ECONOMIC AFFAIRS by Patrick J. ByrneNews Weekly
If Abbott can back Asian Infrastructure Investment Bank...
, March 28, 2015
While the Commonwealth government’s infrastructure development program proceeds at a snail’s pace, the Prime Minister Mr Tony Abbott has announced that Australia is likely to support China’s planned US$100 billion Asian Infrastructure Investment Bank (AIIB).
Mr Abbott’s move followed announcements by the UK, France, Germany and Italy that they will support the new bank. This has paved the way for Australia to follow suit, after earlier moves were shelved because of resistance from the United States. Twenty-seven nations have agreed to join the new agency.
Development experts say that globally as much as US$5 trillion is needed annually to fund infrastructure, stimulate global economic growth and employment. This huge public sector investment is needed after the 2007/08 global financial crisis (GFC) left major economies carrying mountains of debt that may take generations to repay.
Further, the global consulting firm, McKinsey’s, recently revealed that the debt of the major economies has increased, not fallen, since the start of the GFC in 2007. It has soared from US$142 trillion to US$199 trillion, i.e., by 40 per cent.
This debt mountain will leave the global economy sluggish, with many economies operating well below capacity, and unemployment at unacceptably high levels for the next 20 years, or more. Just as high unemployment is causing political instability in Europe, it is now causing unrest in the Abbott government.
Until recently, Australia was able to avoid the fate of the U.S. and European economies, which have been suffering “the long recession” — economic stagnation and high unemployment.
That has all changed. Now, the Australian economy faces serious risks and major structural problems. The sluggish global economy has seen a collapse in demand for our mineral exports.
Further, Australia is carrying a higher level of household debt today than at the start of the GFC and has a bubble in the property market that could burst, according to McKinsey’s debt report. It was the final bursting of the U.S. property bubble, fed by excessive subprime lending, that led to the GFC and seven years of depressed global economic activity.
Relying on traditional monetary policy — lowering interest rates to stimulate growth and employment — will not work in today’s economic climate. So far this year, 14 central banks have cut interest rates. Sweden, Switzerland and Denmark have cut their deposit rates below zero. Yet these measures have failed to lift economic growth in these countries.
Lower interest rates alone won’t solve Australia’s structural problems, such as the shrinking of our manufacturing sector, the closing down of our car industry, the parlous state of our rural sector, and the end of the mining boom.
Officially, Australian unemployment is 795,000 (6.4 per cent), although Roy Morgan Research puts unemployment at 1.2 million, and unemployment plus under-employment at 2.4 million (20.3 per cent).
Worse, governments want to reduce debt by cutting the public sector, which will add to unemployment levels. Regardless of how low bank interest rates fall, businesses won’t invest if consumers, worried about rising unemployment, won’t buy their products and services.
Voters are reacting. They have turned out Coalition governments in Victoria and Queensland after only one term in office. One-term governments have not been seen in Australia since the 1930s Great Depression.
The Abbott government’s poor showing in the polls reflects growing concern at rising unemployment.
So what is the solution?
Last year, the International Monetary Fund said that the solution is public investment in infrastructure. Leading Harvard university economist Larry Summers has said that governments may have to inject financial capital into their economies, permanently.
China’s new Asian Infrastructure Investment Bank aims to boost Asian economic growth through infrastructure investment.
It begs the question: if Australia can back this infrastructure investment bank, why can’t Australia create its own infrastructure development finance corporation?
If Tony Abbott wants to be the “infrastructure prime minister”, he urgently needs to reinvigorate his foundering infrastructure vision.
Late last year, government figures showed that public spending on capital works actually shrank in each of first three quarters of 2014.
The Prime Minister will also have to find a new way to fund his vision. His original plan was to co-fund state programs, on the condition that the states undertook major asset sales.
However, that policy appears dead in the water after Queenslanders at their recent state election clearly voted “no” to further asset sales, when they replaced the Campbell Newman Liberal National Party (LNP) government after only one term.
Former deputy secretary of the Department of Trade Colin Teese has outlined how governments can fund infrastructure without increasing government debt, and how a bipartisan agreement is needed for coalescing a wide-ranging group of experts to map out a long-term national infrastructure program (see pages 9–10 of this issue).
If the Prime Minister can take charge of economic policy and drive major infrastructure projects, the economy will grow, unemployment will fall and dissention in government ranks will fade away.
Patrick J. Byrne is national vice-president of the National Civic Council.