Professor Ross Garnaut, eminent Australian economist, gave a presentation to the South Australian Centre for Economic Studies membership on Thursday 10 March which was an analysis of the performance of the Australian economy over the last few decades, with a particular focus on the period from 2003 which coincided with an unprecedented resources boom.
He started be decrying the decline in independent economic analysis in today’s political culture, the outcome being the increasingly difficult task of prescribing effective policies to address some of the seemingly more intractable issues of declining real wages, non-competitiveness in our non-tradeables sector, chronic budget deficits and low rates of productivity growth.
The main points he made were:
- Australia had the biggest resource boom in its history which was fuelled by China’s economic growth strategy of infrastructure investment. Metals and energy demand rose dramatically with demand for coal and steel almost doubling – resources in which Australia dominated
- The benefits were manifest in growth and in federal and state governments’ budget surplusses. This led to taxation and welfare spending largesse which built in permanently reduced revenue streams for government
- The global financial crisis of 2008 saw global trade collapse on a scale greater than the aftermath of the great depression
- However, Australia dodged the bullet due to China’s response which was to spend more on investment in infrastructure and industry. This served to prolongue the resources boom and allowed government largesse to continue
- The result was a soaring exchange rate and non-tradeable sector price increases; a double hit to competitiveness
- All this ended when the China economic development model changed from the focus on investment to consumption, income equity and environmental objectives
- Australia didn’t see this shift coming and saw over-investment in resource capacity expansion to the tune of $1/4 trillion which has destroyed many resource companies. This extended the boom and the exchange rate didn’t start falling until 2012/13
- In the 2 decades from 1983, Australia was experiencing strong growth in service sector exports but finished with the resources boom and the resultant exchange rate appreciation.
It has made it almost impossible for sectors such as automotive to compete. (Interestingly, Mobil announced its Port Stanvac refinery closure in 2003 followed not long after by Mitsubishi)
He investigated what’s happening now:
- Resources investment is down (but remains historically high)
- Terms of trade are 60% below peak
- Sources of growth have been falling with further to fall
- The real exchange rate is still high but its depreciation has had some impact
- We haven’t had a recession but national accounts measure volume, not value
- Positive elements of growth:
- fiscal stimulus but not sustainable given the seemingly chronic budget deficit
- housing and consumption (housing related) but this is underpinned by high levels of offshore borrowings
- The new China growth model has more a modest growth target of around 6.5% pa compared with 10% pa previously and is not as resource intensive – coal usage has declined in absolute terms
What should our response be?
- Cutting interest rates to generate competitiveness – the real exchange rate remains high. However, the Reserve Bank is resistant to such a move fearing a housing bubble in the Sydney and Melbourne markets. Others, such as Dick Blandy, argue that historically low interest rates in other countries has not guaranteed investment so there needs to be other measures such as deregulation. Whilst agreed, it is considered insufficient given that we have poor competitiveness in the non-tradeables sector with annual price rises of 2.6%
- Taxation policy needs to be revised to correct the largesse handed out during the resources boom
- Eliminate “bad” regulation which has led to over-investment in some sectors eg energy
Takeaways for South Australia from Ross Garnaut talk
For me, Garnaut’s presentation highlighted the vulnerability of the South Australian economy to the larger forces acting at the global and national level.
Firstly we are not a resource rich State in a productive sense so we rely on trade in such things as agriculture and non-resource products and services. As highlighted, the resources boom has been a negative for these sectors.
The required monetary policy is driven by concerns about Sydney and Melbourne housing markets.
Finally, government largesse is no longer feasible, in fact the opposite is the case. So we a starting to hear threats to government funded industry projects such as defence materiel in which South Australia has considerable strengths.by