What is going on in our leadership elite? A series of recent statements by bureaucrats and pollies is adding up to an outbreak of serious arrogance. Perhaps it’s just the usual Canberran isolation. Then again, we seem to have contracted a quite serious case of policy-making hubris.
All of it surrounds Australia’s relative economic out-performance, China and capital flows. As the rest of the world frets about Chinese imbalances, or prepares to take advantage of its rising consumers, our leaders line up to squeeze the new magic pudding. Mining is an indefatigable sausage, the rich stuffing of which can be feasted upon for eternity. Whether it’s the smooth transition from high prices to high volumes or some magical idea about a “staged boom” (not a bust, oh no, not here), we appear blinded by our moment in sun.
Last week the Treasurer, Wayne Swan, appeared in the pages of the AFR to argue that the only issue we face is a lack of confidence:
When I tell my colleagues in the Group of 20 nations about this outstanding combination, they look at me like we’ve just taken out the quadrella on Cup Day. Yet if you listened to the public economic debate in this country you’d swear our nag had broken two legs and the vets were on the track with the canvas screen.
…This relentless negativity is quite simply destructive of confidence and of economic activity. It’s hard to see how that doesn’t have a deleterious impact on businesses’ bottom lines. Business people need to know the good news as well as the bad. As every reader of the Financial Review knows, you can’t tell your shareholders half the story, and you can’t make investments with half the facts.
We run the real risk of talking ourselves out of success and into the mire that’s afflicting other economies around the world
What tripe. There is a major adjustment under way in the economy that is making most households less wealthy; the shift to mining-led growth from credit-led growth. Where’s the discussion of the advantages of the new savings culture? Where is the discussion of how we should be preparing for a post-boom economy? Where is the discussion about how we’ll next engage with Asian growth and continue to grow our exports as commodities shrink? Is it any wonder the government can’t get any traction when rhetoric like this seems to refer to some other country.
The same magic pudding mentality has also seized the Opposition. Last week, in a moment of breathtaking hubris, Tony Abbott flew to Beijing to tell them where they can shove their money.
Diplomacy is usually a game of signals. That is, what is said and done is typically cover for something else. What you declare in the open is invariably just some smoke screen for what you intend. It’s even more the case when it comes to domestic politics.
There are a few occasions when the art is lost and instead the ugly truth is revealed. The pre-election bashing that Mark Latham took from the US in the 2004 is a good example.
I would characterise the recent speech by Tony Abbot in Beijing in this way. Some may argue it was targeted at a domestic audience. But the follow-through from various National Party heavy-weights has put paid to that. It is close enough to being real policy to take seriously. That is clearly how the Chinese view it too given the unusually swift and blunt response from the Chinese Deputy Ambassador, reported today at the AFR:
One of China’s top diplomats in Australia has called for the relationship between the two countries to move beyond resources to finance, infrastructure and agriculture.
Deputy ambassador Xue Bing made a surprise appearance at an investment forum at Canberra University to argue that Chinese investment was in Australia’s interests. It was the first official response after Coalition leader Tony Abbott’s stance in Beijing last week against acquisition of Australian companies by foreign state-owned entities (SOEs).
The comments triggered a split between Liberal and Nationals MPs over whether the Foreign Investment Review Board should take a tougher stance against Chinese investment.
Mr Xue said: “China and Australia are highly complementary in natural resources, industrial structure and scientific development.
“Facts prove that Chinese investment in Australia is good for the Australian economy and good for our win-win co-operation.”
He called for business co-operation to move beyond resources to finance, insurance, clean energy, infrastructure development and agriculture.
Exactly, and why wouldn’t we welcome such investment? As the magic pudding is denuded, we have got next to nothing to sell to the Chinese. Wine doesn’t pass the laugh test. Manufacturing is being adjusted. Education will do well but can’t support our standard of living. We’re going to need to sell the Chinese consumer more goods and services.
But it doesn’t end there. More sensible policy-makers have also caught the exceptionalism bug. Both Ken Henry and Glenn Stevens, two of my favourite economic Mandarins have declared that Australia need fear nothing from a break up of the Euro. From his recent speech, The Lucky Country, Capt’ Glenn argued that:
…if it involved the sort of euro break-up about which some people speculate, could be a flow of funds into Australian assets. In that case our problem might be not being able to absorb that capital. But then the banks would be unlikely to have serious funding problems.
With all due respect, this is hogwash. A Euro breakup means a global financial markets freeze because counter-party risk goes to the moon. The subsequent crash in global trade would make 2008 look like a picnic. As Europe’s largest trading partner, Chinese growth would get smashed. Sure they’d stimulate but not before commodity markets fell 50%. The run towards the $US and Yen would be historic. Is that really a scenario in which Australian assets will flourish? I think not.
The fact is, right now, we have tumbling terms of trade, a dollar that has temporarily decoupled from fundamentals and very little inflation. Why on earth are we talking up our currency?
In the last cycle our economic leaders took a simple and contingent idea by John Pitchford and turned it into a magic-pudding called the Pitchford Thesis; that current account deficits didn’t matter and private credit demand could grow for ever. Needless to say, that sausage is now an empty scrotum hanging on Canberra’s belt loop.
But now, even though we’re still a current account deficit country, it doesn’t matter and never will because we’ve a new sausage to squeeze. A little humility might be useful and might even lead to a novel idea: planning for the future.
