Australia: Wealthiest Citizens, The Most Formidable Economy

Australia stands out as one of the most successful economies globally, with its citizens enjoying a level of personal wealth comparable to only a handful of much smaller nations. Despite facing similar challenges as many other countries worldwide, such as hyperinflation, mass unemployment, and national bankruptcies, Australia has maintained a remarkably stable economic performance, avoiding a recession for over 30 years. This raises the question of why Australia, against all odds, continues to thrive and succeed.

As of 2019, Australian residents are considered the wealthiest in the world when excluding micro nations like Monaco or Liechtenstein. The average net worth of an Australian adult is USD$411,000. Even more impressive is the fact that the median net worth, representing the middle person in a lineup from richest to poorest, is $191,000. This indicates a relatively even distribution of wealth, with a regular Australian having a net worth more than three times that of a typical US citizen. Additionally, Australia has managed to avoid a recession for over 30 years, including the global financial crisis of 2008 and weathering the COVID pandemic relatively unscathed. 

In Australia, the mining industry has thrived due to the abundant deposits of iron ore, coal, natural gas, and other valuable resources found across the vast continent. Its strategic geographical position has positioned it as a key trading partner for rapidly growing Asian economies in the region. The majority of these resources are exported in their raw state to countries such as India, Japan, South Korea, and notably China. This export activity has significantly contributed to the Australian economy, with raw material exports exceeding $270 billion in 2018. The mining sector in Australia has not only fueled economic growth in Asian nations but has also provided lucrative employment opportunities, leading to remarkably high incomes for workers. In the United States, an unskilled laborer typically earns around $47,000 per year. Conversely, unskilled laborers in the Australian mining industry can earn up to $150,000 annually. This is in addition to the generous salaries received by skilled trades workers and engineers working in these mines. Australia is rich in natural resources, but mining does not have as significant an impact on the economy as one might think. While it has certainly contributed, it is not the sole reason for Australia's prosperity. These lucrative mining jobs are actually quite rare, accounting for only about 3% of Australia's total workforce. Furthermore, mining plays a relatively minor role in the Australian economy, making up just 7% of the GDP, lagging behind larger industries such as services, construction, finance, and education.

Studying how Australia has successfully navigated challenges despite following similar paths as countries experiencing more severe outcomes could provide valuable insights for economists, highlighting the significance of seemingly minor differences that lead to significant disparities. Questions arise about Australia's ability to avoid economic failure, sustain its fortunate circumstances in the long run, and offer lessons from its distinctive economic management approach to other nations. It is worth noting that Canada, in a comparable position to Australia in many economic aspects, faces similar issues albeit to a slightly lesser extent.

Australia's economic success puzzles many economists because it possesses the wealth and prosperity characteristic of an advanced economy, yet relies on industries typical of a developing one. Notably, Australia heavily relies on the volatile coal industry, which is influenced by global markets, trade tensions, and the economic performance of distant countries. Despite being one of the world's largest coal exporters, Australia faces challenges due to the declining global demand for fossil fuels in favor of environmental sustainability. Moreover, Australia's economic dependence on China, its primary trading partner accounting for over 40% of its exports, poses risks. With abundant natural resources and a small population of under 26 million, Australia could potentially thrive solely on these resources. However, the country's heavy reliance on exporting raw natural resources without value addition poses significant challenges. This situation, known as the "resource curse" or Dutch Disease, hinders Australia's ability to translate its natural wealth into sustainable economic growth. While exports contribute to the country's GDP, simply selling raw resources overseas does not necessarily benefit the broader economy or its citizens.

Most major mining operations in Australia are incredibly remote and employ a relatively small workforce of people that are transported to these locations by mining companies and then transported back out. These are so-called fly-in, fly-out or FIFO workers. While these workers are on site in the mines, they have most things from food to accommodation provided for them by the company they work for. What this does is effectively separate one of the most lucrative industries in the country from any type of interaction with the rest of the economy. Something like the finance or technology industries centered around major cities in the USA, Western Europe and Asia are also very lucrative, but they help to contribute to the local economy because everybody employed in these jobs will go out shopping, or go out for dinner, or really do anything to contribute to the local economy around them. This recirculation of money means that even people not directly involved in these major industries can still benefit from them. But when the centers of industry are literally thousands of kilometers from major population centers, it makes it much harder for workers to recirculate their money, and even besides that these mines just employ less people to begin with.

Now these issues could be alleviated if the revenues from these mining operations were pushed back into the domestic economy. Obviously the most direct way to do this would be to tax resource sales and then use the tax revenue to fund various government projects. The go-to example of this being done effectively is Norway, which is another country with a vast wealth of natural resources and a relatively small population to share them between. The Norwegian government has heavily taxed natural resource revenues from private companies and even set up their own state company to generate income directly.

That money is then put into a giant national savings account called a sovereign wealth fund which invests the money and uses those earnings to fund government services. It really is the gold standard in making sure that the resource wealth of a nation goes to benefit the people of that nation, because unlike a lot of other industries, natural resources won't create domestic economic activity by themselves. Now a quick side note is that Australia does technically have a sovereign wealth fund, the future fund. But that money came from the privatisation sale of things like Australia's telecommunications company Telstra.

It's also only worth about 17% of Norway's fund, in a country with 5 times as many people, because it receives no direct revenues from natural resources.

Unfortunately, the Australian government has failed to levy direct taxes on mining, and today a lot of the wealth generated from this industry goes largely to benefit a few extremely wealthy individuals or international resource companies that send their profits back to their home country.

Foreign cash transfers are not a part of economic output figures, so a country can be bleeding money and economists would never know it by looking at GDP alone. Now of course other industries like tech and finance have caused problems as well, like massive inequality between wealthy people working in these lucrative jobs and everybody else, but that still happens in Australia with mining too. Fly-in fly-out workers are paid extremely well and can easily outcompete other regular workers for things like housing, which is another major issue in the Australian economy. And a handful of well-paid workers are far from the biggest cause of this crippling problem.

Housing in Australia ranks among the most expensive globally, which may seem puzzling at first. Like any other commodity, the price of housing is influenced by the interplay of supply and demand. Australia boasts abundant land, being the 6th largest country by landmass, yet its population remains relatively small. Despite the vast land available for a relatively low number of residents, Australian homes remain unaffordable, shedding light on market dynamics. While the supply side seems straightforward due to Australia's vast expanse, the majority of the population resides in a few densely populated coastal cities like Sydney and Melbourne, contributing to the issue of unaffordability. Factors such as geographical constraints, cultural preferences for large freestanding homes, and urban sprawl exacerbate the scarcity of land near major cities. Furthermore, the construction industry has flourished in response to soaring housing prices, but the rush to maximize profits has led to poor building standards in new apartment developments. This scenario has pushed potential apartment buyers back into the limited market for freestanding homes, mirroring challenges faced by other countries.

On the demand side, the number of people willing to buy a good is not the only crucial factor. Equally important is whether they have the means to do so. Australians generally enjoy high incomes, with the country boasting the world's highest minimum wage when accounting for exchange rate fluctuations. Australian taxation policies strongly support homebuying, exempting profits from certain taxes and allowing deductions for expenses like mortgage interest and depreciation, especially for investment properties. While the ability to offset asset-holding expenses against income is common globally, Australia stands out by allowing these deductions to reduce not only income from assets but also income from other sources, such as employment. With progressive income tax rates reaching 45% for earnings over $115,000 USD or $180,000 AUD, Australia imposes high taxes relative to other countries, starting from a relatively low income threshold. Despite this, many high earners effectively lower their tax burden by investing in property and claiming losses on paper, taking advantage of the tax benefits that homeownership provides. Consequently, homes in Australia have become more of an investment vehicle than simply places to live. This focus on housing has diverted investment away from sectors like technical innovation, contributing to Australia lagging behind other advanced economies, notably the USA, due to the preference for property investments and limited international market appeal. Nonetheless, the housing sector has played a fundamental role in the economy, creating employment opportunities through construction projects, even if the resulting developments may not always meet high standards. Moreover, state governments benefit from this system through tax revenues generated from property transactions, which now represent a significant portion of their budgets given the soaring home prices.

Australia's economy heavily relies on natural resources, much like Venezuela, Russia, Brazil, Saudi Arabia, and Iran. Moreover, it places a significant emphasis on housing speculation and subpar development, similar to the challenges faced by countries such as China. Despite making comparable or even more pronounced errors, Australia's economy remains resilient. This is because Australia's economic model is not solely about selling resources or real estate; it is about marketing Australia itself. The country is highly sought after for immigration due to its political stability, high standard of living, pleasant climate, and diverse culture. Additionally, being an English-speaking nation, Australia appeals to individuals from the USA, Canada, and England. Furthermore, the prevalence of English enables many highly educated individuals worldwide to communicate effectively while living and working in Australia. The country boasts world-class education, with its top universities rivaling or surpassing Ivy League institutions in the USA and similar establishments in Europe. Notably, schools like James Roose Agricultural School have gained international recognition among affluent migrants seeking a well-rounded education for their children. Australia's education sector has become a valuable export, yielding benefits beyond financial gains from tuition fees. The destination choices of the world's educated youth are pivotal in shaping the future of an increasingly knowledge-driven global economy.

That's on top of the global education industry being massive and very value-adding in its own right. A student coming from overseas to study is an almost perfect economic opportunity for any country. When they arrive, they're going to bring money with them to boost the local economy as they pay for basic consumer goods and a place to stay. As they study, they'll be paying tens of thousands of dollars a year in school fees to universities that in turn employ a lot of people and conduct a lot of research that can further boost the economy. And when they're done paying all of that money and they graduate, the host country in many cases can choose to keep the young, freshly qualified worker at the very beginning of their career, where they can add value to the economy and pay taxes for the longest possible time. In Australia, it's not just students coming to make big contributions to the local economy either. A lot of already very highly skilled and wealthy people want to make the land down under their home. The country's cities may be incredibly expensive, but that's because they're consistently ranked as some of the most livable in the world. Quality of life metrics in Australia are similar to those of Scandinavian countries. Other countries that compete with Australia in terms of lifestyle also tend to be quite insular, whereas Australia actively encourages migration so long as migrants bring something of value with them, either in-demand skills, a lot of money, or at the very least a willingness to work jobs that nobody else in Australia wants to.

The accommodation industry in Australia has become one of the largest sectors in the country, leading to considerable wealth for existing Australians. Owning property near major Australian cities has proven to be extremely lucrative, as the limited supply of homes in such a vast country drives up demand. While this success has its advantages, it also presents challenges. Australia's appeal as a desirable place to live or visit contributes to a stable economy, but the benefits are not equally shared among the population. Despite the country's attractiveness to wealthy and skilled individuals, overall economic output has not increased on a per capita basis in the past decade. This disparity in wealth growth without production growth makes it increasingly difficult for young Australians without existing wealth to afford the high cost of living in major cities, particularly housing. Unlike in other global cities where high incomes drive up housing prices, in Australia, it is the demand for a certain lifestyle, openness to new residents, and tax incentives that primarily influence property prices. This situation puts the average economic participant in Australia at a disadvantage, as the cost of living in major cities is not commensurate with income levels.

It's this unique combination of factors that has almost made Australia a cautionary tale amongst other developed economies of what can go wrong if they let things like housing grow without controls. Unfortunately for Australia, it may be in a position now where there is no turning back. Now everybody knows the line, but Australia is now stuck between a rock and a hard place. If it slows down migration to reduce the competition for its existing residents for things like housing, then its overinflated market could destroy a significant portion of the country's wealth. It can keep on bringing more people in, but if that doesn't translate to developing more productive industries outside of building homes and digging holes, then while the people who have already invested in Australia are going to do well, it's going to get harder for young people to enjoy their high quality of life, which is an economic failure in its own right.