Lead Story
Issue No. 35 - June/July 2007
Prepare to Prosper
by Professor Richard Blandy
As predicted in my article on the economic outlook in South Australia ‘in-business’ last October, the 2006 drought has cut a bit less than one percentage point off the national economic growth rate, and a bit under two percentage points off the South Australian growth rate.
The reason for the bigger impact on the SA economy than on the national economy is because the agricultural sector is about 5% of the SA economy but only about 2.5% of the national economy.
At the same time, the $A has appreciated to very high levels, driven by the resources boom and (by international standards) high interest rates. The effect has been to squeeze the economic viability of other exporting and import-competing activities (agriculture, manufacturing and in-bound tourism). Consequently, the “non-resource” states like NSW, Victoria, Tasmania and SA, where much of the nation's agricultural, manufacturing and tourism activities are concentrated, have fared poorly compared with the “resource” states of WA and Queensland. National economic growth has fallen, notwithstanding the mining boom. Imports have soared as household consumption and investment in mining, construction and services have risen.
We have seen this all before - in the early 1970s and early 80s. The adverse impacts on “non-resource” activities associated with those mining booms was called “the Gregory effect” - named after renowned ANU economist Professor Bob Gregory who developed the idea in Australia. Elsewhere it has been called “the Dutch disease” after the impact (some time ago) of the rapid increase in North Sea oil revenues on the rest of the Dutch economy.
Throw the drought into the mix as well, and it is not surprising that SA has struggled in 2006-07.
In the old days, resource booms were brought to a halt by their inflationary consequences, particularly in wages, leading to the imposition of very contractionary monetary policy and recessions “we...
