21/10/2010 - 00:00

Challenges come with looming boom as WA hitches a ride in ‘Asia’s century’

21/10/2010 - 00:00

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WA may be riding on the back of growth in Asia, but local economists warn the ride will not always be smooth.

Challenges come with looming boom as WA hitches a ride in ‘Asia’s century’

What are the key issues for the WA economy over the next 12 months?

John Nicolaou: The challenges of recent years brought about by the global economic slowdown will soon be distant memories. Challenges come with growth. These include a return of severe labour shortages, capacity constraints such as a lack of affordable housing and infrastructure bottlenecks, and the higher cost of doing business. All these issues are major concerns for local employers as they make it harder to do business, and make WA a less desirable place to invest.

Ian Satchwell: The dominant issue for the state economy is availability and cost of labour. While much of the discussion about skills needs has been focused on mining and construction, experience during the previous investment wave shows that cost pressures and severe shortages will occur in lower-wage occupations as labour is sucked into higher-paying jobs. This has the potential to compromise delivery of community services, health, education and retail services.

The key to relieving skill and labour shortages is international migration.

General capacity constraints are likely to lead to cost increases across the economy, affecting business and consumers alike.

Alan Langford: China is the key driver of the commodity prices important to WA. But LNG is a special case, because geopolitical factors, including climate change mitigation imperatives that favour gas over coal for power generation, can and often do over-ride the traditional relationship between supply and demand. Nevertheless, it should not be assumed that the ongoing discount of gas prices relative to the oil price can continue indefinitely without affecting the viability of prospective LNG projects.

The prospect of multiple mega LNG projects getting the go-ahead in the next year or two is what sets the current prospective boom apart from earlier ones, although that in itself presents new challenges, not least of which is the massive capital requirement to get them up and running. To that end, a WA economy that surely is as capital intensive as any other in the world – Alberta is probably the only one that even comes close – has a keener interest than others in the success of the US Federal Reserve in keeping global bond yields low and equity prices up.

Given the long lead times to bring mega LNG projects to the production phase, it is also far from inconceivable that renewable energy technologies will develop rapidly enough to challenge LNG’s status as the main bridge to the carbon constrained economy.

On the negative side, even if the ‘Fed’ were not on the verge of adding to its already eye-popping balance sheet of $2.3 trillion, the risk of a resurgence in global inflation in the medium to longer term would pose an upside risk to the cost of the long-term capital that is an integral component of the investment decision.

Nevertheless, as important as capital costs are to the business investment that distinguishes WA from most other states, the demand and price for our commodities is still the key driver of whether a project gets the nod from the board of its proponent.

Raymond da Silva Rosa: The key issues for WA’s economy in the short run are similar to those of a jockey riding a fast but high-spirited horse in a short-course race. The odds look good but the rider can easily get unseated ... risks include prolonged industrial action, the rapid rise in the Australian dollar critically destabilising non-resource sector export businesses, skills shortages giving rise to unsafe makeshift arrangements, poor policy making in a stretched government sector, and the rise, yet again, of the view that ‘it’s different this time’ leading to over-investment in marginal projects.

What should the state government be prioritising in terms of economic management?

John Nicolaou: Getting the state’s finances in order should be the top priority of the government. While spending growth has been reduced somewhat by the current government, it remains too high and is an unnecessary drain on the state’s finances.

Doing so will allow the government much needed tax relief to local businesses, which are already facing rising operating costs, and are among the highest taxed the country. Reducing costs like payroll tax would be a simple and effective way for government to help business grow, and create more jobs.

Ian Satchwell: Strong population growth at a rate of up to 70,000 per year, driven by demand for skilled labour, will create big demand for housing and community infrastructure in both Perth and the regions. Timely development of land, housing and infrastructure is the top priority to enable the state to accommodate the people it needs.

The state government needs to do what it can to mitigate costs to business, particularly SMEs, which employ the vast majority of Western Australians.

The government should seek to reduce taxes and charges affecting business, and by ensuring that adequate inputs such as land, energy and water are available when and where businesses need them.

Alan Langford: While there is a realistic chance that the next resources boom will be more durable than earlier ones, the risk of it ending suddenly and painfully are significantly greater than negligible. So deployment of a meaningful proportion of the wealth created to enhance social, as well as industrial infrastructure is another key challenge.

Raymond da Silva Rosa: i) Housing affordability should be a priority. Housing takes up a large chunk of the typical family income. The lack of affordable housing makes it more difficult to recruit staff across all sectors. It probably requires coordinated public policy rather than the injection of very large sums of money.

ii) Laying the foundation for increases in worker productivity. Demographic trends mean that we are going to struggle to continue importing skilled workers.

The government should lay the foundation for increases in worker productivity and workplace flexibility. This might be anathema to a Liberal government but a compact between workers and management offers the best prospect for this task. Germany, one of the world’s leading exporting countries (it only recently lost first place to China) provides a good example of the kind of industrial relations compact that facilitates high productivity per hour worked. The current good times make it easier to lay the foundations for a more cooperative, non-adversarial style of industrial relations.

How do present circumstances create economic opportunities?

John Nicolaou: Rising demand for local resources from the developing economies of Asia will create many business opportunities across all sectors of the economy. A larger urbanised middle class across the developing economies across Asia, especially China, will not just increase demand for the state’s resources, but also lead to added demand for other goods and services offered by local firms. The test for Western Australians, the government, and the business community, is how we will make the most of these opportunities that stand before us.

Ian Satchwell: WA is about to experience a once-in-several-generations level of investment and economic activity. Construction of resources projects will not only generate jobs and business, but will also lead to a long-term increase in the value of minerals and energy production, which could be at around double 2010 levels as soon as 2017.

This activity will provide the platform to transform the economy from one that is driven by minerals and energy to one that is also driven by technology and knowledge. WA’s resources industry with world-scale operations in both minerals and petroleum, and its proximity to Asia, position Perth as a service centre for the region. Perth is already a centre of excellence in minerals and energy education, R&D, engineering, environmental services, legal services and production technologies. There is a great opportunity to develop the city as a knowledge-intensive service centre like Houston and Aberdeen.

Alan Langford: WA is better placed than most to exploit renewable energy’s place in the total global energy mix, if for no other reason than it has lots of energy intensive industrial sites in both sunny and windy places, more than a handful of which are close to coastal locations that have very large tides. And that’s even before geothermal energy generation potential is taken into account.

Renewable sources will soon play a significant, rather than peripheral, supplementary role in power generation.

The role of a price on carbon in just how quickly renewable energy increases its share of global energy production is an issue that is too big for Australia, let alone WA, to tackle alone. But as an energy intensive economy, WA has the most to lose if delay in thrashing out a viable global agreement on a carbon price is at the cost of a more severe eventual regime when, rather than if, a carbon price is imposed, whether in the form of a tax only, or a mixture of tax and an ETS.

Equally, however, WA has much to gain by embracing and facilitating the burgeoning supplementary role of renewable energy, including the export of the intellectual capital gained in melding renewable energy technologies with existing base load capacity from non-renewable sources.

Raymond da Silva Rosa: We don’t want to fall into Dutch disease where one section is so successful it sucks up all the capital and talent. What works well here is entrepreneurialism. It is not just the mining sector – it occurred before the mining boom; WA always had an entrepreneurial streak. We should look to strengthen that. Government should put more into the university sector, as the Queensland government has.

What period in history do you see as offering insight into WA’s current circumstances?

John Nicolaou: This is set to be period of economic development unmatched in the state’s history. It will be a substantial shift in the dynamics of the global economy. With our close trade links with developing Asia, WA and Australia, is ideally placed to benefit. In the 1960s, WA’s economic growth was fuelled by the emergence of an internationally significant iron ore industry. During the 1900s it was the gold rush that sparked significant growth and development. Today, it is growing international demand for a diverse range of natural resources that will push the state forward. We only have look back two years ago prior to the emergence of the global economic slowdown to gain an insight into the demands and pressures that the local economy is set to face.

Ian Satchwell: The level of investment in WA and consequent growth in output is unprecedented. The treasurer, Wayne Swan and deputy governor of the Reserve Bank compare Australia’s coming investment wave only to the mining booms of the 1800s. The effect on WA, relative to its current economy, will be much larger than for the nation as a whole.

Raymond da Silva Rosa: An example of a boom economy that got it wrong was the Middle East; places like Dubai, which built a lot of infrastructure but didn’t develop the services and the human capital.

I think we should be following Jeff Kennett’s lead; it is paradoxical that he had it so bad that he could do anything whereas we have an embarrassment of riches that we don’t know what to do with.

What are the economic drivers for businesses that are not directly connected to the resources sector?

John Nicolaou: As was witnessed during the last period of economic growth at the start of this century, population growth will be one of the key drivers of the local economy. We are already seeing record numbers of people coming to the state to share in the benefits of the positive economic conditions. This will create benefits for businesses across all sectors, and all regions of the state. There will be more demand for products and services, and housing, to name just a few.

However, we are an economy that is centred on a dominant and globally competitive resources sector. The key is to leverage off the opportunities to create a more diversified economic base. While ‘knowledge economy’ may be an over-used term, growth in the education, technical, and health sectors will be important drivers.

Ian Satchwell: Key economic drivers that at not connected to the domestic resources sector are:

• the rapid growth of WA’s population and the construction of housing and community infrastructure required to facilitate this growth;

• development of exports of agriculture and food products, and knowledge; and

• technology intensive services and goods to rapidly growing Asian markets.

SMEs, in particular, may experience the ‘crowding out’ impacts of resources investment, without concomitant rises in revenue.

Alan Langford: If WA is in fact in the early stages of a new resources boom, then managing it will be challenging. The longer and stronger it gets, the greater will be financial stresses on households and businesses not directly benefiting from the wealth created as prices are forced up by robust demand from those that do.

Raymond da Silva Rosa: Many of WA’s strengths are in areas developed by past waves of migrants like the Greeks and Italians and we ought to be exporting those speciality services and expertise.

Looking at our key markets where do you see the opportunities and threats?

Ian Satchwell: This is the ‘Asia century’. Based on current trends, Asia (including Australia and New Zealand) will be the world’s largest economic region by 2030. WA’s location close to the Asian region, which hosts 60 per cent of the world’s population, gives it strong advantages in the Asian market.

The Asia story is not only about China and India. The economies of South-East Asia are also growing strongly. The main threat is a double-dip global recession, which may dampen demand for commodities and put a brake on investment.

Alan Langford: It is far from clear to what extent, if any, low US gas prices, if they persist, will constrain Australian LNG export prices in the future; but there is a legitimate risk of WA being saddled with literally billions of dollars of stranded capital tied up in both public and private LNG infrastructure. The risk is difficult to quantify and is probably low-ish, but it is nevertheless high enough to warrant inclusion in the debate over public LNG infrastructure, including the thorny issue of gas reservation policies.

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