The Coal Curse
QUARTERLY ESSAY 78

The Coal Curse

Resources, Climate and Australia’s Future

Judith Brett
 

Extract

In 2018–19, Australia’s top exports were iron ore, coal, natural gas, international education and tourism, in that order. Coal became our top-earning export commodity in the mid-1980s and has been at number one or number two ever since, vying with iron ore, which needs metallurgical coal to be transformed into steel. The production of LNG has increased rapidly over the past decade since the massive developments in Gladstone, Queensland, and it is now our third-largest commodity export and rising fast. Between 2018–19 and the previous financial year, its export value grew by 60.9 per cent. Coal, LNG, iron ore: in 2018–19 these three earned 41.8 per cent of our export income.

This is why Morrison brought a lump of lacquered Hunter Valley coal into parliament in February 2017. “Don’t be afraid, don’t be scared, it won’t hurt you,” he said, as he handed it along the grinning front bench, “it’s coal.” The point was to ridicule the Opposition’s support for renewable energy, and it was a stupid stunt. But it put on full display how impossible it was for many of our political leaders to imagine Australia’s future without fossil fuels. Australia is the world’s second-largest exporter of coal, and in 2019 we overtook Qatar to become the largest exporter of LNG. So we are now the world’s third-largest exporter of fossil fuels, behind only Saudi Arabia and Russia.

Australia is a trading nation. We have a small population, so exporting enables our companies to grow by reaching larger markets. We need the foreign income earned by our exports to pay for the goods and services we import, and to service debts to foreign lenders. Our exporters also contribute to the national economy by paying taxes, distributing dividends to shareholders and employing people. All this is true of the fossil-fuel exporters, but there are costs to having an export profile so skewed to one sector.

The term “resource curse” was first used by the British economist Richard Auty in 1993 to explain why some resource-rich countries suffer from slow development and corrupt, authoritarian political elites: for example, Nigeria, Angola, Venezuela. At worst, the country embarks on a spending spree, using the export income earned to buy expensive imports, and is left with little when the limited resources run out, as happened most notoriously to Nauru. For a few decades, the money flowed from its phosphate deposits, but when the phosphate ran out, the economy collapsed.

The idea of the resource curse is highly contested, and a country’s institutions are crucial in preventing the worst outcomes. A strong civil society, functioning democratic institutions and the rule of law can limit corruption and underpin a functioning diverse economy like Australia’s. We will turn to the political effects of the resource curse on Australia later in this essay. On the economic effects, not all economists see a country’s reliance on natural resources to earn export income as a problem. They argue that a country should pursue its comparative advantage and if that is in the production of natural resources, then that is what they should sell to the world, buying manufactured goods from countries that can produce them more efficiently.

Australia has a comparative advantage in mineral and agricultural commodities, and exporting these has made us rich. But trade in unprocessed commodities has some significant disadvantages compared with trade in manufactured goods. First, it is a declining sector of world trade. In the nineteenth century, commodity trade was two-thirds of all world trade; by 1966 it was one-third; and by 1983, it had halved again to 17 per cent. The main game in global trade is in manufactured goods, so no matter how strong our performance as an exporter of minerals, we are locked into a declining sector of world trade.

Second, until recently, world commodity prices were falling relative to manufactured goods, although the explosion of cheap Chinese manufacturing since the start of the twenty-first century has reversed this, with a dramatic fall in the price of manufactured goods. Third, the price of manufactured goods has historically been more stable than the fluctuating commodity prices, so the export income they earn has been more reliable and the economies of manufacturing countries less vulnerable to external shocks. In Australia, the depression of the early 1890s and the Great Depression of the 1930s were both partly caused by precipitous falls in the price of wool.

As a commodity-exporting, manufactured goods–importing country, Australia has had recurring problems with its terms of trade, which is the ratio between the prices of exports and imports; in simple terms, how many bales of wool and container loads of coal we must export to pay for the motor vehicles, computers and clothes we import.

Booms in commodity prices can be just as destabilising as busts. Resource booms push up the value of a country’s currency, which makes it harder for other exporters to sell to the world. They also draw capital and labour from other sectors of the economy in pursuit of better returns and higher wages. The discovery of gold in Victoria in the early 1850s emptied Adelaide of able-bodied men almost overnight. The fly-in, fly-out work to build the infrastructure for the recent resources boom has lured workers, especially skilled tradespeople, away from cities and regional towns. Jobs created by a booming commodities sector must be balanced against those lost elsewhere. This is sometimes called the “Dutch disease,” a term first used in 1977 by The Economist to explain the effect the Netherlands’ exploitation of North Sea oil and gas had on the rest of its economy, especially manufacturing, which shrank.

Harvard University’s Center for International Development has an Atlas of Economic Complexity, which ranks economies according to their diversity and complexity in order to assess their potential for growth. In 2017, Australia came in at number 93 of 133 economies ranked according to the diversity and complexity of exports. Our neighbours on the scale were Senegal and Pakistan. Above and below us were underdeveloped, non-Western countries, those we once called “third world.” The nearest country we like to compare ourselves with was New Zealand, at 51. All the other OECD countries were well above us, with Japan leading the way at number one.

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This is an extract from Judith Brett's Quarterly Essay, The Coal Curse: Resources, Climate and Australia’s Future. To read the full essay, subscribe or buy the book.


ABOUT THE AUTHOR

Judith Brett is emeritus professor of politics at La Trobe University. A former editor of Meanjin and columnist for The Age, she won the National Biography Award in 2018 for The Enigmatic Mr Deakin. She is the author of four Quarterly Essays: Relaxed and Comfortable, Exit Right, Fair Share and The Coal Curse. Her other books include From Secret Ballot to Democracy Sausage, Robert Menzies’ Forgotten People and Australian Liberals and the Moral Middle Class.

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