Australia's internal economy can be broken into three in my opinion, the western economy which is resource based, the south-eastern economy which is services and manufacturing based and the Queensland economy which is a balance of both.

The western economy of WA and NT has benefited from the rise of India and China as manufacturers and the resultant pressure they have put on commodity prices. The Victorian Treasury released a discussion paper; A tale of two economies: the regional impact of Australia's resources boom [pdf] which looks at what this means for the other regional economies.

Commodity Price Pressures

As can be seen from the following graph, commodity prices have nearly doubled in the last two years from the demand by the BRIC economies (Brazil, Russia, India and China).

Western Australia and the Northern Territory have been the major beneficiaries of this commodity boom. Both of them have a high amount of their economic activity tied into resource extraction and exportation, nearly eighty percent of all economic activity. Resources make up 70% of the Northern Territory's exports and 80% of Western Australia's.

The report also draws the differences between the service economies of NSW and Victoria with Western Australia. Queensland is also included in the comparisons, but as the most balanced economy in Australia, with relatively equal amounts of services, resources, agriculture and tourism, the resource boom is balanced out.

As the paper notes, Australia's volume of exports hasn't increased drastically, but the value, or price we are getting for the commodities has. This has helped make Western Australia hot without large dollops of capital investment in productivity or infrastructure.

For instance, unemployment in Western Australia is nearly one percent lower than in NSW or Victoria. Wage growth is also higher in WA, nearly 1.5% higher than in NSW. Consumer Price Inflation [CPI] is higher in Perth than in NSW or Victoria.

The paper notes;

... employment in Western Australian mining and

construction has increased by 45 000 persons over the past three years, representing close to half of the total employment growth in that State over this period, and private investment in new machinery and equipment in Western Australia rose by 41 per cent over the two years to December 2005.

As to the economic impact of the high commodity prices, it means that the higher rate of return in resources will be pursued by capital. The paper argues that in the short term the benefits will be to the resource rich states, with possible long term flow on effects to the service economy states as national income increases.

Some of the downsides are that the higher prices effect the manufacturing sectors in the south-eastern states. Another is that the commodity boom puts 'upward pressure' on the exchange rate making the services and manufacturing sectors less competitive internationally.

As Commonwealth

Treasury economist David Gruen has observed, the exchange rate

"plays the role of a shock absorber" by "imposing significant restraint on those export and

import-competing sectors, including parts of the manufacturing sector, which are not

experiencing strongly rising prices for their output or are not directly exposed to the

booming sectors of the economy". This "Gregory effect" or "Dutch disease" implies that the

states with a larger share of agricultural, manufacturing and tourism exports are likely to be

adversely affected.

The effect was first recognised in the 1970s in the context of an earlier Australian resources boom (Gregory, 1976), and in light of the impact of North Sea oil

discoveries on European economies (Corden and Neary, 1982). At the same time, labour

and capital are being absorbed by the resource industries, so non-resource industries are

faced with higher labour and capital costs.

The paper's final conclusion is;

In the long run, labour mobility would result in patterns of net interstate migration shifting to

favour the relatively resource-intensive States, reducing disparities in unemployment rates

and wage rates between the States.

The resource States would also attract investment

from the rest of the country. In other words, permanently higher commodity prices are likely

to have a net positive impact on the size of the Australian economy, but change both the

industry composition and regional distribution of economic activity.