China has been good to Gina Rinehart. The commodities boom fuelled by demand from the world’s second biggest economy has elevated the Australian iron ore heiress to the top of the country’s rich list, with an estimated $10bn fortune.

That may not be the end of it. Research from Citigroup suggests that her private ownership of three of the world’s top 10 undeveloped mining projects, all based in Australia, could catapult her into the world’s superleague alongside the likes of Carlos Slim, the Mexican telecoms tycoon, and Bill Gates, founder of Microsoft.

Dubbed the iron lady of the Pilbara – the desolate northern iron ore region of Western Australia – Ms Rinehart has worked hard to rejuvenate the debt-laden mining business left to her two decades ago by her father Lang Hancock. He made one of history’s great resource finds when he discovered huge canyons of iron ore in the far outback.

On top of a perpetual royalty now worth more than A$100m (US$105m) annually paid by Rio Tinto, the London-based mining group, on its Western Australian iron ore sales, Ms Rinehart’s privately owned Hancock Prospecting owns a half share alongside Rio in Hope Downs, another iron ore operation, which produces 30m tonnes a year. Based on an iron price of A$170 a tonne and production costs of A$40, Ms Rinehart and Rio are splitting profits of close to A$4bn a year from the one operation alone.

The usually reclusive – some say secretive – Ms Rinehart embodies the wealth being generated in Australia, where booms and busts have featured ever since the country’s 1850s gold rush. But the bonanza this time is so great that it has pushed the country’s terms of trade – a ratio of export prices to import costs – to record highs and led to a stampede of investment into the iron ore, coal and natural gas sectors.

But the breakneck expansion – and an accompanying surge in the Australian dollar, seen in world financial markets as a proxy for the commodities boom – has forced painful structural change on the non-mining parts of Australia and led to a fierce debate about the “dark side” of the boom. Paul Cleary, author of the recently published Too Much Luck: The Mining Boom and Australia’s Future, says it is irreversibly changing the country – and not necessarily for the better.

“Surging demand for our dirt and gas has revived the euphoria of the ‘rush that never ended’,” says Mr Cleary. “But unless we manage this extraordinary boom more effectively, our good fortune will curse future generations.”

While Europe and the US struggle under crippling debts and high unemployment, Australia defies global trends – the nation of 23m people will soon enter a third decade of uninterrupted growth. At around 5 per cent, unemployment is barely half that of the US and the eurozone. The government budget is forecast to return to surplus in less than two years and net debt stands at just 6 per cent of gross domestic product.

But booming sales of iron ore and coal have meant the country has hitched its fortunes to China like no other developed nation. That intimacy exposes it to the whims of a communist Asian power that could readily dump Australia if cheaper commodities were to be sourced elsewhere.

In the immediate future, the China-fuelled boom and the growing might of the mining industry are destabilising Australia’s economy by propelling the currency upward, squeezing trade-exposed industries ranging from manufacturing to tourism and boosting inflation. A shortage of workers for big resources projects has led to wage spikes that threaten to spill over into less buoyant industries.

Just ask manufacturers trying to export and those industries trying to compete with imports made cheap by the local dollar, which – long weaker than the greenback but this year bouncing either side of parity – reached a nearly three-decade high last month of US$1.10. Evidence of the difficulties was on display this week when BlueScope, Australia’s biggest steelmaker, shut one of the country’s three surviving blast furnaces.

That was taken as a death knell for the steel export industry; following retrenchments in the food, travel and retail sectors, the headlines screamed that Australian manufacturing had also entered a crisis.

The darker aspects of the boom have imperilled a government that clings to power with the backing of Greens and maverick independent lawmakers that gives it a majority of one in the lower house. Having botched the introduction of a mining supertax under Kevin Rudd, a plan replaced by a heavily watered down levy that has yet to pass into law, the government now headed by Julia Gillard, his successor as prime minister, appears to have lost a once-in-a-generation opportunity to capture a greater share of the boom and realign its economy. Calls for some of the spoils to be protected in a sovereign wealth fund have fallen on deaf ears in Canberra, to the dismay of the central bank and business.

The boom has also exposed the mixed blessing of Australia’s China addiction. The Asian powerhouse’s insatiable demand for iron ore has made it Australia’s dominant trading partner, accounting for 26 per cent of all exports. But in the words of Saul Eslake at the Grattan Institute, a Melbourne think-tank, no other nation in the developed world is at greater risk from a China slowdown.

Spurred by China, Australia may be entering a particularly dangerous resources trap known as Dutch disease, from the effects of the Netherlands’ 1960s discovery of North Sea natural gas: a surging exchange rate propelled by a commodities boom leads to other parts of the economy becoming hollowed out.

In steelmaking, BlueScope buckled under the weight of big increases in raw material costs – ironically the iron ore and coal that the country ships to Asian markets – and steel imports made cheaper by virtue of the nation’s elevated currency. Trades unions called for a “Buy Australian” campaign and accused Beijing of artificially restraining the renminbi to boost its exports into Australia.

Reports that Ms Rinehart had overlooked local steel and instead sourced railway tracks for one of her large projects from China drew criticism. Wayne Swan, federal treasurer, pointed out that local mining houses had plenty of opportunity to buy more Australian goods – including steel.

Emerging from seclusion, Ms Rinehart launched herself on the political stage last year by climbing on to the back of a flat-bed truck and addressing a rally against Mr Rudd’s intended mining tax rise. Megaphone in hand, Ms Rinehart shouted herself hoarse at an “axe the tax” rally. “What are we going to tell those jittery Labor MPs in marginal seats?” she demanded. “The reason I am . . . screaming up and down about this, even in the city streets, is because I feel so strongly about it. I feel strongly about it for our future.”

But her outburst also attracted critics, including Jim McGinty, a Labor former attorney-general of Western Australia. “All I could think of was Gordon Gekko shouting, ‘greed is good’,” he told the Sydney Morning Herald in a reference to the character in the film Wall Street. “Gina was basically saying, ‘I don’t want to pay my fair share of tax – I want to enjoy what I inherited from daddy’.”

The battle waged by the amply funded mining lobby had its scalp weeks later when Mr Rudd was deposed. Under Ms Gillard, the mining industry operating in Australia has never enjoyed greater health.

Rio Tinto this month reported record interim results, with profits from its Australian iron ore operations up by half to US$6bn, producing 78 per cent of the group total. BHP Billiton, also London listed but long seen as Australia’s global champion, on Wednesday reported the country’s biggest ever annual post-tax profit of nearly US$24bn, 86 per cent higher than the previous year.

The planned mining tax “is economically what would be called a deadweight cost”, says Marius Kloppers, BHP chief executive, adding: “On average if you increase the cost, you will get less investment than before.”

In spite of such warnings, the industry is embarking on an unprecedented investment spree. More than 90 projects are under way in Australia’s mining industry – together worth A$174bn, equivalent to 13 per cent of nominal gross domestic product. That figure rises to A$832bn, or 60 per cent of GDP, when projects under consideration are included. That rate of investment is supported by the windfall profits generated by Rio and BHP and by individuals such as Ms Rinehart.

Such profits and investment have inflamed the already divisive debate about Australia’s lopsided economy. Paul Howes, national secretary of the Australian Workers’ Union, which represents 135,000 blue-collar staff, summed up the mood when he attacked “greedy miners” for not investing in local communities. “These are the same miners that bitch and moan every time they have to pay a different tax,” he said on television.

The more measured response from Graham Kraehe, BlueScope chairman and a Reserve Bank of Australia board member, was that a well-designed mining tax with greater industry consultation would win support from both ordinary Australians and resources groups. Funds from such a tax could be used to help the transition of manufacturing and tourism into the new economy, he said as his company axed 1,000 jobs.

Monetary authorities are also in a bind as they set policy for what Mr Swan describes as a “patchwork” economy. The Reserve Bank has lifted rates seven times in two years to stand at 4.75 per cent, the highest in the developed world. It has done so to damp inflationary pressures from the resources boom, but its action has led to a surge in mortgage costs and a slide in house prices. That in turn has prompted jittery consumers to save more and spend less.

Although Paul Bloxham, Sydney-based economist with HSBC, is not convinced Australia is suffering from Dutch disease, he says there are structural forces at work that are hollowing out parts of the economy. He lists a range of problems associated with the resources boom. “Another ‘curse’ of having natural resources is that it can put a country at the whim of often very volatile international commodity markets,” he says. “Resource wealth can also lead to policy complacency, as do many other unearned windfalls. This can manifest [itself] in a stymied reform agenda.”

To back up that point, Australia regularly features at the low end of international rankings for competitiveness, productivity and innovation.

Mr Cleary, the Too Much Luck author, says Australia has relied too heavily on the “dumb luck” created by successive resources booms. “It’s a lazy way of making a living,” he says. The sector “only represents 10 per cent of the economy but it sucks up 70 per cent of capital expenditure”, he says, and the government needs to manage the boom better by moderating the rate of investment. “In Australia, there is a really big lie underpinning our economy and that is that we have infinite amounts of resources. We don’t.”

He cites Geosciences Australia, a government research group. It estimates that the life expectancy of the country’s known iron ore reserves has fallen from 100 to 70 years since 1998, while black coal is down from 180 to 100 years. Those figures do not take into account undiscovered deposits but neither do they fully factor in the rate of expansion now under way.

Well situated to service fast-growing Asia, Australia will one day hit the bottom of the quarry. By then, the windfalls may have been squandered. As one Perth-based mining executive says: “I get a sense we are at a critical point. What is the country getting for these massive revenues and who is getting it? That is becoming a very sensitive political debate.”