The Finance Minister, Lindsay Tanner, has warned that Australia needs to reduce its reliance on mining by revitalising other export industries.

He told ABC local radio that he was worried that a former expansion in tourism, education and wine exports had gone into reverse.

Lindsay Tanner was asked whether Australia’s economy is too dependent on China. This is what he said:

“I wouldn’t so much say China but I would say that we do need to reinvigorate the breadth of our exports,” he told ABC radio 774 in Melbourne.

“We have had a worrying period over the past decade or so where the diversification of our exports in the ’90s kind of stagnated.

“So we had a huge growth in tourism, in education, in specialised manufacturing, in wine, in pharmaceuticals – all kinds of things that helped us to diminish our enormous reliance on minerals, and that’s kind of almost gone into reverse in recent times.

“So it’s not so much that there’s one country that we’re dependent on. It’s that we have I think to some extent too many eggs in that basket.”

The Finance Minister says Australia needs to diversify its exports.

“Minerals are always going to be critical for Australia. There’s no question about that,” he added.

“But our strategy of improving infrastructure and skills and lifting out productivity very much has in mind the need to revive our performance in some of our other exports which have been languishing.”

Dollar damage

What the Finance Minister did not say is that the decline in the export industries that boomed in the 1990s has gone hand in hand with the boom in mining.

“One of the corollaries of the present mining boom is a very high value of the Australian dollar that is hurting the competitiveness of sectors such as agriculture, manufacturing, tourism and education,” said Saul Eslake, the director of the Productivity Growth Program at the Grattan Institute, a policy think tank affiliated with Melbourne University.

“Although the mining industry is generating a lot of prosperity for Australians at the moment, and will do in the foreseeable future, nonetheless the mining industry can’t possibly guarantee prosperity for the vast majority of Australians given that it accounts for less than 3 per cent of total employment.”

Warren Hogan succeeded Saul Eslake as chief economist at the ANZ Bank and he shares his concerns.

“Our real effective exchange rate is at a 30 year high, and this, of course, is a major constraint strategically on this economy,” he explained.

“When you have a commodity boom that drives up your currency because you’re seeing certain of your exports go up in price it puts pressure on other sectors.

“Manufacturing but, I think more importantly in Australia’s case, I’m worried about tourism and I’m worried about education exports. This is the classic Dutch disease. And you know I don’t think many Australians would be happy to think that all we sell is iron ore and coal.”

The term Dutch disease was coined in the 1970s. It described the effect of a huge natural gas reserve discovered in the 1950s which drove up the currency and killed Dutch manufacturing.

It has become synonymous with mineral booms that destroy other export sectors, and it is a real risk for Australia.

“The mining boom, though it may well go on for more than a decade, isn’t going to go on indefinitely any more than previous mining booms have,” Mr Eslake added.

“Future generations of Australians are going to look for other sectors of the economy for their employment prospects long after this present mining boom has come to an end.”

The danger is they will no longer be there by the time the mining boom ends and the currency edges lower.

Industry policy revival?

Frank Gelber, the chief economist with forecasting firm BIS Shrapnel told PM last week that, without intervention, Australia risks becoming a quarry.

“We’re running down the rest of the economy. We’re specialising in minerals, and this is all very nice when we’ve got very high minerals prices and very strong demand,” he said.

“But minerals prices don’t always boom and demand isn’t always strong. The lessons of the last 50 years should have taught us that.”

He is calling on the Federal Government to resurrect unfashionable ideas such as industry policy to help other sectors survive.

“What we need to do is to try to impede the demise of the other tradables industries. Does it mean some sort of an industry policy again? Yes it does.”

However, that concept is anathema to the Department of Treasury.

Back in 2006 the Treasury Secretary, Ken Henry, predicted a commodities super cycle lasting up to 50 years.

He said it would see capital labour relocate to the mining states, enriching those areas and stripping wealth from others, and government policy should be judged on whether or not it backed the trend.

“Proposals that seek to resist the changes should themselves be resisted,” Dr Henry said.

Lindsay Tanner is not talking about resisting the mining boom, and he is not using the phrase “industry policy”.

But if the government wants to maintain a diverse economy and a diverse export base it will have to start asking some hard policy questions, and it may have to buck the Treasury line.