Australia as a Resource-Based Economy and Reasons for Avoiding the Resource Curse Problem - Example

Australia as a Resource-Based Economy and Reasons for Avoiding the ‘Resource Curse’ Problem Introduction Resource-based economies can be defined as those economies in which natural resources play a major role by contributing about 10% of the Gross Domestic Product (GDP) and about 40% of the total exports of the countries (Ahrend 2005, p. 2). As a result of this, such economies are usually affected by different kinds of changes that occur in the prices of commodities in the world market. This situation, which is the beginning of what is generally referred to as the ‘resource curse’ problem, results into slow growth and underdevelopment in the affected countries. Although this has been the trend, several countries whose economies are based on natural resources have experienced long-term growth and prosperity. One notable country in this category is Australia. Although the Australian economy has shown these characteristics over the course of time, the economic development of the country has largely escaped the effect of external shocks and the resultant decline in economic growth. In this essay, the reasons for this observation are presented. This is however is preceded by an examination of reasons that show that the economy is actually a resource-based one. Australia’s development experience as a resource-based economy In general, resource-based economies are characterised by features such as heavy dependence on agricultural production, a large service sector and a relatively small manufacturing sector (Ahrend 2005, p. 3). With little use of technology, such countries have small manufacturing sectors and tend to depend wholly on the natural resource sector of their economies. Other sectors of the economy such as telecommunications, education and services remain less developed a compared to mining and other industries that are based on natural resources. Also, with significant imbalances in population distribution across different areas of the countries, such economies experience major problems in terms of infrastructure and communication (Barbier 2007, p. 4). There are several reasons as to why the economy of Australia can be described as being a resource-based one. To begin with, natural resources have formed a big part of the economy of the country in the form of its GDP. In general, natural resources have made a significant contribution to the total GDP of the Australian economy. This has been witnessed over the course of time and has changed with general trends in the global economy and changes in the prices of commodities in the world market. During the early stages of development, natural resources constituted an average of 30–35% of the GDP. This was experienced from the early times throughout the 1980s (Bishop et al. 2013). Although the situation has changed in the current times, the country is still endowed with a large proportion of natural resources which form an important part of its economic development (Enright & Petty 2013). These are present in the forms of minerals, natural gas and others. It is important to note that although the country is currently endowed with a large proportion of natural resources, the percentage of the resources to Australia’s GDP has declined to less than 10% in the recent times (National Bank of Canada 2013, p. 2). This has been the case for the three major categories of natural resources: energy, forests and minerals. However, the economic growth of the country can be seen to have been supported by natural minerals like oil and minerals, which have made a major contribution to its GDP. The second reason for describing the development experience of Australia as that of a resource-based economy arises from the percentage of the country’s exports that has been contributed by natural resources over the course of time. Theoretically, in resource-based economies, natural resources make up the largest percentage of their total exports. This has been the case for the Australian economy over the course of time. The country’s exports have been heavily influenced by natural resources in the form of forests, minerals and energy. For instance, the percentage of mineral resources in relation to the country’s total exports has been rising from the 1860s following the discovery of gold in New South Wales and falling during the 1930s following social and economic changes associated with overdependence on the discovered natural resources (Grants, Hawkins & Shaw 2002, p. 4). In addition to this, minerals and other natural resources still form the largest part of the total exports of the country. For example, according to the Reserve Bank of Australia, resource exports in the form of metal ores, fuels such as coal and other resources contributed up to 60% of the country’s total exports (Bishop, Kent, Plumb & Rayner 2013). Therefore, the development experience of the country can be described as one that is based on natural resources because of the important role that natural resources such as minerals, energy and forests have played in the total exports of the country over the course of time. These factors have had an effect on the economy of Australia throughout its development. The economic development of the country has taken place in the form of different types of resource booms. Discovery of different types of natural resources at different times has had major effects on the economy over the course of time. This has happened on several occasions. For instance, following the discovery of gold in the New South Wales region back in 1860s, the economy underwent major changes. These were in the form of social, political and economic changes (Dowling 2005, p. 203). It can be seen that the development experience of Australia has been based on two important trends: a high percentage of exports being composed of natural resources and the GDP of the country being made up mostly of natural resources in the form of energy resources, minerals and products from forests. It is important to note that these features, which have described the economic development experience of the country, have been important in giving the country advantages in areas in which it has been disadvantaged. For instance, throughout its early history of economic development, the country has had a small manufacturing sector. This translated into general disadvantages in terms of low exports of capital goods. However, since natural resources made significant contributions to the GDP as well as to the total exports of the country, the resources provided a balance to the economy by filling the gap left by a small manufacturing and other sectors in the country. How Australia avoided the ‘resource curse’ problem In general, many countries which are rich in mineral resources experience slow economic growth as compared to those countries that do not have similar mineral resources. This situation, which is known as the ‘resource curse’, has affected many countries in that they fail to use their natural resources as a platform on which to build sustainable economic growth (Chalecki 2013, p. 17). There are many reasons why resource-rich countries to fail to take advantage of their natural resources to achieve sustainable economic growth and development. One common reason is the failure of policymakers, who instead use the resources of the country to maintain their political leadership. In such a situation, resources which would have been used to initiate economic development are diverted in acts of mismanagement and corruption (The World Bank 2012, p. 121). Another reason is economic factors resulting from volatility in the prices of commodities in the global market. Since resource-based economies depend on mineral resources for their exports, sudden changes in the prices of these commodities mean that the economies are badly exposed to external shocks (Greenaway 2012). However, the situation in Australia has been different. Although the country’s economic development has been based on its natural resources, it has managed to achieve sustainable economic growth and development over the course of time thus avoiding the ‘resource curse’ problem. There are several reasons for this. To begin with, the country has managed to develop its economy and avoid the ‘resource curse’ problem by developing new resource-based industries. According to Ville and Wicken (2012, p. 19), the country used high levels of investment in capital, different fields of knowledge and different international factors to develop highly technical and intensive production systems. Through this process, the country was able to use its natural resources to develop new resource-based industries. These new industries enabled the country to achieve sustainable growth because they were linked to other different sectors of the economy, thus creating an environment that is conducive for sustainable economic growth through shared knowledge, skills and resources. The second reason as to why Australia managed to prosper and avoid the ‘resource curse’ problem is that the country has had sound institutions which have played a key role in helping it achieve sustainable growth throughout its history of development. There is a close link between institutions and the economic development of countries (Mehlum, Moene & Torvik 2008, p. 245). This is because strong institutions are necessary for countries to use their natural resources as a basis for economic growth. There are several ways in which institutions have helped Australia achieve sustainable growth. For instance, the country has had a good degree of flexibility in its institutions (McLean 2013, p. 6). This has been demonstrated in frequent changes in the institutions of the country so as to make them support economic growth. Whereas institutions that support economic growth and prosperity have been maintained, those that failed to support economic growth have either been changed or replaced. This was the case during the early times of the economy in which many institutions in the country were required to work in support of different policies that supported growth and prosperity using natural resources. As well, strong political institutions in the country have played a leading role by protecting economic growth over the course of time. This has been seen in the form of policies that have emphasised on fair trade and economic stability, thus creating an environment that is ideal for economic growth (Arezki & Van der Ploeg 2007, p. 26). The third factor that enabled Australia to use its wealth in natural resources to achieve different forms of development has been the level of relationship that the economy has enjoyed with other external economies. In theory, there is a positive relationship between open policies and the overall economic growth of countries (McLean 2013, p. 35). This is because when countries use such policies, the level of trade with other countries increases, thus leading to overall prosperity. From early times, Australia has developed and pursued policies that have encouraged integration and increased trade with other world economies. For example, the level of openness that the economy of the country had enabled close integration with the economies of other leading countries at the time such as the United Kingdom. The result of this integration was that the local economy benefited from better trading terms, thus leading to sustainable growth (Ziyadov 2011, p. 353). In the recent times, the country has also developed policies that encourage open trade with other economies of the world. Such policies have been beneficial in guaranteeing the overall economic growth in the country. Lastly, Australia managed to escape the ‘resource curse’ because of its ability to learn from prior experiences. Since the natural resources of the country were discovered at different times, the country developed the right policies and practices to enable it avoid common mistakes that act as the primary causes of ‘resource curse’ to different economies. Conclusion In conclusion, the economic development of Australia can be said to have been based on the natural resources of the country. This is because of a number of reasons. Natural resources have made the largest contribution to the country’s GDP throughout its history. The natural resources have been in the form of minerals, gas and crude oil. The second reason is that the country’s total exports have largely been composed of natural resources. Throughout its history, the economy of Australia has been made up of exports in the form of natural resources. Although the country has largely been resource-based, it has managed to escape the ‘resource curse’ problem that makes many resource-rich countries fail to achieve sustainable growth. The main reason for this has been the role played by political, constitutional and other institutions in the country. Secondly, growth has been guaranteed by policies that have encouraged integration with other economies in the world. The country has used these factors to develop new industries that are integrated with other sectors of the economy, therefore achieving sustainable growth. References Ahrend, R 2005, Sustaining growth in a resource-based economy: the main issues and the specific case of Russia, United Nations Publications, Geneva. Arezki, R & Van der Ploeg, F 2007, ‘Can the natural resource curse be turned into a blessing? The role of trade policies and institutions’, International Monetary Fund Working Paper 07/55. Barbier, E B 2007, Natural resources and economic development, Cambridge University Press, Cambridge. Bishop, J, Kent, C, Plumb, M & Rayner, V 2013, ‘The resources boom and the Australian economy: a sectoral analysis’, Reserve Bank of Australia, Bulletin – March Quarter 2013, viewed 5 May 2014, Chalecki, E L 2013, Environmental Security: a guide to the issues, ABC-CLIO, California. 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