It’s hard to imagine a more dramatic day of speeches by leading Australians than yesterday.
Argus, Henry and Garnaut – the first two warning about the consequences of sustained prosperity, the third warning that it may not be that easy.
Actually, they are not as much at odds as might at first appear, although the Treasury Secretary is definitely not as worried as Professor Garnaut about the current account deficit.
They were all talking about sustainability, and the consequences of success, with Garnaut throwing in the small matter of moral hazard.
Garnaut got the ball rolling yesterday at 11am with a speech in Parliament House Canberra in response to Prime Minister Kevin Rudd’s launching of his book, The Great Crash of 2008, written with Business Spectator‘s David Llewellyn-Smith.
The Prime Minister had asked his old mentor for a Distinction for economics. Garnaut gave him a “High Distinction” for response to the crisis, but said that was just the mid-semester exam. “The final exam is how to handle the aftermath. The future of the next generation of Australians depends upon it.”
Garnaut’s basic theme, in the speech and the book, is that Australia’s squandering of the good times through high current account deficits and excessive debt will now mean that it will have to reduce consumption and real incomes more than most countries.
He also warns that government-funded bank bail-outs and deposit guarantees will encourage the “reasonable expectation” that they will do it again. He told a forum at the Lowy Institute on Monday night that he fears moral hazard has been created “on a scale the world has never seen before”.
Henry and Argus followed an hour or two later at lunchtime on Thursday – the Treasury Secretary at a QUT Business Leaders’ Forum in Brisbane and the BHP chairman at the Melbourne Mining Club.
Henry’s speech was about four big, long-term forces:
1. Population ageing;
2. Climate change;
3. The IT revolution; and
4. “The impact on Australia’s terms-of-trade of the re-emergence, as global economic powers, of China and India”.
Numbers one and four are getting the most publicity this morning, specifically his warning that not only is the population getting older it will increase to 35 million by 2049 (“where will they live?”), and his statement that “we should get used to the idea that we could have structurally higher terms-of-trade for quite some time – possibly for several decades”.
Ken Henry listed nine consequences of a sustained improvement in the terms of trade in an economy like ours. I won’t list them all here, but they are definitely worth reading here.
The good news is that: “The set of domestic consumption possibilities expands. In aggregate, Australians are better off, enjoying higher real national income. They demand more manufactures from the rest of the world.”
Where he and Garnaut agree is real incomes.
Henry says: “As the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a ‘two-speed economy’; and real wages growth and labour productivity growth will be weak – possibly even negative.”
In The Great Crash of 2008, Garnaut and Llewellyn-Smith write: “But there are hard times ahead. Sustainable full employment will require reduction of average incomes and living standards below those to which Australians became accustomed before the crash”.
They are making slightly different points, of course, but the effect is the same.
Don Argus also talked about the consequences of prosperity and, in a way, about the current account deficit and real incomes.
He focused on ownership, not debt, implicitly assuming – correctly – that the resource development required to meet the demand from China and India can’t be funded by debt.
Current and planned projects total $360 billion, he said, of which $280 billion are still contingent on financing. The Australian market is unable and unwilling to provide that capital, so the money must be imported and ownership sacrificed if we are not to lose market share.
Then again some people think we won’t have to worry because China is a trembling economic bubble waiting to collapse.
All of yesterday’s speeches coincided with China’s National Bureau of Statistics report that Chinese GDP growth for third quarter was an astounding 8.9%.
Both Ken Henry and Don Argus think this has a long way to go, based on growth in per capita commodity consumption.
Said Ken Henry: “China and India are only in the early stages of catching up with the living standards of the developed world and this process could have a very long way to run.”
Said Don Argus: “I believe we stand at the threshold of an era of unprecedented growth due to demand generated by China and, in the future, India.”
But there were a couple of eye-popping numbers in yesterday’s third quarter statistical report from China.
Over the first nine months of 2009, China’s infrastructure investment grew by 53%. Of the three-quarter GDP growth of 7.7%, 7.3% was accounted for by investment (consumption was 4% and falling net exports subtracted 3.6%).
As a result there is now tremendous over-capacity being created in China. When the Government stops spending so much on infrastructure, the slack is unlikely to be taken up by domestic consumption or exports.
And the other eye-popper was money supply. M2 growth was 29.3%, year on year. Total outstanding loans have grown 28% since the start of the year (in Australia they have fallen).
Over-investment and galloping debt can be a nasty combination, but normal rules seem to have been put on hold in China, at least for a while.
Note: The author is chairman of Melbourne University Publishing, which published The Great Crash of 2008, by Ross Garnaut and David Llewellyn-Smith.
This article first appeared on Business Spectator.
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