Australia’s currency revaluation to US99c last night is as much part of a disorderly global rebalancing and a repudiation of Marxism as a reflection of the stunning strength of the Australian economy.
I mean 49,500 jobs added in September! And this when the Aussie dollar rose from 91 to 97 US cents. The warnings of a two-speed economy and an employment disaster in manufacturing are not coming to pass: 36,000 of the jobs were on the east coast.
Meanwhile, Chinese Premier Wen Jiabao has warned of an employment disaster in China if he is not allowed to continue preventing its currency from rising; in fact, he told a conference in Brussels this week it would be a disaster for the world.
If China were forced to let the renminbi rate rise too quickly, Mr Wen said, “many of our exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world.”
Australia’s attitude to the surging currency? She’ll be right. And so it will be: the rising Oz dollar is not just a reflection of rising national prosperity, but it brings home the bacon. Why wouldn’t you want to be spending the most powerful currency in the world?
There is a profound paradox at the heart of all this: it is that China is actually a capitalist country and Australia is really a socialist one.
In fact, as Martin Wolf wrote in the Financial Times last month China is, in a sense, “the most capitalist country ever”.
Between 1997 and 2009 gross investment rose from 32 to 46% of GDP, while household consumption fell from 45% of GDP to 36%. “This must be the lowest share of consumption in any significant economy ever,” wrote Wolf.
As everyone knows, the result of this is that China’s employment is based on exports, not domestic consumption, and the reason consumption is suppressed is that consumers don’t own the means of production, the state does.
The exporters are therefore mostly government-owned and don’t distribute their profits to consumers as dividends. The profits and taxes are not distributed as welfare either. The result, paradoxically, is that the economy is based on investment and capitalism, not consumption – what you might call ‘economic socialism’.
That, in turn, means the level of employment depends entirely on the international competitiveness of the state-owned firms, and with salaries now rising it’s all about the currency.
Michael Pettis of Peking University’s Guanghua School of Management wrote in his blog yesterday: “…what would happen if China were to raise the currency too quickly? In that case the profitability of the export sector would decline so quickly that exporters would be forced either into bankruptcy or into moving their facilities abroad to lower-wage countries. Either way, they would have to fire local workers.
“But firing workers reduces household income and household consumption. If it reduces household income faster than the revaluation increases real household income (by lowering import prices), the net result is a reduction in total household income and a reduction in household consumption.”
So the problem China faces is that it must rebalance its economy towards consumption and away from production, but if it happens through the currency being raised too quickly it will occur not as an increase in consumption relative to rising production (and employment) but as a drop in production relative to falling consumption – which is the “disaster” that Premier Wen warned about this week.
The problem as I see it has to do with the fundamentally ‘capitalist’ nature of this kind of socialism, in which the proceeds of production are captured by the state instead of the bourgeoisie and aristocracy, but still not distributed either through dividends or tax-funded welfare.
As a result, consumption in China is funded entirely from wages, so rebalancing the economy can only occur through employment, which is why the place is on a knife-edge of currency-based competitiveness.
Australia is in exactly the reverse position because it is truly a ‘socialist’ nation, where the means of production are owned directly by the people – mainly through their retirement savings – and the proceeds are distributed via dividends and welfare transfers.
The political elites here are agents, not owners as they are in China, so the level of the currency, and thus export prices, doesn’t matter to them.
Yes, manufacturing lobby groups scream and economists warn of the two-speed economy, but the purchasing power of voters is rising. They’re all happily travelling around the world and buying imported luxury goods.
And with national unemployment at a tight 5.1%, jobs being created across the country and the participation rate rising, there is no problem (at least for now).
This article first appeared on Business Spectator.
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