Australia's Resource Future

"We can, through our own policies or public opinion, ... frighten away foreign capital and technology from the new mining era. ... we forget that a land can have rich mineral resources but little mineral development. ... the deposits can be known but the political risks and the potential taxes may dissuade companies from developing those deposits and equipping them to produce."

Geoffrey Blainey, 1982, "How to sterilise the golden goose",
The Australian, 30 April, p. 16

EXECUTIVE SUMMARY

• The proposed federal mining tax, and proposals in various states to restrict mining developments in selected tourism or agricultural regions, is a product of a host of anti-mining sentiments concerning the role and contribution of mining to Australian prosperity.
• The recent cropping land restrictions proposed by the Queensland Government will prevent access to significant Coal Seam Gas reserves in the state and is an example of the anti-mining sentiment in Australia.  It is estimated that this proposal will cause an annual $1.6 billion reduction in the value of Queensland's mineral and energy production.
• The key arguments expressed against mining activities, that tend to preoccupy the popular media and political discussion, are that:
• Mining activities perpetuates Australia's position as a "quarry" to the rest of the world at the expense of developing sophisticated, tangible industries domestically, and at the risk of resource depletion and environmental degradation.
• The growth of Australian mining, including as a result of rising commodity prices flowing through an improved terms of trade, exacerbates the de-industrialisation of the national economy as well as creates a "two-speed economy" divide between resource intensive and non-resource intensive states.
• The growth and development of the mining sector has benefited foreign interests more so than Australian interests.
• On the basis of a critical assessment, these anti-mining sentiments simply cannot be sustained.
• Australia is predominantly a services economy but, even so, mining is highly innovative and has extensive and complex links to the rest of the economy.
• Fears concerning the imminent depletion of Australia's non-renewable resources base are ill-founded and disregard the important impacts of price conditions, technological change and human ingenuity.
• The Australian mining sector makes a major contribution toward environmental remediation, and indeed is a world leader in such practices.
• While the movement of resources towards mining activity and resource intensive regions are in Australia's national economic interest, there is scant evidence to suggest that manufacturing has been damaged by the growth in Australian mining.
• It is fanciful to suggest that non-resources states do not benefit from mining, given the roles of services to mining, widespread share ownership in mining companies and taxation revenues.
• The role of foreign investment in mining has been indispensable in the growth of Australian mining, to the benefit of residents in this country.

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1.0 INTRODUCTION

The Australian mining sector has long played a critical role in the nation's economic and social development.  These beneficial contributions can be usefully summarised as follows:

• Economic activity:  The minerals resources industry accounted for more than six per cent of Australia's economy in 2008-09
• Employment:  The minerals resources industry directly employs 161,500 people, and indirectly supports hundreds of thousands of additional jobs through its purchases of goods and services from other Australian industries
• Investment:  Over the past ten years the industry invested more than $125 billion in the Australian economy
• Exports:  In 2008, minerals resources accounted for about one in every two exports dollars earned by Australia making it the country's largest export industry
• Social contribution:  The minerals resources industry has played a vital role in the development of Australian communities (particularly in regional and rural areas), contributes to indigenous and non-indigenous employment, participates in community development and environmental amenity initiatives, and tax revenues acquired from the industry help to underpin the provision of public sector services. ⁽¹⁾

There is a widely held view that the benefits flowing from mining activity will continue at least in the short term.  The Commonwealth Government is estimating a spike in Australia's terms of trade this financial year due to "substantial increases in the contract prices of Australia's commodity exports, including iron ore and coal." ⁽²⁾  The latest estimate of an increase in the terms of trade by 17 per cent for 2010-11 exceeds the estimate made available at the time of the May Budget.

Such predictions, juxtaposed with a self-induced federal budget deficit driven by unproductive stimulus expenditure, led to the Rudd-Gillard government proposing new taxation arrangements for miners.  This entails a Minerals Resource Rent Tax (MRRT) of 30 per cent applied to coal and iron ore projects, with the tax to apply to resource profits over and above the long term government bond rate plus seven per cent, as well as an extension of the Petroleum Resource Rent Tax (PRRT) to onshore oil and gas projects.

Apart from extolling the virtues of extracting a "fair share" of revenue from mining relative to other sectors of the economy, government ministers have made various related arguments to sell its planned mining tax policy.  These include:

• the need to use the revenues to fund a "productivity agenda" centred on infrastructure and innovation benefitting other sectors of the economy with value-added potential
• an obligation to compensate Australians for the extractive activities undertaken by foreign companies operating on Crown and other lands
• to militate the impact of exchange rate movements due to a terms of trade boom upon non-tradeable, and other tradeable, segments of the national economy
• to slow or prevent the divergence of economic growth rates between resource intensive and non-resource intensive regions of Australia.

The recent federal election result of a hung parliament has created new uncertainties regarding the application of the proposed mining tax.

Despite assurances by Bob Brown in September 2010 that the Greens would not push for an extension of the MRRT base, the Greens leader stated earlier in the year that "I'm going to the election saying I want a bigger return from the big miners and I would expect more than one million people will vote for that, so I will have a mandate from where I sit in the Senate." ⁽³⁾

Consistent with this the Greens member for Melbourne Adam Bandt — who currently shares balance of power status in the House of Representatives with various independents — expressed support for the original RSPT model applied across a wide spectrum of mineral resources. ⁽⁴⁾

The International Monetary Fund recently stated that the MRRT "is a step in the right direction" and that "[c]onsideration should be given to broadening the coverage to other mineral resources." ⁽⁵⁾

In addition, the proposed federal mining tax has generated a wider debate about the merits of mining activities in Australia more generally.

On the one hand, it could be reasonably argued that the repeal of the original Resource Super Profits Tax (RSPT) proposal was the product of a highly effective "tax revolt" by the industry and many sections of the community, including in key resources provinces within Queensland and Western Australia, based on an appreciation of the economic and social benefits of mining.

On the other, there have remained strong voices of criticism against mining expressed by some quarters.  For example, the politically influential Australian Greens have repeatedly characterised Australia as a "quarry economy" under the control of "mining barons".

As this paper illustrates, such sentiments levelled against Australian mining are not new.  In some instances they stretch back to the nineteenth century, associated with the explosion of economic activity generated by the discovery and extraction of gold in Victoria during the mid-1800s.

As longstanding as many of the major anti-mining sentiments might be, this paper shows that they are ill-founded and thus do not represent a strong intellectual platform supporting policies constricting the growth of a sector that has proven itself to be pivotal to Australia's prosperity.

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2.0 ARGUMENTS AGAINST MINING IN AUSTRALIA, AND REBUTTALS

A host of propositions have been formulated in the Australian context that all purport to expose the extensive costs surrounding mining activities.  The following sections summarise these arguments levelled against mining, and provide rebuttals against each argument.

2.1 MINING PERPETUATES AUSTRALIA'S POSITION AS A "QUARRY" ECONOMY

Various critics of mining have depicted its activities as resembling little more than the digging of quarries, or holes, in the ground yielding little by way of additional value-added for our economy.  The maintenance, if not expansion, of the quarry economy of mining implies lost opportunities for Australia to diversify its industrial structure.

The economics editor for The Age newspaper, Tim Colebatch, lamented the notion that "the implicit argument from our officials is that we should allow otherwise-viable industries to be put down in the interests of making room for us to extract as many minerals now as possible." ⁽⁶⁾

He went on to contend in the same article that "this is wrong:  not just because they are picking winners, or just because China, too, has its vulnerabilities and could fall, but because you don't put all your eggs in one basket."

Swinburne University academic Michael Gilding characterised the effects of mining as follows:  "Mining sucks oxygen from the rest of the Australian economy.  It attracts investment capital, which might otherwise go into innovative technologies or creative industries.  As a result, our best and brightest often cannot find the venture capital they need to support their innovations." ⁽⁷⁾

Writer John Legge recently invoked the Lee Kuan Yew-inspired image of Australia as the "poor white trash of Asia" when warning of the risk that, without knowledge-based manufacturing products and infrastructures, "Australia will be no more than a quarry and tourist resort, catering to the whims of people from countries where knowledge creation is taken seriously." ⁽⁸⁾

In a 2009 edition of Quarterly Essay, public commentator Guy Pearse castigated the "quarry vision" of widespread political, business and media support for the non-renewable resources industries:  "[d]ebate rages about virtually everything else, but there's perfect harmony on the importance of the quarry.  It's a given." ⁽⁹⁾

The Australian Greens criticised the Building Australia Fund, an infrastructure financing initiative announced in the 2008-09 federal budget, on the basis that it would deliver "quarry economy handouts".  According to spokesperson Senator Scott Ludlam, "pouring money into more roads and ports to service the mining industry does not benefit the majority of Australians, or help improve our long-term economic future." ⁽¹⁰⁾

The chief executive of the Federation of Automotive Products Manufacturers, Anna Greco, invoked a sense of manufacturing-nationalism when stating:  "I'm a proud Australian who wants to live in a country that produces things.  If the day comes that Australia reverts to being no more than a ... quarry ... I'll join the estimated 1 million Australians who have taken their knowledge and skills overseas." ⁽¹¹⁾

In his first speech as Opposition Leader in late 2006 Kevin Rudd asked "Will we still make things?  Or is that all gone?" to then declare prior to the 2007 federal election that he wanted Australia to be "a country that actually makes things."

This declaration was closely associated with arguments made by other political figures at the time, such as now-Treasurer Wayne Swan, that the mining boom, induced by strongly rising commodity prices, would be of a temporary nature and thus Australia should refocus its economic energies toward investing in infrastructure and innovation activity benefiting non-mining industries.

Recently there has emerged a view that growth in mining necessarily threatens to displace other activities, such as tourism and agriculture, and thus reduce diversity of the national economic structure.

In Western Australia there has been growing community pressure placed on the state government to introduce legislation preventing mining activity in the Margaret River wine growing region.  The possibility of such a restriction against mining could threaten a proposal to access a coal seam some 15 kilometres north of Margaret River.

The Queensland Government has announced a process to establish a "policy framework" for protecting what it calls "the state's valuable and scarce strategic cropping land" (see the Appendix for further details and critical assessment).  Specifically, the proposal is that future legislation would require any proposed development, which may impact on selected areas of cropping land, to be assessed to ensure that it does not cause "permanent damage" to such resources.

As noted by various mining and other stakeholders, such a proposal risks interfering with the property rights of landowners and constraining the extent of potential economic gains as a result of limiting legitimate resource exploration and mining activity.

The proposition that mining activity positions Australia as an economic quarry, squandering alternative opportunities for sustainable growth, is not a modern one.

The 1964 book by Donald Horne, The Lucky Country, develops a narrative of an Australia gripped by a culture of innovative complacency as a consequence of its natural resources endowment.  Horne conceded that our mineral bounty, including new discoveries of iron ore in Western Australia, helped ensure our position as one of the wealthiest countries in the world.  Yet, this was a mixed blessing;  due to the stock of minerals available, Australians "showed less enterprise than almost any other prosperous industrial society." ⁽¹²⁾

Delving even further into Australian history, there is evidence of a dismissive attitude toward the efforts undertaken by miners to extract economically valuable resources for the benefit of consumers.  In 1877, legislators in Queensland derided miners as being little more than "wandering diggers roving over the face of the country, and making holes for sheep and cattle to fall into." ⁽¹³⁾

Associated with these arguments is the view that since non-renewable natural resources are finite, the "quarry" economy of mining cannot last forever.

For example, entrepreneur and political commentator Dick Smith recently outlined a neo-Malthusian vision of population growth juxtaposed with the depletion of mineral resources:  "Australia earns its living mainly through selling non-renewable resources, and sooner or later this wealth will begin to decline.  With more people, the pie will be sliced thinner and our quality of life will most likely decline unless we act now.  We're exhausting our soils, draining our rivers and destroying our environment at an accelerating rate." ⁽¹⁴⁾

Citing the Mark Twain refrain, "What is a definition of a gold mine?  A hole in the ground owned by a liar", the environmental pressure group Friends of the Earth castigated the operations of a mining company involved in "an easy quick-grab profit that will be taken out of the country scarring the land, flora, fauna and people for decades to come." ⁽¹⁵⁾

Similar sentiments have been expressed in Australian literature with, for example, the Queensland indigenous poet Kath Walker describing the work of mine operations as follows:

"The miner rapes
The heart of earth
With his violent spade."

The pollution and destruction of the landscape were also commonly expressed in Judith Wright's poetry and by other Australian poets and writers. ⁽¹⁶⁾

2.1.1 Rebuttal:  Australia is not a "quarry" economy

Despite protestations by mining critics to the contrary, Australia is not a quarry economy.

According to the latest National Accounts data supplied by the Australian Bureau of Statistics (ABS), the contribution of the mining sector to Australia's Gross Domestic Product (GDP) is small.  In 2008-09 the share of mining to GDP was eight per cent.  Finance and insurance (12 per cent of GDP) makes a greater contribution to the economy, as does manufacturing (ten per cent).

Services (including those provided by the public sector) accounted for over two-thirds of GDP in 2008-09, however criticisms of Australia as somehow being a "checkout" economy are sparse at best.

While the relative share of mining in national economic output has increased slightly over the past decade in response to an upswing in demand for commodities from China and India, the relative economic importance of mining has actually declined over the long run (Figure 1).  According to economic historian Noel Butlin, at the peak of the 1850s gold rush mining comprised about 35 per cent of GDP.

Figure 1:  Contribution of mining sector to GDP

Mining value added, per cent of nominal GDP.

Source:  Ric Battellino, 2010, Mining booms and the Australian economy, Address to The Sydney Institute (accessed 18 August 2010).

Similar historical trends can be observed in relation to the total employment share of mining in the Australian economy.

Much attention has been focussed on the impact of recent strong increases in commodity prices on Australia's terms of trade.  However, as noted by economist Stephen Kirchner "[t]he terms of trade boom has led to an exaggerated sense of the importance of commodities to the economy." ⁽¹⁷⁾

If anything, the secular trend has been for commodity prices to decline in real terms albeit with considerable short run volatility, even as consumption of base metals and fuels have increased.  An analysis of real base metals prices by the Reserve Bank of Australia (RBA) shows a trend decline in price over the past century, partly offset by more recent price increases. ⁽¹⁸⁾

The RBA paper tracks long run changes in real iron ore contract prices, noting that "[a]fter rising in the 1950s in the context of strong world demand for steel — for which iron ore is primarily used — real iron ore prices declined for the next five decades.  These price declines reflected in part large iron ore discoveries in Western Australia and Brazil in the 1960s and 1970s, and technological advances in the steel industry." ⁽¹⁹⁾

Meanwhile, a Commonwealth Treasury analysis showed no discernable trend in the price of coal relative to overall prices over the last one hundred years. ⁽²⁰⁾

2.1.2 Rebuttal:  Australian mining has extensive links to the rest of the economy

The quarry economy narrative invokes misleading pejorative images of mining activities as representing nothing but digging holes in the ground for precious base metals or fuels.  However, such a depiction overlooks the elaborate structure of production entailed in mining exploration and extraction processes, and the extensive inter-industry linkages that this structure implies.

Mining involves much more than drawing picks and shovels.  It is a relatively capital intensive sector of the economy, with large scale expenditure on exploration, the development and construction of open cut and underground mines and off-shore drilling platforms in the oil and gas industries. ⁽²¹⁾  These types of capital are highly specialised by nature, and are associated with a high degree of sunk costs.

Considerable expenditure by mining companies is also necessary for infrastructure, such as transport and communications facilities (roads, rail, aerodromes, ports, telecommunications) and water and power supply.  Mining also make a significant contribution to the development of social infrastructure services for mine employees and local communities.

ABS data provides some insight into the composition of capital used by the mining sector, sourced from domestic and foreign suppliers of manufactures and other materials (Table 1).

Mining accounts for the second largest amount of non-dwelling construction, machinery and equipment, and research and development (R&D) net capital stock of all sectors in Australia.  The value of computer software used by mining as net capital exceeds that of the agriculture, construction, tourism (accommodation and food services), and arts and recreational sectors.

The highly specialised capital used by the mining sector is combined with labour services to produce ore for domestic and international markets.  As at May 2010, 179,400 people were directly employed by the mining sector compared to 74,800 people ten years ago — an increase of 140 per cent over the period.  About two thirds of direct mining sector employment is situated in Queensland and Western Australia. ⁽²²⁾

Inconsistent with the depiction of miners as merely earth shovelers, a recent analysis of the mix of labour in mining shows occupations as diverse as drillers, miners and shot firers, metal fitters and machinists, engineering technicians, truck drivers, production managers, plant operators, geologists and geophysicists, accountants, project administrators, clerks and power plant operators. ⁽²³⁾

Nearly two thirds of mining workers had completed a non-school educational qualification, with the need to attain a qualification becoming increasingly important given the growing complexity of mining operations. ⁽²⁴⁾

Table 1:  Net capital stock in selected industries, by selected capital types, 2008-09, $ millions

(a) Total includes dwellings, ownership transfer costs, weapons systems, cultivated biological resources, and artisitic originals.

Source:  Australian Bureau of Statistics, Australian System of National Accounts 2008-09, cat. no. 5204.0.

In addition to this, mining retains extensive linkages to the remainder of the Australian economy including services.  As recently remarked by economist Judith Sloan, the "spin-off ... [of mining] ... for the service sector is immense — for contractors, accountants, lawyers, caterers and many others." ⁽²⁵⁾

This is confirmed by the total requirements coefficients data contained in the latest ABS input-output tables, which shows the value of output of mining industries required directly and indirectly to produce $100 of final output by other industries throughout the economy. ⁽²⁶⁾

Numerous Australian companies also engage in adding value to extracted ore through mineral processing activities, including smelting and refining of alumina, aluminium, copper, gold, iron, lead, nickel, silver and zinc (Table 2).  A significant proportion of these processed outputs are exported to international markets.

Table 2:  Production of selected manufactured products by mineral origin, 2007-08

Source:  Australian Bureau of Statistics, Year Book Australia, 2009-10, cat. no. 1301.0.

2.1.3 Rebuttal:  Australian mining is a major source of technological innovation and R&D

Far from retarding Australia's industrial development, the mining sector has contributed to this process by encouraging domestic innovation activity including through cutting-edge research and development.

Data supplied by the ABS on the extent of research and experimental development by the private sector shows that, in 2007-08, Australian mining businesses invested some $3.3 billion in R&D expenditure. ⁽²⁷⁾  This represents a significant increase on expenditure of $392 million undertaken a decade ago.

The mining sector today accounts for 23 per cent of total business expenditure on R&D, up from ten per cent in 1997-98.  It is significant to note that the sector sources about 96 per cent of its R&D expenditure from its own funds.

Australia has made numerous contributions to technological change in the mining sector, such as exploration assessment technologies, mine planning and design innovations, mineral processing, and technologies improving environmental amenity and worker safety at mine sites.

It has been estimated that the mining technology services industry alone contributed over $3 billion to GDP in 2000-01, with exports in the order of $1.2 billion in 2004-05. ⁽²⁸⁾  Over 60 per cent of the world's mining operations utilise software developed by Australian companies.

The information presented above paints a picture of mining as an elaborate set of economic processes, rather than merely digging holes in the ground.  Contrary to the beliefs expressed by the critics, Australian mining has contributed extensively to innovation by displaying significant enterprise and initiative in response to complex production and supply problems.

2.1.4 Rebuttal:  The scarcity of mineral reserves are contingent on a wide range of economic and other factors, including human ingenuity

Ever since the writings of Rev. Robert Thomas Malthus in the late 1700s, there has existed a strain of thought suggesting that mankind is verging toward the complete exhaustion of the natural resource base.  This view appears to have become increasingly popular in public opinion, as evidenced by the "Club of Rome" thesis, the "peak oil" proposition and the growth of the environmental movement.

One way in which critics attempt to illuminate the degree of mineral resource finiteness is to calculate an effective number of production years remaining by comparing existing levels of mining production against known economic resources (Table 3).

The data provided in the Table implies that, with the exception of brown coal, nickel and uranium, Australia will run out of significant mineral commodities within a century on current production levels.  It is sometimes postulated, as Dick Smith did recently, that continuing population and economic growth will only exacerbate the rate of resource depletion.

Table 3:  Economic resources versus production rates, 31 December 2009

Source:  Geoscience Australia, Australia's Identified Mineral Resources 2010 (accessed 24 August 2010).

However, it is fanciful to consider the question of physical resource finiteness in the absence of changing economic conditions.  Consider, for example, the important role of commodity prices in shaping actions by mining sector participants.

A reduction in the price of a given commodity, other things being equal, suggests that the supply of the commodity is increasing relative to its demand and is hence becoming less costly to deliver onto market.

The implied prospect of a lower return on investment will encourage existing miners to mine their ore bodies less intensively, or to abandon mine sites with lower grade ore altogether.  Potential entrants could be discouraged from investments in the affected commodity class.

A falling commodity price could also discourage exploration activities.  As explained by Geoffrey Blainey in the late 1960s, "[t]he discovery of mineral deposits is to a considerable degree the result of the amount of intelligent searching, both horizontally and vertically.  In turn the intensity of the search depends heavily on the incentives to search", ⁽²⁹⁾ such as changes to commodity prices.

Another potential reaction to a fall in the commodity price is that firms could seek to divert their investments into seeking and extracting alternative, albeit more profitable, resources.

What this all means is that proven reserves are a function of economics and not geological abundance. ⁽³⁰⁾  In the example provided above, the consequence of a reduction in the commodity price is to stretch out even further into the future the years of available supply for the material.

Despite recent increases due to rising commodity demands by industrialising China and India, in the long term commodity prices "have generally trended down or sideways rather than up since the late 19th century ... [which] ... argues against the notion that 'non-renewable' resources are becoming more scarce in an economically meaningful sense." ⁽³¹⁾

Other factors in addition to the role of price must be considered when assessing the finite nature of resources.  Technological change is an important factor, as described by Barnett and Morse:

"[f]ew components of the earth's crust ... are so specific as to defy economic replacement, or so resistant to technological advance as to be incapable of eventually yielding extractive products at constant or declining cost.  When coal, petroleum, hydroelectric power, and the atomic nucleus replace wood, peat, and dung as sources of energy;  when aluminium yields its secrets to technology and is made to exist, as never before, in the form of metal;  when the iron in taconite, once held there inseparably, becomes competitive with that in traditional ores — when all this happens, can we say that we have been forced to shift from resources of higher to those of lower economic quality?" ⁽³²⁾

Other man-made factors, such as changes in incomes, consumer tastes and government tax and regulatory policies, have critical implications for mining sector production. ⁽³³⁾

Indeed, as the economist Julian Simon famously explained the very concepts of a resource, and what are valuable resources, is a function of the human mind.  Human creativity and innovativeness was capable of converting a previously useless liquid — oil — into a lucrative resource, while previously useless sand has been found to have an economically useful application in the production of computer chips and fibre optic cabling.

Far from being responsible for exhausting the planet's treasures population growth is necessary in order to attain more minds to resolve problems, including finding new ways of combining scarce resources to furnish products that satisfy consumers.  For that matter, economic growth is indispensable in ensuring that the greater number of creative minds have the capacity to put mineral and other resources — and ever changing conceptions of these — to good work for human development.

2.1.5 Rebuttal:  The mining sector invests substantially in promoting environmental amenity

The environmental implications of mining sector activity are varied.  During the exploration stage, ground level activities could involve the development of bore holes and excavation pits.  Mineral extraction and processing may involve the generation of wastes, such as mine tailings and gaseous emissions, which if not managed appropriately could disseminate into local environments through air and water systems. ⁽³⁴⁾

While the extent of environmental impact is contingent on a wide range of factors, including accessibility and other characteristics of the ore body, the types of technologies used in exploration and extraction as well as unique local conditions, ⁽³⁵⁾ they have become a source of growing public scrutiny over the past two decades or more.

Like any other private sector business attuned to the attitudes and concerns of customers and local communities, the mining sector undertakes numerous activities to minimise its impact on the environment.

Companies routinely undertake rehabilitation of sites, including restoration ensuring that an area is returned as close as possible to its pre-mined state and other techniques such as land recontouring and revegetation.

According to the Minerals Council of Australia, there exists an accumulated provision of about $3.5 billion for rehabilitation with the sector forecast to spend more than $200 million annually on rehabilitating disturbed sites. ⁽³⁶⁾

Complementing existing state and federal environmental legislation, the mining sector enforces its own Australian Minerals Industry Framework for Sustainable Development. ⁽³⁷⁾  Alongside addressing economic and social concerns, the framework obligates signatory companies to seek continual improvement in environmental performance, contribute to biodiversity conservation and integrated land use planning, and encourage responsible product design, use, re-use, recycling and disposal.

2.2 THE CURSE OF RESOURCE ENDOWMENT:  GROWTH IN THE MINING SECTOR ACCELERATES AUSTRALIA'S DE-INDUSTRIALISATION AND FRACTURES THE MACROECONOMY

Some economists and social commentators have claimed that the possession of natural resources by a given country can exert a negative impact on economic growth, instead of a positive contribution as outlined in the conventional economic literature.  This negative effect has been dubbed the "resources curse".

An element of the resources curse is the "Dutch disease" hypothesis, outlined by Australian economist Bob Gregory in 1976, which hypothesises that an expansion of mining will tend to displace manufacturing activity and hence aggravate a process of de-industrialisation within the economy.

An increase in the terms of trade following an increase in the price of an exported commodity has two general effects according to the Dutch disease thesis.

First, a "spending effect" materialises due to the additional income generated by the commodity boom.  This leads to an expansion in demand for both tradeable and non-tradeable goods and services, raising the price of non-tradeables but not of tradeables (as its prices are determined by the global market).  This implies an increase in the real exchange rate, reducing the competitiveness of sectors such as manufacturing.

Second, the Dutch disease entails a "resource movement" effect, in which the commodity boom leads to a shift of labour and capital from manufacturing to the mining sector. ⁽³⁸⁾

Goodman and Worth paint a neo-Marxist perspective on the role of an expanded mining sector in promoting conflict between economic "haves" and "have-nots".  With the resources curse, "the internal contradictions of capitalist development are laid bare.  The class contradiction, a labour-capital antagonism between those who benefit from and those who bear the costs of accumulation, is borne out in sharp social divisions created by resource extraction.  Spatial antagonisms between contending localities, regions, and states, as played out in political tensions and confrontations, reflect underlying capital-to-capital contradictions." ⁽³⁹⁾

There has been a significant growth of interest in recent years on the geographic implications of the resources curse, with commentators and policymakers increasingly referring to a "two-speed economy" trend between the resource intensive states of Queensland and Western Australia, on the one hand, and the remainder of Australia (NSW, Victoria, South Australia and Tasmania) on the other.

A 2006 Discussion Paper by the Victorian Department of Treasury and Finance used a computable general equilibrium model to estimate the short run effects of a commodity price boom on state and territory economies. ⁽⁴⁰⁾

It was estimated that increases in commodity prices would lead to a decline in economic output (of 0.22 per cent) compared to what it otherwise would have been.  Victorian and NSW Gross State Product (GSP) is about 0.5 per cent lower due to, in part, the impact of exchange rate appreciation on manufacturing in these two jurisdictions.

In a recent letter to The Australian newspaper, University of Technology Sydney economics lecturer Gordon Menzies offered support for a "substantial mining tax" on the basis that "a booming sector or state drains workers out of other parts of the economy, and bids up wages" implying that a tax is required to slow down the growing mining sector. ⁽⁴¹⁾

Previously the Australian Marxist economist Ted Wheelwright opined that the growth of mining will inevitably create divisions between resource rich regions and others.  Since the resource intensive states "come to have more in common with foreign capital and markets than with the federation ... economic forces begin to exert pressures which tend to pull the nation apart." ⁽⁴²⁾

2.2.1 Rebuttal:  The spatial reallocation of labour and capital is an indispensable aspect of a well functioning economy

It has long been understood by economic theorists that wealth creation and material prosperity is enhanced when regions and nations specialise in sectors and industries where they have a comparative advantage.

It is no coincidence that mining companies have invested to ensure Australia's position as a major global producer of minerals — such as alumina, bauxite, black coal, copper, diamonds, gold, iron ore, lead, lithium, nickel, silver, uranium and zinc — with the nation reaping the substantial economic benefits from these investments.

As noted recently by the Commonwealth Treasury, "[h]igher mineral resource export prices, combined with reduced prices of imports (especially imports from low cost producing countries in Asia), have translated into an improvement in Australia's terms of trade.  An improved terms of trade provides for an increase in Australia's national income, creating an opportunity for an improvement in the wellbeing of all Australians." ⁽⁴³⁾

It follows that the shift in the terms of trade requires the reallocation of capital, labour and other resources towards mining and associated activities in order to optimise the gains to national income. ⁽⁴⁴⁾

According to analysis by the Productivity Commission for the period 1974-75 to 2006-07, the Australian mining sector has exhibited a consistently high level of labour productivity.  Indeed, mining productivity has exceeded that of manufacturing and that of the market sector of the economy as a whole. ⁽⁴⁵⁾  To continue to capture these economic gains the transfer of workers (and other resources) to mining regions, and into mining sector activities, should not be impeded by regulatory or taxation barriers.

The various critics of mining sector activity implicitly argue that the movement of resources should be from more productive to less productive uses, so as to ensure that Australia avoids the grip of a resources curse.  However this would achieve nothing but impairing market productivity and restraining Australia's long run growth potential.

2.2.2 Rebuttal:  Concerns that mining growth is hurting Australian manufacturing are misplaced

Despite intense protestations to the contrary, there is little evidence that the Australian manufacturing sector has been seriously damaged by the implications of a resurgence in mining.

The contribution of the manufacturing sector to the economy, in absolute terms, has increased substantially over time from $65 billion in 1974-75 to $103 billion in 2008-09 (an increase of 58 per cent over the period) (Figure 2).

Since 1977-78, when disaggregated statistics were collected for the manufacturing sector, the metal products industry has made the largest (net) contribution to growth, accounting for almost a third of the increase in total manufacturing gross value added.

Critically, the value of merchandise exports by the manufacturing sector has also increased significantly in recent years.  In 1999-2000 the value of manufacturing merchandise exports was about $58 billion increasing to over $92 billion by 2008-09 — an increase of 59 per cent over the period. ⁽⁴⁶⁾

An important contributing factor to the increasing international orientation of Australian manufacturing has been the reduction in effective rates of industry assistance over the past three decades.  In 1970-71 the estimated effective rate of assistance to manufacturing was about 35 per cent, falling to about five per cent since 2000. ⁽⁴⁷⁾  The reduction in tariff and other protective barriers not only reduced the cost of capital imports for use by domestic manufacturers, but also encouraged the development of niche products of greater value for sale to export markets.  This has facilitated the emergence of a relatively smaller, but more sophisticated, manufacturing sector more resilient to economic shocks.

Figure 2:  Manufacturing production, $ millions Chain volume measures.

Source:  Australian Bureau of Statistics, Australian System of National Accounts, 2008-09, cat. no. 5204.0.

While the recent appreciation of the Australian dollar will increase the price of exported outputs by manufacturing, and other sectors, this movement in the exchange rate should also reduce the cost of imported inputs and further encourage manufacturers to develop additional value added products that command a price premium in international markets.

It has not been clear that the recent expansion in Australia mining, caused by growth in global demand for minerals and other resources, has led to a one-to-one correspondence in terms of a diminution of manufacturing activity.  Studying the effects of the terms of trade boom prior to the 2008 global financial crisis, McKissack et al found growth in manufacturing profits which was "driven by those parts of manufacturing that are connected to the resources sector, such as petroleum, coal, chemical and associated products and metal products." ⁽⁴⁸⁾  Investment in manufacturing, relative to GDP, increased since 2003-04 while the long run decline in manufacturing employment had moderated.

They concluded by stating "we have not seen so-called 'Dutch disease' effects associated with a higher exchange rate flowing through as strongly as could be expected in the manufacturing industry and other traded parts of the economy." ⁽⁴⁹⁾

2.2.3 Rebuttal:  The benefits of mining are also enjoyed by non-resources states

As noted above, the mining sector has extensive linkages with the remainder of the Australian economy including manufacturing and services.  Many of these related activities are based in non-resource intensive states.

For example, Victoria is the home to many global and Australian mining company head offices, such as BHP Billiton, Rio Tinto, Alumina, OZ Minerals, Newcrest Mining, Oxiana, Western Mining Corporation and others.  Sydney is the location of company headquarters for mining firms such as Xstrata and Centennial Coal. ⁽⁵⁰⁾

It is estimated that these head offices employ thousands of people alone, and purchase professional and business services in the areas of legal, accounting, communications, finance and recruitment on behalf of mining operators in resource rich regions of Australia. ⁽⁵¹⁾

In addition, there are many superannuation funds based in Sydney and Melbourne which invest substantially in mining shares on behalf of their members.  Many individuals, including those resident outside of Queensland and Western Australia, also benefit by virtue of their share ownership in mining companies.

These indirect benefits were affirmed by a 2008 Treasury paper analysing interstate growth trends, which found that "[w]hile recent output growth in the non-mining states has been slower than average, growth in employment and real household disposable incomes has been significantly faster.  This suggests that the benefits of the resources boom have spread well beyond the sectors and regions most closely linked with the mining sector." ⁽⁵²⁾

Similarly, as Richard Blandy explained earlier this year, "everyone across Australia has a stake in the good fortunes of their fellow Australians, wherever they may be located.  A bonanza within one's own state or territory may be popularly regarded as the most desirable outcome to be achieved, but because of mobility of labour, capital and goods within Australia, the economic gains from particular state bonanzas are rapidly dispersed and shared with Australians all across the country." ⁽⁵³⁾

Finally, it must be acknowledged that direct mining activity itself has a presence in most states and territories.  According to ABS statistics, mineral exploration expenditure was undertaken in all jurisdictions (except the ACT) in 2008-09 (Figure 3).

Figure 3:  Mineral exploration expenditure, state and territory share of total, 2008-09

Source:  Australian Bureau of Statistics, Year Book, Australia, 2009-10, cat. no. 1301.0.

Table 4 also suggests that mining sector activities are distributed throughout most of Australia, in terms of employment, wages and sales incomes.  While the distribution of activity is not, and never will be, uniform it is misleading to suggest that most areas of Australia completely miss out from accruing at least some direct benefits attributable to a growth in mining.

Table 4:  Selected economic indicators for mining sector, state and territory, 2008-09

np = not published.

Source:  ABS, Australian Industry, 2008-09, cat. no. 8155.0.

In April 2010 the Australian Bureau of Agricultural and Resource Economics provided a list of major minerals and energy development projects.  At the end of April 2010 there were 75 projects at an advanced state of development in every state and territory except the ACT (Table 5).

Table 5:  Advanced mining projects, April 2010

Source:  Michael Lampard and commodity analysts, 2010, Minerals and energy:  Major development projects — April 2010 listing, ABARE, May.

As economist Richard Blandy noted earlier this year, although the ACT has no mining activity of significance it has recorded the highest level of average household disposable income per head last year.  This is because "Canberra does have first crack at the federal budget." ⁽⁵⁴⁾

The increasing profitability of mining companies, and wages growth for mining workers, in the resource intensive states flow through the Australian Taxation Office through company and personal income tax receipts, respectively, and then spill out across Canberra and the rest of the country via government expenditures. ⁽⁵⁵⁾

The complex interconnections between mining and other sectors of the economy, including those based in non-resource intensive jurisdictions, and the distribution of a considerable amount of mining activity outside of Queensland and Western Australia, it is a gross oversimplification to contend that Australia can be effectively consigned into mining "winners" and "losers".

2.2.4 Rebuttal:  An excessive focus on the "two-speed economy" risks overlooking the sources of economic underperformance of non-resources states

A recent analysis of disparities in economic performance between states and territories, and by industry, reveal that variations are commonplace across a complex market economy where the drivers of economic growth are rarely, if ever, uniform. ⁽⁵⁶⁾

This lack of economic uniformity is, in large part, a product of the millions of transactions undertaken by acting individuals — operating both within and across regions and nations — to produce, exchange and consume resources.

These transactions take place against the background of, and are influenced by, evolving supply and demand conditions and price adjustments that are in turn affected by such variables as incomes, consumer tastes, production costs, technologies, and government policies.

Notwithstanding that recent disparities in economic growth between states and territories are low by historical standards, there is a clear risk that a focus on the "winners" and "losers" from growth of mining activity can cloud assessments of other factors that can influence the degree of interregional disparity in economic performance. ⁽⁵⁷⁾

For example, an inordinate focus on the "two speed economy" — separating Queensland and WA from the rest — has tended to overlook the real problems associated with the disparity in economic performance between New South Wales — Australia's largest state economy — and the rest of Australia. ⁽⁵⁸⁾

In general, the best policy response in response to a commodity boom is not to slow down the pace of mining growth through additional taxation or regulation but to ensure that policy institutions permit adjustments to occur relatively smoothly and at low cost. ⁽⁵⁹⁾  The implementation of widespread economic reforms that boost productivity should also ease the extent to which competition for labour and capital between firms, industries and sectors place upward pressure on inflation, and hence interest rates.

State governments, including those in non-resource intensive areas, can do much to improve the international competitiveness of their regions — through the implementation of low taxes, low levels of government expenditure, efficient regulation, and competitive infrastructure provision.

The Commonwealth Government, for its part, should maintain, and where necessary enhance, a policy regime of flexible capital, financial, labour and product markets, floating exchange rates, low tariffs and other import protections, monetary stability, and fiscal sustainability underpinned by low taxation and low government spending.

2.3 GROWTH IN MINING BENEFITS FOREIGNERS AT THE EXPENSE OF AUSTRALIANS

The maintenance and growth of the Australian mining sector is reliant upon a number of factors such as the inflow of foreign capital to finance mining operations.

According to the ABS, the level of foreign direct investment (FDI) in the mining sector as at 31 December 2008 was $99.7 billion (Figure 4).  This was the largest amount of FDI for all sectors of the economy, accounting for 25 per cent of the total FDI of $392.9 billion.

By contrast, in 2001 the level of FDI in mining was $36.8 billion accounting for only 17 per cent of total FDI in Australia.

Figure 4:  Level of foreign direct investment in Australia by industry division, $ millions

As at 31 December of each year.

Source:  Australian Bureau of Statistics, International Investment Position, Australia:  Supplementary Statistics, 2008, cat. no. 5352.0.

Information on the extent of foreign ownership of businesses operating in Australia shows that about 13 per cent of businesses in the mining sector have a level of foreign ownership greater than 50 per cent, followed by information media and telecommunications (eight per cent), wholesale trade (seven per cent), manufacturing (three per cent) and rental, hiring and real estate services (two per cent). ⁽⁶⁰⁾

While these developments have been welcomed by many, there exists a number of groups who have expressed intense opposition to foreign investment in the mining sector.

Arguably one of the most vociferous critics against this development was Ted Wheelwright.  His central proposition was that the infiltration of foreign capital into the mining sector would create a new form of exploitative colonialism or "client state whose main function is to shape the future development of the economy in such a way that the profits of foreign corporations have first priority, and the needs of the Australian people the last priority." ⁽⁶¹⁾

According to Wheelwright, an implication of this is that "transnational investment decisions, based on their short-term profitability criteria, could leave Australia as a large hole in the ground by the end of the century, with a large population to support, accustomed to a high standard of living, but with few renewable resources and even fewer skills and industrial equipment than exist now." ⁽⁶²⁾

The role of foreign investment in promoting "excessive mineralisation", according to Wheelwright, will also create a situation whereby the "economy is assimilated further into the bowels of world capitalism, the country may well begin to look less like a developed country, with its economy as an integrated whole, a dense network of internal exchanges, and a broadly diversified industrial structure.  It is probable that within a decade or so, Australia will look more like an underdeveloped country." ⁽⁶³⁾

Sentiments against foreign ownership and control in the Australian mining sector have also been episodically raised by politicians over the past few decades.  In 1964, Liberal federal backbencher William Wentworth raised concerns about foreign investment concerning a bauxite mine at Gove in the Northern Territory:  "We have been inclined to give away our national resources a little too cheaply." ⁽⁶⁴⁾

Former Country Party Prime Minister John "Black Jack" McEwen also stated during the 1960s that the "independence of our people was at the mercy of people in other countries to the extent to which foreign capital controlled our industries, mines, farms, and fields." ⁽⁶⁵⁾

Such concerns at the time were widely shared by Labor politicians, which later materialised into a set of restrictive policies affecting mining sector investment by the Whitlam Labor government from 1972 to 1975.

Whitlam appointed Rex Connor as his Minister for Minerals and Energy, who elucidated the government's position on external involvement in Australian mining as follows:

"There shall be at least a majority Australian control over both equity and policy in resources development, and that we will devise and implement an integrated and coordinated national fuel and energy policy.  In particular we will regulate exploration, development, transportation, marketing, and use of oil, natural gas, and all related hydrocarbons." ⁽⁶⁶⁾

Initially the Whitlam government sought to implement these objectives, and stymie foreign investment in mining, through the following policy initiatives:

• full Australian ownership in new minerals and energy projects
• extensive public sector participation through a Petroleum and Minerals Authority with the power to explore, produce, transport and market minerals in competition with the private sector (later ruled by the High Court as being unconstitutional)
• energy self-sufficiency through a centrally planned and directed national pipeline grid. ⁽⁶⁷⁾

It also enacted the Foreign Acquisitions and Takeovers Act 1975 to impose regulatory restrictions on foreign ownership in the mining sector, including uranium mining.

While the more extreme elements of the Whitlam agenda were not pursued by subsequent governments, the anti-foreign investment policies proposed or implemented from 1972 to 1975 has served as something of a clarion call for economic nationalists seeking to reduce the contribution of foreign capital in mining and other sectors.

More recently a debate has emerged about the merits of greater investment by state owned enterprises (SOEs) and sovereign wealth funds (SWFs), including from China, in the Australian mining sector.

The Australian Workers' Union couched its call for stricter government controls over capital inflows from these investment vehicles on the basis that "[f]or too long, Australia has tendered [sic] to undervalue the true economic value of its resource endowment which has assisted the industrialization of trading partners ... We should not panic and be forced into accepting any offer for core and strategic businesses — and particularly not in the resources sector." ⁽⁶⁸⁾

The Nationals Senate leader Barnaby Joyce instigated a "Keep Australia Australian" campaign in 2009 to prevent Chinese SOE Chinalco from purchasing a greater stake in Rio Tinto, stating that minerals are "our sovereign asset, and this is the government of another country buying into our asset, buying into the nexus between the Australian people and the wealth that's created by our minerals." ⁽⁶⁹⁾

In February 2008 Treasurer Wayne Swan amended the Commonwealth Government's foreign investment guidelines by outlining six additional criteria to apply to investments by SOEs and SWFs.  This has had the effect of "providing more, not less, uncertainty to investors by introducing prejudgement into a non discriminatory FDI policy." ⁽⁷⁰⁾

2.3.1 Rebuttal:  Without foreign capital a large scale Australian mining sector, and its many benefits, cannot be sustained

Australia has had a long history of using foreign investment to access greater funds than that available from domestic savings.  As the former Commonwealth Treasury Secretary, Ted Evans, stated over a decade ago, "[i]t is a fact that, for all of its modern history, Australia has borrowed from abroad — our prosperity has been built on foreign investment." ⁽⁷¹⁾

The injection of foreign sourced funds has enabled the Australian mining sector to grow to a size beyond that implied by the extent of the small domestic market alone.  This in turn allows Australia to sell its mineral and fuel commodity treasures around the globe, generating economic prosperity in both Australia and those countries purchasing our mining exports.

Makin has estimated that over the decade to 2006 additional real national income stemming from total foreign investment in Australia has been approximately $25 billion, equivalent to an extra $2,500 per worker each year over the period. ⁽⁷²⁾

Mining has played a significant role toward the achievement of the substantial macroeconomic gains attributable to foreign investment.  Foreign owned businesses operating in the Australian mining sector contributed over $15 billion in value added to the national economy. ⁽⁷³⁾

From a historical perspective, Drysdale observes that "[f]oreign direct investment has accounted for more than one third of capital formation in all Australian industry since the turn of the ... [twentieth] ... century;  in mining and resources it has accounted for almost half, and in some years a much higher proportion, of total capital formation in the sector." ⁽⁷⁴⁾

Foreign direct investment in 2006 was equal to over 80 per cent of new mining capital expenditure, underpinning the continuing growth of the sector. ⁽⁷⁵⁾

A benefit associated with growth of foreign investment in Australian mining that is not directly captured in official statistics has been the propagation of technical, managerial and commercial knowledge and skills otherwise scarce or unavailable in the Australian economy.  This in turn has augmented Australia's innovative and entrepreneurial capacities.

As described by R.B. McKern, in his study of foreign investment in the minerals industries in the 1960s, "there were very few Australian firms in existence at the beginning of the decade of the 1960s which could have served as vehicles for investment in the large mining projects which came to fruition during that period.  The list of Australian owned companies with the necessary financial, technical, entrepreneurial and marketing resources at that time is probably restricted to no more than three."

Since that period, the inflow of foreign capital has made a significant difference to levels of skills and expertise accessible to the domestic mining sector.  Recently economist Peter Drysdale attested that Australia's position as "perhaps the most efficient mining sector in the world" is attributable, at least in part, to the know-how and access to markets associated with foreign investment. ⁽⁷⁶⁾

Of course, there are other economic benefits associated with foreign investment in the mining sector.  These include job creation, particularly in regional and rural areas, and the attainment of disposable incomes by mining workers used to underpin living standards for them, their families and communities, and the flow of substantial tax revenues to government. ⁽⁷⁷⁾

Contrary to the view expressed by Wheelwright and others that foreign investment represents a diminution of Australian wealth, it is estimated that for every dollar of mining income generated in Australia 95 cents remains in Australia with only five cents repatriated overseas. ⁽⁷⁸⁾

2.3.2 Rebuttal:  Concerns over the loss of national sovereignty are overstated, as foreign investors must accede to Australian laws

All foreign investments, regardless of source, are subject to federal, state and local government laws.  This should be sufficient to ensure that a foreign SOE or SWF investor will not create monopolistic industry conditions, evade taxes or abrogate corporate or other legal standards in Australia. ⁽⁷⁹⁾

With respect to the Australian mining sector, a recent paper by ITS Global states unequivocally that:

"Australia retains ultimate control of Australian resources.  Full control is never handed over.  Businesses are given rights to exploit resources on the condition they pay taxes, support the local community, protect the environment and abide by national laws.  Sometimes the right to use the resources is limited in time.

Governments can take those rights back if they think it necessary, though they should be careful how they do it.  They might deter future foreign investors." ⁽⁸⁰⁾

One aspect of concern about national sovereignty relates to the capacity of multinational corporations operating in Australia to perform transfer pricing.  This is a situation whereby firms may under-price exported minerals to reduce their Australian tax liability, thereby earning higher profits in downstream activities in another country that imposes lower tax rates than Australia.

In response to this, economist Peter Hartley suggested that "[e]ven if transfer pricing occurs it is not clear that restrictions on foreign ownership are an effective method of handling this problem.  Rather, it would seem the problem can only be solved by changes in the (implementation of) taxation laws and income reporting requirements.  Australian owned firms would appear to be just as capable of setting up foreign subsidiaries in low tax areas as are foreign firms. ... it would seem that requiring Australian ownership would do little to control transfer pricing." ⁽⁸¹⁾

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3.0 CONCLUSION

The viability of mining, just like any private economic activity in Australia, is heavily contingent upon its ability to attain sufficient financial and economic returns.

The process of exploration for new mineral deposits is a time consuming and costly venture, requiring the application of time, resources and entrepreneurial ingenuity.  Depending on the location of exploration, this process can often be inherently risky and uncertain for those involved.  Yet, without such painstaking activities, the value of resources laying remnant underground remain worthless.

If an economically valuable deposit is discovered, there is then the question as to whether extraction of the resource should proceed.

Again, the mining company to be responsible for extraction needs to attract specialised capital (given the nature of the ore body to be mined), draw in skilled labour often from other regions, and may have to develop its own infrastructure to transport the minerals to destination markets.  These processes entail their own costs, which are often sunk by their nature, and risks.

The factors that can influence the decision to mine include the expected economically demonstrated amount of ore available, actual and expected commodity price conditions, the availability of factors of production, infrastructure adequacy and the quality and durability of supply chain relationships.

However, there exist yet even more factors that can influence the viability of mining in Australia.  Nearly thirty years ago the esteemed Australian historian Geoffrey Blainey warned of the potential damaging consequences of anti-mining sentiments for the future vitality of the mining sector.

Negative portrayals of the mining sector that preoccupy the popular media and political discussion — driven either by a lack of understanding of the fundamental economics of mining, or the product of an emerging "cringe" rhetoric concerning mining's effects — have the clear potential to lead to poor public policy outcomes.

It can be reasonably argued that the proposed federal mining tax, which will dramatically increase the effective rate of taxation on mining in Australia to amongst the highest in the world, is a clear case in point.  This is because its rationale has been based on a mix of misplaced arguments about averting Australia from "quarry" status, helping to spread mining wealth to laggard industries and states, and to get a fairer return from multinationals digging into our sovereign grounds.

As the information presented above suggests, all aspects of these biases against mining can be satisfactorily addressed.  In so doing, it is possible to appreciate the significant "up side" to mining activities in Australia:

• the direct and indirect contributions of mining sector participants to aggregate wealth and prosperity, while maintaining first class stewardship over the environment
• the capacity of Australians — regardless of location — to share in the economic benefits of mining undertaken in specific locations of the country
• the beneficial role of foreign investors in building our economic capacity.

If future generations of Australians are to enjoy the economic bounty offered by our resources, and policy settings are to avoid damaging the value proposition that are mining exploration and extraction activities, it is essential that such an appreciation of the strong benefits that mining delivers to Australia be heeded.

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4.0 APPENDIX

PROTECTING QUEENSLAND'S STRATEGIC CROPPING LAND:  A CRITICAL ASSESSMENT

4.1 THE PROPOSAL

The Queensland Government has indicated that it wishes to reserve from mining activity four per cent of the state's prime cropping land.

Establishing a value of this cropping land is difficult.

Based on properties for sale in the areas identified by the policy framework identifies, land values (excluding those mixed farming properties with a substantial residence and those affected by their development potential stemming from their location near major urban areas) range between $1000 per hectare (Tallwood) and $1700 (Hanneford).  One sugar property near Mackay was listed at $8,000 per hectare.

On the evidence available it is unlikely that the average value of the farmland with its improvements in levelling, dams and bores and fencing is greater than $3,000 per hectare.  At present only 2.2 per cent of Queensland land is used for cropping — presumably the most valuable land available for that purpose — and it is proposed that this and additional land to a total of four per cent of all state land, will be sterilised from alternative uses.

If the land reserved from alternative uses is four per cent of the state (7.4 million hectares) and it is worth $3,000 per hectare, then its value is $22 billion.  If $22 billion were to be lost to agriculture this would be a major cost to the state.  However:

• According to the Department of Environment and Resource Management, only 0.08 per cent of Queensland's land area has been disturbed by mining over the past century or so.  It would take a tenfold increase in mining activity over the next century for this to reach one per cent of the land area;  such a level of activity is most unlikely.
• Rarely will a mining activity render the associated agricultural land unproductive.  Even strip mining after remediation, can leave the land little changed in terms of fertility and productivity once mining is completed.  While restoration activity has not been undertaken on a major scale in Australia because there are few places where a mining resource has been depleted, dozens of examples have been assembled in the US. ⁽⁸²⁾
• It is argued that large scale coal seam gas (CSG) processing brings additional "externality" costs and is likely to have deleterious effects on the Great Artesian Basin (GAB) as well as causing subsidence as a result of it depleting the water table. ⁽⁸³⁾  It is necessary to address such issues but also to recognise that many such adverse spillovers are found to be relatively minor or easily controlled.  Issues are:
  1. The estimated amount of water extrated for coal seam methane is 350,000 ML per annum.  This is not large.  Irrigators' annual extractions from the Murray Darling are 11,000,000 ML.  Moreover the GAB is replenished by flows from the eastern range, and if the flows are determined by the Basin's replenishing capacity the evaporative loss of the water used in mining would simply mean water that no longer flows to the sea.
  2. The water extracted becomes saline after it has been used in the CSG processing and salt might need to be removed prior to reinjection if its presence is likely to become significantly contaminated.
  3. These issues are of less concern in the case of open cut strip mining of coal by open cut.  Issues in regard to that activity may well include inconvenience of trucks on local roads.  However perhaps offsetting this are benefits from upgraded roads and the appearance of other services to meet the demands of the mining activity and its workforce.

4.2 COSTS AND BENEFITS LIKELY TO EMERGE

Even if all of the land which might face disturbance over the next hundred years were to be rendered worthless to agriculture because it had been mined there would still be a net gain to the state since the procedures which permit mining projects to go ahead require that full compensation be paid.

• The resource value for mining (sometimes called the rental value) is usually many times that of farming where a mineral deposit is uncovered.  Such a magnitude of higher rental value is unlikely in much of the area which is being considered for mineral exclusion since the coal deposits are relatively well known and require considerable capital investment to extract.
• There is evidence that the mining companies (in particular Xstrata) are buying farming properties in the Darling Downs area that they are seeking to mine, at a value said to be twice that of the market value. ⁽⁸⁴⁾
• The value of minerals and energy production for Queensland in 1998-99 was $7.4 billion and in 2008-09 was $49.4 billion dollars. ⁽⁸⁵⁾  Adjusted for inflation, that is approximately a fourfold increase in minerals and energy production in 10 years.  We can reasonably expect the mineral and energy production will increase in the next 10 years or so by a similar amount.  Accordingly, the prospective removal of four per cent of Queensland's land from mining activities can be estimated at an annual loss of some $1.6 billion.  There are many reasons to suggest this might be a conservative estimate.  Among these is that the proposed restriction includes land that is highly prospective as for significant Coal Seam Gas reserves.  In addition, as the land in question is largely located relatively close to major urban centres, the value of its deposits is likely to be higher than average because of the availability of infrastructure.

Removing a resource from uses the market considers most valuable is a serious step to take.  Governments have a role of seeking to maximise the nation's income subject to the availability of capital and labour and consistent with defending underlying capacities.  Farm produce is valuable as are mining outputs.  In both cases export markets are likely to be the major target.  And both activities are likely to bring spin-offs in terms of employment and service provision.

In some cases the excision of the land from mining uses will amount to a retrospective action, as exploration — and even land purchases — has already taken place.

A key reason why there are political pressures to introduce a mining ban is that mineral rights are not part of land rights in Australia.  This position is similar to many other jurisdictions with the common law framework, though not the eastern part of the USA where the land was vested alongside its mineral rights before the current ownership rules evolved.

Elsewhere, exploration rights are granted to the first comer (with requirements for these to be either converted into a production lease or surrendered back to the crown).  Production leases incorporating a reasonably certain royalty rate are readily expected to be granted on demand (otherwise the risks to exploration would escalate and far less searching activity would take place).

It is barely conceivable that Australian rights to land use and minerals will ever be conjoined.  Experience has shown that where the rights are jointly vested, there is sub-optimal energy allocated to searching for minerals.  This is because the finder, instead of getting to keep the greater part of the deposit's worth, would be hostage to the land owner who would, in any event, not normally be willing to grant access for exploration except for a fee or guaranteed share of the benefits.  Such a fee or share would simply result from passive action and would therefore dilute the value that accrues to the successful explorer and seriously diminish the incentive to undertake that activity.

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ENDNOTES

1. Minerals Council of Australia, 2010, Minerals resources, tax, and the prosperity of all Australians, Policy Brief, June.

2. Commonwealth of Australia, 2010, Pre-Election Economic and Fiscal Outlook 2010, Departments of the Treasury and Finance and Deregulation, Canberra.

3. John Breusch, Mathew Dunckley and Peter Kerr, 2010, "Miners warn on Brown's tax plans", The Australian Financial Review, 22 July.

4. Louise Dodson, 2010, "Pressure to rework the resources tax", The Australian Financial Review, 26 August.

5. International Monetary Fund, 2010, Australia - 2010 Article IV Consultation Concluding Statement (accessed 1 October 2010).

6. Tim Colebatch, 2010, "Digging a hole for ourselves", The Age, 2 March.

7. Michael Gilding, 2010, "More tax dollars and less mining? That's a win-win situation", The Age, 3 August.

8. John Legge, 2010, "Without support for industry, we're no more than a quarry", The Age, 13 August.

9. Guy Pearse, 2009, "Quarry vision: Coal, climate change and the end of the resources boom", Quarterly Essay 33, p. 1.

10. Senator Scott Ludlam, 2008, Carbon friendly investment, not quarry economy handouts, Media release, 3 October.

11. Anna Greco, 2008, "Nation to feel bumps of car industry's rocky road", The Age, 8 September.

12. Donald Horne, 1964, The Lucky Country, Penguin, Melbourne.

13. Queensland Parliamentary Debates, 1877, quoted by Doran, 1984, "An Historical Perspective on Mining and Economic Change", in L H Cook and M G Porter, eds., The Minerals Sector and the Australian Economy, Allen & Unwin, Sydney p. 42.

14. Dick Smith, 2010, "What's the big idea? The answer is not more growth", The Australian, 10 August.

15. Friends of the Earth Australia, 2006, "What is a definition of a gold mine? A hole in the ground owned by a liar". Mark Twain, Press release, 17 April (accessed 5 August 2010).

16. Reba Gostand, 1983, "The 'Mining Theme' in Australian Literature", in W.H. Richmond and P.C. Sharma, eds., Mining and Australia, University of Queensland Press, St. Lucia.

17. Stephen Kirchner, 2010, "The mining tax highlights the terms of trade boom", The Australian, 15 July.

18. John O'Connor and David Orsmond, 2007, "The Recent Rise in Commodity Prices: A Long-Run Perspective", Reserve Bank of Australia Bulletin (April): 1-9.

19. John O'Connor and David Orsmond, Ibid, p. 5.

20. Angelia Grant, John Hawkins and Lachlan Shaw, 2005, "Mining and commodities exports", Economic Roundup (Spring): 1-15. There was a significant increase in relative coal prices during the 1970s energy crisis, however prices subsequently fell back to long term trend levels. Prices have risen again in recent years due to an uplift in global commodity demand.

21. Vernon Topp, Leo Soames, Dean Parham and Harry Bloch, 2008, Productivity in the Mining Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper, p. 68.

22. Australian Bureau of Statistics (ABS), Labour Force, Detailed, Quarterly, May 2010, cat. no. 6291.0.55.003.

23. Department of Education, Employment and Workplace Relations, 2010, Employment Outlook for Mining, DEEWR, Canberra.

24. DEEWR, Ibid.

25. Judith Sloan, 2010, The super profits tax: a not so super idea, Catallaxy Files blog (accessed 22 August 2010).

26. ABS, Australian National Accounts: Input-Output Tables, 2005-06, cat. no. 5209.0.55.001.

27. ABS, Research and Experimental Development, Businesses, 2007-08, cat. no. 8104.0.

28. Department of Industry, Tourism and Resources, 2003, Mining Technology Services: Australia Leading The World, Mining Technology Services Action Agenda, Strategic Leaders Group Report to Government, Commonwealth of Australia, Canberra; Department of Resources, Energy and Tourism, Minerals and Petroleum Exploration and Development Guide for Investors (accessed 24 August 2010).

29. Geoffrey Blainey, 1968, "The Cargo Cult in Mineral Policy", The Economic Record 44: 470-479, p. 473.

30. Jerry Jordan, The Growing Abundance of Natural Resources (accessed 24 August 2010).

31. Stephen Kirchner, 2010, op cit.

32. H J Barnett and C Morse, quoted by Commonwealth Department of the Treasury, 1973, Economic Growth: Is It Worth Having?, Treasury Economic Paper No. 2, AGPS, Canberra.

33. For an example as to how government policy - in this case, a moratorium on the mining of uranium in Australia - affects the economic incentives for mining exploration and development, see Geoffrey Blainey, 1969, "Mining - And Undermining", The Economic Record 45: 607-615.

34. ABS, 2003, "Mining and the environment", Year Book Australia, 2003, cat. no. 1301.0.

35. ABS, 2003, Ibid.

36. Minerals Council of Australia, 2010, "The Australian Minerals Industry and the Australian Economy" (accessed 24 August 2010).

37. Minerals Council of Australia, Enduring Value: The Australian Minerals Industry Framework for Sustainable Development (accessed 24 August 2010).

38. R.G. Gregory, 1976, "Some Implications of the Growth of the Mineral Sector", The Australian Journal of Agricultural Economics 20 (2): 71-91; W. Max Corden and J. Peter Neary, 1982, "Booming Sector and De-Industrialisation in a Small Open Economy", The Economic Journal 92 (368): 825-848.

39. James Goodman and David Worth, 2008, "The Minerals Boom and Australia's 'Resource Curse'," Australian Journal of Political Economy 40: 27-43, p. 27-28.

40. Victorian Department of Treasury and Finance, 2006, A tale of two economies: the regional impact of Australia's resources boom, Discussion Paper, May.

41. Gordon Menzies, 2010, Letter to The Australian newspaper, 24 August.

42. Greg Crough and Ted Wheelwright, 1982, Australia: A Client State, Penguin Books, Ringwood, p. 126.

43. Commonwealth of Australia, 2010, Budget Strategy and Outlook 2010-11, Budget Paper No. 1, Commonwealth Treasury, Canberra, p. 4-4

44. Judith Sloan, 2010, op cit.

45. Vernon Topp, Leo Soames, Dean Parham and Harry Bloch, 2008, op cit, p. 20.

46. Australian Bureau of Statistics, 2010, Year Book Australia, 2009-10, cat. no. 1301.0.

47. According to the Productivity Commission, "[m]ajor influences on this decline have been the 25 per cent across-the-board tariff cut of 1973, the abolition of (subsequent) tariff quotas and the broad programs of tariff reductions that commenced in the late 1980s. Recent declines have been associated mainly with reductions in tariff assistance to the TCF [textile, clothing and footwear] and passenger motor vehicle industries" (p. 22). Productivity Commission, 2010, Trade and Assistance Review 2008-09, Annual Report Series, Canberra.

48. Adam McKissack, Jennifer Chang, Robert Ewing and Jyoti Rahman, 2008, Structural Effects of a Sustained Rise in the Terms of Trade, Commonwealth Department of the Treasury Working Paper No. 2008-01, p. 10.

49. McKissack et al, Ibid, p. ii.

50. John Wilkinson, 2010, Sydney and Melbourne: An Economic Overview, NSW Parliamentary Library, Briefing Paper (accessed 26 August 2010).

51. Wayne Kayler-Thomson, 2010, "Rudd's mining tax grab will hit hard in Victoria", Sydney Morning Herald, 28 May.

52. Phil Garton, 2008, "The resources boom and the two-speed economy", Economic Roundup 17-30.

53. Richard Blandy, 2010, "Minerals boom benefits us all", The Australian, 21 April.

54. Richard Blandy, Ibid.

55. The above-average capacity of the resources states to attain mining royalty revenue implies that they receive a relatively lower share of the total GST revenue distributed across the states and territories, in accordance with Commonwealth Grants Commission revenue assessments.

56. Deloitte Australia, 2010, Clouds in the silver lining? The two speed economy and Dutch disease, Paper for Minerals Council of Australia, May.

57. Ibid, p. 5.

58. Robert Gottliebsen, 2008, "Australia's two-speed economy is a myth — it's just NSW dragging us down", The Business Spectator, 18 June.

59. Kym Anderson, 1997, Are Resource-Abundant Economies Disadvantaged?, University of Adelaide, Centre for International Economic Studies Seminar Paper No. 97-03; Deloitte Australia, 2010, op cit, p. 7; Amela Karabegović, 2009, Institutions, Economic Growth and the "Curse" of Natural Resources, Fraser Institute, July.

60. ABS, Selected Characteristics of Australian Business, 2007-08, cat. no. 8167.0.

61. E L Wheelwright, 1984, "The Political Economy of Foreign Domination", in P J Lloyd, ed., Mineral Economics in Australia, George Allen & Unwin, Sydney, p. 222.

62. Ibid, p. 212.

63. Crough and Wheelwright, op cit, p. 128-129.

64. Quoted in Max Griffiths, 1998, Of Mines & Men: Australia's 20th Century Mining Miracle 1945-1985, Kangaroo Press, East Roseville, p. 101.

65. Ibid, p. 102.

66. Ibid, p. 104.

67. Brian Galligan, 1987, The Regulation of Direct Foreign Investment in the Australian Mining Sector, Australian Journal of Political Science 22 (1): 35-46, p. 38; Max Griffiths, op cit.

68. Australian Workers' Union, 2009, Submission to Senate Inquiry into Foreign Investment in Australia by State-Owned Companies (accessed 26 August 2010).

69. Senator Barnaby Joyce, 2009, Keep Australia Australian (accessed 28 August 2010).

70. Richard J. Wood, 2008, Australia as a destination for foreign capital, Occasional Paper (accessed 28 August 2010).

71. Ted Evans, 1999, Economic Nationalism and Performance: Australia from the 1960s to the 1990s, Ninth Annual Colin Clark Memorial Lecture (accessed 28 August 2010).

72. Richard J. Wood, 2008, Capital xenophobia and the national interest, Occasional Paper (Accessed 28 August 2010).

73. ABS, Economic Activity of Foreign Owned Businesses in Australia, 2000-01, cat. no. 5494.0.

74. Peter Drysdale and Christopher Findlay, 2008, Chinese Foreign Direct Investment in Australia: Policy Issues for the Resources Sector, Presentation to Australian National University Crawford Public School Seminar, September, p. 5.

75. Doug Ritchie, 2009, Foreign Investment and the Mining Industry, Keynote presentation to Committee for the Economic Development of Australia, May.

76. Peter Drysdale, 2010, China as a new foreign investor in Australia's resource sector (accessed 29 August 2010).

77. In the ten years to 2008-09 the mineral resources industry combined corporation income tax and royalty payments totalled some $80 billion, a fourfold increase over the time period. Minerals Council of Australia, 2010, op cit.

78. Doug Ritchie, 2009, op cit.

79. Julie Novak, 2008, op cit.

80. ITS Global, 2009, Foreign investment in Australia — China and common sense, May, p. 23.

81. P.R. Hartley, 1984, "Foreign Ownership and the Australian Mining Industry", in L.H. Cook and M.G. Porter, eds., The Minerals Sector and the Australian Economy, Allen & Unwin, Sydney, p. 171.

82. Mineral Information Institute, Land Reclamation success stories — Coal, (accessed 20/10/10)

83. See for example, Ian Hayllor, Coal seam gas extraction and the environment, Address to the Australian Environment Foundation, October 2010

84. Pers. Com. Ron Bahnisch, Property Rights Australia

85. ABS, 2001, "Chapter 12- Mining", Queensland Year Book, cat no. 1301.3, p 245; Queensland Government, 2010, Queensland Annual Mineral Summary: Quantity and Value of Minerals and Petroleum produced in 2008-09, accessed (20/10/20)

It's an IKEA world

It's a tiny squeak in the roar of global capitalism, but IKEA has altered its ubiquitous Billy bookcase ever so slightly.

The fasteners which fix the top, middle, and bottom shelves in place are now plastic, not metal.

And the studs on which the adjustable shelves rest are no longer simple cylinders but hollow little cups with a lip which rests against the side of the bookcase.  The new studs are vastly more complex pieces of industrial design;  thinned at the end, but ridged to ''grip'' the walls of the holes they are stuck in.

The old studs weighed three grams a piece.  The new studs weigh just one gram.

The changes to studs and fasteners are nearly imperceptible.  But there are sixteen studs per bookcase.  The bookcases are shipped all over the world -- flat-packed into cardboard boxes, stuffed into the omnipresent containers of global capitalism, and sent to one of IKEA's 267 stores.

If you multiply the weight saving over the 3.1 million Billy bookcases produced every year ... well, you can bet IKEA's management knows exactly how tiny changes add up.

The retail price of the Billy has declined over the last 30 years in every country it is sold.  A few years ago, the basic Billy sold in Australia for $99.  In the 2011 catalogue, it was listed as $79.

No company epitomises global capitalism more than IKEA.

After all, at first glance, it's an unusual space for an innovative company to occupy.  Furniture is hardly cutting edge, retailing furniture made largely of wood even less so.  There's no fashionable Moore's Law (the theory the processing power of computers doubles every two years) for cheap couches and brightly painted wood side tables.  IKEA is far from the realm of biotechnology or the information technology.

Yet few companies play the capitalism game harder.

For example:  IKEA pays next-to-no tax.  It isn't even a Swedish company:  the umbrella body for most of the stores is registered in the Netherlands, and it's registered as a charitable foundation.  The company fled Sweden in the 1970s because of the Scandinavian country's inheritance tax (now abolished) and its high income tax (definitely not abolished).

Observing IKEA's low tax burden is not to criticise it.  Any company is within its right to minimise its tax profile while observing the law.  Just as individuals hoard receipts for their personal tax deductions, companies are entitled to do the same.

But it is to point out that IKEA's success at avoiding its tax liability is in our interest -- we reap the benefits of an aggressively capitalistic company pushing hard against its competition.

The furniture isn't always good quality.  (Is it ever good quality?  I don't imagine there will be many IKEA heirlooms.)  But it's damn cheap.

And the company offers aesthetics and design affordably to those who can't afford an Eames lounge chair or a Regency writing desk.  In previous generations, the young and the poor scrounged for furniture at op shops and garage sales.  In the 21st century the young and the poor buy Grevback, Husa and Rykene.  It's often cheaper, and they get to pick the colour.

That should be reason enough to celebrate capitalism and the dynamics of the marketplace.

But by and large we don't.  We dismiss or ignore the micro-innovations we see around us -- the ever so slight increases in our standard of living.

Think of the tiny changes to products at supermarkets which may be little, but are genuine help.

You can buy grated parmesan cheese in single serve packets.  Honey now comes in squeezable, plastic containers, which is pretty convenient, but also designed to be upside down, to harness gravity, and with suction lids, to keep the container clean.

These sorts of innovations may seem trivial.  They aren't.  Some of them -- like the changes to the Billy bookcase -- keep prices down and profits high.  Others reduce waste.  Others just ease petty frustration.

Critics of the market economy claim we're getting unhappier, fatter, less virtuous, dirtier, and more iniquitous.

I think for the most part the data suggests the critics are wrong.  But put aside those debates for a moment.  And celebrate the joy of capitalism:  the trickle of innovation, invention, efficiency and entrepreneurship which steadily, gradually, but inexorably increases our living standards.

That means celebrating better hairdryers, cheaper linen, sturdier toothbrushes, more cup-holders in cars, flexible silicon bake ware, safer razors, a wider variety of cheaper clothes, and stronger dishwashing gloves with longer sleeves.  (Matt Preston might also point out paper towels are more robust these days.)

None of these products are exposed to the argument they're just indicators of conspicuous consumption:  nobody ever impressed with a Billy bookcase or toothbrush.

They're just the things we quietly enjoy.  And they're result of millions of people competing in a global economy to make our lives just a fraction better.

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Putting a price on climate change policy

The Government has initiated a new saga in addressing greenhouse gases policy options.  It has set up a parliamentary committee with membership restricted to ''those who are committed to tackling climate change and who acknowledge that effectively reducing carbon pollution by 2020 will require a carbon price''.

The committee's focus is on the economics of a carbon price, but its tasks do not include examining the economics involved in the costs and benefits of policy actions.  This avoids the two key questions;  ''What is the benefit from preventing global warming said to be stemming from greenhouse gas emissions;  and, what cost does Australia and the world at large need to pay in order to abate the emissions?''

There have been about a dozen ''peer reviewed'' studies into the global costs of human induced global warming on the basis of a 3 degrees Celsius increase in world temperature.  The range of these studies estimated the average cost per head in 50 years time is between a gain of 2.5 per cent of gross world output and a loss of a similar magnitude.

Unlike other studies, the UK Stern Review provided a very high cost estimate, 12.5 per cent, but that report was not subjected to independent review and has been comprehensively discredited.

An avoidable cost of 2.5 per cent is not insignificant.  But this is projected to occur in the context of a forecast 200 per cent business-as-usual increase in world real income per capita levels over that same period (a 70 per cent increase for Australia).

A key question is whether the business-as-usual outcomes are unaffected by the attempted transformation of energy sectors to prevent the emissions of carbon dioxide and other greenhouse gases.

This is pertinent to Australia which would need to eliminate over four fifths of current emissions.  It is equally important to developing countries which would need to find and adopt different sorts of energy sources from those which have underpinned growth of rich countries.  The failure of the Copenhagen Conference on greenhouse emissions was due to China and India having no confidence that the necessary cost breakthroughs were imminent.

Critical in estimating the costs is the CO2 price necessary to drive the changes.  This in turn largely depends on the ease with which carbon emitting energy can be substituted for other forms of energy.

Some estimates suggest a carbon price at hundreds of dollars per tonne would be necessary to drive the targeted changes.  Treasury suggests a price in present day dollars of $100 to $150 might do the trick.  For Australia each $100 per tonne on the carbon price raises the wholesale electricity price threefold.

Though Australia would need to abandon its existing low cost energy (and policy denies it the nuclear option) Treasury puts the costs of achieving our target at only 3-6 per cent of GDP over the course of 40 years.  But these projections are pure guesses.  They are derived from bold technological assumptions coupled with the experience of consumers' responses to minor price changes that have taken place in the past.  And, of course, they are based on all nations adopting similar carbon abatement regimes -- even Treasury recognises that income leakage from Australia would be serious should we go it alone.

The world's only experience of the sort of substantial price changes thought to be needed has been the quadrupling of oil prices during the 1970s.  However, that event brought substitutions of oil by coal, natural gas and nuclear as well as increased oil discoveries.  Climate change policy would prevent similar developments.

Some say energy is easily managed since it accounts for only 5 per cent of GDP and half of this consists of distribution costs.  But much the same can be said of food, which in rich countries comprises only some 12 per cent of GDP, most of which is distribution and value-added features.

With both food and energy, forcing a major reduction in usage would bring the economy to the point of collapse.  Indeed, low cost dependable energy is so critical to modern economies that, at least without substituting nuclear energy for fossil fuels, a dramatic loss of living standards may be inevitable at any carbon price.

These considerations barely merit a mention in the renewed debate on emission controls.  Instead the agenda is focussed on a tax on the emissions or creating a tradeable right to emit.

This agenda is predicated on looming cost breakthroughs in renewables and carbon capture and storage costs.  But if such changes are just around the corner, why not wait for them rather than take early action that involves penalising current technologies?

The bottom line is that on the best spin the Government can offer, we spend 3-6 per cent of GDP to save 3 per cent.  But the more likely outcome is the measures proposed will mean economic stagnation and future income levels at only half what they would be under business-as-usual, even if Australia's outcomes were part of a coordinated global approach.  Setting ourselves up as a pacemaker would create an even worse outcome and would almost certainly plunge the economy into a deep depression and wreck the nation's competitiveness.

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Julia's secret state stinks

On Wednesday it was reported that resource giant Xstratra was unhappy it is not a member of Prime Minister Julia Gillard's business advisory round table on climate change.  Some of the companies at the round table are BHP Billiton, Rio Tinto, Woodside Petroleum and Origin Energy.

Well, now Xstrata knows bow the small and medium sized miners felt when Xstrata, BHP Billiton, and Rio Tinto were exclusively, and secretly, negotiating with the federal government on changes to the resource super profits tax.  And now Xstratra knows how everyone who believes Australia should not have a carbon price feels about not being able to be included in the federal government's climate change consultation process.

As Gillard has made very clear, the only people she'll be talking to during her consultations are people who agree with her.

Xstrata has good reason to be worried.  It was inside the government's tent on the resource super profits tax.  It saw what happened to everyone who was outside of the tent.  The big three miners, got most of the deal they wanted and the small miners were reduced to pleading their case to a committee of bureaucrats.

Ministers should be free to talk to anyone they want.  But they can't claim the legitimacy of ''consultation'' if they only ''consult'' with people who share their opinion.  Further, if ministers do engage in consultation, the process must be transparent and they must be careful not to be seen to be extending privileges to some groups and not others.

Based on what's happened over the past few months it looks like the Gillard government is less interested in genuine consultation and more concerned about getting public relations outcomes.  Worse, there's the issue that the federal government appears to be giving preferential treatment to some groups and not to others.

Imagine what would be the public reaction if Wayne Swan announced he planned to increase personal income tax rates for all 11 million Australian taxpayers, but the only people he was going to consult were taxpayers who earned more than $1 million a year.  Further, imagine if Swan held his meetings with these millionaires in secret and he gave the millionaires confidential information from the Treasury department about the predicted impact of these tax changes on the condition that such material could not be made public.

Finally, imagine if at the end of this process Swan declared that, as a result of his consultations with the millionaires, he had decided on a revised set of arrangements that would apply to every taxpayer in the country, regardless of whether they earned $20,000 or $20 million a year.  There would be an outcry.  As there should be.

Yet this is almost exactly what happened in relation to the resource super profits tax.  The only difference between this imaginary scenario and the reality of the RSPT is that in the latter case the government was driven to the negotiating table by a multi-million dollar advertising campaign against it.

What's worrying is not even that the sort of behaviour witnessed over the RSPT is what passes for normal these days.  In Victoria, there's been the episode of an adviser to the planning minister being caught inventing an entirely sham consultation process for a building development in central Melbourne.

What's alarming is that few people seem to care that this is what government in Australia has come to.  To his credit, independent senator Nick Xenophon has called on Wayne Swan to publicly release the information from Treasury that was made available to Xstrata, BHP Billiton, and Rio Tinto during the negotiations on the resource tax.  So far the Treasurer has refused.  He's claimed that releasing such information would be damaging to the government and to those three companies.  Maybe the Treasurer is right.  But a broader principle is at stake.  Government should not be conducted in secret.  And there's something else too.  It should not be forgotten that the resource tax is actually a law.  And it is a law that applies to more than just three companies.  The idea that government should secretly negotiate a law with only some of the people to whom the law potentially applies is abhorrent.

The way the federal government and Australia's three biggest mining companies acted over the resource super profits tax set a dangerous precedent.  Hopefully, when it comes to setting a potential price on carbon, government and big business will act differently.

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Individual liberty in the eyes of a novelist

Novelists often have strongly held political views.  Nobel Prize-winning novelists are obviously no exception.

But what is surprising about the winner of this year's Nobel Prize for Literature, the Peruvian Mario Vargas Llosa, is just what those political views entail.  Vargas Llosa is a classical liberal.  With varying degrees of sympathy, Australians might call his politics free market liberalism, libertarianism, or neo-liberalism.

In other words, he's a supporter of liberty.  And not in the vague, collectivist sense offered by those who speak of freedom as taking control of the state for their own purposes.  But in the individual sense.  Vargas Llosa supports low taxes, limited government, private property, and free markets.  He's even a fan of business, describing it in a 2003 essay as a ''beneficent institution of development and progress''.

While most commentary has mentioned Vargas Llosa's strong political beliefs in passing, his politics is more than incidental to his life and work.  He won the Nobel ''for his cartography of structures of power and his trenchant images of the individual's resistance, revolt, and defeat''.  The thread which ties his novels together is the human desire for freedom, and many of his essays and non-fiction work apply liberal philosophy to Latin American politics.

One of the earlier political controversies he engaged as a liberal was opposing the nationalisation of the Peru's banks by president Alan García in 1987.  García, who has had a second term as president since 2006, now celebrates Vargas Llosa's Nobel win.

On the back of that campaign, and with a new liberal political party, Vargas Llosa ran for the Peruvian presidency in 1990.  He lost.

Since then he has been Peru's most prominent and fearsome advocate for individual liberty and liberal democracy.  His influence in Peru is so substantial he triggered a ministerial ousting last month when he resigned from a museum committee to protest a new law excusing human rights abuses under Alberto Fujimori, Peru's president during the 1990s.  Fujimori is now in jail, but has many allies in Peruvian politics.

Vargas Llosa has had a long running stoush with Cuba's Fidel Castro, and Venezuela's Hugo Chavez, describing the latter as autocratic.  He has close relationships with free market think tanks in Latin America, in the United States and around the world.

That's his political credentials.  But why are they so surprising?  Vargas Llosa has just won one of the highest prizes for literature.  There's been speculation his political views meant he didn't get the Nobel earlier.

We seem to presume that culture is the sole responsibility of the left.  Perhaps justifiably:  I don't think it's overgeneralising to say the majority of artists, actors, writers and musicians profess near uniformly social democratic views.

The Argentinian writer Luisa Valenzuela said Vargas Llosa's liberal politics ''stains his literature''.

Liberalism is easily caricatured.  First as a political philosophy of cruelty that believes all people should be subjected to the harsh storm of the marketplace.  Only those who manage not to drown deserve to survive.  Or alternatively, as a dictatorship of the accountants, obsessed with efficiency and streamlining above all human concerns.

Against these caricatures, liberalism's critics offer a vision of a society built on compassion and cooperation.  And this vision is easy to sentimentalise.

Certainly, liberalism resists collective goals.  As a philosophy it provides no support for the pursuit of national greatness, which throughout history has been the source of much romantic sentiment.  So liberals struggle to tell ''national'' stories as they are sceptical that artificial collectives like the nation have any real moral agency.  Only individuals do.

In 1997, Vargas Llosa told the Los Angeles Times that the great battle of the future was the ''battle against borders, against this provincial, small, petty vision that defines a human being through the idea of a nation''.

Vargas Llosa's achievement is to show that liberalism has its own romantic elements.  Individual liberty is as much a cultural achievement as a political one.  When individuals are able to pursue their own goals, free from the structures of the state or the collective, they are able to self-actualise -- to realise their own potential and live their preferred life.

It was, after all, the development of individualism that provided the spark for modernity.  The great Swiss historian Jacob Burckhardt argued the cultural and philosophical achievements of the Italian Renaissance were largely attributable to the idea of the individual as a unit.  It's easy to trace this idea through history to the 21st century political philosophy espoused by liberals like Vargas Llosa.

Last week the Mexican historian Enrique Krauze described Vargas Llosa's win as ''an act of justice toward literature and toward liberty.  They are two inseparable words''.

If nothing else, his deserved Nobel Prize should remind us that culture, art, and creativity are not just franchises of left-wing politics.  Individual liberty has the capacity to stir the heart as much as collectivism.

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War in Afghanistan: who are we helping?

Could anyone remind me just what it is that we're achieving in Afghanistan?  Don't all speak at once.  No, I mean what good things we're accomplishing.  Anyone?  Hello?

So asked the Washington Post's esteemed columnist Eugene Robinson a few days ago.  They're questions that should be aimed at not only both Julia Gillard and Tony Abbott, but Australia's media class, too.

For unlike the Americans or the Brits, we have had no real debate over the Afghanistan war in recent times, beyond the reports of our rapidly rising casualty rate (21 and counting).

Indeed, the political and media treatment of Australia's involvement in Afghanistan is being conducted in a reality vacuum in this country.  Take the past week's petty dramas that sadly continue to drive the news cycle.

First we had Tony Abbott hitting his first rhetorical wall since his seemingly never-ending election campaign.  Under fire for not accompanying the Prime Minister on a visit to our diggers in Afghanistan, the Opposition Leader said he did not make the trip because he did not want to suffer jetlag in anticipation of a meeting with British Conservatives in London.

There's no point in sugar coating these remarks.  It was quite a gaffe, especially from a triathlete who underlined his physical stamina by spending the last two days before election day without sleep, dragging a pack of haggard journalists with him through the night visiting cops and shift workers.

Then came Julia Gillard, whose behaviour is even more reprehensible.  Her office leaked news of the invite to Abbott simply to play politics and embarrass him.  It would have known of Abbott's upcoming visit to Afghanistan.  It would have known that Abbott had also planned to visit England last week.

And yet the office still extended an invitation to Abbott, knowing full well that he was committed to his original plan and then using the jetlag gaffe to further politicise the war.  It is difficult to disagree with Abbott's assessment that Gillard's stunt was an ''act of low bastardry''.

Australian soldiers, meanwhile, are fighting bravely in Afghanistan, and all too often being killed or injured as a result.  Yet the media agenda is more focused on a petty political fight between the Prime Minister and Opposition Leader.

Australian voters, and the men and women whom their leaders send to fight overseas, deserve better.  The more important questions are not who did or did not visit the troops and why, but whether or not this nation-building exercise is really worth it at all.

The answer is especially important when you consider that the Labor Government has failed to offer any coherent explanation for the deployment of the 1,500 troops and workers on the ground.

Never mind that the goal of eliminating the Al Qaeda base in Afghanistan from which the 9/11 terrorist attacks were launched was achieved years ago.  Never mind that democracy is not an export commodity, especially to an artificially constructed state and ethnically and tribally divided society such as Afghanistan.  Never mind that no recent invader has ever prevailed in what is known as the ''graveyard of empires''.  And never mind that other Western nations are heading for the door.

Lest one think I've suddenly embraced a Green Left worldview, bear in mind that many influential American Republicans and British Tories, not to mention conservative commentators in both nations, believe this war is unwinnable.

Yet in Australia, neither Coalition nor Labor politicians recognise this reality.

Afghanistan increasingly seems like a magician's distraction, taking attention away from other fronts, both military and political, in the fight against Islamic extremism and terrorism.

Chief among these is Afghanistan's next door neighbour, the duplicitous, nuclear-armed Pakistan, whose civilian government is weak.  As Robinson puts it:  ''Its military establishment calls the shots;  and its national security focus is on India, not Afghanistan or the threat of international terrorism.''  It is, moreover, playing America and her allies for fools.  On the one hand, it takes billions of dollars from Washington to fight terrorism;  on the other, it gives clandestine advice and support to the Taliban and tolerates the presence of Al Qaeda's leaders.

To be sure, Coalition troops in Afghanistan have scored major, important victories against the Taliban and Al Qaeda.  But it is surely folly to expect that, after nine long years of war, Australia can do any good in what even leading neoconservative scholar Fouad Ajami calls a ''hopeless undertaking in an impossible land''.

Which brings us back to Eugene Robinson's aforementioned questions about the war.  What good are we doing over there?  Why does Afghanistan justify so much western blood and treasure?  Whom exactly are we helping?  Ms Gillard?  Mr Abbott?  Anyone?

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A partial defence of GDP

The human inclination to measure and record the existing state of its economic and social welfare is almost as old as human existence itself.

In 1086 the Domesday Book was completed, providing an account of the worth of land and livestock throughout England.  About 600 years later William Petty published Verbum Sapienti (1665) and Political Arithmetick (1676), early forerunners of national accounts for England/Wales and the Netherlands/France respectively.

During the 20th century the Australian economist Colin Clark and others, including Simon Kuznets and Richard Stone, made formative contributions towards the establishment of that internationally accepted measure of aggregate economic activity that we label today as Gross Domestic Product (GDP).

Yet, perhaps unsurprisingly, ever since the production of the first, preliminary sets of national accounts there have been at least as much ink spilled criticising the GDP measure as there has been ink spilled comparing the performance of regions and nations against this metric.

Many economists have been careful to emphasise (on what should be an obvious point) that the value of market production measure of GDP does not represent a comprehensive measure of human welfare.

Kuznets himself cautioned using GDP as a catch all welfare measure as it does not distinguish ''between quantity and quality of growth, between costs and returns, and between the short and long run.  Goals for more growth should specify more growth of what and for what.''

Others have focussed on specific limitations of the GDP measure.  The treatment of non-marketable public sector activities that are coercively financed through taxation -- and thus not based on the market logic of competitive prices and the profit loss mechanism -- is a major case example in point.

Assuming that a government employs a new worker with pay of $55,000.  The national accounts will record GDP as having increased by $55,000, since any public sector activity is included in the measure ''at cost''.  However the recruit might contribute far less in value to the economy than the cost of employment recorded in GDP, and this likelihood is magnified in the absence of competitive prices and the profit loss mechanism applying to the public sector.

As noted by Australian economist Steven Kates, ''[i]n the private sector, expenditure is only recorded after a business goes to all the effort of production and has then found someone to purchase what has been produced.  In the public sector, whatever the government spends, on whatever it happens to buy, is put straight into the accounts without making any adjustment to determine whether there has actually been an increase in the community's wealth.''

Such an anomaly enables the likes of Julia Gillard and Wayne Swan to state with near impunity that the government's $80 billion fiscal stimulus package raised GDP, and hence ''saved'' Australia from recession, even though school halls were constructed at more than twice the going industry rate and home insulation subsidies led to lost houses and lives.

Notwithstanding the continuing efforts of economists, statisticians and government agencies to refine the conventional GDP measure -- taking into account issues such as the treatment of the growing intangible services economy and the generalised improvement in product quality -- the limitations of GDP have been seized upon by an influential minority that have hitched their anti-production wagon to attacking the GDP messenger itself.

As early as 1973 -- at the time that neo Malthusian Club of Rome pessimism seemingly reigned supreme -- the Commonwealth Treasury summarised the anti production sentiment as follows:

''[t]hough economic growth remains an important object of concern of national governments in all countries, and in its broadest sense retains much of its 'grass roots' support among people generally, it is under increasingly strong attack by articulate and influential minorities.  It is held to be responsible for many of the ills of modern industrial society -- for the increasing pace and pressure of urban living and for the co existence of 'private affluence and public squalor';  for the creation of 'imagined' wants rather than the satisfaction of 'real' needs;  for the relentless exploitation of the earth's non renewable resources;  for poisoning of the air and waters;  for despoliation of the environment and threats to the biosphere;  for ugliness;  materialism and acquisitiveness;  for crime, violence and drug addiction;  and for a variety of other problems and failings.''

Modern calls for the overthrow of GDP have been led by the recent release of the Sen-Stiglitz-Fitoussi (SSF) report commissioned by the French Sarkozy government.  According to the report, ''the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people's well being.  And measures of well being should be put in a context of sustainability.''

Other countries are already pursuing the development of substitute or complementary measures to GDP.  In 2005 British Conservative Party leader, and now Prime Minister, David Cameron commissioned environmental journalist (and now Conservative MP) Zac Goldsmith to examine ''quality of life'' issues including the replacement of GDP.

The Canadian government has introduced an ''Index of Wellbeing'' while, in Australia, the ABS recently released the 2010 edition of its Measures of Australia's Progress publication which seeks to provide a ''triple bottom line'' assessment of the state of the nation.

In what follows, I wish to outline three propositions that provide a partial defence of (or, if you will, raising two out of three cheers for) GDP as an indicator of economic success.

Proposition #1:  The market value of production, provided by GDP, is a reasonable measure of economic welfare

SSF call for the replacement of the production measure of GDP with a measure of material living standards associated with consumption.

While the authors state that most households associate increases in their wellbeing with consumption, the fact remains that it is the act of production -- the combination and transformation of scarce economic resources by producers for sale in the market -- that precedes the act of consumption.

Indeed, production provides the impetus for the transformation and growth of the market economy.  This is because the livelihoods of producers depend critically upon whether their conjectures about consumer preferences -- embodied in the array of goods and services on offer -- are confirmed by sufficient sales revenues.

In a competitive economy, a producer that provides an output of a desired quality and reasonable price will stand to acquire profits as a return on initial investments.  Profitability provides a spur for additional investment, including the application of technological and scientific advances that not only increase the quantity of production but enhance its quality, and encourages aspirants to enter the market and either imitate or improve upon the successful product.

The galaxy of goods and services available in the market economy today are the product of successful producer conjectures about consumer preferences in the past, as well as producer conjectures about what consumers might want tomorrow.

Growth in the value of market production, measured by growth in GDP, represents a sure sign of economic success in the sense that initial producer conjectures have translated into a material improvement in living standards.

Proposition #2:  Economic welfare, as measured by GDP, is highly correlated with other measures of human welfare

While many critics are keen to highlight the limitations of GDP as a measure of overall human welfare, numerous studies have shown strong and robust relationships between GDP (either in terms of levels of growth) and other indicators of welfare.

Whether it be in terms of economic freedom, better health and social outcomes, and levels of happiness, higher levels of, or growth in, GDP are correlated with superior outcomes.  Correlation plots are readily available on the internet for inspection (for example, see here).

To be sure, while correlation does not necessarily imply causation, the available evidence is indicative of the notion that wealthier countries are more capable of providing their citizens with a better quality of life.

Proposition #3:  Many of the criticisms levelled against the measurement of market activities within GDP are misplaced

Many of the critics of the GDP measure overlook French classical liberal Frederic Bastiat's observations concerning the ''broken window'' fallacy, and how economic and other ''bads'' might be reflected in GDP.  Consider a few examples.

Assume I crash my car, to the extent that it is a write off.  My need to purchase a new car, to travel to and from work, is recorded in the GDP measure.  While some critics might decry that GDP implicitly rewards careless driving, the fact is that my previous car and its contribution to the economy has been lost to GDP.

One of the great shibboleths of our time is the revived neo Malthusian idea that current generations are consuming resources, and laying waste to the environment, and that such conduct is reflected in increased GDP.

A farmer or miner may wish to lay waste to all land or mineral commodity reserves today, but the absence of resources tomorrow will be recorded as a reduction in GDP.  Besides, the inherent incentives for producers to minimise costs (as a way of optimising profitability) suggests that a ''live for today, forget about tomorrow'' approach towards production and economic stewardship is an unrealistic one that won't sustain GDP growth.

As noted above, at least with respect to the treatment of public sector activity, GDP is an imperfect measure of economic welfare.  Further, no self respecting economist would wish to claim that GDP is an all encompassing indicator of human welfare.

Despite all its flaws, there is arguably no better measure existing today that reflects the value obtained through voluntary market exchange than GDP.  Indeed, one suspects that recent calls to alter or expunge the GDP measure represents little more than the continued disillusionment by the confiscatory-left towards economic growth and the empowerment of individuals that this entails.

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The expansion of presidential power

In the United States, many thought Barack Obama's election would be the moment the rule of law reasserted itself in the fight against jihadi terrorism.

After all, that's what he promised -- ending the use of torture and extreme rendition, revising the Patriot Act, closing down Guantanamo Bay detention camp, eliminating warrantless wiretaps, and restoring the right of prisoners to challenge their detention.

So the debate whether the Obama administration has the legal authority to assassinate an American citizen without any due process is pretty unedifying.

The citizen in question is Anwar al-Awlaki, a radical Muslim cleric.  He's probably holed up in Yemen.  In April, the administration authorised his assassination.

Now his father is suing the government to prevent the government doing so.  In response, the administration asked the court to dismiss the lawsuit because it involves state secrets.

There's no doubt al-Awlaki is a bad guy.  He's reportedly called for American Muslims to wage violent jihad against the US.  His sermons have been attended by an array of accused and convicted terrorists.  He's apparently the inspiration for the Times Square bomber and the Christmas Day bomber.  The US government now claims he's gone from encouraging terrorist attacks to actively participating in them.

American governments have long had the power to assassinate those waging war against the United States.

Yet assassinating a US citizen goes well beyond anything previous administrations have ever been able to do.  A senior Bush legal official told the New York Times he couldn't recall any similar case.

And, Barack Obama -- or, at least, Barack Obama's lawyers -- believe the president has an absolute right to do so without limitation and without scrutiny.

As the legal commentator Glenn Greenwald wrote, the Obama administration seems to believe that ''not only does the president have the right to sentence Americans to death with no due process or charges of any kind, but his decisions as to who will be killed and why he wants them dead are 'state secrets', and thus no court may adjudicate their legality.''

One could make the case al-Awlaki has so abrogated his American citizenship he is effectively a foreigner, and that his threat to the US is so substantial they have no choice but to assassinate him.  But that's a case they should make to a court.  Instead, the administration believes the government shouldn't have to justify targeting the cleric.

This argument proposes the US president be given absolutely unlimited powers.

No matter how hawkish you are on the war on terror, that's a bad idea.

In her 2008 book, The Dark Side:  The Inside Story of How The War on Terror Turned into a War on American Ideals, Jane Mayer laid out how the administration of George W. Bush fumbled its way into its security framework.

Guantanamo Bay, the renditions, the blurring of legal and illegal torture, and the augmenting of the president's war powers were a result of panic after September 11 attacks and an escalating security machismo within the White House.

The urgency meant it took less than 12 months for these policies to be fixed in place.

That's not an excuse for the Bush administration blundering -- and there was a lot of blundering while the administration tried to reform criminal processes to fight a war against terrorists.  And it's no excuse for their utter disregard of due process, civil liberties, and individual rights.  But it is an explanation.

By contrast, it is nearly incomprehensible that, a decade after the September 11 attacks, those powers are still expanding rather than contracting.

Certainly, terrorism remains a national security problem in the US and around the world.  Recent warnings about threats in Europe and India remind us of that.  But the direct political pressure over terror has been relieved -- partially due to the global financial crisis, which displaced public fear of the risk of attack with a much more real fear of unemployment.

And many of the tactics deployed after 2001 have been, in retrospect, dismal failures.

The effort to prosecute accused terrorists through military commissions rather than the civilian legal system has been decidedly uninspiring:  those who could have been jailed for life had they faced the full gamut of civilian charges have received peculiarly light sentences.

The recent expansion of presidential power is made worse by the fact that Obama specifically campaigned against legal abuses in the conduct of the war on terror.

This brazenness is unlikely to hurt the president.  Many in the American left have been reluctant -- even embarrassed -- to admit Obama has doubled down on some of the most reviled policies of the Bush administration.  Those who do point out a Palin administration would be far worse.

And conservatives are more eager to criticise Obama for being too soft on terrorism than being unprecedentedly bold.

In his new book Obama's Wars, Bob Woodward quotes the president claiming the US could ''absorb'' another terrorist attack.  This has been described as a gaffe.  And, from a political perspective, it is.  But it's also an uncommonly honest reflection of the nature of the terrorist threat.

If only that moderation was translated into policy.

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Green protectionist racket incompatible with free trade

Following meetings with senior US officials recently, Emerson said he was ''genuinely encouraged'' by the support to conclude global free trade negotiations.

But the good faith needed to finalise these talks is being undermined by governments pushing green protectionism.  Yesterday on the Australian Agenda program on Sky News, Emerson claimed the Gillard government wouldn't ''cop [European] governments cloaking protectionism in this sort of green cloak of respectability, where it's just old protectionism''.  He's not in a position to lecture on protectionist policies gussied up as environmentalism.

During the election, federal agriculture, fisheries and forestry minister Tony Burke announced Labor ''will implement a package of reforms to restrict the sale of illegally logged wood in Australia'', including making it an offence to import illegally harvested wood.  The same commitment was made by Labor during the 2007 election.

But instead of being a policy that would contribute to cutting illegal logging imports, the policy is protectionism disguised as environmentalism.

Earlier this year a government-commissioned report by the Centre for International Economics concluded:  ''Australia's imports account for about 0.034 per cent of global timber production, and 0.34 per cent of products incorporating illegally logged timber.''  The report concluded that trade restrictions would be ineffective and cost more than they are worth.  Labor's policy was designed to bow at the altar of Greens voters and the Construction, Forestry, Mining and Energy Union, who want to stop competitive imports.

This wasn't the first time the Rudd-Gillard government cloaked ineffective protectionist policies in environmental garb.  In 2008, Industry Minister Kim Carr established the $1.1 billion Green Car Innovation Fund subsidising foreign-owned car companies to innovate lower-emission, Australian manufactured vehicles.  Coupled with a $35 million grant from the Victorian government, the federal government provided $35m to Toyota to develop a hybrid Camry.  But with a target to sell 10,000 vehicles this year, Toyota has reported only 2960 have been sold, two-thirds of them to the government of Victoria.  The scheme also provided a $149m subsidy for Holden to develop Australia's ''most fuel-efficient four-cylinder car'' in South Australia that's been ridiculed for delivering virtually no green innovation at all.

And in the ultimate demonstration of the futility of the fund, this year's budget papers included a $200m cut to the program in response ''to lower than expected demand''.

The Green Car Innovation Fund never lived up to its name because it was designed as a subsidy to the industry to mitigate the consequences from phasing out Australia's long-standing automotive industry tariffs.  And this green protectionist racket is set to continue.

Labor's $394m Cleaner Car Rebate, or ''cash for clunkers'', will subsidise consumers to buy greener cars such as unwanted Toyota Hybrid Camrys and Holden fuel-efficient four cylinders sitting on the assembly line.

Ironically, given Emerson's announcement, the US implemented the same scheme to prop up ailing automotive manufacturers through artificially inflated demand for cars as a form of stimulus.

According to Emerson after his recent meetings, ''the US sees benefits in using trade for job creation''.

And the same should apply to the Australian government.

However, as long as protectionism is being adopted by the government to secure votes, job creation will always come second.

And the real cost of green protectionism will be worn by consumers.

According to Labor's election news release announcing its timber policy, there was no costing for the initiative because ''there will be no impact on the budget''.

They're right.  That's because the cost flows through to consumers through higher retail prices as a result of reduced competition and the cost of regulation to enforce trade barriers.

Thankfully, Emerson has already rejected the Greens' more extreme trade policies.

They want to ''remove Australia from existing bilateral free trade agreements where possible'' and insert environmental and labour standards in agreements.

But to advance Australia's broad free trade consensus, Emerson's effectiveness won't be tested in rejecting bad Greens policies.  It will be in educating his parliamentary colleagues to understand the costs of the green protectionist agenda they are pushing.

If he can't, he's unlikely to succeed in convincing Europe to do the same or, more important, advance the conclusion of global free trade negotiations.

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Silenced in court

Andrew Bolt is getting sued.  Don't applaud yet.  There's been a lot of outrage about the federal government's proposed internet filter.  But lawsuits like the one now faced by the prominent conservative Herald Sun columnist are as much a restriction on freedom of speech as anything Communications Minister Stephen Conroy has come up with.

Nine people are suing Bolt for an article that claimed their Aboriginal self-identification was ''fashionable''.  He had said they all had part-European, part-indigenous heritage (and fair skin) with an opportunity to describe themselves as a range of nationalities.  But, he wrote, they chose to describe themselves as Aboriginal.  Doing so gave them ''political and career clout''.

At worst, Bolt is deliberately and provocatively disrespectful.

But as their lawyer has pointed out, there are two tests of whether someone is Aboriginal.  The first is an objective genealogical test:  a fairly clear cut question of whether they have Aboriginal ancestors.  The second is subjective:  whether a person chooses to self-identify as indigenous, and whether they are ''communally'' regarded as such.

Bolt's columns criticised political appointments and government awards that pivot on an individual's Aboriginality.  They're absolutely within their rights to apply for those grants, prizes and positions.  But like it or not, by sponsoring things like indigenous-specific art and literary awards, the government makes what constitutes Aboriginality a political question.

And it's a question academics have been trying to unpack for decades.  Universities teach courses in the ''concept of Aboriginality''.  Surveying the literature in 2002, the Parliamentary Library could only conclude ''an individual's ethnic identity is always to some degree fluid, multiple, differing in degrees, and constructed''.

Of course, Bolt tackles the issue with trademark belligerence.  The merits of his argument will now be tested in court.  But put aside the conservative commentator.  This isn't about the collected works and opinions of Andrew Bolt.  And put aside the complexities of racial identity, Aboriginality and reconciliation.

This case is troubling because of what it says about our right to freedom of speech.  If successful -- or just really expensive to defend -- this lawsuit could have a stifling effect on political debate.

The 19th century philosopher John Stuart Mill argued that only by airing contested views publicly and freely could the truth be known.  Societies need free speech if only to test and challenge controversial opinions.

And we're not going to have those necessary debates while legal action stifles one side.  No matter how wrong or misguided that side may be.

Silencing Bolt doesn't just silence him.  It potentially silences the speech of others who might be afraid of being similarly dragged through the legal system.

After all, Bolt and his employer can afford to defend themselves.  No doubt they have lawyers on call.  Newspapers know their way around court.

By contrast, bloggers, amateur journalists, Twitterers and Facebookers commenting on sensitive political issues -- for whatever reason, with whatever motives -- are much more exposed to punitive legal action than newspaper columnists are.

Should only the rich be able to have controversial views?  If anything is going to suffocate the blossoming citizen media, it will be lawyers.

Bolt is being challenged under the federal government's Racial Discrimination Act.  But that's hardly the only law on the books that has a damaging impact on free speech.  Our politicians have a long and shameful history of using Australia's defamation laws to sue their critics -- threatening someone with a defamation suit is a public relations tactic.

In Victoria, our Racial and Religious Tolerance Act, introduced in 2001, has been co-opted as a stick for religious groups to hit each other.

First, the Islamic Council of Victoria took the fundamentalist Christian Catch the Fire Ministries to court.  Then a Wiccan prison inmate took the Salvation Army to court.  Then the Australia-Israel Jewish Affairs Council threatened to take the Islamic Information and Services Network of Australasia to court.

That's a shabby record for a law supposed to promote tolerance, not division.

Suppressing offensive views can be counterproductive.  The churches and mosques targeted by the Victorian Racial and Religious Tolerance Act were able to say their beliefs were being persecuted -- attracting more followers.  The victimised dissident is a hero, not a villain.

To his credit, Bolt is a prominent critic of Victoria's vilification laws.  Last year, the Human Rights Consultation Committee faced the task of recommending what should appear in an Australian bill of rights.  It struggled to balance our right to free speech with a new ''right'' demanded by some -- the right to not be offended by the speech of others.

But there are an infinite number of ways people could be offended.  How could we possibly prevent all outrage?

You can have the right to free speech, or you can have the right to be protected by the government from the offensive speech of others.  You can't have both.

There are other ways to respond to distasteful views.

Refuse to buy the Herald Sun.  Tell your friends to do the same.  Condemn it in other opinion columns.  The solution to bad speech is more speech.  If something is offensive, it deserves to be condemned, loudly and often.

This week saw the first Aboriginal member of the federal House of Representatives sit in Parliament.  Ken Wyatt is a Liberal.  He promised to advocate for Aboriginal and Torres Strait Islander people in Parliament.  His mother was one of the stolen generations.  In his maiden speech, Wyatt thanked Kevin Rudd for the 2008 apology.

That's a genuine step towards reconciliation.  Wielding the legal system as a weapon to try to silence critics isn't -- no matter how offensive they might be.

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Early bird can miss out

In business there's no advantage in being the first mover when it comes to change.

Harvard Business Review asserted that one of the best business books of 2001 was Will and Vision:  How Latecomers Grow to Dominate Markets (McGraw-Hill).  It's a marketing book by Gerard Tellis and Peter Golder, a pair of academics from the University of Southern California and the Stern Business School at New York University.  The book's purpose is to demolish one of the most prevalent myths in business -- the ''first-mover advantage''.

Julia Gillard should buy a copy of Will and Vision for the members of her new climate change committee.  While she's at it, she could buy a copy for Marius Kloppers as well.

The myth of the first-mover advantage persists because we want to believe it's true.  We think that the person who's the first to take a risk should get a benefit.  But the point of Will and Vision is that companies don't necessarily get a competitive advantage simply by being first to market with a product or service.

Commercial success comes from being the best, not the first.  Google wasn't the world's first internet search engine and Facebook wasn't the world's first social networking website.  Xerox was quick off the mark when it came to making photocopiers, but speed didn't guarantee it a sustainable long-term advantage.

Scott Cook is one of the founders of Intuit, the $14 billion company that produces Quicken and QuickBooks software programs.  Apparently, he jokes of his ''47th-mover advantage''.  That's because when he launched his personal finance software there were 46 similar products already on the market.

A fortnight ago, BHP Billiton boss Kloppers called upon the federal Labor government to set a carbon price and act before an international agreement.  He was doing so to ensure Australia maintains its ''competitiveness''.  Julia Gillard credits Kloppers' speech as one of the reasons why she broke her election promise that ''there will be no carbon tax under the government I lead''.

Leaving aside the question of what happened if Australia sets a carbon price and an international agreement never eventuates, there's the issue of why it's assumed that acting first provides any benefit whatsoever.  Certainly, some people have used moral arguments about Australia's responsibilities to the rest of the planet as the justification of pricing carbon when other countries are not.  But Kloppers didn't base his claims on morality.  He based his claims in the dispassionate language of the country's economic self interest.

To be fair to the BHP Billiton boss, he's not the only one falling into the first-mover trap.  In the Treasury Department's briefing to the incoming Labor government that's now been made public, at the end of the discussion as to why market-based mechanisms to reduce carbon emissions should be adopted there's the statement:  ''All of this serves to underscore the conclusion that the sooner an emissions trading scheme can be implemented the better.  Too much time has already been wasted -- for which the Australian community will necessarily pay a big price.''

In simple terms, the reason there's no such thing as a first-mover advantage is because, second, third and fourth movers have more knowledge than the first mover.  It's a principle that applies regardless of whether a company is selling toothpaste or an economy is managing the introduction of a carbon price.  There's a multitude of ways to implement a price on carbon and it is naive to think that somehow Australia is going to fluke at its first attempt the optimal design of such a pricing scheme.

The ''at least something is better than nothing'' argument doesn't apply in this case because the cost of fixing a flawed system could be more expensive than introducing it in the first place.

Similarly, the claim that because Australia is such a carbon-intensive economy it should therefore be the first to introduce a carbon price because it will give businesses longer to adjust to using less carbon, doesn't acknowledge the fact that the way in which businesses reduce their carbon emissions is as important as the amount they reduce their emissions by.

If Australia implements a carbon tax, and the United States implements a cap and trade scheme, what happens then?  What will have been the advantage of Australia going it alone on a carbon tax?  The idea that Australia should impose a price on carbon emissions ahead of the rest of the world and that this will give us a competitive advantage is another manifestation of the myth of the first-mover advantage.

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