ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
Will exports or our home market be our salvation?
, October 26, 2013
Over the last 30 years, incoming Australian governments have been able to govern on the basis that the economic fundamentals — both domestically and internationally — would continue unchanged.
The impact of global financial crisis has shaken the world clear of that comfortable assumption. A recent gathering of central bankers in the United States agreed that the economic fundamentals that Western governments had come to accept as “normal” would not return.
They concluded that faults embedded in the system, resulting in the creation of surplus and debtor nations, had permanently destabilised the international financial system. In future we should resign ourselves to a permanent cycle of financial booms and busts.
The usual suspects, Japan, China and Germany, continue to pursue unilaterally their “beggar-thy-neighbour” policies of holding down their exchange rates to retain and improve their export competitiveness. The theory of comparative advantage, love child of trade theorists, has been replaced by currency manipulation as the more accommodating path to export competitiveness.
Other adversely affected countries are now following suit by self-interestedly pursuing their own beggar-thy-neighbour policies. Parochial national self-interest is now once more trumping cooperation as the driving force of international economics.
The United States’ adoption of the policy of so-called quantitative easing is the most celebrated example, if only because the US is the world’s largest economy. By forcing down interest rates and the value of its dollar, the US helps fix its own domestic economy but creates adverse consequences for others.
In Australia’s case, and the same goes for many other countries, the adverse impact is an overvalued currency.
Our previous prime minister Julia Gillard closed her eyes to this problem, but Mr Abbott may not have that option. Early in his prime ministership, he will almost certainly be called upon to deal with the consequences of this problem as it impacts upon matters as diverse as international trade, industry policy, the plight of farmers and foreign investment.
No mechanisms are currently in place or under consideration to help him. Yet, if these problems are left unaddressed, they will leave Australia increasingly exposed to the proliferation of beggar-thy-neighbour policies. Mr Abbott does not need to sit back and look on, helpless to respond.
Since the early decades of the 20th century, there have been three fundamental shifts in world economic direction. The first happened in the 1930s. As the Great Depression intensified, Australia was lucky enough to be a dominion in the greatest economic power on earth — the British empire. We were able to take shelter beneath the British “beggar-thy-neighbour” policy, then called imperial tariff preferences. Both our agriculture and our burgeoning manufacturing industry benefited as we rode out the Depression.
A new stabilising international financial and trade structure, created shortly before the end of World War II, helped sweep away beggar-thy-neighbour policies of the pre-war period. Thenceforth, international relations — including economic relations — came to be guided by the newly-created ideal of international cooperation. The establishment of the United Nations and the onset of the Cold War helped develop a system of Western financial and trade cooperation under US guidance, which remained in place until the end of the 1970s.
By the end of World War II, the shape of a post-war world was becoming clear. Australia’s then Labor Prime Minister, Ben Chifley, badly misread those signs. Mistakenly, he believed that a consensus was building around socialist planning. In fact, a new idea was emerging — the notion of a mixed economy. Mr Chifley’s miscalculation cost him the 1949 election.
Robert Gordon Menzies’ newly created, moderately conservative Liberal Party read the signs more accurately.
Containing his more conservative instincts, the newly elected Liberal Prime Minister, with the able support of his Country Party partner, carefully adjusted the idea of a mixed economy to serve Australia’s interests. He was rewarded with 17 years of prime ministership, and his party remained in office for a further six years.
The Hawke/Keating Labor government handled the economic adjustment we faced in the early 1980s less ably. They embraced the letter, rather than the spirit, of the new economic mantra of deregulationist/free market economics. Labor naïvely came to believe that, regardless of the behaviour of our trading partners, unqualified adoption of free market economics would ultimately serve Australia’s interests. Subsequent governments — the Coalition under John Howard and Labor under Kevin Rudd and Julia Gillard — did not deviate from this path.
In the wake of the 2007/08 global financial crisis, most of the Western world (excepting Australia, where doctrinaire economic ideologues continue to dominate policy thinking) did not wait for the world’s central banks to tell them that the deregulationist/free market model of capitalism had become unworkable. Independently, they moved to shelter their domestic economies against the ill winds of burgeoning beggar-thy-neighbour policies.
The West’s major economy, the US, without actually trumpeting its intentions, quietly shifted the emphasis of economic policy-making away from international trade and towards rebuilding the domestic economy. Necessity could be said to be driving common sense.
The day of reckoning had arrived for a flawed growth model sustained by heavily indebted consumers continuing to borrow money in order to buy cheap imports. The obvious correction was to get back to providing jobs at home rather than abroad. Americans were in a position to make and buy most of what they needed, so why not let them do so? Since the US remains the largest economic unit in the world, that choice could not fail to have its consequences for the rest of the world.
At the same time, China — the US’s closest economic rival — although it was driven by a different kind of necessity, also decided to shift its emphasis away from exports and towards domestically generated growth.
The Europe Union countries — especially Germany, the most powerful of its trade-surplus countries — faces the uncomfortable prospect of having to adjust to these important global shifts while wrestling with intractable structural problems associated with the EU currency, the euro. For these countries, the present disruptions could hardly have come at a worse time. Fundamentally, European, and particularly German, prosperity has relied heavily upon export-driven economic growth based on an undervalued currency.
The new reality is that the world’s two major economies, the US and China, are now pursuing policies that are certain to neutralise that advantage.
From the peculiar perspective of Australia’s best interests, Prime Minister Abbott will be obliged to grapple with our problems against the background of these and other new realities. He must not repeat the mistakes of Bob Hawke and Paul Keating and assume that economic theory, mindlessly embraced, will serve us best. Rather, he should look to the example of Menzies and, along with his Coalition partner, the Nationals, develop policies best suited to Australia’s needs.
In doing so, he may need to soft-pedal on his push for free trade agreements with South Korea, Japan and China. The prospects of our new Minister for Trade and Investment, Andrew Robb, getting favourable deals with those partners are not good. What they want from us may not be achievable at a price we are willing to pay.
In any event, it may be necessary for us, following the lead of the larger economies, to focus more of our attention on rebuilding our domestic economy. And, most certainly, it has to be conceded that there are important problems facing our farm and manufacturing industries.
And here, Mr Abbott seems better positioned. He appears to have good ministers heading up the departments of manufacturing and agriculture. Perhaps the most difficult problems confronting these ministers will be where to look for wise counsel.
Recent tradition has been for governments to seek advice from the Australian Productivity Commission. Unfortunately, this supposedly independent organisation has strong ideological positions about the role of agriculture and manufacturing industry. The survival of our farmer sector, the Productivity Commission believes, depends on its being able, unaided, to meet subsidised competition in export markets. It is unwilling to recognise how much farmers’ prosperity depends on preferred access to its domestic market, and on being able to borrow at reasonable cost.
As to the car industry, the Productivity Commission is on record as saying it doesn’t mind how much support the government gives to that industry as long as it doesn’t work! It wants the industry to collapse. General Motors and Ford seem to have much the same idea. They would rather import than build the right kind of cars here. In other words, their international strategies determine what they will allow their very capable design and manufacturing teams to make here.
The companies both have the capacity to design and build the right cars, yet company policy won’t allow that to happen. Certainly, that was not the understanding on which the two foreign-owned manufacturers were encouraged to set up here. It can hardly be acceptable to our new Minister of Industry, Ian Macfarlane, and is a matter the new government should be addressing.
The other important issue is foreign investment, which happens to be closely associated with both trade and import policy. The starting point here is that we are unable to earn enough foreign currency to pay for what we are importing, principally for consumption. Currently we are redressing this imbalance by selling off assets. We must recognise that this kind of foreign lending, however necessary in the circumstances, adds no new productive capacity or jobs to our economy — besides which, selling assets to pay for consumption imports is unsustainable.
Longer term, this form of consumption must be tied our export capability. Foreign lending then would revert to its correct function of introducing new productive capacity and employment into the Australian economy.
These are the challenges we must find ways to meet. It would be folly to assume that the task facing the government will be easy — or indeed to imagine it is simply a matter of getting a stalled growth engine restarted.
All the evidence indicates that the economic engine will be in need of constant attention if it is to be kept running smoothly.
Colin Teese is a former deputy secretary of the Department of Trade.