OPINION: by Ken AldredNews Weekly
The West's long-running economic malaise
, November 22, 2008
How did so many Western democracies convert from their post-war status of wealth-producing saver nations to their present position of being consumer and import-oriented debtor nations, asks Ken Aldred.Former London employees of Lehman Brothers drown their sorrows in the All Bar One pub opposite their plush Canary Wharf offices. The US Bush Administration scrambles to put into place its US$700 billion Treasury Department rescue program for the American economy. Australia's Prime Minister Rudd blows the budget surplus on his $10.4 billion Economic Security Strategy in an effort to inject spending money into a contracting Australian economy.
Across the globe, investors wring their hands over the collapsing share prices, and everyone blames the US sub-prime crisis for their troubles.
All these events great and small simply reflect a day of reckoning that was inevitably coming. Even the sub-prime crisis was nothing more than the catalyst that set off a predictable chain of events. The catalyst could have easily been some other financial occurrence.Debtor nations
The cause of the present economic downturn, as distinct from its dramatic symptoms and subsequent panic-stricken solutions, lies in a long-running malaise that has afflicted the industrial West. That is the conversion of the West, especially the Anglo-Celtic democracies, from their post-war status of wealth-producing saver nations to their present position of being consumer and import-oriented debtor nations.
Australia is a classic illustration of this steady degeneration from economic strength to economic vulnerability. As a national trading entity, Australia, for a quarter of a century now, has been trading at a loss.
The measure of our ongoing lack of profitability or losses as a nation is the current account deficit (CAD). The CAD reflects the net trading position of Australia with the rest of the world. We trade in goods and services and Australians receive incomes from abroad. We also pay income to foreign individuals and entities. The result of all these transactions over a period of time (one year) is either a surplus or a deficit on the current account.
Our CAD has fluctuated over the past 25 years, but has normally been in the range of 3 to 6 per cent of gross domestic product (GDP). It must be clearly of concern that over the last five years the CAD has normally been between 5 and 6 per cent of GDP and sometimes fractionally higher.
Australia's foreign debt position is obviously adversely affected by a deteriorating CAD. The ongoing losses for Australia as a national trading entity, as shown by the worsening CAD, have to be covered by additional borrowings. Such borrowings are largely through loans from foreign banks, hence adding to our net foreign debt and making us increasingly vulnerable to any economic downturn.
In the 1981-82 financial year our net foreign debt was just $18.4 billion. By 1991-92 it had soared to $162.5 billion, and by 2001-02 it was $329.2 billion. It is now past $600 billion and is escalating inexorably towards $700 billion.
Equally disturbing is the fact that our net foreign debt in 1981-82 was only 11 per cent of GDP, and today net foreign debt equals half of our GDP.
A major contributing factor to our worsening CAD, and subsequent increasing net foreign debt, has been the adoption of economic rationalist or free trade policies that have contracted our industrial base and our agricultural sector. As a result, our capacity to earn export revenue from these sectors has been hampered and we have increasingly had to supply our domestic market with imports.
Job prospects for Australia's workforce have similarly suffered as a consequence. The proportion of the workforce employed in manufacturing has shrunk from 19.4 per cent in 1981-82, to 14.2 in 1991-92, and today a little over 10 per cent.
Since 1990, the Society for Australian Industry and Employment (formerly the Society for Balanced Trade) has warned of the inevitable dire economic and social consequences that would follow from the economic rationalist and free trade policies that have contracted our industrial and agricultural sectors. This situation was exacerbated by the perpetrators of these policies then dismissing as of no importance the worsening CAD and larger net foreign debt that resulted.
We in the Society were not the only ones to warn of what was coming. Twenty-two years ago, in the United States, John M. Culbertson warned his fellow countrymen:
"In touting free trade to other nations the United States has not only invited its own economic destruction but also misled other countries in their expectations from international trade. It is time for America to reject this false god and accept blame for preaching an unrealistic doctrine." (Harvard Business Review
, September-October 1986).Prophetic words
John M. Culbertson's words could not have been more prophetic. The US, Australia and other Western democracies have now paid a terrible price for unquestioningly following an economic ideology that was built on sand. Corrective policies and common sense will ultimately bring us out of the present global economic crisis, but we would be well advised as a nation to never again listen to the inept high priests of economic orthodoxy who never ever really understood what they were doing.- Ken Aldred is chairman of the Society for Australian Industry and Employment and a former federal Liberal MP.