Labor must face its mining demons

Eric Lobbecke

THE Labor Party has been deeply ambivalent about the mining and resources sector for decades with its titan from the Whitlam age, R.F.X. Connor, dismissing mining leaders as "mugs and hillbillies" and seeking a $4 billion loan to assist government direction of the sector.

Resources policy was pivotal to the demise of both Gough Whitlam and Kevin Rudd as prime ministers. History suggests the current expansion of mining -- the greatest boom since the mid-19th-century gold rushes -- is a stark challenge for Labor in policy, political and emotional terms.

Julia Gillard has no wish to join Whitlam and Rudd as the next Labor PM whose defeat is tied to failed mining sector policy and politics. But the risk is real.

The ghost of Connor is long buried yet his story testifies to dark instincts within Labor's soul. With grim determination, Connor, backed by Whitlam, sought the $4bn loan to mastermind his resources vision; the process of executive council approval turned the governor-general, John Kerr, against Whitlam forever with Whitlam's forced dismissal of Connor the final trigger that led to the 1975 supply crisis.

Has there been anything so fantastic to match it? No. But don't overlook the truly remarkable effort of the Rudd government in mismanaging the mining tax: the policy ground was unprepared, the federal-state tax issues were unresolved and the tax was sprung on the industry by ambush.

Rudd would have survived as leader to the 2010 election absent this event. He fell, ultimately, in a mining policy debacle that fundamentally changed the course of the current Labor story.

In truth, Labor carries a psychological "black spot" towards the sector. It ignites too many alarms in Labor's ethos -- as the industry where multinational power reaches its zenith, triggering suspicions that miners aren't paying fair taxes, that their profits are inequitable and exorbitant, that they resist proper climate change responses and that mining produces too many maverick leaders too ready to challenge Labor. Witness Lang Hancock, Clive Palmer, Gina Rinehart and even Andrew Forrest.

Labor is able to manage corporate relations in manufacturing and services, but mining is different. Once Labor ministers such as Wayne Swan translate the Occupy Movement's saga to Australia, shining a spotlight on the top 1 per cent, the miners are automatic targets. The debate about the mining boom today is essentially a debate about redistribution of income. That is inevitable yet a dangerous trap.

For Labor, the mining debate seems dominated by spreading the benefits, as the Treasurer said, "to every postcode" in the nation. This is bedrock Labor tradition given lift-off by Swan's warning that self-interested mining bosses (Palmer, Forrest, Rinehart) are bringing "our proud egalitarian tradition" into "grave danger".

Paul Keating has called for Labor narratives and Swan is now obliging. The political gyrations are extraordinary: with Gillard having done a deal with the "big three" miners -- BHP Billiton, Xstrata and Rio -- on the new mining tax, Swan now demonises other mining bosses to invoke public support for the tax.

The evidence suggests that Labor's mining tax with benefits flowing to small business and all corporates will be a political winner.

It is wrong, however, to think this finishes the politics of the resources boom. On the contrary, it is hardly the start. Managing the resources boom with the terms of trade having peaked will become the "make-or-break" policy and political challenge for this period of Labor government. Redistribution of mining income will not suffice. Labor needs both policies and a story that explain what the mining boom means for the entire economy and how its huge disruptions can be managed.

The boom is driving a core structural change. According to the Reserve Bank, mining is expected to reach 40 per cent of all business investment. Manufacturing, tourism, property and services sectors are under pressure. In a paper just released for the Minerals Council of Australia, independent economist Ed Shann says mining and related production will rise from 4 per cent of output in 2002-03 to more than 9 per cent by 2012-13.

By definition other sectors will contract and restructure. Shann says Treasury forecasts point to the non-mining 75 per cent of the economy growing at only 1 per cent.

Treasury secretary Martin Parkinson said last week that Australia must accept this new phase of restructuring, just as it had in the 1990s. "To put it simply, Australian policy reform in the face of past structural pressures has raised Australian living standards dramatically," he said.

The nation now faces the same choices again. It can use the mining boom to pursue another round of pro-market, pro-competition, pro-productivity reforms or it can melt under pressure. This is the choice facing Gillard and Swan. But the politics are hard and no persuasive narrative has appeared beyond the unsold idea of tapping into the Asian century.

Putting the issue more bluntly, Shann said: "We should not try to preserve the past." In short, it is wrong to subsidise and protect the outdated pre-boom economic structure that cannot sustain the new higher exchange rate.

This is a huge economic and psychological moment for Labor. What will it do? Will it allow the mining sector to expand, with its ability to deliver higher national income? Or will it use subsidies, regulations and protections to prevent capital and labour from flowing into mining-related sectors and remaining in less productive and lower income-generating enterprises, notably sections of manufacturing?

How does Labor feel about the mining sector getting bigger as the path to greater national prosperity? Are the trade unions tied to the old economy rather than the new? Such difficult questions highlight the real politics of the mining boom. They are hard and nasty.

Shann argues the key to restructuring lies in running a high-growth economy. Optimising productivity will allow the Reserve Bank to permit lower interest rates than otherwise without provoking inflation. This needs to be matched by a series of pro-market supply-side reforms. Frankly, this is a daunting task for Labor and its political nerves.

Shann and Parkinson highlight the bigger picture: the mining boom is just part of the greater Asian boom that will run for decades. This should become the unifying new vision for Swan and Gillard. They know the intellectual case. What count are the policy and political reforms. And that means liberating Labor from its past demons.