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OPINION INTERNATIONAL Volume 24, No. 3, May 2006 email: asiatoday@asiatoday.com.au web: www.asiatoday.com.au PUBLISHER Barry Pearton EDITOR Florence Chong CHIEF CORRESPONDENT Philip Bowring CORRESPONDENTS Hong Kong – K.K. Chadha, James Yapp, India – N. Hariharan, Rajendra Bajpai; Indonesia – Tom McCawley; Indo-China – Steve Joel; Japan – Russell McCulloch; Korea – John Park; Malaysia – Mages Ramakrishnan; Pakistan – Raja Ashgar; Philippines – Abby Tan; Singapore – Andrew Symon; Thailand – Robert Horn; Taiwan – Michael Taylor. ADVERTISING AUSTRALIA – ASIA TODAY INTERNATIONAL, Level 29 Chifley Tower, 2 Chifley Square, Sydney NSW 2000, tel (61 2) 9970-6477, fax (61 2) 9913-2003, email advertising@asiatoday.com.au ASIA – Herb Moskowitz, Regional Advertising Manager, The Media Representative Company, 39th Floor Exchange Square One, 8 Connaught Place, Central, Hong Kong, tel (852) 2838-8702, fax (852) 2572-5468, email herbmosk@yahoo.com.hk PUBLISHER’S REPRESENTATIVES USA/CANADA InterMark3 <strong>International</strong> Communications, Inc. 5929 Albervan Street, Shawnee, KS 66216 USA. Tel (91 3) 248-7770, Fax (91 3) 248-7771 Contact: Fred Baehner, email: fbaehner@mail.intermark3.com EUROPE LIVEpr, 4th Floor, 124 Victoria Street, London SW1E 5LA United Kingdom. Tel (44 (0)20) 7630-1100, Fax (44 (0)870) 121-5572, email info@livepr.net Contact: Ross Clarke, David Wallen. Office Manager: Khin Htwe Spaliviero Production: Oliver Timm DAILY ONLINE UPDATES – and, for subscribers, a weekly email summary of items you may have missed. Visit www.asiatoday.com.au and for further details of online benefits available to subscribers, email admin@asiatoday.com.au COPYRIGHT© All material in ASIA TODAY INTERNATIONAL is copyright. Reproduction in whole or in part is not permitted without written permission of the publisher. Member of Circulations Audit Board Audited nett circulation, 8,479 copies per issue (12 months to March 2005) ® ➔ FROM PAGE 5 of patriotism. It was regarded as selling national assets,’’ Sunai said. It’s a strange turn of events. Big infrastructure projects, privatisation and FTAs are always contentious issues – and would elicit opposition no matter what government is in power. When Thaksin swept to office in 2001 he was hailed as a globaliser, the kind of leader who had the knowledge and savvy to navigate these types of deals and give Thailand the advantage. But many now believe that any deal under Thaksin will ultimately be to his own advantage. Ironically, in Thailand, Thaksin has given globalisation a bad name. * Robert Horn is Bangkok correspondent for ATI. MANAGING THE GOLDEN GOOSE AS Australia’s minerals and energy exports continue to rise, there is likely to be more public concern over how governments use their mining and petroleum revenues . . . COMMENT Andrew Symon* SINGAPORE – Resource-rich Australia looks set to enjoy a long minerals and energy export boom fuelled by demand from the world’s industrialising giants, China, India and Brazil. Boosting prospects further is the expectation of increasing sales of uranium oxide for China’s ambitious nuclear power programme. Anticipating this bonanza, Australia’s Federal and State governments, not to mention companies and investors, are rubbing their hands with glee. But like a man who wins a lottery, resources revenues can be easily squandered. Worldwide experience shows that resources booms can, in fact, end up harming countries if governments do not manage them properly. One classic case is Nigeria, which has received more than US$280 billion in oil revenue in the last three decades – more than the total of all government development assistance to all of Africa in this period, the World Bank says. Yet Nigeria’s real per capita income has declined. While Australia should hardly find itself ending up as an Antipodean Nigeria, it needs to take heed of lessons elsewhere. Countries gaining sudden and often relatively shortlived wealth – minerals, oil and gas, and coal eventually run out – may find that local manufacturing and agriculture becomes less competitive and is squeezed out by the booming resources sector as it causes the currency to appreciate. Local currency values may rise significantly as exports surge and domestic inflation takes off through the booming sector’s own demand, easier bank credit as foreign currency is converted into local currency – thus expanding money supply – and increases in government spending. Speculation may also hold up value as traders put a premium on the local currency in view of the outlook for strong world commodity demand – as has been Australia’s experience. Resource prices may also turn out to be very volatile, with economy-wide upheavals caused by sudden falls, loss of export income, falling exchange rates and a consequent exodus of overseas capital. Australia, now with a high current account deficit sustained by large investment inflows – and high foreign debt as a result – therefore needs to be wary. Although analysts expect commodity prices to remain strong, a sudden drop could see Australia’s currency fall sharply. Interest rates then would have to increase to stabilise the situation, possibly sending the local economy into recession. Resource booms can be especially fatal for developing countries where the modern economic sector is small – until the advent of the mineral or petroleum development – and much of the population is reliant on semi-traditional agriculture. The new resources industry overwhelms the economy. Such danger is not exclusive to developing economies, as the Netherlands found in the late 1960s and 1970s when North Sea gas was first produced and exported. Economists now refer to the problem as the “Dutch disease”. Government corruption – or perhaps more accurately put, corruption facilitated on a grander scale than before – may also result. Where use of funds is not transparent and accountable, ministers and officials may feather their own nests and use funds to cement political support through government contracts to cronies. In the case of Australia, though, whatever one may think of politicians and bureaucrats, one would not expect them to stash public funds into Swiss bank accounts in the manner of, say, the notorious former president of Zaire (now the Democratic Republic of the Congo), Mobutu Sese Seko. Yet whether a country is developing or developed, there is always the danger of mismanagement of public revenues. To avoid this, should the resource income be dedicated for longer-term investment in infrastructure, education and training and R&D, rather than just being poured into treasuries to support general recurrent spending? One developed country taking this course is oil- and gas-rich Norway, which puts its petroleum revenues into a special fund to provide for welfare and aged pensions over the long term. The fund is invested domesti- ➔ CONTINUED PAGE 7 6 | ASIA TODAY INTERNATIONAL MAY 2006
HIDDEN DANGERS OF A RESOURCES BOOM ➔ FROM PAGE 6 cally and internationally. The Parliament limits the amount of fund revenue that can be used by the Government in any one year. The fund also helps avoid the “Dutch disease” resulting from excessive government spending and credit expansion in the short term, and evens out the revenue ups-and-downs through volatile oil prices. Similar funds operate elsewhere in the world, with the most relevant for Australia in terms of country and economy comparability being those in the State of Alaska in the US, in Alberta, Canada, and in Chile. Elsewhere, there are funds in Venezuela, Botswana, Kuwait, Oman, Iran, Azerbaijan and Kazakhstan. Timor Leste (East Timor), which recently resolved a problem with Australia over development of gas fields in the Timor Sea, is also setting up a fund to manage its oil and gas revenue. Timor Leste is being advised by the Norwegian Government. In the case of a poor country such as Timor Leste, the fund promises to prevent corruption. A well-managed fund combined with careful spending decisions should reduce Timor’s reliance on overseas government assistance loans and consequent debt for health, education and physical infrastructure development. Of course, there are plenty of governments that do manage effectively resource booms without such funds. This no doubt will be the argument from most Australian treasuries. They will also point to the fact that, unlike classic international cases, mining and petro- ❝ Countries gaining sudden wealth may find local manufacturing and agriculture is squeezed out by the booming resources sector as it causes the currency to appreciate ❞ leum production is a small proportion of Australia’s total Gross Domestic Product – not more than 10 per cent – taking into account downstream processing and services supply – and governments rely on many other sources of revenue apart from resource rents. But mining and energy (coal, liquefied natural gas, some oil, and uranium oxide) dominates Australia’s trading accounts. Mineral and energy exports made up 39 per cent of total goods exported in 2004/05. And this figure underestimates the contribution of natural resources because it excludes those exports of minerals partly processed. Government resource revenue funds in the Australian situation would most likely have to be State-based affairs as they levy onshore and immediate offshore resource royalties, not Canberra. Canberra does get royalties from offshore production beyond three nautical miles, and these will grow sharply with the assured and large expansion of liquefied natural gas exports from fields offshore Western Australia and the Northern Territory. Western Australia, with vast resources deposits producing 40 per cent of the country’s minerals and energy, could be a prime candidate. Mining and petroleum royalties currently contribute AUD1.3 billion, or about 10 per cent, of the WA State Government’s AUD13 billion annual revenue. Natural resources strike an emotional chord for the public as they are felt to be national assets from which all should gain some benefit as a result of development and export. Strengthening this feeling will be the probable growing role of foreign companies and their investment – and here Australia is likely to see growing investment from Chinese companies. Illustrating this, the Chinese State-owned Sinosteel Corporation recently dangled US$3 billion in front of Australian iron ore miners at a conference in Perth. Already an investor in Australian mines, Sinosteel said it wanted to partner new projects in Australia and elsewhere to diversify supply. As mineral and energy exports rise – a significant increase is projected by the Australian Bureau of Agriculture and Resource Economics – and so play an evergreater role in Australia’s fortunes, there is likely to be more public concern over how governments use their mining and petroleum revenues. * Andrew Symon is Singapore correspondent for ATI. ASIA TODAY INTERNATIONAL MAY 2006 | 7
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