There is only one way to China-proof Australia

It’s all far too late but at least the right questions are being asked by a few, from Callam Pickering:

If Chinese authorities are successful in orchestrating their economic transition, then Australian growth will take a direct hit through weaker export volumes and earnings. Education exports and tourism are the two main areas that could benefit from a more consumption-focused Chinese economy.

But the best way for Australia to return to prosperity — and weather the headwinds coming from China — is through economic policies that promote entrepreneurialism and innovation, that boost productivity, and encourage risk-taking.

The National Reform Summit was a good start to a discussion that should have started years ago. The ideas discussed are worth pursuit, but talk is cheap and needs to be followed by bipartisan support for a comprehensive reform agenda that prioritises growth and opportunity over political opportunism.

Callam’s suggestions for how to China-proof Australia are right and the National Rent Seeker Summit was an OK start. But as mooted prior, the appearance at the event of the primary rent-seekers in the Australian economy – banks and miners – ensured that the blue print for reform was very soft. After all, which is of them is going to openly endorse:

  • kicking banks off government guarantees?
  • removing all of the real estate supports in the system?
  • ramping up mining taxes so that future booms are controlled via fiscal stabilisers?

Other measures are welcome but these three are at heart of the productivity-devouring Australian ponzi that takes mining income, leverages it offshore, inflates asset prices, and hollows everything else out via a chronic and acute case of real exchange rate destruction, otherwise known as Dutch disease. The Rent Seeker Summit was not even a pimple on the arse of this problem. In fact, it was symptomatic of it as a real estate addicted media self-aggrandised the entire event despite its overly narrow focus.

No, there are only two steps to China-proofing Australia. It is the same way that you fix low commodity prices. Low prices are their own cure as output collapses. Or, to the extend the analogy to the Australian economy, low commodity prices will trigger deflation across the entire economy in time, including real estate, restoring competitiveness and productivity growth.

So, step number one is underway and will arrive in time. It’s actually step number two that is the hard part. When the cure to Dutch disease does arrive, it will be greeted with the screaming of 2 million horrified Australian landlords a, not to mention the howling of countless other land holders leveraged to the old, dying model.

Many of these occupy the national Parliament and unless the crisis is managed as a trigger for real reform to the structure of the economy by some outstanding leadership, it will instead be used by these rentiers to soak up the last of Australia’s resources in another sickening bailout.

Thus to really China-proof Australia, an entirely new political party is needed.

And with that I bid you adieu for two weeks holiday. The very able Chris Becker will fill my shoes until then.

Comments

  1. There will also be about 20 odd million people screaming for the heads of whoever is in power because the price of all their everyday essentials have gone through the roof. This will be accompanied by screams for pay rises by the powerful at the added expense to ordinary workers who don’t have such power. The f..kup is monumental! It can’t be fixed.

    • Yes flawse, it won’t be the deflation that will make the changes we need but the inflation that comes afterwards that will finally break the back of the rent seeking behaviour.

      That is why I continue to keep a close eye on upcomers in the ALP, centralised wage fixing will be needed when everyone’s savings and debt get inflated away.

  2. So…..put up interest rates, now!
    If you want a transition from speculative excess, starve the beast of its food – cheap money.
    If you want entrepreneurial vigor, then put risk back into money. Those who want to take productive risk, will, regardless of the cost of capital. And, dare I say it, if the alternative of asset speculation is tamed, where else is the money to then be made? In a dynamic risk-on economy! And that comes with the Unconventional Policy of…. putting up interest rates into the teeth a recession!

      • Not sure about these H&H?

        (a) kicking banks off government guarantees? If the UK hadn’t seep up in 2009, London would cease to exist today. Do you really want that for Oz?

        (b) removing all of the real estate supports in the system? Not sure what you mean here, but scrapping NG and GST handouts for first home buyers – probably a good idea. But remember property is the basis of a modern economy… so we have to be careful.

        (c) ramping up mining taxes so that future booms are controlled via fiscal stabilisers? This is mickey mouse economics buddy. You don’t have a leg to stand on. If you want mining to go elsewhere fine. But a boom and a crash is always better than no boom at all. At least you get stuff done in the interim. Go and live in Africa for a while – and you will understand what grinding property is. Australia is only here because of the number of mining booms it has.

    • In this book, I treat neoliberalism as a governing rationality through which everything is “economized” and in a very specific way: human beings become market actors and nothing but, every field of activity is seen as a market, and every entity (whether public or private, whether person, business, or state) is governed as a firm. Neoliberalism … casts people as human capital who must constantly tend to their own present and future value.

      Neoliberalism is a “reprogramming of liberalism” rather than only a transformation of capitalism. … Thirty years ago, at the dawn of the neoliberal era, we get human capital that entrepreneurializes itself at every turn. Today, homo oeconomicus has been significantly reshaped as financialized human capital, seeking to enhance its value in every domain of life.

      In contrast with classical economic liberalism, then, the contemporary figure of homo oeconomicus is distinctive in at least two ways. First, for neoliberals, humans are only and everywhere homo oeconomicus. This was not so for classical economists, where we were market creatures in the economy, but not in civic, familial, political, religious, or ethical life. Second, neoliberal homo oeconomicus today takes shape as value-enhancing human capital, not as a creature of exchange, production, or even interest. – Wendy Brown

  3. Enjoy your timeoff HnH, come back well rested.

    Don’t worry we won’t burn the joint down to the ground in your absence! 🙂 🙂

    • bolstroodMEMBER

      We won’t burn the place down..
      No but it might self combust.
      Have agreat break H&H & thanks for your work. See you on the other side.

  4. How about other policy holes?

    Like the fact that in the USA, paying people with equity doesn’t trigger a capital gain until it’s liquidated?

    I asked a startup I was considering working part time for to do this, and it was apparently just way too hard here.

    Major disincentive to take a chance.

  5. “But the best way for Australia to return to prosperity — and weather the headwinds coming from China — is through economic policies that promote entrepreneurialism and innovation, that boost productivity, and encourage risk-taking.”

    Then I read from The Drum:
    “Research reveals a huge proportion of Australia’s richest people amass their wealth via political connections rather than via innovative businesses – which is helping them at the expense of everyone else, write Paul Frijters and Gigi Foster.”
    http://www.abc.net.au/news/2015-08-26/frijters-foster-battlers-and-plutocrats/6725118

    So if another political party come along will it just fall into the same mess that Australia is today?

    • Britain, you know the empire, was our biggest trading partner and/or recipient of our primary industry output for generations, which we still defer to in many ways, and still paying for it re. lack of innovation etc., but I don’t ever recall anyone complaining especially when many Australians were and are still more loyal to the ‘mother country’ like Tones.

  6. Mmmm, we need a ‘Shark Tank’ made up of 2 from Universities, 2 from the Govt and 2 from Private Capital… in every town and city in Australia. Not broadcast like some sideshow, but real….

    • And the academics, bankers and g-men – they go in the tank with half starved bull sharks, right?

      • Mmmm… over 4 years…. I would think $1b in govt money AU wide, administered by govt bots on panel, extra $500 million for research grants to University bots from govt. Private investors should have at least $50million in net assets and to get govt %0.5 loans for seed capital.
        Private bots should get first right of offer and after that only rule would be no more than 50% equity taken by govt…..Private Bots could be companies or corporations, both domestic or foreign.
        Food for thought, if we are wanting to get serious about VC and innovation.

      • Australia get serious about VC??? must be Beer-o’clock in Australia
        Actually I liked Stat’s version of the SharkTank live Bull Sharks feasting on Bureaucrats now that’s Aussie Innovation, combined with fundamentalist economics, productively using that which is in excess….love it.

  7. Miners as rentseekers! Outlandish assertion indicative of a bloke in need of a good rest. Enjoy the break.

    We don’t need a new political party, we need a new political system. Some kind of benevolent pragmatic autocracy capable of ignoring the squeals from the noisy ill informed (greens and social services mainly) dedicated to the long term economic strength of the nation. A benign dictatorship that understands we need a robust business-friendly economic environment that promotes innovation and rewards success. A regime that understands we need a sustainable social safety net that helps in need but is not a way of life. One that encourages its citizens to be independent, forward thinking and responsible – so much so that perhaps one day it may cede power to the citizenry 😉

      • If that’s your thing, I’m sure it can be arranged. Indeed Chris Becker likes to wield the big stick, he may well volunteer.

    • Sideshow Bob: Because you need me, Springfield. Your guilty conscience may move you to vote Democratic, but deep down you long for a cold-hearted Republican to lower taxes, brutalize criminals, and rule you like a king. That’s why I did this, to save you from yourselves. Now, if you’ll excuse me, I have a city to run.

    • ErmingtonPlumbingMEMBER

      ” A benign dictatorship that understands we need a robust business-friendly economic environment ”

      You’ve already got that dude in the form of the good old US of A and we are well on the road to joining them. You’ve already won 3d, why are you even here?….just to gloat?

      https://www.youtube.com/watch?v=vbtpNblpGh0

  8. mine-otour in a china shop

    Every time you guys go on holiday something bad happens!

    I have sold everything – including the cat on ebay.

  9. What a ridiculous premiss, China proofing Australia. it would be impossible to even contemplate this at a company where one customer represented over 30% of revenue and it will prove equally impossible at a country level, like it or not we’re tied at the hip.
    The best cases is as goes China so goes Australia, if China shifts it’s efforts away from Infrastructure then we must also shift our efforts away from mining, but not away from China. Their growth is our opportunity (we’re on the inside track), their policy shift is something we can capitalize on or simply piss away. BTW it’s not a zero sum game if we piss away this opportunity it wont necessarily be offered to us again. There is no doubt in my mind that China can survive without Australia….nt sure it works the other way around

    • Of course we can survive without China – just over a decade ago exports to China made up less than 6% of the total. Moreover, the commoditities that have made up the bulk of our recent massive exports to China, China is already showing less interest in, a trend which is likely to continue. So we have no choice about decoupling from China – unless we have genuine competitive advantages in other goods and services of interest to the Chinese, which is dubious.

      In your analogy, our shop had been there for twenty years, and doing okay, when suddenly one of our customers developed an obsession with one product we stocked, of which he bought as much as we could stock at a massive premium, leading us to drop some of our lines. Now it looks like he’s getting a bit bored of that product, so it’s time to start looking after some neglected customers and suppliers.

      EDIT: In the five years to 2014, I note that exports to India went backwards – declining 11% per year – during a period when India’s GDP grew between 4% and 11% in each year. The opportunity cost of going all in on China has been huge.

      • The three most difficult things to achieve in business are
        – win new loyal customers
        – create successful new products
        – Achieve sustained growth
        All I’m really saying is that we should focus on hanging onto our one new customer (China) and provide them with new products (Education, Tourism, Food …) rather than throw in the towel and start from scratch. By hanging close to China we’ll also achieve growth so we’ll have two of the three most difficult business development tasks taken care of. If as a society we cant move fast enough to create the new products demanded by a consumption shift in China’s then we deserve our fate and will truly become the poor white trash of Asia.

      • Put it another way:

        If I owned a business with many customers who each represented a similar amount of my business, and woke up one morning to find that one customer was third of my business while many of the other accounts had shrunk, I’d shit myself, and make diversifying my customer base a very high priority.

        It’s pure fantasy to think that the Chinese are going to take Aussie holidays and sign up for Aussie tertiary education (while their school leaver numbers shrink and others around the world muscle in!) so far above what they already do that it replaces our commodity exports to any significant degree. Similarly food – at the same time as the Chinese population approaches its peak, dozens of other countries are expanding their agriculture sectors to sell food to China.

        Here’s another business truism- doing the same thing tomorrow that worked yesterday (including targetting the same customers) is the right way to go out of business. Japan, the US and the UK have all been our number one customer in times past, and aren’t any more. It will happen to China too.

        @kevin,

        if we trashed our manufacturing and suppliers it just makes the task bigger, it doesn’t make it any less important.

  10. @Stat
    Less than 5 years back I remember an Australia that took out the big stick and caned our Manufactures unmercifully, there was lots of cussing and threats that if they ever saw us again they’d chop of our manhood and nail it to the mantle. Least ways that’s what I remember.
    What now that Mining is going all is forgiven?….that’s never going to happen
    Australia has @#$%ed up royally and needs to regroup and focus on available opportunities that’s all I’m saying. This does not mean we need to do this to the total exclusion of other customers and other markets.
    BTW displacing a firmly in place incumbent supplier (especially customers in another country)is a very different business problem to that of deepening your engagement with an existing high growth customer. Personally, in uncertain times, I’d always try to deepen the customer relationship first than attempt to broaden the customer base when times were a little more certain.

    • Deepening a relationship with an existing single customer (I was never talking about suppliers) leaves you exposed to the risk that a change in management or business strategy in that customer’s organisation renders your goods or services redundant or otherwise unwelcome for completely arbitrary reasons – believe me, I’ve seen it happen. And China is just the kind of place where a change in management leads to sharp changes in overall direction with zero warning. And it’s precisely in uncertain times when the risk is greatest.

      Auto manufacturing is gone and won’t come back, but all manufacturing is not gone. Our terms of trade are going to mean we can’t afford many imports we have gotten addicted to. Some we’ll have to give up completely or drastically cut back on, others we’ll have to re-learn how to do for ourselves. Factories that were mothballed at Aussie dollar =US$1.1 may well re-open at Aussie dollar = US$0.50, even if the machines are in someone’s paddock (done that one too). After all, when they were going concerns, those factories were making money at Aussie = US$0.80 (I worked for one such).

      The available opportunities in China going forward are nowhere near sufficient to replace mining exports. Time to get over it and move on to something else.

      • Moving on is excellent advice and maybe advice you should be considering yourself.
        Australia has moved on it’s people have already voted on their future and manufacturing didn’t win a single vote matter of fact they cheered the end of grubby factories and gleefully ripped factories down to provide extra housing extra apartments and extra shopping malls . Maybe it’s folly but it’s the folly they collectively chosen so I’m really just trying to understand the business options that are still available and how to best execute these plans.
        If as you imply its folly then collectively Australia will know a recession the like of which we’ve never seen before a real Argentinian style crises and that’s not something I’d wish on Australia

      • Of the factories that I used to drive past on the way to work – they didn’t get ripped down they just locked the gates and sent the workers home. They’re still there if someone wants them – just got to clean the graffiti off the ‘For Lease’ sign to find out the agent’s phone number.

        Just because they cheered the end of the factories when they were buying Cayennes and jetskis with iron ore dollars doesn’t mean they won’t come crawling back trying to figure out where the factory ‘situations vacant’ board got moved to when those items have been repossessed and they’re behind on rent.

        If you’re going to talk about business options, they have to be realistic, or at the very least you have realistically evaluate how much they can hope to pull in. That is, it’s time to accept that when the iron ore shipments return to 2001 levels, most of those export dollars will never be replaced with such an easy option and if you want to grow exports by $100 bn/ year, expect it to be massively tougher, expect to be looking at multiple industries and multiple export destinations, not two or three industries and one customer with only minimal extra fuss compared to shipping dirt.

        Sometimes when an addict hits rock bottom it’s precisely the wake up call they needed. Other times it kills them. C’est la vie, I guess.

      • Trust me mate, the factory might still be there physically but try getting a 10 year lease (or even a 5 year lease) and you’ll find out that the owners only see land whose value will at least double once the ugly buildings are gone. They offered me one year leases practically for free but what good is that? Two year leases were available but only on the condition that I signed a waiver which basically stated that I accept the land owner has the right to actively investigate other uses for the land.
        Mate it’ll take a long long long hard recession before most Aussies reset their goals.

      • But equally backing the same horse in a couple of extra races is not going to prevent that recession. Pretending otherwise is lazy and damaging.

        If we want to have a thousandth of a chance of doing that we need to start selling something we are not selling at that the moment, and develop multiple new customers to sell to (could be something we used to sell, or something completely new, doesn’t really matter).

      • Problem is, even if we backed the one horse, that horse is going to get old before it gets rich and catalytic technologies could just kill or boost the horse overnight. What and when that horse will do is not set in stone. Same with every trading partner we have.

        Our essential opportunities is in new products, services and also growing new clients, (Afghanistan, Burkina Faso, Burundi, Chad, Congo, Democratic Republic of the Congo, Timor-Leste, Guinea-Bissau, Liberia, Mali, Niger and Uganda.)

        I have faith we can create the new, or existing products more competitively and services for the emerging world, as I know we are a creative nation. We have had to be, as a young 227 year old developed nation. Just part of our current Aussie DNA….

      • @CB
        Telling point about the lease. Industrial areas should be zoned as such to allow industry to recover. Alas, the opposite is true, with politicians in the thick of development plans for new immigrants to buy expensive housing and find work in the local cafe. . As Flawse says, we’re already cooked.

  11. “kicking banks off government guarantees?”

    The state manipulates the cash rate and thus distorts the risk/reward reward equation for depositors, the least they can do is stand behind those deposits. Personally I think the amount guaranteed should be cut, but like I’ve said before, do you really want a scenario where people losing jobs and bank savings at the same time?! Won’t that super charge any recession we have?

  12. Our political system is broken. A dated, incompetent, mess run by dated, incompetent mess. It simply doesn’t work in the interests of the most vulnerable and the masses.

    Simply bolting on and injecting another political party into the same pathetic system will not address the real underlining issues confronting average Aussies.

    Pull the system apart and reconstruct it from scratch, with a fresh vision, new political parties with modernised vision that call on positive realistic virtues. new faces, connected individuals that have a real intimacy with the needs of our society.

    Unless we disintegrate the status quo, expect more of the same downward spiral into nothingness.