A speech by former Treasury secretary Dr Ken Henry last month was reported as a great call for comprehensive tax reform. But it was also something much more disturbing: an entirely different perspective on why our economy has been weak for most of this century and once the present pandemic-related surge has passed is likely to stay weak.

The nations economists have been arguing for years about why the economy has grown so slowly, why real wages have been stagnant for at least a decade, why the rate of productivity improvement is so low and why business investment spending has been so little for so long.

Most economists think weve just been caught up in the secular stagnation or slow-growth trap that all the advanced economies are enduring. But Henry has a very different answer, one thats peculiar to Australia. Unlike everyone else, hes viewing our economy from a different perspective, the viewpoint of our external sector our economic dealings with the rest of the world.

What conclusion does he come to? Weve allowed ourselves to catch a bad case of what economists call Dutch disease but Henry thinks should be renamed Old and New Holland disease.

When a country discovers huge reserves of oil or gas off its coast or, in our case, the industrialisation of China causes the prices of coal and iron ore to skyrocket all the locals think theyve won the lottery and all the other countries are envious. Now well be on easy street.

But when the Dutch had such an experience in the 1960s, they eventually discovered that, while it was great for their mining industry, it was hell for all their other trade-exposed industries.

Why? Because the inflow of foreign financial capital to build the new industry and the outflow of hugely valuable commodity exports send the exchange rate sky-high, which wrecks the international price competitiveness of all your other export and import-competing industries: manufacturing, farming and services.

Not only that. The rapidly expanding mining industry attracts labour and capital away from the other industries, bidding up their costs. Their sales are down, but their costs are up. Youre left with a two-speed economy. Remember that phrase? Its what weve had for a decade or two.

Well, interesting theory, but wheres Henrys evidence that Dutch disease is at the heart of our problems over recent decades?

Hes got heaps. Start with the way the composition of our exports has changed. Between 2005 and today, and in round figures, minings share of our total exports has doubled from 30 per cent to 60 per cent. Manufacturings share has fallen from 40 per cent to 20 per cent. Everything else mainly agriculture and services has fallen from 30 per cent to 20 per cent.

Over the same period, exports grew from 20 per cent of gross domestic product to 27 per cent. This means mining exports share of GDP has gone from about 6 per cent to more than 16 per cent. Manufacturing exports share has fallen from about 8 per cent to 5.5 per cent.

Next, who buys our exports? Chinas share has gone from about 10 per cent to more than 45 per cent. Actually, that was the peak it reached before Chinas imposition of restrictions after some smart pollie decided it would be a great idea for Australia to lead the charge of countries blaming China for COVID. Since then, Chinas share has fallen to 30 per cent. Since 2005, minings share of total company profits has gone from about 20 per cent to 50 per cent. Manufacturings share has fallen from about 20 per cent to less than 10 per cent. Financial services banking and insurance have seen their share fall from 20 per cent to less than 5 per cent.

Now, whats happened to those industries share of total employment? Manufacturings share has fallen from more than 9 per cent to about 6 per cent. Financial services share has been steady at a bit over 3 per cent. Minings share has risen from less than 1 per cent to 1.5 per cent. You beauty.

In summary, Henry says, mining employs a very small proportion of the Australian workforce except in the boom times, when it induces a worker to leave other jobs for mine-site construction work generates about 60 per cent of Australias exports, about half of pre-tax profits (mostly repatriated overseas to foreign shareholders) and exposes the Australian economy to highly volatile global commodity prices and a heavy strategic dependence upon a single buyer, China.

Not to mention the way mining leaves us heavily exposed to the risk of global decarbonisation.

How have we profited from being a mining-dominated economy? Real GDP per person a rough measure of our material standard of living has been in trend decline for two decades. In the decade pre-pandemic, we recorded the sort of growth rates only previously recorded in recessions, Henry says.

This weakness is largely explained by our poor productivity performance. Though no one else seems to have noticed, our productivity growth isnegativelycorrelated with our terms of trade thepriceswe get for our exports, relative to the prices we pay for our imports.

That is, when our terms of trade improve, our rate of productivity improvement worsens. And our terms of trade are largely driven by world commodity prices, especially for coal, gas and iron ore.

Now the tricky bit. Why would a mining boom depress productivity improvement? Because of the way it raises ourrealexchange rate our nominal change rate, adjusted for the change in our rate of production-cost inflationrelativeto those of our trading partners.

The resources boom increased our nominal exchange rate by about 25 per cent. Then, by 2011, high wages growth and weak productivity growth relative to our trading partners had added afurther35 per cent to the rise in the real exchange rate, Henry calculates.

This caused our non-mining producers to suffer a profound loss of international competitiveness. Is it any wonder that, between the turn of the century and 2019, the annual rate of investment by non-mining businesses fell from 7 per cent of GDP to 5 per cent?

The result is that two centuries of capital-deepening increased equipment per worker have stalled. This move to capitalshallowing explains our poor productivity.

And also, our move from current account deficit to current account surplus. We are exporting [financial] capital because Australia has become an increasingly unattractive destination for doing business in the eyes of foreign investors and Australian [superannuation] savers alike, Henry says.

The mining boom has left us with a very big competitiveness overhang that will probably take decades to work off, he says, including by decades of weak growth in real wages.

What should we have done differently? Had we applied a rational tax to the windfall profits of the mining companies, we would not only have retained for ourselves more of the proceeds from the export of our own natural resources, but also caused the rise in our real exchange rate to be lower.

Remember Kevin Rudds proposed resource super profits tax? The mining lobby set out to stop it happening, telling a pack of lies about how it would wreck the economy. The Abbott-led opposition threw its weight behind the mainly foreign miners.

Julia Gillard consulted the industry and cut the tax back to nothing much. The incoming Abbott government abolished it.

Petty, short-sighted politicking caused us to sabotage our economy for decades to come.

First published in The Sydney Morning Herald eEdition April 17, 2023