ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
The do-nothing approach that's crippling our economy
, October 1, 2011
Describing the current status of the Australian dollar as “high” or “low” is not strictly accurate. The value of any currency — including ours — can only be usefully measured relative to the currencies of our important trading partners at any given moment. On this measure ours has been “high” for a very long time, and seems likely to stay there.
The mining boom is identified as the cause of this — though it is only part of the problem.
Whatever the cause, it is widely recognised that the economic welfare of many ordinary Australians is being adversely affected by the present strength of the dollar. Doing something about this requires government intervention of some kind.
The problem is simple. A strong dollar buys a great deal more U.S. dollars and Euros than otherwise. A consequence of this is to make our imports cheaper and exports dearer. By allowing the Australian dollar to continue strengthening, our government is effectively imposing a tax on exports and offering a subsidy on imports. This is being presented to ordinary Australians as some sort of advantage.
Not surprisingly, disadvantaged farmers or manufacturers and workers, who depend on export business or who face import competition, are not buying this argument.
Free market fundamentalists insist that relative changes in the value of currencies reflect nothing more than the immutable, market-determined economic realities. Our government believes them. In doing so, it is succumbing to the fantasy world of its misguided advisers.
Of course, the real world operates somewhat differently. There, most governments routinely intervene to adjust the relative value of their currencies in order to secure or consolidate economic advantage.
The current Secretary of the Treasury, Dr Martin Parkinson, is leading that pack of bureaucrats, politicians, academics and commentators locked into the fantasy world.
Dr Parkinson tells us that our economy is undergoing necessary, fundamental “structural adjustment” (presumably to accommodate to what he describes as the mining “boom”). This “adjustment” — a euphemism for unemployment and low wages — apparently entails a more or less permanent strengthening of our currency.
All this is happening, he seems to believe, within some kind of perfect economic vacuum, which governments approach at their peril. Nothing can or should be done about it!
Unfortunately, he is wrong — and so are his followers. The Australian dollar is not sitting where it is, at a high level relative to the currencies of our important trading partners, because that is where the mining boom and the free operation of currency markets dictate.
On the contrary, it is there to a major extent because the governments of our important trading partners have been intervening to manipulate the relative value of their currencies down for their own purposes. Their gain harms our manufacturers and farmers.
Once this is understood, the advice that our government can do nothing about it makes no sense.
Neither does the opinion — suggested in an article in the business section of the MelbourneAge (August 31) — that we must accept higher unemployment in manufacturing and agriculture as “collateral damage” of the mining boom.
Quite apart from considerations of fairness, this position surely is politically unwise. Do we imagine that the unemployed will calmly accept the idea that they can be thrown to the wolves? At the very least, won’t it rekindle interest in the idea of some kind of special tax on mining profits?
Furthermore, is it really sensible to place all of our economic eggs in the minerals extraction basket? Out of Dr Parkinson’s own mouth comes the view that we are in the midst of a boom which, he assures us with a sweep of the hand and absolutely no supporting evidence, “will last for decades”.
He could easily be wrong. And whether he is right or wrong, we all know how booms end. Is the Treasury Secretary proceeding on the basis of another invisible hand of “structural adjustment” again rescuing us?
Meanwhile, we resign ourselves to our fate: digging minerals out of the ground, selling them for what we can get, and using the proceeds to buy whatever we want from the cheapest possible overseas sources.
What a way to run an economy — from the man whose Commonwealth department is supposed to be the principal source of economic advice to the government.
Dr Parkinson apparently believes we confront an “either or” situation. We can have a minerals industry, or manufacturing and agriculture, but not both.
Well, he is wrong. We can, and we did, have both, until the Whitlam Labor Government decided in 1973 to begin undoing it all by unilaterally cutting tariffs by 25 per cent. The outcome of that was the creation of the first real unemployment since the war.
From 1983 onwards, the Hawke and Keating Labor governments built onto this a more far-reaching “structural adjustment” platform in the form of labour and financial market deregulation and free trade. Remember, no invisible hand of the market was at work here, but rather unannounced policy imposed from above in response to a combination of ideological economic fads and international pressures forAustraliato conform.
That policy prescription is now deeply ingrained in the psyches of most members of both sides of politics and is widely accepted within a significant body of elite public opinion.
Dr Parkinson is right about one thing: within the framework of those economic policy settings — which he strongly supports — nothing can be done. Except, that is, to sit around and watch, while what other countries push our economy, and the Australian people, this way and that.
No other country in the world has allowed the pursuit of free market economics to so completely define the national economic agenda.
In the present climate, nothing could be more dangerous. The world is in the midst of economic and political turmoil. Other countries may not know quite what to do, but at least they aren’t sitting on their hands hoping something will turn up. We are.
While others move to shore up their national interest, we, by conscious choice, are allowing ever-larger chunks of our business and national sovereignty to be whittled away.
Manufacturing industry is being sacrificed on the altar of economic ideology. Major Australian enterprises are increasingly looking beyondAustraliafor their chief executive officers. Have our business boards lost faith in the capacity of Australian-born CEOs?
Other countries don’t do this. Can you imagine the Germans or the French hiring foreign nationals to run their iconic businesses or banks?
It isn’t the fault of CEOs that Australian companies are under pressure. It is the policy framework in which they are asked to operate. The new Qantas boss has a mandate to make the airline profitable. Given the policy settings of airline operation, his only option is to cut labour costs.
The CEO is cornered. Given that government policy has made a gift of much of the traffic generated here to other airlines with cheaper labour costs, he has no alternative. The Qantas boss has no option but to chase down the fares of his low-cost competitors.
Our biggest mining enterprise, BHP, may look safe for now. We are told mining profits are “bomb-proof”. But on what assumptions? How will the company fare when price pressure comes on coal and iron ore from lower-cost sources?
Let’s hope the company has its eye onBrazil— our major competitor in the Chinese market.Brazilhas had no hesitation in holding its exchange rate down to maintain export competitiveness. That policy delivers competitive advantage as much toBrazil’s minerals as to its manufactures and agriculture.
What our Treasury Secretary tells us can’t be done is being done by our most serious competitor,Brazil.
If we don’t do the same, when the heat is turned up on minerals prices,Australiaand Australians will again be the losers. BHP might choose to look off-shore for its coal and iron ore.
And don’t expect help from the Treasury Secretary, even though this time the sufferer would be an industry where we are supposed to have a comparative advantage.
The sad fact is that, in the modern world, comparative advantage can be created by and/or undermined by government action.Australiahas committed itself to remaining on the receiving end of this reality. In the process, we have embraced an economic culture facilitating the de-Australianisation ofAustralia.
Perfectly sound businesses are being pushed to the wall or denied the reasonable means of continuing. Australian managerial talent is being overlooked.
In our chase for the rainbow of globalisation, we have embraced a system which diminishes our economic and political sovereignty, in the misguided belief that we are within reach of a new, liberating economic miracle.
Almost alone among the proponents of globalisation, we appear actually to believe that unadulterated benefits await only those who most wholeheartedly embrace the virtues of deregulation and free market economics.
The rest of the world is in the process of adjusting to the fact that the promised miracle was a mirage, and are taking whatever actions they deem appropriate to defend and enlarge the national interest.
Thus far, Australian governments of whatever persuasion seem inclined to accept the advice that they should proceed as if none of this was happening.
As a matter of policy, our government have chosen to sit by and watch while actions by other countries eat into the fruits of our economic labours — something that seems scarcely credible to the balanced observer. It amounts to telling ourselves, and the world, that we are satisfied to leave important elements of our sovereignty, nationhood and national interest to the vagaries of market forces.
When John Maynard Keynes observed that markets can remain irrational longer than you can remain solvent, his remark was directed principally to individual market players. The message nevertheless, holds equally true for countries.
Colin Teese is a former deputy secretary of the Department of Trade.