how to manage the financial beneficence the nation is now enjoying is one of which the Coalition is acutely aware.  Indeed, last year Prime Minister John Howard himself identified the issue facing the government.

"The politics of prosperity are no less challenging than the politics of adversity", he said.  "The biggest challenge of all is to avoid the pitfalls of complacency.  Complacency is the giant-killer of Australian politics".

He might have added that complacency is also the giant-killer of good policy.

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