The Experience of Australia and Kazakhstan in the Mineral Price Boom of 2006-2014 by Dr Ian Manning

Both Australia and Kazakhstan are large in physical area but relatively small in population. Both have extensive mineral deposits complemented by relatively fragile manufacturing sectors. Thanks to high prices for energy minerals and iron ore, the terms of trade of both countries were highly favourable from 2006 to 2014. Australia is well endowed with coal, iron ore and natural gas, all of which fetched high prices during the boom years; Kazakhstan has a similar endowment with the addition of oil. In Australia, the central and state governments have surrendered control over national investment strategy to the private sector and are also, with the exception of the petroleum sector, have foregone the capacity to exact additional revenue from the mining sector during times of high mineral prices. From 2009 high profitability in the sector triggered considerable investment in capacity expansion. Australia’s exchange rate is market-determined and followed the terms of trade, in the short term facilitating mining investment but in the long-term exacting a high cost: its manufacturing and other non-mining trade-exposed industries suffered loss of competitiveness, with a resulting lack of investment and industry closures. The Australian banks also borrowed overseas, and now that the boom has ended the Australian banking system finds itself with high levels of short-term overseas borrowing and very low levels of foreign exchange reserves.  By contrast, Kazakhstan’s market-oriented reforms over the past three decades did not surrender broad state control of the pattern of investment. Its government responded to the high mineral prices by concentrating on the oil industry, using negotiated agreements to finance developmental investment and build up an Oil Fund. This allowed control of the exchange rate to give its manufacturing industries the opportunity to upgrade their competitiveness. Royalties on other minerals were maintained at rates which discouraged exploration. The author is much more familiar with the Australian history than with that in Kazakhstan (the two countries are seldom compared) and will seek views as to whether his interpretation of Kazakhstani history is correct. The initial conclusion is that Kazakhstan managed the mineral price boom much more effectively than Australia.

Australia Kazakhstan paper