Revisiting the banana republic

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Cross-posted from the Conversation

We took the view in the 1970s – it’s the old cargo cult mentality of Australia that she’ll be right. This is the lucky country, we can dig up another mound of rock and someone will buy it from us, or we can sell a bit of wheat and bit of wool and we will just sort of muddle through … In the 1970s … we became a third world economy selling raw materials and food and we let the sophisticated industrial side fall apart … If in the final analysis Australia is so undisciplined, so disinterested in its salvation and its economic well being, that it doesn’t deal with these fundamental problems … … Then you are gone. You are a banana republic.

Revisiting then-Labor Prime Minister Paul Keating’s infamous 1986 warning should remind us how economic conditions change and how they keep changing: how new “realities” are quickly replaced by even newer “realities” masquerading as permanent changes.

Resources have been good for Australia, unlike for some other countries where there really has been a resource curse. However, with the end of the boom it is likely that we will revisit some earlier concerns about Australia’s over-reliance on resources.

Another quote from Bob Hawke, Paul Keating and John Button in 1991, taken from Building a Competitive Australia also seems particularly relevant at the moment.

This tough, increasingly competitive world of five and a half billion people does not owe, and will not give, seventeen million Australians an easy prosperity. The days of our being able to hitch a free ride in a world clamouring, and prepared to pay high prices, for our rural and mineral products, are behind us. From this fact flows everything else.

This sentiment was true for the 1980s and early 1990s, but less so for the 2000s where rising prices for resources and increases in national income provided an easier prosperity than Hawke could have imagined.

In 2000, Keating was still arguing against the resources as saviour view of long-term Australian prosperity:

The global terms of trade will not suddenly flow back in the direction of commodity producers. So even if we wanted to, we can never again rely on export wealth generated by Australian farmers and miners to pay for the preservation of tariff walls to protect our manufacturing and services sectors from competition.

China changed everything. Its voracious appetite for resources pumped up the prices Australia received for its exports – particularly coal and iron ore. Australians promptly forgot the warnings of the past, as resource wealth became the new reality masquerading as a permanent change.

Increased prices then led to a huge investment boom, with gas the major recipient in recent years. The scale has been remarkable, as a recent report from Australia’s Bureau of Resources and Energy Economics (BREE) shows.

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This boom has now peaked and Australia must now find new sources of growth. According to BREE, the “likely scenario” is that

the value of projects currently at the Committed Stage is scheduled to moderate after 2013 as a result of the completion of mega projects currently under construction. In 2014 the stock of committed investment is expected to decrease by $8 billion, and then by a further $63 billion in 2015. From 2017 onwards, the stock of committed investment in the mining sector is projected to revert back to levels comparable to 2007.

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While some commentators, including the Reserve Bank Governor Glenn Stevens, argue that we are now entering the third – export – stage of the boom, it is likely that just as the boom surprised us on the way up, so will the crash on the way down. Australia will no doubt export more for at least a few years, as recent data shows, but with increased global supply and lower prices, it is likely that we’ll start worrying about our dependence on resources once again.

Recent data clearly shows that commodity prices are on the decline, with iron ore and coal prices substantially lower. According to the RBA:

Over the past year, the index has fallen by 8.6% in SDR terms. Much of this fall has been due to declines in the prices of coking coal, iron ore and thermal coal. The index has fallen by 9.9% in Australian dollar terms over the past year.

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Australia is a lucky country, but it is also vulnerable. Australia’s historical vulnerability to declines in international resources demand is about to re-emerge, which will make economic management a difficult task after the September election.

Things have been tough for the Rudd and Gillard governments, but they will be even tougher for an Abbott government constrained by their rhetoric of the dangers of public debt. Labor was helped by the investment revitalisation of the Chinese economy, but should they win the election, the Coalition will come into office at a time of Chinese economic consolidation and rebalancing.

In the late 1980s, when some commentators were eulogising about the end of the industrial revolution and touting the beginning of the information age, Australia appeared to be doomed unless it weaned itself off a reliance on resources. This new reality was superseded by an even newer one – the remarkable rise of the Chinese economy. Not only did Chinese demand increase the price of Australian exports, but it also decreased the price of Australian imports. The terms of trade – the average price level of exports in relation to the average price level of imports – is a ratio (or fraction) and so can be affected by both the numerator and the denominator. Rising costs in China are likely to constrain further reductions in the price of manufactured goods.

The terms of trade improved remarkably from the early 2000s, it then declined as commodity prices fell in the immediate aftermath of the global economic crisis. To the surprise of many, including myself, it then ascended again to new heights as China embarked on one of the biggest investment booms in history, a boom that required many of the things that Australia exports to support it.

There can be no denying that Australia has been lucky to be in a position to take advantage of China’s industrialisation and recent Asian economic exceptionalism in the face of a slow American recovery and continuing European crisis. Similarly, however, any downturn in China and other Asian economies will now negatively affect Australia.

Article by Tom Conley, Senior Lecturer, School of Government and International Relations at Griffith University

Unconventional Economist


    • ditto.

      Actually there is a strong sense of early 80s rerun here. They had the investment phase in 1981 it just didnt flow through to volumes as prices collapsed.

      As PJK noted time and again we had the worlds biggest industrial museum, a propensity to consume.

      This time we have shrunk the industrial museum and spruced it up maybe, but it still isnt going to be that competitive without a load of effort.

      Easy productivity runs could be made then with IR reform. I doubt they will get that now, and demographics alone will run against that much labour reform.

      So we need something else.

      But the balance of payments crisis and currency plunge — for mine they are in the mail at some point.

    • Yep – that quote alone makes our current crop of party hacks look like the squabbling second rate chooks they are!

      If I have to endure one more session of mock outrage over some puerile comment from a hack somewhere in the opposing party machine I’m going to shoot myself.

  1. People pooh-poohed Keating at the time, but he’s been proven right. Too many years of taking the easy options have gotten us to this point. It’s hard to blame them though – it would be very difficult to choose the difficult option when we had China on the doorstep prepared to pay silly prices for our resources. There was always a future government to clean up the mess.

    Well now that’ll be Abbott’s job. I’m looking forward to seeing how he handles it. He was probably hoping for a cushy rerun of the Howard years but now I’m sure he realises that it’s going to be quite different. I’ve seen no evidence that the Coalition are ready to take the tough decisions. Almost everything Abbott says in public suggests the opposite – that he’ll be a convictionless populist. But difficult times bring out the best in some people. Abbott may well surprise us all.

    • Mark Out West

      Abbott described himself as a “Weather Vain”, although he’s a Rhodes Scholar that intellectual rigor has not followed him.

      Abbott with make all the mistakes that other conservative governments have made and that is mass public service sackings.

      It has started in WA and this will be the underlying strategy for Abbott and we will then see a rerun of the Eurocrisis and the effects of economic stagnation.

      I notice that Keating is nowhere to be seen when the present government wanted elder statesman support, he know a bunch of duds when he seen them.

      Maybe Clive can build a whole lot of Titanics and save us all, except Barnaby.

      It seems the only people who’ve been talking up innovation, tax mining to support innovation and spend on education and innovation are the greens, but hey lets delude ourselves and say that Abbott is our man in shinning armor.

      Cometh the hour cometh the man (in budgie smugglers)

      • I think the correct word is “weather vane”, though I see your point in spelling it the other way.

        Doesn’t the intense and consistent success of the Pascometer lie with his ability to read the groupthink and publish it? … and Damn the Consequences!!

        The apparently imminent political success of the weather vain in Mr Abbott therefore seems likely to be quickly rewarded with a result in diametric opposition to the one postulated. (I’m thinking things like a *return* to “adult government” and “fiscal responsibility” and other such catchphrases.

  2. “Abbott may well surprise us all.”

    Abbott is a denialist. He is in denial about climate change, the budget, the economy and the character of the country.

    What we need is a realist.

    • rob barrattMEMBER

      On an earlier blogg today a few people commented on the realities of unemployment in terms of what they have recently witnessed. It got me thinking about that weeping woman leaving Target’s HQ in Geelong. Single mother & now unemployed. I’m a Campbell Newman (or maybe it’s a Bligh) victim, but fortunately my partner has a job. The problem is, it’s with Queensland Health…

      I think the coming period is going to force the forging of a leadership which cannot currently be envisaged in our current spoiled, unproductive cloud cuckoo land. Whoever will lead us out of that won’t even be on the horizon right now.

    • I think Abbott will be a passenger just like the rest of us. The only help will come from the Salvation Army when the Banana Republic takes hold!!
      Wish I was joking.

    • rob barrattMEMBER

      I think the coming period will force the forging of a leadership which we currently cannot imagine. When it will happen is anyone’s guess. But one thing is for certain, if there were to be an international hunt for cloud cuckoo land HQ tomorrow, they’d find it here.

    • His smarts and courage on CAGW is a huge plus as far as I am concerned. And Vaclav Klaus is one of the greatest world leaders of all time. The Czechs could be still be grizzling and grumbling about the loss of past glories and worshiping strongman xenophobes like the Russians worship Putin. But they pulled their socks up and elected some of the world’s best ever leaders and rose into the ranks of the OECD itself, pretty much meeting New Zealand as it fell to the bottom.

      I read a comment in “The Dog and Lemon Guide” recently, about Skodas – something to the effect that the Czechs can make VW’s better and cheaper than the Germans. Says a lot. Would any car manufacturer say the same about its cars built in Australia by a subsidiary? Skodas sell not too badly all over the world. That’s the model for “local car manufacturing”. If you can’t sell them all over the world, forget about it.

    • migtronixMEMBER

      I don’t trust his denialism on global warming I think it’s fake and just like the GST the carbon tax will never be repealed. BtW there hasn’t been any warning in 17 years going by the data and not computer games, I mean models. I think you are a denialist because you deny reality but hey I’m sure taxes would stop any warning if there was any

      • drsmithyMEMBER

        BtW there hasn’t been any warning in 17 years going by the data and not computer games, I mean models.
        How about 18 ?

  3. Keating’s logic and use of language is refreshing and in stark contrast to the current mediocrities, on both sides, that aren’t up to the task.

  4. michael francis

    We’ll become a banana republic for sure if Clive Palmer sails into the Senate on his Titanic.

  5. In the last month it’s amazing how many medium sized business have frozen due to a complete stop in orders. I deal in this sector and its like they have seen a ghost.
    It’s unbelievable.

  6. This is amazing, I never understood before what this Mark Mills guy says here about the shale oil and gas fracking revolution in the USA:

    That is: it is a small-to medium-business revolution. “Big Oil” is threatened and is coming late to the party.

    The revolution has been restricted to places where permits are easy to get, and restricted to private land or State government land in pro growth States.

    The technology required to work out “where to drill” has become cheap; there is a “Houston Alley” technology industry made up of small players providing it TO small players in exploration and drilling.

    Another “only in America” phenomenon? Or more to the point, another “only in certain parts of America” phenomenon…..

    • Ronin8317MEMBER

      It makes commercial sense for the large companies to stay away from fracking/shale oil. If the water table gets contaminated, a small company can just fold up, leaving the government to deal with the cleanup. There are many places where fracking has occurred with no negative effect, but there are also places where the water is contaminated. With natural resource extraction, there is always the risk of environmental damage. The question is : how much damage? and is the reward worth the risk? Right now, it’s still pretty much an ‘unknown’.

      As to ‘peak oil’, nobody really knows since Saudi Arabia keeps it’s oil reserve as a state secret. The biggest worry is whether production can keep up with consumption as China and India grows bigger, and whether it’ll reach a point when poorer countries can no longer afford oil.

      • “…..whether it’ll reach a point when poorer countries can no longer afford oil……”

        According to the “renewable energy is already more cost effective” pundits, that should be no disadvantage…… (tongue inside cheek…)