ECONOMIC AGENDA: by Patrick J. ByrneNews Weekly
Abbott government needs an economic agenda
, March 15, 2014
The Coalition government has yet to develop an economic strategy in the face of major industries terminating their operations in Australia.
Air Vice-Marshal (Retd)
John Blackburn AO.
Ford, Holden and Toyota have announced that they will be shutting down car manufacturing in Australia.
Soon, Alcoa will have closed two of its six aluminium-refining plants, and the future of the remaining four are in doubt. The industry generates $5 billion in exports.
Aluminium refining consumes almost 15 per cent of all the electricity produced in Australia, according to a study done by Dr Hal Turton in 2002 for The Australia Institute.
Similarly, the refining of copper, silver, lead and zinc is declining. The industry is also a heavy user of electricity and is expected to generate revenue of $3.5 billion in 2013-14, well down from $5.5 billion in 2008-09.
Electricity prices have increased 110 per cent in the past five years, and continue to rise. Less that a decade ago, Australia had the lowest-cost energy in the developed world. Now it has some of the highest-priced electricity, according to the new CEO of the Minerals Council of Australia, Brendan Pearson. 
Prices are not only hurting consumers; they are a major reason why smelting industries are closing down.
Gas prices are rising as the domestic price shifts upwards to match the much higher world market price for gas.
The National Roads and Motorists’ Association (NRMA) is the latest agency to warn that, since 2000, Australia’s dependence on imported fuel has grown from 60 per cent to over 90 per cent, “and there is no plan to stop our dependency growing to 100 per cent”.
By 2030, all Australia’s oil refineries are set to close, leaving the country with only 20 days’ reserves of liquid fuels and entirely dependent on imports (see John Blackburn AO’s report, Australia’s Liquid Fuel Security: Part 2, published by the NRMA, February 2014). 
How will the nation pay for this fuel when we already have a net foreign debt of $853 billion, worth about 50 per cent of gross domestic product?
The rural sector is suffering, not just from drought but from deregulation, imports from a corrupt world market, and years of policies that have focused on the export markets at the expense of Australia’s domestic markets for food and fibre.
Agriculture, its input and downstream industries make up 12 per cent of the Australian economy and employ over 17 per cent of the nation’s workforce, according the Australian Farm Institute.
The crisis facing these and other industries will mean tens of thousands of jobs vanishing, a massive loss in the nation’s skills base and lost investment in research and development. The bulk of manufacturing R&D is done by the car industry, and that will go when the car companies close.
Furthermore, many exporters cannot compete with imports which are made cheaper by the high value of the Australian dollar.
Most of Australia’s major trading partners have manipulated down the value of their currencies since the global financial crisis (GFC) struck in 2008. This has seen Australia’s free-floating dollar rise against major currencies, effectively penalising our exports and subsidising our imports.
While the first condition for global free trade is for trading partners to have floating exchange rates, the first change in policy by the major exporting nations after the GFC was to abandon floating exchange rates in favour of managing down the value of their respective currencies, thereby benefiting their exports and curbing their imports.
Japan has maintained a low exchange rate for decades. China has achieved the same thing, although it has slowly allowed the value of its currency, the renminbi (also known as the yuan), to rise in recent years.
The U.S. Federal Reserve’s quantitative easing program has seen money pumped into the American economy, forcing down interest rates and, in turn, lowering the exchange rate of the U.S. dollar.
Germany has effectively enjoyed the benefits of a low exchange rate, because for Germany the euro is undervalued in relation to the price of its exports.
All the East Asian nations manage their exchange rates and hold large currency reserves.
The widespread use of managed exchange rates represents the first dramatic shift away from the free trade agenda that had been promoted globally since the early 1980s. It is just part of a much wider rethink of economic policy that is underway in the U.S. and Europe.
The former deputy secretary of the Commonwealth Department of Trade, Colin Teese, recently reported on the change of heart of an influential Harvard economist, Professor Lawrence H. “Larry” Summers.
Summers was one of those who persuaded President Bill Clinton to repeal the Glass-Steagall Act of 1933, which had separated conventional banking and speculative banking. He was a supporter of the deep globalisation economic agenda.
Summers now says that the Western economies are most likely trapped in a state of long-term stagnation, and may require near permanent injections of government funding to make economies grow and provide jobs.
Such radical economic thinking is part of the new economic discourse underway overseas, but not yet in Australia.
Why is Australia so different? Surely we don’t lack the intellectual capacity to rethink policy as structural changes take place in the global economy?
Perhaps the problem exists because Australian policy-makers believe the crisis that has beset the U.S., Europe and elsewhere won’t happen here.
But they should look back to the early 1980s, when the global financial system was being deregulated.
Subsequently, there were a series of major financial crises: the Japanese asset price bubble (1986-2003); Black Monday (1987); the U.S. savings and loans crisis (late 1980s); the 1994 Mexico economic crisis; the 1997 East Asian meltdown; the Argentine economic crisis (1999-2002); and the global financial crisis of 2008, which has paralysed the major economies.
Each financial shock was larger in amplitude. Each time, warnings that these crises would drive the Australian economy into recession failed to materialise, or the downturn was very short.
Each time, Australia became a “safe haven” for foreign capital in times of crisis. When the economies of other countries were suffering, Australia defied the trend and prospered.
Such capital inflows have kept Australia growing when other nations have been suffering recessions and unemployment.
This has happened so many times since the early 1980s that Australians have become conditioned into believing “it can’t happen here”.
Unfortunately, this prosperity has conspired to drive up the value of the Australian dollar, which punishes exporters and those industries competing with cheaper imports. This has hollowed out many of the large industries that are now collapsing.
It may not be the fault of the Abbott government, but it is now happening on its watch.
It means a wide sweep of new policies will be needed.
In the coming issues of News Weekly, the agenda pages will be looking at what policies are needed to restore the ailing Australian economy.
Patrick J. Byrne is national vice-president of the National Civic Council.
 Hal Turton, The Aluminium Smelting Industry: Structure, Market Power, Subsidies and Greenhouse Gas Emissions (The Australia Institute, Canberra, ACT): Discussion Paper No. 44, January 2002.