No. 74

Stone the crows! What’s the mandarin for “magic pudding?”

According to the Treasurer, “China and India are undergoing an historic transformation – an industrialisation and urbanisation process that is larger than any the world has ever witnessed.”[i]

He has a case, certainly for their impact on Australia. According to ABARE, India’s purchase of Australian minerals quadrupled to 8 per cent of sector sales in the decade to 2008-2009.

And this is less impressive than ordinary compared to the expansion of exports to China over the same period, which grew from 5 per cent of a $34 billion business to a full third of an $83.6bn industry. [ii]

This is big bikkies and Canberra has a case that the transformation of China (with India as first reserve) signals the start of a rush that never ends (or runs at least as long as Wayne Swan stays treasurer.)

In 1990 China’s share of purchasing-power, parity-adjusted world GDP, was around 3 per cent, (India’s was a little less). By 2030 the Chinese will account for 23 per cent and India will be closing on 10 per cent.[iii] Both will need Australian raw materials to fuel their extraordinary output. China already consumes more energy than the US.[iv]

Good-oh, this explains why the budget bets the farm less on the China boom staying stronger for longer than running indefinitely and keeping commodity prices up in turn.

But while the Crows can barely count, the one thing they know about economics is that there is no such thing as a sure thing and that we are already over-exposed to Chinese demand.

Adrian Rollins pointed out last week that a “small drop in global commodity prices could blow a $9bn hole in government finances and keep the budget in deficit, highlighting the vulnerability of the Commonwealth balance sheet to conditions in China and other emerging economies.” [v]

What could go wrong? Well the comrades could muck everything up in the middle kingdom.

Given two of the three conditions for a successful capitalist economy, democracy and the rule of law, are light on in the PRC it is not hard to imagine how.

In Beijing, the people with the power and their pals with the money intend to hang onto both and inevitably the faction fighting which passes for politics in authoritarian states shapes public policy. With generational change among the country’s leadership imminent, some players are invoking a Maoist manqué manifesto of socialist rectitude as a political platform.[vi]

Such a political system an efficient economy does not make. As John Lee points out;

Chinese leaders adopted the free market as a therapeutic device to accelerate growth and remain in power. The regime never intended the free market to be transformative. There is only lip service paid to the principle of ‘limited government,’ and efforts to build robust systems of ‘property rights,’ ‘rule of law,’ etc have been weak. Instead the desire of the Party to stay in power is the driving force behind the Chinese political economy model. [vii]

Nothing looks like changing in China while the economy expands and the comrades in control appease public opinion by executing the occasional official caught in an act of egregious greed. Francis Fukuyama argues that the Middle East model of people’s revolts will not apply to the PRC – unless there is a slump. And if there is, in the words of Fukuyama:

If the country’s current property bubble bursts and tens of millions are thrown out of work, the government’s legitimacy, which rests on its management of the economy, would be seriously undermined.[viii]

Surely this is less a matter of “unless” than “when.” As Lee points out, “the primary economic strategy is growth that will allow China to grow its way out of its problems. Yet, growth is not the ultimate objective – regime preservation is, … (but) political objectives and constraints directly hinder the capacity of the regime to meet its contemporary reform obligations.” [ix]

The Chinese puzzle is profound – the regime relies on economic growth to protect its power but the nature of the regime inevitably makes the economy unjust, inefficient and, in consequence, inevitably unstable.

Unless Beijing realises that without democracy, and the rule of law for all, capitalism cannot flourish Australia faces the real risk that the magic pudding will stop producing the slices we rely on.

This makes the case for reform, far beyond making the whole country “shovel ready”.

And Wayne Swan knows it. “Success hinges on harnessing our rich natural resource heritage to strengthen our diverse, knowledge economy,” he told the National Press Club on Wednesday.[x]

This must mean more than throwing a bucket of money at the training system, or obsessing about a carbon tax, which will have bugger-all impact on global greenhouse gas emissions.

It means considering all of the Henry tax reform proposals, not just the ones the government thinks it can sell in the short term. Wayne Swan says the way the taxation and social security interact is on the agenda for the October tax forum.

Good, but not good enough. We need an economy that will stumble but not fall if Asian demand for resources slows. That means considering the role of the GST in the tax mix and addressing negative gearing on investment properties and other forms of middle class welfare – for a start.

As Treasury puts it:

… to maximise the opportunities that will flow from the continued rise of Asia, Australia needs to continue to change and innovate – as it has done in the past. We need policy settings and institutions that harness the talents of our people and allow them to make the most productive use of those talents and respond to a changing world. [xi]

The Crows wonder whether this bit was underlined in the copies that went to Wayne Swan, and Tony Abbott. They hope so. Economic reform is much easier when the political settings are right, which they are in Australia but not in Beijing.

Stephen4@hotkey.net.au

ENDNOTES


[i] Wayne Swan, “The story of the budget part one: fiscal foundations. Address to the Brisbane North Chamber of Commerce, May 13” = recovered on May 14

[ii] Australian Bureau of Agriculture and Resource Economics, Statistical Tables (2010) @ www.abare.gov.au/publications_html

[iii] Commonwealth of Australia, “Budget 2011-2012. Budget Paper Number 1 Statement Four: Opportunities and challenges of an economy in transition,” 4-4 @ www.finance.gov.au/publications/commonwealth-budget/2011-12/2011-12/content/download/bp1_bst4.pdf

[iv] Spencer Swartz and Shai Oster, “China tops US in energy use” Wall Street Journal, July 18 2010

[v] Adrian Rollins, “Finances at whim of commodity prices,” Australian Financial Review, May 12

[vi] “Princelings and the goon state,” The Economist, April 14

[vii] John Lee, Will China Fail? The limits and contradictions of market socialism (Centre for Independent Studies, 2009) 106

[viii] Francis Fukuyama, “Is China next?” The Wall Street Journal, March 12

[ix] Lee, op cit 55, 56

[x] Wayne Swan, “An economy in transition: address to the National Press Club,” May 11@ =

[xi] Budget Statement 4, ibid 4-3

'2012