A Turn to Asia

• Author: Alison Stuart
• Position: a Deputy Division Chief in the IMF’s Asia and Pacific Department.

A STRONG increase in export prices and a boom in mining investment supported buoyant income growth and rising living standards in Australia over the past decade. Now, as mining investment begins to slow, Australia needs to generate higher productivity and broaden its export base to sustain that rapid improvement in prosperity.

Over the past decade a mining investment boom transformed Australia’s economy into one that is more resource intensive than before and increased its export links with Asia. Australia benefited from Asia’s rapid industrialization and urbanization, especially in China, which led to higher demand for products required for construction and other investment and led to sharply rising global commodity prices from the early 2000s through 2011.

Increased exports of commodities, whose prices can be volatile, have also made the Australian economy more sensitive to changes in the terms of trade—that is, the relative price of exports in terms of imports (see Chart 1). Because of high export prices for coal and iron ore, which started rising in the early 2000s, Australia’s terms of trade reached a historic high in 2011. Since then, as the supply of commodities increased, prices have softened and Australia’s terms of trade weakened, lowering income and reducing tax revenues.

Meeting demand

When commodity prices began to rise a decade ago, Australia, like other resource producers, ramped up mining investment and increased output. The country’s mining investment rose from about 2 percent of GDP in 2002 to about 8 percent in 2013 (Arsov, Shanahan, and Williams, 2013). Investment was mainly in coal and iron ore early on, but more recently, liquefied natural gas (LNG) projects have increased to meet rising global demand for energy.

The mining investment boom has helped Australia’s economy grow for 23 consecutive years—even during the recent global economic crisis. Between 2000 and 2012, real (after-inflation) incomes grew an average 2.5 percent a year per capita.

And mining will remain an important part of Australia’s economy. The country’s resources are diverse and plentiful and Australia is a low-cost and very competitive producer. In 2011 Australia had the world’s largest reserves of gold, iron ore, nickel, rutile, and zircon. It also has bountiful reserves of a number of other minerals, including black coal (Australian Government, 2013), and is the world’s third-largest LNG exporter (EIA, 2013).

Still, the future is uncertain. Over the next...