NATIONAL AFFAIRS: by Patrick J. ByrneNews Weekly
Garnaut calls for new industries, lower dollar
, July 20, 2013
Professor Ross Garnaut recently signalled that Australia needed new industries built alongside mining and called for the exchange rate to come down about 40 per cent.
Australia’s prosperity has been substantially dependent on supplying raw materials — minerals and energy — to feed China’s rapid growth over the past two decades. However, in an interview with MacroBusiness TV (May 21, 2013), Garnaut said that huge structural changes were underway in China’s economy.
In part he said that China is managing four simultaneous structural shifts: 1) a shift away from exports; 2) a shift towards growth in its interior provinces, driven by investment in soft infrastructure like education, health and a social safety net; 3) a shift away from infrastructure-led towards consumption-led growth; and 4) a shift towards industries with greater environmental amenity.
These four shifts mean there would be a significant downwards shift in the contribution of metals and energy to China’s gross domestic product (GDP). At the same time, the world is approaching a global over-supply of bulk commodities, which will further force down the price of minerals and energy.
Professor Garnaut said that to compensate for these changes in China and global commodities, “a huge expansion in investment in non-mining tradable sectors is required if Australia is to grow through the forthcoming fall in mining investment, which will return to its historic average of around 2 per cent of GDP”.
In short, Professor Garnaut was effectively calling for a new economic agenda: the building of new industries alongside mining. And, essential to this process, the exchange-rate value of the Australian dollar must be reduced.
Colin Teese recently outlined in News Weekly (May 11) how to bring down the exchange rate: lower interest rates would bring down the high Australian dollar. If that doesn’t work, cap the value of our dollar and print more dollars to keep it down, as Switzerland has done with its currency.
Garnaut’s call for the building of industries was underscored lately by Ray Morgan Research, which found in June that Australian unemployment was 9.7 per cent, while unemployment plus under-employment totalled 18.9 per cent.
In the same month, the Australian Bureau of Statistics (ABS) put unemployment at only 5.5 per cent.
Morgan’s figures are based on a broader definition of unemployment than that used by the ABS, which says that anyone who has worked for one hour or more for payment, or has worked without pay in a family business, is considered employed.
Australia faces a tough task to build industries. Manufacturing industry has been hollowed out over the past three decades from a combination of hard-line free-trade policies and a volatile Australian dollar, which has been seriously overvalued in recent years, making imports cheaper and exports dearer, thus making industries uncompetitive.
By 2009-10, manufacturing was a mere 8.7 per cent of our GDP. It is unprecedented for a developed country to experience manufacturing shrinking to less than 10 per cent of the economy.
Recently, the dire state of agriculture — which, along with its dependent industries, employs over 17 per cent of the workforce — was encapsulated by Queensland farmer and economist Ben Rees, at a rural debt roundtable in Brisbane last October.
He measured the capacity of farmers to repay debt by looking at farm profits compared to farm debt.
In 1980, the total farm debt of all Australian farmers equalled their total farm profits. However, by 2011, total farm debt was over six times the total debt of all Australian farmers.
The big question is how to deliver investment to the economy when government revenues are falling as the mining boom subsides and as governments cut expenditure to reduce debt?
The Queensland Newman government is slashing investment to reduce debt, and any Abbott-led federal Coalition government would be likely to make major budget cuts after the next election.
The answer is that governments should be looking to channel into infrastructure and other national investment opportunities some of the $1.3 trillion in Australian superannuation funds. By 2023, superannuation is expected to be worth $3 trillion.
Infrastructure Partnerships Australia says that $40-65 billion has gone into infrastructure, but in fact most of this is invested offshore.
It is time to establish new agencies to help fund domestic infrastructure and private businesses.
A government-backed infrastructure agency, using government-guaranteed bonds to raise capital from the super funds, would allow governments to undertake major infrastructure works without increasing their budget deficits.
A special-purpose AusBank, financed along these lines to offer long-term loans at low interest rates to expand and build new industries, should be modelled on Germany’s highly successful Kreditanstalt für Wiederaufbau (KfW). The KfW was established in 1948 as part of the United States’ post-WWII Marshall Plan aid to help rebuild Germany. By 2012, it boasted a balance-sheet of €494.8 billion.
It is absurd that, at a time when Australia needs around $600 billion spent on new infrastructure and more invested in new industries, over half of our super funds are invested offshore because Australia lacks the agencies needed to act as conduits from the super funds to domestic investments.
Patrick J. Byrne is national vice-president of the National Civic Council.