Tuesday, October 17, 2006

Water, Drought and the Environment - working from facts

I had not intended to post again today. But I listened to a conversation that worried me.

Australia faces a serious drought, perhaps the worst on record. Whether this drought is simply a bad drought or a sign of global warming is an important issue. But in the conversation I am talking, about discussion went from drought to water to the need to phase out primary production dependent upon water, especially irrigation crops. Part of the argument was couched in terms of the need for the metro cities to have access to more water, part in terms of the need for the environment to have more water, part on the belief that farming and grazing was no longer viable in many parts of Australia.

Now that got me thinking, because it seemed to me to ignore the importance of agriculture to the Australian economy. So I thought that I would check a few facts. In doing so, I came up with a few nasty answers. The stats that follow are drawn from official statistics. I do not pretend that the analysis is complete or rigorous.

If we start by looking at the overall trade position over the period 1999-00 to 2004-05, we find that with the exception of one year, our exports of goods and services have been consistently less than our imports. So we have been borrowing from overseas.

When I look at the composition of our exports, I see that:

  • our exports of primary products including minerals over the period have grown from $A54.8 billion to $A77.7 billion.
  • our exports of manufactures were $A32.4 billion in 99-00, $A35.2 billion in 04-05, so have barely grown.
  • our exports of services have grown from $A28.6 billion to $35 billion over the period, a reasonable increase, but only a small proportion of the increase in primary products.

On the surface, we appear to have a problem if we are buying more than we sell and at the same time are increasingly dependent on primary products in what we sell. So I then looked in more detail at the composition of exports.

I had some problems here because of data availability. However, a few tentative conclusions:

  1. Coal exports reached $17.1 billion in 04-05, increasing by 11 per cent per annum over the period. Iron ore exports were $8.1 billion in 04-05, growing at 12 per cent per annum. Coal, a green house problem export, is now by far our largest export. Both coal and iron exports depend upon world demand.
  2. If we look at our other major primary exports ranked by value we have crude petroleum ($5.7 billion in 04-05 but declining), gold ($5.6 million with a low upward trend), bovine meat ($4.9 billion growing over the period at 6 per cent per annum), aluminium ores including alumina (4.4 billion and growing slowly), aluminium ($4.1 billion but declining), wheat ($3.4 billion and declining), natural gas ($3.2 billion and rising over the period at 6 per cent per annum) and alcoholic beverages ($2.8 billion growing at 13 per cent per annum). I am not sure that this mix gives me great comfort.
  3. I do not have the data to comment on manufacturing exports except to note that performance does not appear good.
  4. Finally, the services data is difficult to interpret. However, working from numbers from other sources, our services exports appear to be dominated by tourism, something over over $16 billion, and education services, possibly around $9 billion. This leaves something aroundr $10 billion for everything else. Our net tourism earnings (exports minus imports) appear quite low, our net education earnings high. Given that overall net earning on services were negative in 04-05, our overall performance on the services side would appear to be dangerously dependent on education.

Now I might be wrong in all this, but if the numbers and my analysis of them are in any way right, just at the moment I would be worried about the impact of drought and water shortages on our export performance. To the degree that water is short, and subject to environmental considerations, I would be focusing short to medium term discussions on where we can get the greatest export gains from the water we do have.

But perhaps I am wrong.


Travel Italy said...

There are so many directions that this evaluation could take. Generally I think that Globalization and rampant emigration are causing a dislocation of resources.

We are superficial in our vision of the cost of production thinking that only the immediate price of what we pay to produce a good is the only cost to be associated but the unintended consequences are often the true reflection of costs.

While I talk about this often, the current focus of my counterparts is simply a window in time of extremely short duration, thus there is little possibility that this will change.

Jim Belshaw said...

I thought of you as I was writing this post, David.

I agree completely that we are superficial in our cost of production thinking. I also agree re unintended consequences.What to do about it, that's the rub.

Anonymous said...

It's a sad fact that the Australian economy has depended on primary produce for so long. As a developed country, we have been unable to create a manufacturing industry that thrives on exports and benefits the balance of payments situation. Thirty years after the Whitlam government took the initiative to expose domestic industry to international forces and make it more competitive, by removing protection, the trend to relocate overseas and exploit cheap labour has meant that we still rely on primary produce to earn foreign dollars. The water crisis only reinforces what we've known for a long time, that we are living off the sheeps back.

Jim Belshaw said...

Lexcen, there is a story in our failure to develop an export oriented manufacturing sector that I will write on at some point.

Did you know, for example, that in the 1950s and 1960s we had an exchange control policy that prevented Australian business investing overseas?

So on the one side we had a tariff policy encouraging overseas firms to invest here to service the domestic market, on the other we stopped local firms expanding offshore at just the time globalisation was getting underway.

Pretty dumb in retrospect.

Travel Italy said...

Even discussing the problem takes vision. That is something in very short supply today as each of us think of our own "today".

Over time the cyclicallity of things will associate the costs appropriately and I actually see that process with some trepidation.

So I talk and write and am looking for a way to create a business from the changes that, sooner or later, will occur.

Italian saying: Things must change to remain the same

Anonymous said...

Jim, thanks for that, I didn't know.

Jim Belshaw said...

David, I loved your Italian saying. More broadly, I thought that your brief comments were very perceptive. There are cycles that ultimately match costs and benefits. Where things really get out of balance, then the cycles can be quite extreme.

I also liked: "So I talk and write and am looking for a way to create a business from the changes that, sooner or later, will occur." I can see how this fits with the things that I know that you do.

Jim Belshaw said...

'Tis a pleasure, Lexcen. Liked your garden, by the way. I put a story up on the regional living australia web site on the home garden - http://regionallivingaustralia.blogspot.com/2006/10/australian-regional-food-looking-back_15.html