How to run a cheap foreign labour economic model

Given that’s what we’re doing, and screwing ourselves royally in the process, here’s some advice on how to do it properly.

First, you set up a special economic zone where the normal rules do not apply. This should include lower taxes and no industrial relations laws. Put it somewhere out of the way of the press but as close as possible to your target markets. Northern Australia or even our far flung refugee gulags are ideal.

Then invite capital in by building the infrastructure needed to turn it into a low-end manufacturing dynamo. Build ports and large domiciles where underpaid foreign workers can be packed in like sardines. Import gas and power from Indonesia given Australian is now cartel-priced and add real local area NBN (as opposed to our national joke). Roads aren’t needed. Nobody is going anywhere.

The money will flow in as all sorts of cheap assembly outfits see the upside. We’ll repatriate all kinds of businesses that were long ago lost to China and South East Asia. Moreover, the zone will run enormous current account surpluses with such low costs and high exports, contributing an off balance sheet boost to the national external account.

Local profits will soar for the listed firms engaged, the tax take will rise and wider income growth will get a boost from the extra demand, rising share prices and tax cuts.

This can be contrasted with what we’re actually doing, which is importing cheap foreign labour into our formerly high wages services economy.

When you do that what happens is wages get systemically undermined. Profits for those businesses that are exposed to the rising volume of demand and the falling wages enjoy a margin boost. These will include property developers, banks and some retailers (though certainly not all). That’s because the wider economy gets bogged down as wages growth stalls and falls.

Inequality begins to rise as those exposed to the upsides of the cheap labour imports gallop ahead of the vast majority. Indeed, most see falling living standards as the people flood overwhelms infrastructure and public services, in tandem with their falling wages. This is exacerbated by rising asset prices, which also serves to drive youthful talent offshore.

The tax take begins to crumble as its largest source – income taxes – gets hammered. Government in general begins to destabilise as standards of living fall without explanation.  That, in turn, further upsets confidence, lowering investment and consumption. The economy bogs down even more.

Yet despite the weakness, the external account deteriorates as externally funded banks and government borrow to fund the mortgages and a build-out for all of those imported folks who consume more but add little to exports, given they all now work in sectors servicing their own booming numbers.

Eventually, an increasingly desperate population used to rising standards of living turns to cranks and nut jobs for solutions instead of established parties. At least they point to the elephant in the room and express grievance. Politics disintegrates.

I mean, really, if you’re going run an economy on cheap foreign labour, there is only one way to do it sensibly.

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  1. Constitutionally, there is nothing to stop the Commonwealth from setting up the NT or the ACT (but not a State or part thereof) as a laboratory for radical reform, including tax reform. This could become a standard method of neutralizing scare campaigns. Before the reform is tried, opponents only get to scare the small number of voters in the affected region. If the economy in that region improves after the reform is tried, it will then be harder to scare the rest of the country.

    • TailorTrashMEMBER

      ……and what the betting we will get the airport and apartments …and apartments ..and apartments …and more apartments …….and then ??

      • The clown politicians are a one trick pony which is debt and property. When that runs its course the economy will sink like a stone.

    • Yep and because a lot of cheap migrants that we let into the country go to Western Sydney anyway it will become the cheap smog ridden ghetto with slum apartments amd the noise of massive cargo planes. That is of the jobs aren’t a automated away. Shamethe residents living in the nice parts around there – there are some nice still affordable family areas around there that will be swallowed up by this.

  2. I’m sure there’s something also about selling the family silver and pulling our pants down for foreign ‘investment’ but not smart enough to dovetail this into your narrative…

  3. Yes, we need a port up past the Roper River somewhere and a canal from the North West Queensland resource area to it. It will never happen if we have to wait for Brisbane based politicians to borrow it into existence. They will keep spending on useless light rail and under river tunnels in the South East

    • I wonder what gave them away… Probably someone tried to claim on their Private Health Insurance and they said they don’t have the code, and they only do cash in umm… hand anyway…

    • Jumping jack flash

      And how!

      This is better than my desert slum idea to keep the poor away from the rich.

  4. Agree completely and a very fine post. The short version: make slaves out of other people not your own.

    • Let me fix that for you: “ At first, make slaves out of other people not your own, your own will soon follow

  5. What about Slavery? You haven’t mentioned the extra benefits that accrue when labour costs are driven down to zero.

    • Actually with the current 457 model, you can get the slaves to pay you back much of their wages for the privilege of you sponsoring their 457 visa, or keeping quiet about the fact that they are working on a student visa.
      Dominos and 7-11 did well out of this model.

    • reusachtigeMEMBER

      Bring back the coolies! Actually, just go see a labour hire company, they’ve already got them. Great for profit maximisations!!

      • Cyber coolies too! Get them to program computers for $2000/month. Who cares about giving the job to Aussies.

    • Domestic & care workers should be allowed in en mass anywhere in Oz so your average man or women can share in the spoils, just like those clever people in Singapore, Dubai, Saudi Arabia etc it’s racist I tells ya that we can’t exploit the worlds poor …. cough cough ….. Er I mean let them share in our good fortune.

    • Jumping jack flash

      Slavery is a necessary component of capitalism.

      Without it, it doesn’t work long term and eventually hyperinflates itself into oblivion.

      Its all that “alignment of the moons”, “butterfly wings”, and chaos theory sort of stuff, but the end result, without zero cost labour (or near zero), ie, slavery, is hyperinflation.

  6. Problem is when you can’t compete there’s really nowhere left to hide, global wage arbitrage F’s you one way or the other.
    If you’re uncompetitive than you’re uncompetitive, you’re uncompetitive and that’s about all one can really say. The rest of the story is about what happens when the real world acknowledges this inescapable fact and finds alternatives. Alternatives take a hundred different forms but all are ultimately about labour arbitrage, a call center in the Philippines at $2/hr or one in Orange at $10/hr, damaged Aussie car dismantling / reconditioning happening in Pakistan instead of Australia, Computer Sys-Admin in Bangalore for $5/hr or Bankstown for $15/hr. It’s all the same game of labour arbitrage that’s just slowly moving up the pay scales / job skill requirements.
    There’s nothing new about this phenomenon and it leaves us with 3 choices:
    1) drop our wages to a level where they are internationally competitive (import cheap labour to create downward pressure)
    2) Find ways to increase/incentiveize local jobs (especially housing sector…according to RBA each $1M spent in RE creates 17 jobs) and forget about the rest.
    3) Increase our global competitiveness by deploying advanced automation and up-skilling the Aussie workforce.
    At the moment were locked in a battle between those that believe in the first solution and the advocates of the second, nobody is seriously considering the third alternative, even though it’s the only solution that has any long term hope of success.
    Australian’s need to leverage this robotics inflection point or suffer labour/wage consequences far more damaging than a few 457’s.
    I kind of believe we need a combination of all three but make no mistake about it, the main focus must be on the rapid adoption of Robotics hand in hand with appropriate technology education and up-skilling.
    BTW given our free capital market it’s wishful thinking to believe that the Aussie dollar will do the heavy lifting on any of these issues, unfortunately the structural shift from labour to robotics/automation is a global thingy so everyone faces the same problem except they’re way ahead of us when it comes to talking down their currency.

    • I was going to comment that HnH’s idea looks impossible to achieve in Australia as it requires effort and co-ordination, but the idea of rapidly upskilling and taking additional advantage of robotics seems to require effort, co-ordination, a serious non-ideological focus on education and a certain amount of intelligent thought and discussion, so kind of more impossible than impossible.

      • Yep, given the timeline, what I’m proposing probably is impossible…but what long term choices do we really have?
        Since 2000 we’ve leveraged our Private balance sheets but that cash stream is quickly running dry,
        since 2015 we’ve fortunately forgotten the religious stupidity of public sector surpluses and we’re quickly leveraging up the public purse, but that well to is finite and will probably collapse if we’re forced to adopt an Irish solution to our housing crises.
        IMHO We can only get away with pretending we are competitive for about another 8 to 10 years at which point it’s game over (real Greek style economic disaster). I don’t know about the rest of you but I plan to still be alive in 20 years so I kind of believe we need some longer term thinking on these issues….even if they are impossible!

      • I guess the whole point of 457s, imported skilled labour and the situation with housing is that we are only interested in short term thinking – they are all examples of short term thinking causing long term pain, which seems to endemic to Australia.

        IMHO We can only get away with pretending we are competitive for about another 8 to 10 years at which point it’s game over (real Greek style economic disaster).

        Tend to agree, although I possibly get there a little differently, and my timeline is more like twenty years – the point at which we will stop being able to afford to bring in highly trained people at massively under Australia’s lowest wages, by which time we will have done so much damage to education and training we will have very little ability left to upskill our own people. For me the crunch will come when India’s workforce begins to shrink around 2040, which sounds a long way away, but note that a 20 year old in 2040 will be have been born in 2020, and begun school in 2025, which is not a long time to turn around the downward trajectory of education in this country.

      • Jumping jack flash

        Yea, or they can always import already-made, cheap, off the shelf, robots straight from China…

    • The spruikers say Australia should become the ‘clever country’ and develop niche high-tech industries which aren’t eroded by cheap overseas labour. Thats very hard to do, especially on a scale large enough to bolster our export earnings.

      The other choice is to become ‘Fortress Australia’; rely on primary industry for export earnings and have the domestic market only serviced by local businesses. No 457 visas, greatly reduced immigration, make outsourcing much more difficult for companies. There would be much short term pain. Whether the long term would be better than where we are now heading is hard to say.

      • I’m not actually against this Fortress Australia idea but reality suggests it is equally impossible to implement.
        Look at the Gladstone LNG plants, we’ll be lucky if they ever pay a single penny of Royalties or Taxes, despite the huge volumes of Natural gas that they are exporting. Part of the problem is our uncompetitive labour / material markets, in essence all future profits (net positive cashflow) were paid forward to enable the construction of these structures, especially if we compare these construction costs with other parts of the world. Same story with our Dairy farmers, most are selling milk at a loss because we’re just not competitive (high land costs, high risk capital costs, high labour costs, high costs of living).
        If we look at Iron ore there’s an inescapable problem of Steel recycling that will guarantee iron ore volumes to China basically nose dive from about the mid 2020’s onward. (will India replace China …who knows)
        Short answer is that our Primary Industry export revenue streams don’t have a rosy long term outlook, I hope these are not the foundation upon which Fortress Australia rests!

    • +1
      The sooner people wake up and realise that the global factors of production are going to rain some brutal economic reality down on Western economies and their overpaid workforces, the sooner the aforementioned can begin the adjustment process.

      The tragedy is that so many citizens in the West are taking on vast amounts of debt believing that the era of high relative (and continually rising) wages will last forever, when the reality is that, real wages have already peaked and will be going backwards for some considerable time.

      Trump talks protectionism for this reason — he’s promised the plebs he’ll protect their wages and their lifestyles but it is impossible, just as it is impossible to protect those of Australians and other Western countries. In attempting it, you are trying to suspend the laws of economics, which is akin to believing you can control the forces of nature.

      The political elites need to start the painful discussion with their citizens and prepare them for what’s coming rather than try and hide the fact by encouraging the blowing of huge asset bubbles which only ensures the future reckoning will be more painful.

      • The political elites need to start the painful discussion with their citizens and prepare them for what’s coming rather than try and hide the fact by encouraging the blowing of huge asset bubbles which only ensures the future reckoning will be more painful
        Yeah except personally I’m not the kind to want to scare people into action, I’m too much of an optimist to every contemplate on the costs of failure, I’d much rather focus on the profits that flow from success. If we know what will be successful (in broad strokes)than surely it is sufficient to highlight the possible solutions and watch as freedom works its magic creating hundreds if not thousands of different ventures all leveraging expertise that I never imagined fellow Australians possessed.
        The free market is a wonder to behold when it’s permitted to function, sure you need laws but these need to be sensible laws that direct commerce towards favorable “fair” solutions. The primary responsibility of Politicians and our business elite is to create an environment where success is more likely than failure…..unfortunately that’s not the one we’re living in.

      • fisho
        The free market is the only solution here (much to the chagrin of the “big government” hordes on this blog), however, this necessarily requires the government to butt out and largely disappear from the scene. In other words, it needs to become a lot smaller and it’s only policy as regards the economy is to have no policy whatsoever i.e. ignore the economy entirely. The government will never do this however because the various shadowy interests that stand behind it (corporations, oligarchs and unions) need the Gov to do their bidding and protect their respective ‘patches’. Only my mother and various other naive souls believe that, deep down, the government is doing what’s best for the people.

        The government will interfere and do the wrong thing until the whole system goes bang. Of that you can rest assured.

  7. This is what Saudi Arabia could do when people switch to electric cars.

    Saudi Arabia is a huge peninsula – unlike Dubai which had to make artificial Islands.

    Demarcate 500 sqm and declare it to be a special economic zone and allow 5 million South Asians to live there. Promising good infrastructure: clean water 24/7, electricity 24/7, enough police on the beat, enough judges and jails, good schools, and an ok uni. 😉

    Heck, AUS could do this, but the bleeding heart lefties would want to give the 5 million SEZers an Aussie passport. 🙄

    • Demarcate 500 sqm and declare it to be a special economic zone and allow 5 million South Asians to live there

      I know Asians can be small, but can you really fit five million into a space equivalent to 20m x 25m, or not too much different to an old fashioned suburban block?

    • ”but the bleeding heart lefties would want to give the 5 million SEZers an Aussie passport” But thats what the LNP right wing psychopath party are doing right now, how else do you undermine every working persons wages and conditions? The LNP want the entire country to be a special economic zone for their ongoing get-rich scheme/scam and if that means open slather for immigration then thats what they will do if they can get away with it.
      Twould be nice to have a sensible sane party to vote in.