Oct 282012

This post is one of the series of articles on the Australia in the Asian Century report.

The release of the Australia in the Asian Century discussion paper today raises the question of where the country sees itself and where it is going. It lets us down on many levels.

While there’s a lot more to discuss in the paper, which I’ll do over the next few days, there’s a few issues that come to mind on first reading.

The reliance on mining

A constant  in the discussion about Australia’s future is the continued mining boom. This was the underlying theme of Monday’s Mid-Year Economic Outlook and is also the case in the Asian Century paper. Here’s chart 4.4.2 from the document which shows the forecast makeup of Australia’s exports.

Today mining exports are shown as being just over 50% of Australia’s trade with Asia and have mineral income growing to well over 60% of trade by 2025.

What is frightening about this is the belief across Australia’s political and business leaders that the mining boom is here to stay and will continue to keep growing.

Little risk analysis

Also notable about the report is how little acknowledgement of risk there is in the document. Most of the risks are dismissed in six paragraphs in Chapter 4.4

Geopolitical risk does get its own chapter, but even there most of the challenges are glossed over. Eventually most of the risks are dismissed with this line.

None of these developments of themselves make major power conflict likely—in some important ways they will probably act as a constraint. All the major powers recognise how interdependent their economic interests are.

This is reminiscent of the line used in the late 1980s – “no two countries with a McDonalds have ever gone to war against each other.” A glib nonsense which ceased to be true when NATO attacked Serbia in an effort to stop the massacres of the Yugoslavian disintegration.

Trivialising the big risks

Had anyone predicted in 1986 that within five years, there would be a bloody civil war in Yugoslavia, the Eastern Bloc collapse and the Russian Empire’s eagle replace the hammer and sickle on the Kremlin they would have been dismissed as fools.

Yet that is exactly what happened.

The risk of instability within the People’s Republic of China isn’t mentioned or even the effects of what a collapse of North Korea would mean to South Korea – another key Australian mineral market – both of which would have massive effects on Australia’s export markets over the next decade.

While I’m certainly not forecasting the collapse of either the DPRK or the Communist Party of China in the near future, these are massive risks to any plan which purports to look at the next decade. Ignoring them or trivialising them does not help the paper’s credibility.

Australian hubris

Most notable in the white paper is the tone of Australian Exceptionalism through the commentary. In the Prime Minister’s speech she said “we are the nation that stared down the economic crisis.”

Calling massive stimulus packages, reinflating the property market and guaranteeing bank liabilities is hardly ‘staring down’. Australia’s avoiding going to into recession after the 2008 crisis was due to the “go early, go hard” philosophy of pumping money into the economy which was learned by Australia’s bureaucrats in the 1990s recession.

That policy worked to stave off recessions during the Asian currency crisis of 1998, the Long Term Credit Bank collapse and the post September 11 uncertainty. It worked on massive scale during the post-Lehmann Brothers collapse.

Crediting Australia with some sort of miracle economy is hubris on a grand scale and hardly the basis for developing a sensible plan to guide us through the next decade.

What is Australia’s competitive advantage?

Essential to understanding where the nation can prosper from the rise of Asian economies is where our current strengths lie. Apart from empty phrases on “skilled workforces” and “new opportunities will emerge in manufacturing” there’s no explanation of exactly where Australia can profit from these.

In fact most of the case studies refer to Australian companies outsourcing or Asian trading patterns that really don’t need any skilled or valued added contribution at all, a case in point is the story of ‘Hitesh’, one of India’s rising middle class.

Hitesh, 31, is a stockbroker in a firm that he opened with his friend several years ago. He brings in an annual income of US$5,280, placing his family squarely in the middle of Ahmedabad’s middle class.

Nowhere does the case study explain exactly what Australia can offer him – the air conditioners and cars certainly won’t be made or designed in Australia and his daughters’ educations in 2025 might well come through the internet from MIT or the London School of Economics instead of them flying to Melbourne to drive taxis and do barista courses in the hope of getting Australian permanent residency.

In fact if anything, it’s difficult to see why an Asian company would choose to do business with an Australian stockbroker when they earn thirty to a hundred times more than Hitesh.

1980s thinking

Much of what is in the white paper is what we’ve heard before in the 1980s – back then it was Yuske in Nagoya who was going to buy our wine and come to the Gold Coast for holidays.

There’s nothing in the projections we haven’t heard before, except today we’ve squandered two decades of opportunity by ramping up our property markets and building an unsustainable middle class welfare state.

Sometime in the 1990s – possibly around the time of John Howard’s election – Australia turned inwards and insular. We had the opportunity  to position Australia as a credible mid-level power in the region but we chose instead to renovate our kitchens.

That opportunity has been lost and repeating the mantras of the 1980s with the words ‘China’ and ‘Chinese’ substituted for ‘Japan’ and ‘Japanese’ won’t cut it.

Australia in the Asian Century was an opportunity to show some vision and stake a claim on sharing some of the 21st Century’s riches. Instead the writers chose to give us platitudes underpinned by the certainties of a never ending economic boom.

  7 Responses to “Australian Hubris in the Asian Century”

  1. Excellent analysis, Paul.

    The big question yet unanswered in Australia is;

    “Which activities should Australia undertake domestically and which should she outsource?”

    Only then will we stop bailing out failed businesses (Ford/Holden) and giving away public money in bribes (FHOG) and get on with doing something sustainable for the next few decades.

    • Thanks TNA, that is one of the big missing parts of the Asian Century white paper – exactly what is it that Australia has to contribute to the Asian economies?

      All the report really says is they expect mineral exports to keep climbing as a proportion of our exports.

      Everything else is management speak sprinkled with fairy dust, most of which we heard twenty years ago when Japan was going to conquer the world.

      Interestingly, I remember around that time that it was Japanese property speculators that were going to save the Aussie housing market – plus ca change.

  2. “Australia turned inwards and insular. We had the opportunity to position Australia as a credible mid-level power in the region but we chose instead to renovate our kitchens.”
    So true! A +100 but forgotten something. Australians are still thinking that renovating kitchens is the way to go! Nothing has changed….

    • Sadly you’re right David – one of the things that really worries me is this view of Australian Exceptionalism which thinks we have nothing to learn from the mistakes of the US, Ireland and Spain so we’ve just continued to jam money into property speculation at the expense of the rest of the productive economy.

  3. A very interesting article, don’t know if you had humour in mind, this article did make me smile. Shows us for what we are.

    Indeed, Australia did not stare down any downturn, we went in with it. What kept us afloat was the enormity (as in think of something huge, now keep multiplying it) of credit and debt issuance. That set a thick masking on top of what was to be a bad situation. Total debt in Australia, being; all government debts + personal, household, housing, credit card debts + business debts, comes to over $4.6 Trillion.

    Mining boom, a little over $50 Billion per year (in trade), doesn’t cut it. If it is indeed true that 83% is foreign owned, well the investors have the boom, not us. And if it is true that the foreign owned part of the boom paid 14% tax, well,… exploration and development cost, a business expense, comes to more than that. This is industry is 8.4% of GDP and 1.8% of the labour force. I see why it is praised on its’ own right, and not compared to our ailing Manufacturing industry, currently at 9% of GDP, who praises that?

    Then comes the Banks, not so solid, but now I digress,… With an economy that has such emphasis on property, gee! What’s coming next?

    Very good article.

  4. g
    The similarities with Japan keep popping up for me all the time; I lived and travelled through Europe during the late 80s and 90s, all the classic tourist destinations had dozens of Japanese taking photos, hence the stereotype.

    Now, there are no Japanese but lots of Chinese. Makes one wonder what happened to the Japanese and whether China will go the same way.

    The Hugh Hendry interview currently on the Economist website explains why China isn’t our saviour.

    Link to it from the comments of this blog post; http://thenewaustralian.org/?p=2400#comments

    • Hey TNA, that Hugh Hendry Economist interview is good but I though the panel that followed was even better with some great perspectives on China – I reckon a lot of taxpayers’ money would have been saved if we’ve just paid Ken Henry to go to the Buttonwood Conference and take notes.

      While there’s similarities in Australia’s cargo-cult belief in China today and that of Japan in late 1980s, I’m not sure how much of a parallel we can really draw between the two economies themselves given that the Japanese boom of the 1980s was the culmination of their post WWII reconstruction and, for all the property mania in China, Chinese property today is nowhere as ridiculously priced as Japan’s was in the late 80s.

      There’s also the question of government interference; while the Japanese Ministry of Finance loves tinkering, their interference in the economy is nothing like China’s command and control system – which in itself is another risk to Australia that’s glossed over by Ken Henry and his band of intellectual dwarfs in the Asian Century report.

      Overall, the Asian Century report is really unsatisfactory as it has no real understanding of either where the Aussie or the Asian economies are beyond the “blue sky mining” view of a never ending commodities boom.

      I guess it could be worse, that Infrastructure NSW report was a shocker – Nick Greiner and Paul Broad make Ken Henry look like John Bradfield. At least we can say blithering incompetence from men stuck in the 1980s is one of the few bi-partisan truths of Australian politics.

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