COMMODITY BOOMS AND THEIR IMPACTS
ON THE WESTERN AUSTRALIAN ECONOMY:
THE IRON ORE CASE
by
Qiang Ye
State Development Strategies Division
Western Australian Department of Industry and Resources
Abstract
Western Australia is a resource-rich province. Since 1890s, the resources
booms have played a key role in the development of the State’s economy.
In the last a few years, Western Australia’s resources industry continued to
enjoy exceptional conditions created by strong international demand for
commodities. This paper is aimed to examine the likely impact of this
commodity boom in the iron ore sector on the Western Australian economy
using a general equilibrium approach. The modelling results indicate that
the Western Australian economy will benefit from the expansion in iron ore
exports and investment in terms of rising consumption and employment,
although at the industry level there will be losers as well as winners.
*I would like to thank Professor Ken Clements, Dr Grant Coble-Neal and Ms Dianne Forde for their
helpful comments and suggestions. I am also grateful to Dr Don Flint for providing me with some
valuable data. This study is a contribution to the ARC Linkage Project “Exchange Rates and
Commodity Prices” of the Economic Research Centre, The University of Western Australia. The
views expressed here are those of the author and do not necessarily represent those of the Department
of Industry and Resources.
Introduction
Western Australia is a resource-rich province and among the world’s major producers
of heavy mineral sands, iron ore, diamonds, alumina, nickel and liquefied natural gas
(LNG). Western Australia has significant world market shares for a range of strategic
minerals. In 2005 for example, Western Australia accounted for 54% of world
tantalum production, 32% of zircon, 26% of rutile, 18% of iron ore, 17% of alumina,
15% of nickel, 8% of LNG and 7% of gold (table 1).
Table 1: Western Australian share of world production for 2005 (by quantity)
Commodity
Share (%)
Tantalum
Zircon
Rutile
Ilmenite
Iron ore
Diamonds (mainly industrial grade)
Alumina
Nickel
LNG (seaborne trade)
Gold
Salt
54
32
26
18
18
18
17
15
8
7
5
Source: Western Australian Department of Industry and Resources, ABARE and USGS.
The resources sector which consists of the mining and petroleum industries has long
played an important role in the Western Australian economy. In 2004, the resources
sector accounted for around one quarter of gross state product and around 80% of the
State’s merchandise exports. In 2004-05, capital expenditure on mining equalled
56.5% of total Western Australia capital expenditure. Total commodity sales reached
$33.2 billion, generating $1.26 billion of mining and petroleum royalties.
In the last a few years, Western Australia’s resources sector continued to enjoy
exceptional conditions created by strong international demand for commodities. This
paper aims to examine the impact of this commodity boom, specifically the iron ore
resources boom, on the Western Australian economy using a general equilibrium
approach.1
1
Previous studies on the economy-wide impacts of resources projects in Western Australia include
Adams (2004), Clements and Greig (1994), Clements et al. (1996), Layman (2004) and Ye (1998).
2
The paper is organized as follows: Section 1 presents an overview of resources booms
in Western Australia. Section 2 examines new developments in Western Australia’s
iron ore industry. Section 3 explains the model and simulation designs. Section 4
contains the modelling results and the last section concludes the paper.
1. An overview of resources booms in Western Australia
The resources sector is a vital source of growth to Western Australia. The historical
development of the Western Australian economy indicates that the current economic
and political relationship within the State owe a great deal to the foundation laid in the
previous resources booms. Though there are other factors such as major post-war
immigration, depressed prices in world agricultural commodity markets, the collapse
of the Australian Wool Corporation’s price support scheme, and the State’s
geographic isolation from the rest of Australia, which have also influenced the current
situation, resources booms resulting from major mineral discoveries have played a
key role over the past century.
From a historical view, Western Australia has had a strong link with minerals and
other primary industries, such as pastoral, agricultural, hardwoods and sandalwood
industries, for its economic welfare now for over a century. Since the formal
foundation of the colony of Western Australia in 1829, the British Government
intended the colony of Western Australia to have an agricultural and pastoral base.
But the poor quality land and inadequate labour supply and infrastructure hindered the
healthy development of these industries. With the discovery of gold in the 1890s, a
newly developed mineral industry became an important component of the State’s
economy (figure 1).
Figure 1: Historical Mineral Production Value in Western Australia
(in 1997 dollars)
$ Millions
25000
Diamond
Salt
Nickel
Petroleum Products
Alumina
Heavy Mineral Sands
Iron Ore
Coal
Gold
Other
20000
15000
10000
5000
Source: Western Australian Department of Industry and Resources.
3
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
1915
1910
1905
1900
1895
1890
0
The gold rushes in the 1890s was the first commodity boom in Western Australia’s
history and provided a strong boost to the Western Australian economy.
Accompanying the economic development was a new railway system, a major water
pipeline to the goldfields and a range of other major infrastructure investments. The
erstwhile sleepy colony whose European population was only 40,000 in 1890 had
quadrupled its population within ten years (Maxwell, 1996).
The improved labour supply, finances and infrastructure that resulted from the 1890s
goldrushes benefited other primary industries during the post-goldrush period. From
1901 to 1929 for example, Western Australian agriculture experienced a long
prosperous period, which only ended in the Great Depression of the 1930s when
world agricultural markets collapsed.
Since the goldrushes of the 1890s the importance of minerals in the Western
Australian economy has varied. During the last century other primary industries,
particularly agriculture, have been on the ascendancy in between periods of mining
dominance. Greig (1998) reports that from the end of World War II until the mid1950s agricultural production, especially wool, underpinned Western Australia’s
economic development. In addition, there was abundant post-war immigration. Over
the period from 1945 to 1965, on average Western Australia’s population grew by
2.8% per annum in comparison to the national figure of 1.9% (Maxwell, 1996).
In the 1960s, Western Australia experienced its second resources boom. The major
discoveries of nickel at Kambalda in 1966, Mt. Windarra in 1969 and Agnew in 1971
and the discovery of massive iron ore deposits in the Pilbara region of Western
Australia attracted many overseas companies. These discoveries bolstered the
emerging Western Australian economy. Mines and various industrial and social
infrastructure (railways, ports, towns, community facilities) were developed. As a
result of the 1960s resources boom, a world-class minerals industry including iron
ore, nickel, gold, bauxite and alumina, and mineral sands was established in Western
Australia. Through the 1970s, both minerals and agricultural and pastoral industries
enjoyed steady expansion and relatively prosperous conditions.
The 1980s saw the third resources boom. This boom resulted from exploitation of
diamond discoveries in the remote Kimberley region and the massive North West
Shelf gas deposits near Dampier. Alongside the exploitation of diamond discoveries
and gas deposits, the application of new technologies to the extraction of gold from
ore, enabling much lower grades of ore to be profitably treated, fuelled the economic
resurgence of the Eastern and Northern Goldfields. According to Greig (1998), over
the course of the 1980s, annual Western Australian gold production went from around
10 tonnes to almost 180 tonnes. The 1980s resources boom not only provided an
extensive stimulus to the State’s economy, but also facilitated the development of a
world-class mineral industry service sector.
4
Since the second half of 2003, Western Australia has been experiencing another
resources boom, driven by strong export demand. Robust growth from the US and
China in particular has sent commodity prices to very high levels. Compared with
2003, for example, average prices in US dollar terms in 2005 rose by 107% for
copper, 92% for oil, 90% for lead, 83% for iron ore, 67% for zinc, 53% for nickel,
39% for alumina, 33% for aluminium and 22% for gold (figure 2). The (composite)
price index of commodities produced in Western Australia (WACPI)2 in both $US
and $A terms increased significantly over the period of 2002 — 2005 (figure 3).
Figure 2: Average price comparisons 2003-2005
% change
120
US$
100
A$
80
60
40
20
G
ol
d
m
m
in
iu
A
lu
m
in
a
A
lu
e
N
ic
kl
Zi
nc
or
e
Iro
n
Le
ad
O
il
Co
pp
er
0
Source: Western Australian Department of Industry and Resources.
This latest resources boom seems to be a prominent one in Western Australia’s
history since the Kalgoorlie gold rushes of the 1890s. It has strengthened Australian
currency and improved Australia’s terms of trade significantly, seeing resource-rich
Western Australia enjoy its best economic times for a generation or more. The
Western Australian economy grew at its fastest pace with the annual rate reaching
10.4% in 2005. The mining investment boom resulting from the resources boom
created more job opportunities. As a result, the unemployment rate in the State fell to
4.0% in January 2006, the lowest level in more than two decades. It is rumoured that
some job advertisement in Western Australia can stipulate merely “applicant must
2
WACPI is compiled by the Western Australian Department of Treasury and Finance (DTF).
According to DTF, WACPI is comprised of the export-weighted prices of Western Australia’s most
important commodity exports. It differs from the commonly quoted Reserve Bank of Australia (RBA)
Australian Commodity Price Index because Western Australia’s exports are made up of a significant
quantity of oil (not represented in the Australian index), but no coal, Australia’s largest resources
export. Liquefied natural gas is also a significant higher proportion of WACPI (WADTF 2006).
5
have a pulse” (Caton, 2006). Skills shortage in Western Australia’s labour market
caused large inflow of migrants, resulting in population gains and house price rises in
Western Australia while real estate markets weakened in the east States.
Figure 3: Western Australian Commodity Price Index (WACPI:
Non-rural index, 2001-02 = 100) and Exchange rate ($US/$A)
$US/$A
1.0
WACPI
250
0.9
$US/$A
200
0.8
0.7
0.6
150
0.5
WACPI ($US)
0.4
100
0.3
WACPI ($A)
50
0.2
0.1
0.0
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
Jun-98
Jun-97
Jun-96
Jun-95
Jun-94
Jun-93
Jun-92
Jun-91
Jun-90
Jun-89
Jun-88
Jun-87
Jun-86
Jun-85
Jun-84
0
Source: Western Australian Department of Treasury and Finance.
Different from previous resources booms which were mainly caused by discoveries of
one or a few minerals, this resources boom is sparked by a sustained increase in
China’s demand for raw materials from alumina to zinc. To quantify the economywide impact of such a broadly based resources boom would need to take into account
all relevant commodities. However, given limited data available and to make the
modelling task manageable, this paper will be focused on iron ore — one of the
dominant commodities in this boom.
2. The iron ore industry in Western Australia
The iron ore industry is now the largest individual commodity sector in Western
Australia by value and plays a pivotal role in the State’s export-driven economy. In
2005, the iron ore industry accounted for 29% of total value of minerals and
petroleum sales, up from 22% in 2004. Driven by Chinese demand, iron ore sales
reached record volumes for a sixth consecutive year, increasing by an impressive 13%
to 244.5 million tonnes (Mt). The solid increase in quantities sold together with a
surge in iron ore prices pushed sales values to a new record of $11.3 billion, up 83%
on the previous year’s level (figure 4).
6
Figure 4: Western Australian iron ore sales, 1981-2005
Mt
$ million
300
12,000
250
10,000
Volume
200
8,000
Value
150
6,000
100
4,000
50
2,000
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
0
Source: Western Australian Department of Industry and Resources.
Western Australia’s iron ore industry is highly export-oriented and accounting for
37% of global iron ore seaborne trade. In 2005, iron ore exports from Western
Australia increased by 84% to over $11.1 billion. China is now the largest consumer
of Western Australia’s iron ore, accounting for 53.5% of the State’s iron ore exports,
followed by Japan (29.4%), South Korea (9.5%), Taiwan (4.0%) and Europe (3.4%)
(figure 5).
Figure 5: Western Australian iron ore exports in 2005
China
53%
Exports
$11.12
billion
Japan
29%
Korea 9%
Other 7%
Source: Western Australian Department of Industry and Resources.
7
The bulk of Western Australia’s iron ore industry is centred on operations in the
Pilbara where two of the world’s richest ore deposits are located. In response to
China’s emergence as the world’s largest steel producing nation, Western Australia’s
iron ore production from the Pilbara region had exceeded the 200 Mt per annum mark
for the first time in 2004. Apart from the Pilbara region, iron ore production and
potential also exist in other areas such as the Yilgarn, Kimberley and Mid West
regions.
Most iron ore is traded on contracts that are negotiated every 12 months. Due to
strong demand for iron ores fuelled principally by a booming Chinese economy, iron
ore prices have continued to rise since 2003. Following a 9% rise in iron ore prices
for the Japanese fiscal year (April — March) in 2003 and a 16.7% rise in 2004
negotiated between Australian iron ore producers and Japanese steel makers, a record
71.5% increase was again achieved for the Japanese fiscal year in 2005. This brought
high grade lump up to 78.77 US cents per dry metric tonne unit and high grade fines
up to 61.72 US cents per dry metric tonne unit3 (figure 6).
Figure 6: Negotiated iron ore contract prices
$US/dmtu
0.9
Iron
(Lump)
Iron (Fines)
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
Jan-06
Jan-05
Jan-04
Jan-03
Jan-02
Jan-01
Jan-00
Jan-99
Jan-98
Jan-97
Jan-96
Jan-95
Jan-94
Jan-93
0.0
Source: Western Australian Department of Industry and Resources.
As a result of strong demand for iron ore from China and other Asian economies and
escalating iron ore prices, the iron ore industry now flourishes in Western Australia.
As Preston (2006) points out, “Prospects for iron ore are as sought after as gold was in
3
Iron ore prices are denominated in US cents per dry metric tonne unit, which reflects a common base
per unit of iron content. To compare prices on a “per tonne” basis instead of an “iron ore units” basis,
the following conversion can be used: US$ price per tonne = US cents per dry metric tonne unit × iron
content.
8
the gold rushes or nickel in the nickel boom. Equally, where iron ore was seen as an
exclusive club of the big mining houses, it is now being promoted by a whole
spectrum of industry players and even those without previous mining interests and
certainly with no iron ore experience.”
Encouraged by the bright prospect for iron ore, exploration expenditure for iron ore in
Western Australia reached an all-time record level in 2005, increasing by 46% in
2005 to $149.7 million following a substantial 92.5% surge in 2004 (figure 7).
Currently, more than 60 companies are exploring for iron ore in Western Australia.
Figure 7: Western Australian iron ore exploration expenditure
(2005 dollars)
$ Million
160
140
120
100
80
60
40
20
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Western Australian Department of Industry and Resources.
Higher iron ore prices have created an iron ore investment boom in Western Australia.
Iron ore producers are investing heavily in increasing production capacity through
both brownfield expansion and greenfields projects. There are more than $15 billion
worth of iron ore projects either underway or planned for the State over the next few
years. Table 2 lists projects that were committed as at 20 February 2006. The
projects comprise (i) new developments; (ii) expansion of existing project; and (iii)
upgrading existing facilities. The total value of all projects is $3.4 billion. The new
output capacity will be 48 Mt per annum. As this will be offset by an 8 Mt per annum
reduction in capacity due to the suspension of BHP Billiton’s Goldsworthy ship
loading operations at Finucane Island, net increase in installed capacity will be 40 Mt.
The current iron ore investment boom will further consolidate and enhance Western
Australia’s position as a prominent supplier in the world iron ore market. With large
reserves of high-grade iron ore, close proximity to Asia, sophisticated infrastructure
and continued strong demand, the Western Australian iron ore industry is expected to
continue its strong growth through 2006 and beyond.
9
Table 2: Committed iron ore projects in Western Australia (as at 20/2/2006)
Project
Company
(1)
Koolyanobbing -- Iron ore project
Koolanooka/Blue Hills Hematite mine
Rapid growth project 2
Rapid growth project 3
Yandicoogina -- Mine expansion
Rail duplication
Cost of
Output Production
project
(Mt/y) start year
($m)
(2)
Portman Limited
Midwest Corporation Limited
BHP Billiton Iron Ore Pty Ltd
BHP Billiton Iron Ore Pty Ltd
Hamersley Iron Pty Limited
Robe River Mining Company Pty Ltd
Total
(3)
(4)
(5)
75
26
745
1,700
700
200
3
1
8
20
16
2006
2008
2007
2008
2007
2006
3,446
48
Sources: 1. WA Department of Industry and Resources' Prospect (March-May 2006).
2. bhpbilliton's News Release (24 January 2006).
3. Modelling the economy-wide impact of the iron ore boom
This unprecedented iron ore boom is likely to generate substantial effects on the
Western Australian economy. To assess the magnitude and scope of these effects, a
general equilibrium modelling approach is adopted. A new version of the Monash
Multi-Regional Forecasting-Green model (MMRF-Green) developed by the Centre of
Policy Studies of Monash University has been used.
The model
MMRF-Green is a multi-sector dynamic model of the Australian economy covering
the six States and two territories. It models each region as an economy in its own
right, with region-specific prices, region-specific consumers, region-specific
industries and so on. Details of the MMRF-Green model are described in Adams
(2001). The version of the MMRF-Green model used in this study distinguishes 50
industries and 55 commodities.
As a dynamic model, MMRF-Green is able to produce sequences of annual solutions
connected by dynamic relationships. The MMRF-Green model determines regional
supplies and demands of commodities through optimising behaviour of agents in
competitive markets. Optimising behaviour also determines industry demands for
labour and capital. Labour supply at the national level is determined by demographic
factors, while national capital supply responds to rates of return. Labour and capital
can cross regional borders so that each region’s stock of productive resources reflects
regional employment opportunities and relative rates of return.
10
Interpreting results
To run a dynamic simulation, MMRF-Green has to develop a reference case or a
“business as usual” simulation. The reference case projects the growth in key
variables in a region based on business-as-usual assumptions for the economy. In this
report, for example, the reference case represents the likely outlook for general
economic conditions in the Western Australian economy without the resources
booms. Against the baseline provided by this reference case, the impacts of changes
in policies or other external factors can be assessed.
The estimated impacts on economic variables of policy changes or external shocks are
typically expressed as percentage deviations between the equilibrium levels of those
variables in the reference case and their equilibrium levels in the policy simulation.
For example, the impact on Western Australian Gross State Product (GSP) of the iron
ore boom can be identified by comparing the level in the State’s GSP in the policy
simulation (i.e. with the iron ore boom) with its level in the reference case (i.e.
without the iron ore boom). If GSP in the reference case in 2024-25 is projected to be
$100 billion and following the iron ore boom, GSP in 2024-25 is projected to be $101
billion, this corresponds to a 1% increase in GSP from the reference case. Hence, in
this example, the effect of the iron ore boom would be to increase Western Australia’s
GSP by 1% compared with the reference case projection at 2024-25 (figure 8).
Simulation design
Strong demand for iron ore led by China has significantly pushed up iron ore prices
and driven Western Australian iron ore exports to a record level, leaving the Western
Australian iron ore industry to operate at full capacity. With global demand expected
to remain strong, established and emerging Western Australian iron ore producers are
investing heavily. To fully appreciate the impact of the iron ore boom on the Western
Australian economy, both initial increases in iron ore exports and the subsequent
investment boom in iron ore projects need to be simulated. Thus, the simulations
involve a series of exogenous increases in both exports and investment in the iron ore
sector based on data available.
The following four scenarios that cover the period up to 2024-25 have been modelled:
1. Base Case. The base case or the reference case is a projection for the Australian
and state economies, representing the likely outlook for general economic
conditions based on business-as-usual assumptions.
2. Scenario 1. This is an optimistic scenario which assumes that rising demand for
iron ore is sustainable, thus Western Australia’s iron ore exports will remain at its
record level and new iron ore projects will materialise as scheduled. It is
equivalent to the base case plus a total $3.6 billion increasing of iron ore exports
together with the development of new iron ore projects listed in Table 2.
11
Figure 8: Interpreting results in MMRF-Green simulations
$ billion
101
c
Policy simulation
b
100
Base case
a
2004-05
2024-25 Time
Deviation from the reference case
%
1
e
d
0
2004-05
3.
2024-25 Time
Scenario 2. This is a pessimistic scenario. The assumption underlying this
scenario is that the iron ore boom will end in 2008-09. Consequently, although
new investment in iron ore has been carried out as scheduled, Western Australia’s
gains in iron ore exports will be lost in 2008-09. It is equivalent to the base case
plus a short-lived expansion of iron ore exports, which ends in 2008-09. It also
includes the development of new iron ore projects listed in Table 2 as in Scenario
1, but production by these projects stops in 2008-09 because of the assumed
contraction of the iron ore demand causing exports to fall back to the base-case
level.
4. Scenario 3. The resources boom is likely to generate more revenues to the
Government. One assumption underlying the above scenarios is that the
Government will spend the additional revenues so that the government budget
balances remain unchanged. But what would happen if the Government was to
run a surplus rather than to spend it? This question will be explored in Scenario 3,
which is exactly the same as Scenario 1 except the modification made to the
assumption associated with government budget balances.
The effects of scenarios 1 to 3 are reported as deviations between the values of
variables in these scenarios and their values in the base case scenario.
12
Exogenous shocks
Table 3 presents exogenous shocks for exports and investment imposed in the
simulations under scenarios 1 to 3. These shocks are annual changes in exports and
investment expenditure in the iron ore sector.
Table 3: Exogenous shocks to investment and exports
($ million, constant price (1996-97 = 100), deviations from base case values)
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10>
Scenarios 1 and 3
Investment
Exports by existing projects
4.1
1,332.7
1,099.7
487.6
2,433.6
2,433.6
2,433.6
2,433.6
2,433.6
2,433.6
90.5
573.2
1,206.8
1,206.8
1,206.8
Exports by new projects
Scenario 2
Investment
Exports by existing projects
4.1
1,332.7
1,099.7
487.6
2,433.6
2,433.6
2,433.6
2,433.6
90.5
573.2
1,206.8
Exports by new projects
Exogenous shocks for investment and exports by new projects are estimates of new
investment and exports for all projects listed in Table 2. For new iron ore projects as
a whole, investment began in 2004-05 and will end in 2006-07. Exports from the new
projects begin in 2005-06 and gradually ramp up to a value of about $1.2 billion.
With exports by existing projects included, total new exports will be more than $3.6
billion in 2007-08. It is assumed that the value of export increase remains at its
2007-08 level through to the end of the simulation period (2024-25) in Scenarios 1
and 3, while in Scenario 2, exports are assumed to fall back to the base-case level in
2008-09.
Major assumptions
Apart from assumptions associated with different scenarios, there are other
assumptions pertaining to labour markets, private consumption and investment,
government budget balances, and production technologies. Based on the traditional
wisdom of the developers of the MMRF-Green model (Adams, 2004), assumptions
associated with MMRF-Green’s standard closures are adopted. They include the
following:
• At the national level, economy-wide employment is allowed to deviate from
its reference level in the short run, but the national real wage rate will respond
13
to gradually eliminate any deviation in national employment caused by new
iron ore projects. Accordingly, in the long run national-wide employment is
determined by demographic factors rather than by changes in iron ore exports
and investment in Western Australia.
• However, the regionally-based new projects are likely to have significant
effects on regional distribution of employment, thus at the regional level
labour is assumed to move between regions so as to maintain inter-state wage
and unemployment rate differentials at their reference levels.
• Household disposable income determines consumption expenditure of the
regional household. In calculating the change in household disposable income
due to the iron ore boom, MMRF-Green takes account of the locally-retained
income directly generated by new iron ore projects, the income indirectly
generated via input/output linkages and induced income effects.
• Capital supply responds to rates of return which are allowed to deviate from
their reference levels in the short run. Over time, changes in capital stocks
gradually erode the divergences in rates of return. Consequently, in the longrun rates of return on industries’ capital return to their base case levels.
• Government expenditure is assumed to move in line with government revenue
changes due to the iron ore resources boom. Consequently, government
budget balances at both the federal and state levels are fixed at their base-case
levels through endogenously-determined changes to the average income tax
rate and direct transfer payments to households. This assumption applies to all
scenarios except for Scenario 3.
• All indirect tax rates are assumed not affected by the expansion in iron ore
exports and new iron ore projects.
• All industry technology and household preferences variables in the policy
simulations have the same values as in the base case simulation.
4. Western Australian economic impact of the iron ore boom
The economics of expanding sectors
Before proceeding to present the macro economic impact of the iron ore boom on the
Western Australian economy, its is worthwhile to briefly note the way of thinking
about the general equilibrium effects of an expanding industry.
14
As the current resources boom in Western Australia is mainly characterised by a surge
in exports and most of the output of new resources projects will be exported, the
export expansion has put upward pressures on the exchange rate. An appreciation of
the exchange rate would squeeze other exporters (i.e., exporters who are not part of
the expanding sector), as well as firms in import-competing sector. A similar effect
could also occur during the period in which the projects are under construction due to
additional economic activity putting upward pressures on costs in general. As the
high costs would have to be paid by all sectors, the profitability of other exporters and
import-competing industries would be squeezed.4 These effects can be described as
an appreciation of the real exchange rate, whereby the nominal exchange rate
appreciates relative to costs. These effects are known as the “Gregory Thesis” in
Australia (Gregory, 1976) and the “Dutch Disease” in Europe and elsewhere (The
Economists, 26 November 1977, pp. 82-83).
The basic idea of the Gregory Thesis is that a large surge in new exports does not lead
to an increase in total exports of the same amount. The initial surge forces up the
prices that other industries have to pay for their inputs and thus hurts other exporters,
causing exports of their products to fall. Accordingly, the change in total exports
comprises the surge in new exports and the reduction in other exports, so that the total
increase is less than the initial stimulus. Firms in traditional export industries are hurt
by an appreciation of the exchange rate and/or a rise in costs in general associated
with the higher level of economic activity generated by the new projects. For similar
reasons, the profitability of import-competing firms is also squeezed, causing imports
to expand.5
Macroeconomic impact on Western Australia
The iron ore boom is expected to generate higher investment, employment,
consumption, exports and gross state product (GSP). This occurs because the boom
will significantly increase the iron ore production and export capacity, generating
direct and indirect demand for labour that in turn leads to higher incomes which
increase private consumption potential in the economy. Increases in investment,
exports and consumption will lead to higher GSP. However, the magnitude of the
impact will depend on whether the boom is sustainable (figure 9).
4
Note also that to the extent that the foreign-exchange market is forward looking in its behaviour, the
exchange rate could appreciate in anticipation of the future expansion of exports. This would add to
the pressure likely to be experienced by other exporters and the import-competing sector.
5
For the literature pertaining to Australia, see Corden (1982), Dornbusch and Fischer (1984), Gregory
(1976), Helliwell (1984), Long (1983), Snape (1977) and Stoeckel (1979). See also Choi (1988),
Corden (1984), Corden and Neary (1982), Gelb et al. (1988) and Neary and Wijnbergen (1986).
15
Figure 9: Western Australian macroeconomic impact on GSP, investment,
consumption, exports and employment (annual percentage deviations)
Scenario 1
Percent
10.0
GSP
Exports
Employment
9.0
8.0
Investment
Consumption
7.0
6.0
5.0
4.0
3.0
2.0
1.0
2024/25
2023/24
2022/23
2021/22
2020/21
2019/20
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
0.0
Scenario 2
Percent
10.0
9.0
GSP
Exports
Employment
8.0
7.0
Investment
Consumption
6.0
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
2024/25
2023/24
2022/23
2021/22
2020/21
2019/20
2018/19
2017/18
2016/17
2015/16
2014/15
2013/14
2012/13
2011/12
2010/11
2009/10
2008/09
2007/08
2006/07
2005/06
2004/05
2003/04
-2.0
Tables 4 – 5 present macro economic impacts on the Western Australian economy in
Scenarios 1 and 2. The upper and middle panels of these tables present major
macroeconomic effects as absolute deviations from the corresponding values in the
base case in both undiscounted and discounted (Net Present Value) terms (in 2002-03
prices).6 The lower panels give the corresponding percentage deviations from the
reference case values.
6
Assumed discount rate is 5%.
16
Table 4: Macroeconomic impacts of the iron ore boom on Western Australia (Scenario 1)
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
14/15
15/16
16/17
17/18
18/19
19/20
20/21
21/22
22/23
23/24
24/25 Average
Total
Absolute deviations from the reference case values ($million, 2002-03 prices, undiscounted)
GSP
Investment
Consumption
Exports
Imports
Employment*
2,851 2,923 3,246 3,765 3,877 3,985 4,094 4,201 4,309 4,414 4,518 4,620 4,718 4,731 4,820 4,903 4,984 5,062 5,137 5,189 5,267
2,064 1,775 1,250
890
840
812
795
785
777
771
764
757
749
710
709
700
689
679
678
626
696
1,608 1,533 1,642 1,870 1,906 1,951 1,999 2,048 2,097 2,144 2,190 2,234 2,275 2,273 2,310 2,339 2,370 2,402 2,428 2,434 2,492
1,473 1,586 2,015 2,543 2,592 2,630 2,663 2,696 2,729 2,764 2,801 2,841 2,881 2,868 2,904 2,956 3,005 3,034 3,081 3,123 3,138
909
835
715
668
678
692
711
731
752
774
796
819
841
845
868
887
908
931
952
959
995
32,196 28,831 27,069 27,808 27,323 27,020 26,839 26,719 26,629 26,546 26,454 26,344 26,209 25,533 25,379 25,150 24,967 24,722 24,522 23,891 24,103
4,363
882
2,121
2,682
822
26,393
91,615
18,519
44,545
56,324
17,265
2,540
588
1,246
1,566
490
26,393
53,348
12,347
26,169
32,883
10,294
Absolute deviations from the reference case values ($million, 2002-03 prices, discounted)
GSP
Investment
Consumption
Exports
Imports
Employment*
2,715 2,651 2,804 3,098 3,038 2,974 2,909 2,844 2,777 2,710 2,642 2,573 2,502 2,390 2,318 2,246 2,175 2,103 2,033 1,956 1,890
1,966 1,610 1,080
732
658
606
565
531
501
473
447
421
397
359
341
321
300
282
268
236
250
1,531 1,390 1,418 1,538 1,494 1,456 1,421 1,386 1,352 1,316 1,281 1,244 1,207 1,148 1,111 1,071 1,034
998
961
917
895
1,402 1,439 1,741 2,092 2,031 1,962 1,893 1,825 1,759 1,697 1,638 1,582 1,528 1,448 1,397 1,354 1,311 1,261 1,219 1,177 1,126
865
758
618
549
531
517
505
495
485
475
466
456
446
427
417
406
396
387
377
361
357
32,196 28,831 27,069 27,808 27,323 27,020 26,839 26,719 26,629 26,546 26,454 26,344 26,209 25,533 25,379 25,150 24,967 24,722 24,522 23,891 24,103
Percentage deviations from the reference case values
GSP
Investment
Consumption
Exports
Imports
Employment
3.12
8.81
3.61
3.30
4.87
3.24
3.07
7.32
3.32
3.40
4.24
2.84
3.27
4.98
3.44
4.12
3.44
2.61
3.65
3.42
3.79
4.96
3.05
2.63
3.61
3.12
3.73
4.82
2.93
2.53
3.56
2.92
3.69
4.66
2.84
2.45
3.51
2.76
3.65
4.50
2.76
2.38
3.46
2.63
3.61
4.34
2.69
2.32
3.41
2.52
3.57
4.18
2.63
2.27
3.36
2.41
3.53
4.03
2.56
2.22
3.30
2.31
3.48
3.89
2.50
2.16
* Units for employment are persons.
17
3.24
2.21
3.43
3.75
2.43
2.11
3.18
2.11
3.38
3.62
2.37
2.06
3.06
1.93
3.26
3.43
2.26
1.96
3.00
1.87
3.20
3.30
2.20
1.91
2.93
1.78
3.13
3.20
2.13
1.86
2.86
1.69
3.07
3.09
2.06
1.81
2.79
1.61
3.00
2.97
2.01
1.76
2.72
1.56
2.93
2.86
1.95
1.71
2.64
1.39
2.84
2.76
1.86
1.63
2.57
1.49
2.81
2.63
1.83
1.61
3.2
2.9
3.4
3.7
2.6
2.2
Table 5: Macroeconomic impacts of the iron ore boom on Western Australia (Scenario 2)
04/05
05/06
06/07
07/08
08/09
09/10
10/11
11/12
12/13
13/14
14/15
15/16
16/17
17/18
18/19
19/20
20/21
21/22
22/23
23/24
24/25 Average
Total
260
-76
-17
129
-44
-457
231
-120
-54
147
-64
-950
222
-71
-45
126
-61
-857
893 18,748
195 4,097
353 7,416
480 10,075
133 2,792
5,554
699 14,670
204 4,284
305 6,397
382 8,020
126 2,644
5,554
Absolute deviations from the reference case values ($million, 2002-03 prices, undiscounted)
GSP
Investment
Consumption
Exports
Imports
Employment*
2,851 2,923 3,246 3,765
411
2,064 1,775 1,250
890
-311
1,608 1,533 1,642 1,870
56
1,473 1,586 2,015 2,543
172
909
835
715
668
-36
32,196 28,831 27,069 27,808 -1,512
424
-181
91
137
-9
-285
436
-127
111
132
5
449
434
-102
113
133
9
778
428
-91
109
138
10
918
416
-86
100
144
7
914
401
-85
88
149
3
834
385
-85
75
151
-2
692
367
-85
61
153
-8
528
348
-87
46
152
-15
332
329
-89
31
152
-21
151
309
-91
15
148
-28
-77
292
-91
2
153
-35
-217
269
-106
-18
142
-45
-510
Absolute deviations from the reference case values ($million, 2002-03 prices, discounted)
GSP
Investment
Consumption
Exports
Imports
Employment*
2,715 2,651 2,804 3,098
322
1,966 1,610 1,080
732
-244
1,531 1,390 1,418 1,538
44
1,402 1,439 1,741 2,092
135
865
758
618
549
-28
32,196 28,831 27,069 27,808 -1,512
317
-135
68
102
-7
-285
310
-90
79
94
4
449
294
-69
77
90
6
778
276
-59
70
89
6
918
255
-53
61
88
4
914
235
-50
51
87
2
834
214
-47
42
84
-1
692
195
-45
32
81
-4
528
176
-44
23
77
-7
332
158
-43
15
73
-10
151
141
-42
7
68
-13
-77
127
-40
1
67
-15
-217
112
-44
-7
59
-19
-510
103
-30
-7
51
-17
-457
87
-45
-20
56
-24
-950
80
-26
-16
45
-22
-857
0.18
-0.23
0.02
0.16
-0.07
-0.01
0.17
-0.22
0.00
0.16
-0.08
-0.02
0.15
-0.25
-0.02
0.14
-0.10
-0.04
0.14
-0.17
-0.02
0.12
-0.09
-0.03
0.12
-0.27
-0.06
0.13
-0.12
-0.06
0.11
-0.15
-0.05
0.11
-0.11
-0.06
Percentage deviations from the reference case values
GSP
Investment
Consumption
Exports
Imports
Employment
3.12
8.81
3.61
3.30
4.87
3.24
3.07
7.32
3.32
3.40
4.24
2.84
3.27
4.98
3.44
4.12
3.44
2.61
3.65
3.42
3.79
4.96
3.05
2.63
0.38
-1.16
0.11
0.32
-0.15
-0.14
0.38
-0.65
0.17
0.24
-0.04
-0.03
0.37
-0.44
0.20
0.22
0.02
0.04
0.36
-0.34
0.20
0.21
0.03
0.07
0.34
-0.30
0.19
0.21
0.03
0.08
0.32
-0.27
0.16
0.21
0.02
0.08
0.29
-0.26
0.14
0.21
0.01
0.07
* Units for employment are persons.
18
0.27
-0.25
0.11
0.20
-0.01
0.06
0.25
-0.24
0.09
0.19
-0.02
0.04
0.23
-0.24
0.07
0.18
-0.04
0.03
0.20
-0.23
0.04
0.17
-0.05
0.01
0.8
0.9
0.7
0.9
0.7
0.5
Western Australian macroeconomic impacts in Scenario 1
In Scenario 1 which assumes that rising demand for iron ore is sustainable, as a result
of the significant rise in iron ore exports and investment, Western Australia’s GSP in
the end year of the simulation period (2024-25) is projected to increase by $1,890
million in net present value (NPV) terms (or 2.6%) compared with the base case
without the boom. Investment would increase by $250 million in NPV terms (or
1.5%), consumption (private and public) by $895 million in NPV terms (or 2.8%),
exports by $1,126 million in NPV terms (or 2.6%) and imports by $357 million in
NPV terms (1.8%). There would also be an increase of about 24,100 jobs, up 1.6%
on the base case value (Table 4).
Average annual increases between 2004-05 and 2024-25 (in 2002-03 prices and in
NPV terms) relative to the base-case levels are projected to be $2,540 million for
GSP, $588 million for investment, $1,246 million for consumption, $1,566 million for
exports and $490 million for imports. The Average increase in state-wide
employment is about 26,400.
Over the whole simulation period 2004-05 to 2024-25, total (cumulative) increases
due to the iron ore boom are projected to be $53.3 billion (in 2002-03 prices and in
NPV terms) for GSP, $12.3 billion for investment, $26.2 billion for consumption,
$32.9 billion for exports and $10.3 billion for imports (Figure 3).
Figure 3: Total (cumulative) macro economic impacts of the iron ore boom on
Western Australia
60,000
GSP ($m, NPV)
Investment ($m, NPV)
Consumption ($m, NPV)
Exports ($m, NPV)
Imports ($m, NPV)
Employment (persons, annual average)
50,000
40,000
30,000
20,000
10,000
0
Scenario 1
Scenario 2
Western Australian macroeconomic impacts in Scenario 2
In the pessimistic Scenario 2, as the iron ore exports are assumed to fall back to the
base case level in 2008-09, the economy-wide impact in the subsequent years is
significantly smaller than in the Scenario 1. As shown in Table 5, compared with the
levels in the base case, Western Australia’s GSP in 2024-25 is projected to increase
19
by $80 million in NPV terms (or 0.1%) and exports by $45 million in NPV terms (or
0.1%). However, investment, consumption and imports will be lower. Specifically,
investment would fall by $26 million in NPV terms (or 0.2%), consumption (private
and public) by $16 million in NPV terms (or 0.1%), and imports by $22 million in
NPV terms (0.1%). There would also be about 850 less jobs, down 0.1% on the base
case value.
Nevertheless, due to the substantial gains in the earlier years of the simulation period,
on average, the iron ore boom is still projected to have a positive impact over the
whole period. Average annual increases between 2004-05 and 2024-25 (in 2002-03
prices and in NPV terms) relative to the levels without the boom are projected to be
$699 million for GSP, $204 million for investment, $305 million for consumption,
$382 million for exports and $126 million for imports. Employment in the State
would increase by about 5,550 persons per annum.
Over the whole simulation period 2004-05 to 2024-25, total (cumulative) increases
resulting from the expansion of iron ore exports and new investment are projected to
be $14.7 billion (in 2002-03 prices and in NPV terms) for GSP, $4.3 billion for
investment, $6.4 billion for consumption, $8.0 billion for exports and $2.6 billion for
imports (Figure 3).
Western Australian welfare impacts
As pointed out by Layman (2004), GSP is generally regarded as a poor measure of
economic welfare as it includes income that is “owned” by overseas corporations,
while it takes no account of the additional resources required to produce an increase.
In contrast, consumption of private and public goods and services is considered a
better measure of welfare, as it reflects only income that flows to domestic residents.
Figure 4 presents the impact on Western Australia’s welfare (private and public
consumption) in Scenarios 1 and 2. In Scenario 1, as a result of the surge in iron ore
exports and new iron ore projects, total increases in the State’s welfare in NPV terms
over the period until 2024-25 are projected to be $30.5 billion. On average, the
State’s welfare in NPV terms is forecast to increase by $1,452 million per annum.
The corresponding figures for Scenario 2 are $7.7 billion and $368 million.
However, consumption as a measure of welfare still suffers from the “scale” effect
that is normally associated with modelling a new project resulting in an inflow of
labour and capital into home State from other States in a CGE modelling framework.
For details, see Layman (2004). To eliminate this “scale” effect, Layman proposed to
use a measure of economic benefits based on per capita consumption. The increase in
20
per capita consumption aggregated over the population that would have been there
without the iron ore boom over the period to 2024-25 is projected to be about $8.9
billion in NPV terms in Scenario 1 and $1.5 billion in NPV terms in Scenario 2.
Figure 4: Western Australian welfare impact (annual deviations)
Scenario 1
$m, in NPV terms
2500
Total welfare impact
Private consumption
2000
Public consumption
1500
1000
500
2024-25
2023-24
2022-23
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
0
Scenario 2
$m, in NPV terms
2500
Total welfare impact
2000
Private consumption
Public consumption
1500
1000
500
0
2024-25
2023-24
2022-23
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
-500
Impacts on Western Australian Government revenues
The impact of the surge in iron ore exports and investment on Western Australian
Government revenue is positive. A large increase in iron ore exports will lead to
growth in royalties. In addition, the stimulus provided by the export expansion and
new iron ore projects will result in larger economic activities in the State.
21
Consequently, revenues from sources such as payroll tax and stamp duty will rise,
especially in the construction phase.
Figure 5: Impacts on the Western Australian government revenues (annual
deviations in 2002-03 prices, discounted and pre-Grants Commission
revenue effect)
Scenario 1
$ million
250
Royalties
200
Taxes
Other revenues
150
100
50
0
2024-25
2023-24
2022-23
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
-50
Scenario 2
$ million
250
Royalties
200
Taxes
Other revenues
150
100
50
0
2024-25
2023-24
2022-23
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
-50
Figure 5 presents the likely impacts on the Western Australian Government revenues
of the iron ore boom for the two scenarios. In Scenario 1, in NPV terms, on average,
royalties are projected to increase by $86.9 million per annum, taxes to increase by
$64.7 million per annum and other revenues to increase by $118.4 million per annum.
22
Total cumulative increases in the State Government revenues over the period 2004-05
to 2024-25 are forecast to be $1,825 million for royalties, $1,359 million for taxes and
$2,487 million for other revenues.
Reflecting an ephemeral expansion of iron ore exports assumed, the impact on
Western Australian Government revenues in Scenario 2 is much smaller than that in
Scenario 1. In NPV terms, on average, royalties are projected to increase by $19.4
million per annum, taxes to increase by $22.2 million per annum and other revenues
to increase by $45.2 million per annum. Total cumulative increases in the State
Government revenues over the period 2004-05 to 2024-25 are forecast to be $406
million for royalties, $467 million for taxes and $949 million for other revenues.
Although the surge in iron ore exports and new iron ore investment is projected to
generate significant revenues for the State Government, the State will not be able to
reap all rewards brought about by the resources boom under the Commonwealth
Grants Commission’s equalisation processes.7 When Grants Commission effect is
taken into account, total post-Grants Commission revenue (in 2002-03 prices and
NPV terms) is $4,642 million in Scenario 1 and $1,664 million in Scenario 2,
respectively. This compares with the total pre-Grants Commission revenues of
$5,671 million in Scenario 1 and $1,822 million in Scenario 2 (figure 6).
Impacts on Western Australian industries’ output
Figure 7 presents the selected Western Australian industry output effects of the export
expansion and new investment in the iron ore industry. These results are reported as
the cumulative percentage changes away from the base-case level. For example, if a
variable grows by 2% in year one of the reference case and 3% in the policy
simulation, the deviation is 1%. If the deviation is 2% in the second year and 0.5% in
the third year, then the cumulative deviation is 1% in year one, 3% in year two and
3.5% in year three. The industry results presented are for the real (inflation-adjusted)
output of each industry.
Non-expanding export-orientated industries and import-competing industries
As a result of the iron ore boom, output from non-expanding export-orientated
industries and import-competing industries is forecast to fall slightly due to an
7
As an independent statutory authority, the Commonwealth Grants Commission (CGC) is responsible
for making recommendations about the distribution of general revenue assistance to the States and
Territories. “The general revenue assistance is distributed on the basis of horizontal fiscal equalisation
which is embodied in the per capita relativities calculated annually by the CGC. Horizontal fiscal
equalisation has been defined as providing each State and Territory with the capacity to deliver the
average standard of State-type services, assuming it operates at an average level of efficiency and
makes the average effort to raise revenue from its own sources.” (http://www.treasury.qld.gov.au
/office/services/state-relations/grants/index.shtml). Under the CGC’s fiscal equalisation processes,
Western Australia retains only its population share (10%) of any so-called windfall gains.
23
appreciation of the real exchange rate, whereby the nominal exchange rate appreciates
relative to costs. The additional demand generated (particularly in the construction
phase of new projects) pushes up the aggregate level of prices in the Western
Australian economy and the surge in iron ore exports also puts upward pressures on
the exchange rate. As a result, the competitiveness of the State’s non-expanding
exports industries (e.g., agriculture) and import-competing industries (e.g., textile,
clothing and footwear) deteriorates, leading to the contraction of output in these
industries.
Figure 6: Total (cumulative) increase in Western Australian Government
revenue (in 2002-03 prices and discounted)
Scenario 1
$ million
7000
$5,671.08
6000
5000
$4,642.19
4000
3000
2000
1000
0
Post-Grants Commission (incl GST)
Pre-Grants Commission
Scenario 2
$ million
7000
6000
5000
4000
3000
2000
$1,663.77
$1,822.43
Post-Grants Commission (incl GST)
Pre-Grants Commission
1000
0
24
0.0
-0.5
-0.5
25
4.0
3.5
3.0
2024-25
2024-25
2024-25
2023-24
2022-23
Export and import-competing industries
2023-24
2021-22
Export and import-competing industries
2023-24
2022-23
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
-3.0
2022-23
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
4.0
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2007-08
2006-07
Scenario 2
2024-25
0.5
2005-06
Scenario 1
2023-24
0.0
2004-05
-2.0
2022-23
1.0
0.5
2008-09
5.0
2021-22
1.5
1.0
2020-21
2.0
1.5
2019-20
2.5
2.0
2018-19
2.5
2017-18
Trade
HotelsCafes
BusServices
ServicesOth
2016-17
Percent
4.5
2015-16
Domestic industries
2014-15
-0.5
2014-15
0.0
-0.5
2013-14
0.0
2013-14
ElecCoal
ElecGas
ElecOil
ElecSupply
2012-13
2.5
2012-13
2.0
2011-12
2.5
2011-12
3.0
2010-11
3.5
3.0
2010-11
3.5
2009-10
4.0
2009-10
Percent
4.0
2008-09
Energy industries
2008-09
-1.0
2007-08
0.0
-1.0
2007-08
1.0
2007-08
0.0
2006-07
2.0
1.0
2006-07
Investment-related industry
2006-07
3.0
2.0
2005-06
3.0
2005-06
Cement
Construction
OtherEqp
MetalPrd
2005-06
Percent
6.0
2003-04
2.0
2004-05
1.0
2004-05
Percent
3.0
2004-05
-3.5
2002-03
AgAnimal
AgOther
Drink
TCF
2003-04
-1.5
2002-03
-0.5
2003-04
0.0
2002-03
2024-25
2023-24
2022-23
1.5
2003-04
2024-25
2023-24
Percent
2002-03
3.0
2024-25
0.5
2024-25
1.0
2023-24
1.5
2023-24
3.5
2021-22
-3.0
2022-23
-2.5
2022-23
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
-2.0
2022-23
4.0
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
4.0
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
5.0
2021-22
2020-21
2019-20
2018-19
2017-18
2016-17
2015-16
2014-15
2013-14
2012-13
2011-12
2010-11
2009-10
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2002-03
Figure 7: Western Australian industry output impacts
(cumulative percentage deviations from the base case)
0.5
1.0
-1.0
-1.0
0.0
AgAnimal
AgOther
Drink
TCF
-4.0
Investment-related industry
Percent
6.0
Cement
Construction
OtherEqp
MetalPrd
Energy industries
Percent
ElecCoal
ElecGas
ElecOil
ElecSupply
2.0
1.5
1.0
0.5
Domestic industries
Percent
4.5
Trade
HotelsCafes
BusServices
ServicesOth
Investment-related industries
All investment-related industries are projected to benefit from the development of
new iron ore projects, particularly during the construction phase. As a key input to
business investment, the construction industry is expected to benefit the most in
percentage terms. For example, the modelling results indicate that production of the
construction sector would be 5.5 percentage points higher in 2004-05 compared with
the base case level. Other industries which supply construction materials and
equipments are also expected to benefit from the iron ore boom.
Energy industries
Demand for energy is expected to rise due to the resources boom. As a result, all
energy industries are forecast to grow faster than in the base case. In cumulative
percentage deviation terms for example, the output of the electricity industry will be
about 2.4 percentage points higher in 2004-05 compared to the base case level.
Domestic industries
Higher employment resulting from the resources boom will increase the consumption
capacity in Western Australia. Also, the influx of interstate migrants associated with
large investment activities in the State will stimulate the demand for financial,
education and health services. As a result, Western Australia’s domestically focussed
industries such as retail trade, business services, hotel services and other services are
forecast to expand relative to the levels in the base case.
Impacts on Western Australian industries’ employment
Figure 8 presents the effects on employment for selected Western Australian
industries. These results are reported as the average number of jobs created in each
industry over the simulation period to 2024-25 and the share of total new jobs
accounted for by each industry.
As can be seen from the upper panel of Figure 8, in Scenario 1, the industries whose
employment expands more than 1,000 jobs due to the surge in iron ore exports and
new iron ore projects are Government services (5,550 additional jobs), wholesale and
retail trade (5,490), business services (3,240), construction (3,220), iron ore (1,760),
other services (1,550), financial services (1,200) and hotel, café and restaurant
industry (1,100). These sectors together account for more than 85% of the total
number of jobs (26,400). These industries alone indicate the variety of the demand
for different skills likely to be created by a sustainable iron ore export expansion and
new projects.
26
Trade
GovServices
BusServices
Construction
IronOre
ServicesOth
FinServices
HotelsCafes
RoadTrans
Commun
OtherMining
MetalPrd
RailTrans
TransOther
PaperProd
OtherEqp
ElecSupply
NmtlMinPro
WaterTrans
ManufOther
FoodAnimal
Cement
WaterSupply
FoodOther
TranspEqp
GasSupply
IronSteel
ElecGas
ElecCoal
Drink
PetrolRefin
ChemProds
TCF
Fishing
AgAnimal
AgOther
GovServices
Trade
BusServices
Construction
IronOre
ServicesOth
FinServices
HotelsCafes
RoadTrans
RailTrans
Commun
OtherMining
TransOther
MetalPrd
PaperProd
WaterTrans
ElecSupply
FoodAnimal
NmtlMinProd
Cement
WaterSupply
OtherEqp
ManufOther
FoodOther
GasSupply
IronSteel
ElecGas
PetrolRefin
ElecCoal
ChemProds
Drink
TranspEqp
Fishing
TCF
AgOther
AgAnimal
The sectoral employment effects in Scenario 2 exhibit a similar pattern to that for
Scenario 1. The top eight industries are the same except that the wholesale and retail
trade sector is now the most expanded industry in terms of the number of jobs created.
Figure 8: Western Australian sectoral employment effects (average annual
deviations from the base case)
Scenario 1
'000 persons
6.000
%
25
5.000
4.000
000 persons
Share of total employment increase
1.000
'000 persons
1.500
1.200
0.900
000 persons
Share of total employment increase
27
20
15
3.000
2.000
10
5
0
-1.000
-5
Scenario 2
%
25
20
15
0.600
10
0.300
5
-
0
-0.300
-5
Does the Government budget balance matter?
One of the assumptions underlying the above modelling results is that Government
budget balances at both the federal and state levels are fixed at their base-case levels,
that is, the resources boom is assumed to be budget neutral. To examine how changes
in government budget balances affects the modelling results, this budget balance
restriction is released in Scenario 3.
Table 6: Impact of budget balance changes
($ million in 2002-03 prices and discounted)
Budget balance
Fixed
(Scenario 1)
Not fixed
(Scenario 3)
Changes
(%)
Average annual deviations
GSP
Investment
Consumption
Exports
Imports
Employment*
2,540
588
1,246
1,566
490
26,393
2,496
564
1,187
1,574
475
25,570
-1.8%
-4.0%
-4.8%
0.5%
-3.2%
-3.1%
Total cumulative deviations
GSP
Investment
Consumption
Exports
Imports
Total per capita consumption
53,348
12,347
26,169
32,883
10,294
8,939
52,414
11,847
24,919
33,063
9,965
8,166
-1.8%
-4.0%
-4.8%
0.5%
-3.2%
-8.7%
Note: Unit for employment is persons.
Table 6 contains a comparison between Scenario 1 and Scenario 3. As can be seen
from the table, without fixing the government budget balance, the potential economic
benefits resulting from the resources boom would be reduced. The only exception is
exports which are slightly higher. Compared with Scenario 1 in which government
budget balances are fixed, GSP gains from the iron ore boom would be 1.8% smaller,
investment gains 4% smaller, consumption gains 4.8% smaller, import gains 3.2%
smaller, employment gains 3.1% smaller and per capital consumption gains 8.7%
smaller if government budget balances are not fixed. The reason for this is
straightforward: with unfixed budget balance, government can build up a large surplus
28
derived from the resources boom. As these surpluses are not converted to
consumption/investment either through tax cuts, transfers or other channels, stimulus
in the economy is reduced. Consequently, the economy-wide impact of the resources
boom will be smaller. Lower investment and consumption is likely to reduce local
absorption, which in turn results in a slight rise in exports.
5. Concluding comments
As a prominent resources-rich province, Western Australia has experienced several
resources booms since the 1890s. The latest boom seems to be the most prominent
one in Western Australia’s history. Using the iron ore sector as an example, this
paper attempts to assess the flow-on effects of the current resources boom on the
Western Australian economy. The main findings are as follows:
•
As a result of the surge in iron ore exports and new iron ore projects, total
(cumulative) increases over the period up to 2024-25 are projected to be $53.3
billion (in 2002-03 prices and in NPV terms) for GSP, $12.3 billion for
investment, $26.2 billion for consumption and $32.9 billion for exports if the
strong demand for iron ore is sustainable. If the iron ore boom is short-lived
and to be ended in 2008-09, total (cumulative) increases resulting from the
boom are projected to be $14.7 billion for GSP, $4.3 billion for investment,
$6.4 billion for consumption and $8.0 billion for exports.
•
The surge in iron ore exports and investment will create approximately 5,550
to 26,400 new jobs in the State, depending on whether the expanded iron ore
exports are ephemeral or sustainable.
•
After eliminating the “scale” effect, aggregate per capita consumption in
Western Australia over the period to 2024-25 is projected to increase by about
$8.9 billion in the optimistic scenario and $1.5 billion in the pessimistic
scenario (both in NPV terms).
•
With respect to the sectoral effects, industries which closely relate to
construction activity, supply energy and provide various services are projected
to benefit the most from the resources boom; while non-expanding export
industries and import-competing industries are expected to either contract or
benefit least.
Based on the above results, there are at least three important conclusions can be
drawn from this study:
29
•
The effects of the resources boom are not all of the “good news” variety. The
economy as a whole will grow faster, but at the industry level there will be
losers as well as winners. In particular, non-expanding export industries and
import-competing industries will be squeezed by the real appreciation of the
exchange rate during the construction phase of the new projects.
•
The expansion of iron ore exports and new iron ore projects will generate
substantial flow-on benefits. It is interesting to note that only a small
proportion (about 6.7% in Scenario 1 and 5.3% in Scenario 2) of new jobs
generated in the whole economy are located in the iron ore industry, while
more than 80% of the total number of additional jobs are projected to be
generated in other industries, in particular the service industries. This shows
that the economic effects of the expansion of iron ore exports and new iron ore
projects are very broad.
•
Western Australia’s benefits in terms of government revenues are projected to
be significantly reduced due to the Commonwealth Grants Commission’s
equalisation processes. This is consistent with the usual claim that Western
Australia subsidises other states. Thus the resources boom not only benefits
the resources-rich state, but also helps non-booming states which might suffer
from the “Dutch Disease”.
30
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