The 'Bigger, Longer and Better' Resource Boom Hypothesis

In early 2010 many observers noted the potential for a resources boom as a consequence of the rapid growth arising in China and other emerging economies in the wake of (at least the first phase of) the global financial crisis.

However there has been a well-established view since the 1980s that Australia needs to diversify it economy away from reliance on commodity exports because of their boom-bust character, their low productivity except duing boom periods (because it is impossible with undifferentiated commodities to create the competitive advantages needed to maintain high margins) and because resources booms tend to hollow-out other industries (eg by raising exchange rates and thus undermining other sectors' competitiveness) - a phenomenon which has been labelled the Dutch Disease.

In relation to such concerns it was argued that the emerging resources boom (from which Australia's economy could benefit enormously) would be strong and durable, and that productivity down-turns associated with periods of high investment do not last.

 The debate about effect of resources boom on economy has taken an unduly negative tone (ie considering stress on other sectors). Key component of growth are: investment; labour force growth; and productivity. Emerging markets (eg China and India) will grow faster than the developed economies because of: (a) faster working age population growth; (b) higher rates of savings and investment. Emerging markets have driven the rapid growth in capital accumulation over the past decade, and Australia is helping the development of infrastructure through commodity exports. China and India are well short of the $15000 / capital income levels at which growth slowed in Japan and Korea. Energy is likely to be focus of next phase of Asian demand. However resources sector is just entry point. Higher commodity prices has multiplier effect on economy generally by lifting demand. Productivity growth usually slides during investment booms - but has recovered in the past. Rapid Asian growth and rising demand for raw materials will continue and significantly boost Australia's economy. (Rider M.,  (UBS Global Asset Management), 'The boom will be bigger, longer and better than most imagine', The Australian, 1/3/10 )

This view does not, unfortunately, take account of structural features that could easily lead to financial crises in emerging economies (especially China) on whose growth the resources boom depends.

Thus, for reasons outlined below, it seems that corporate and economic strategies in Australia should be based on the development of the economy and governing institutions generally - rather than giving special emphasis to resource exports.

Systemic Weaknesses in Emerging Economies' Financial Systems

The problem with heavy reliance on resource exports is that devoting a high rate of savings to unproductive capital investment is unlikely to be sustainable - and China is like Japan in that it lacks financial systems that are attuned to the profitable use of capital (eg see Understanding East Asia's Economic Models). Accumulating foreign exchange reserves reflects an economies' cash flow, not its balance sheet (ie whether or not savings have been used productively).

Moreover many other emerging economies are in a similar predicament. It was, after all, fear of financial crises associated with the unproductive use of capital (and IMF encouragement) that caused many emerging economies to copy the example set by Japan and China in shifting to export driven economic strategies (and so avoid current account deficits) in the years following the 1997 Asian Financial Crisis.(see Leadership by Emerging Economies). It seems that many investors are assuming that productive investment in emerging economies is now assured - noting the more advantageous terms on which such economies can now obtain sovereign capital (see Economist, 'Asia's Sovreign debt drought', Australian Financial Review, 27-28/2/10). However such investors may well be disappointed.

In the case of economies such as Japan and China, 'demand deficits' (associated with a savings rate that exceeded even the high rates of investment that were being made) have been and remain vital to avoid the need to attract external capital to financial institutions that have made capital available to state-connected entities focussed (as best) on maximizing market share and cash flow, rather than on profitability.

Past Consequences

This has given rise to international financial imbalances that contributed to the global financial crisis (GFC). Those imbalances have been reflected in current account deficits in many developed economies (especially the US) and in corresponding surpluses in Japan, Germany and various emerging economies (most notably China).

Imbalances emerged because maintaining global growth in the face of structural 'demand deficits' (ie excess savings) in East Asia required huge excess demand elsewhere. For many years increases in the value of asset (eg shares / property) driven by easy monetary policy and easy access to credit enabled others (mainly US consumers) to afford the excess demand needed to sustain rapid export-led economic growth. Unfortunately the long term effect of this was the GFC - see Impacting the Global Economy. It can be noted that the important, though not-immediately-obvious, role that international financial imbalances have played in the GFC have been pointed out by various credible analysts (eg the excellent work by Martin Wolf at the Financial Times, such as his book Fixing Global Finance).

Future Consequences

The fundamental constraint on the  'bigger, longer and better' resource boom hypothesis, is that global growth won't be sustainable until the financial imbalance problem is overcome (eg see Martin Wolf's Inevitable Sovereign Defaults). The latter draws attention to the private sector de-leveraging that now characterises developed economies and the limits to government spending that have been reached. Radical economic transformations will thus be required in developed economies (especially the US) - and major consequences may well be: (a) a need by currently-deficit economies to shift to export-based economic growth; and (b) probable financial crises that disable growth in countries (such as Japan and China) that have to rely on current account surpluses to protect financial institutions that lack a real profit focus.

Strategic Directions

Thus economic strategies oriented towards development of the flexibility and productivity of Australia's economy generally and the effectiveness of its governing institutions would be preferred at this time to those geared mainly to assumptions of a 'bigger, stronger and longer' resources boom.

How such a balanced strategy might be given practical effect is suggested in Lifting Productivity: Considering the Bigger Picture. This would neither preclude the growth of resource-oriented industries (if the 'wheels don't fall off' China's economic wagon), nor create undue dependence on their success.

Michael Stutchbury
The Australian

Re: Prosperity betrayed by reform retreat, The Australian, 21/8/10

Congratulations on this challenging article (outlined below), in which you strongly argued the need to think seriously about how Australia's future economic prosperity might best be ensured.

Some additional options that might be of interest are suggested below. They relate to:

• Australia's economic history, and current uncertainties in the international environment;
• the inadequacy of economic and public sector reforms over the past 2 decades;
• complexities of the 'Big Australia' debate;
• constraints on privatisation as a means for improving infrastructure;
• industrial relations reform through enterprise bargaining; and
• options for boosting Australia's economic performance, and making governments more effective.

Regards

John Craig

Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?

Mr Glenn Stephens,
Governor,
Reserve Bank of Australia

Re: Economic Conditions and Prospects, RBA, 15/6/11

I should like to suggest alternatives to reliance on the ‘stronger for longer’ resource boom that your recent address in Brisbane to the Economic Society of Australia suggested would be a sound basis for Australia’s future economic growth.

As I interpreted it, your address (which is outlined on my web-site) seemed to suggest that:

• Economic dislocations (eg the global financial crisis and natural disasters) are just temporary events, and their effects will fade;
• The global economy has undergone a major transition since about 2006, involving the emergence of strong global economic growth driven by emerging economies and this has fundamentally changed the prospects of resource industries; thus
• Rather than experiencing long term decline in prices relative to other sectors as in the past, the high levels of demand for resources will now permanently improve their strategic value, and this will particularly benefit Australia;
• Resource-based industries generate wealth throughout the entire economy, not just in resource-rich regions.

The latter point implies that the perceptions of a ‘two-speed economy’ (ie weakened competitiveness of other industries due to the high exchange rate associated with a resources boom) will simply be a transitory phenomenon, as the economy adjusts to its new environment in which resources demand will permanently tend to exceed available supplies. 

While your hypothesis deserves serious consideration, it seems overly simplistic, because:

• The strategic disadvantages traditionally associated with primarily commodity-based resource industries are not just those your address suggests no longer apply. There is also a need, for example, to consider problems such as boom and bust cycles and the so-called ‘resource curse’ (ie the tendency of resource riches to undermine the quality of governance and economic leadership in a community);
• Australia’s long term competitiveness in resource industries is not assured, given the likely emergence of new competitors and the erosion of the institutional capacity to support such activities in terms of innovation and infrastructure. The global peak-oil event is also likely to challenge all competitors in resource industries because efficient production in such industries tends to depend on liquid fuels;
• The expectation that a major transition has occurred, which will see strongest future growth in Asia (especially China), is anything but certain or uncomplicated. For example:
  • The GFC is arguably partly a manifestation of a challenge to Western-style democratic capitalism as the basis of the international order by the neo-Confucian systems of socio-political-economy that have permitted economic miracles in East Asia. Moreover;
  • The GFC is ongoing, with emerging sovereign debt risks partly also a manifestation of the imbalances associated with the neo-Confucian systems;
  • Cultural constraints make it unlikely that the neo-Confucian systems can be adapted to work under current international political and economic regimes, when (in future) they can no longer rely on the protection provided by the current account surpluses that result from export-led growth;
  • Operating in an ‘Asian-style’ business environment involves complexities and risks that Australians are ill-equipped to deal with;
• Likewise the expectation that strong growth will be driven by demand from emerging economies elsewhere is suspect, because the poorly developed financial systems in many such economies have obliged them also to rely on export-based growth (and thus on trading partners able to incur current account deficits indefinitely);
• Institutional weaknesses, both domestically and internationally, need to be considered in developing an economic strategy;
• Australia has alternatives to primary reliance on resource exports and to the simple market-liberalization approach to economic diversification adopted in the 1980s and 1990s, and these could substantially improve its economic position;
• While there is a need for communities to be made aware of their options, economics can provide only part of this understanding.

The above suggestions are presented in more detail on my web-site, and I would value any comments on them.

John Craig

Summary of 'Economic Conditions and Prospects' and  Detailed Comments [Working Draft]

Outline of Stephens G., Economic Conditions and Prospects, RBA, Address in Brisbane to the Economic Society of Australia, 15/6/11: Recent natural disasters have challenged people and adversely affected the economy (eg coal and iron ore production fell). The effects are gradually abating – so the price effects of supply disruptions should also reverse. While the destruction of capital is a loss of wealth, it will be rebuilt. These events occurred in a changing international context. Since 2006 it has been clear that profound changes have been occurring related to continued rapid growth of China, India and other emerging economies. Despite disruptions due to the financial crisis this has continued (eg because authorities responded forcefully to ensure strong growth continued). These expansionary forces are at work on Australian economy that was fully employed in early 2008 – and though capacity utilization is not as high or unemployment so low, the degree of slack in economy is less now because of resource sector income and investment. Thus restrained macroeconomic policies are needed – and this has been done in monetary policy, though whether this is sufficient is unclear. The fiscal impact of federal budget is also tightening (by 2% of GDP in 2011/12). There are differences in economic performance around the country – and a ‘two speed’ economy has been suggested became some don’t see the resource boom benefiting them. However it should be noted that: (a) the effect of resource sector expansion does get spread around (eg by providing inputs, through taxation, by being shareholders, or through investment effect on construction / manufacturing). Regional variations in unemployment are not much more than normal. (b) some current trends {eg in housing prices and population growth) seem like the inverse of previous trends. Relative costs are affected by interstate population flows, and these costs in turn have feedback effects on population flows (especially in Queensland). Queensland had a high rate of population growth – and with readily available finance. Brisbane house prices (previous about half the Sydney level) were similar to Sydney’s by 2008. Housing prices in Brisbane have been declining since because of fall in interstate and international migration as well as tougher conditions on bank financing. The interaction of various forces (commodity price cycle, financial cycle, population flows, and endogenous responses of housing prices which then affect population flows) has led to differences in performance. (c) Australia’s industry composition is continually changing – though usually slowly. Trade exposed manufacturers not linked to resources now face difficult conditions – though manufacturing peaked in Australia in the late 1950s. Business services however have increased. Mining’s share of GDP has risen since 1960s, but is now about the same as in 1912 (due to gold rush). Australia’s terms of trade reflect large and persistent change in global relative prices – and while there is a cyclical component in China story there is also a structural dimension. For a long time world prices of foodstuffs and raw materials declined relative to manufactures, services and assets. But this has now reversed over several years due to global demand. Prices have risen because there has been more demand than could be supplied at old prices, because hundreds of millions in emerging economies have seen growth in their incomes and living standards, and want to live more like Australians have done. This implies a more energy / steel intensive way of life, and this is changing the shape of the global economy. Commentators have been calling on emerging economies to rely more on domestic demand and less on exports to major countries – and this is happening. This implies that more global spending is going to products that are steel, energy or protein intensive for emerging world consumers. Thus more of marginal production of world economy has to be in raw material intensive products (and in raw materials themselves). Australian consumers would face rising raw material prices if Australia were not a major raw material producer. $A would be weaker. There would be less of a multi-speed economy, but it is unlikely that economy overall would be stronger, or unemployment lower. Australia is a resource producer – and so can take advantage of things in strong demand. This increases incomes, and this flows through to others. Agricultural prices have also been strong. Consumers benefit from stronger $A. While consumers are more cautious, many travel offshore. The effect of floods will pass. Higher exchange rate is also forcing structural change (eg in retail sector due to effect of internet, which allows consumers to avoid high local retailing costs). Economic adjustment is not easy, but it is necessary. There is a need to focus on productivity – an area where recent performance has been disappointing. Australia is better placed than many advanced countries (with fewer problems in banks and public sector balance sheets). Resilience and adaptability will be required. The role of economists is to help communities understand that they have both greater opportunities and challenges than for many years.

The above address suggests (amongst other things) that:

• Economic dislocations (associated with the global financial crisis (GFC) and natural disasters) are just temporary events, and their effects will fade;
• The global economy has undergone a major transition since about 2006, with strong global economic growth now being driven by emerging economies, and this has fundamentally changed the prospects of resource industries. Thus;
• Rather than experiencing long term decline in prices relative to other sectors as in the past, the high levels of demand for resources will now permanently improve their strategic value, and this will particularly benefit Australia;
• Resource industries generate wealth throughout the entire economy, not just in resource-rich regions.

The latter implied that the perceptions of a 'two-speed economy' (ie weakened competitiveness of other industries due to the high exchange rate associated with a resources boom  - a phenomenon sometimes called the ‘Dutch disease’) will simply be a transitory phenomenon as the economy adjusts to a new environment in which resource demand permanently tends to exceeds available supplies.

These suggestions deserve serious consideration. However, for reasons outlined below, the context seems to require much deeper consideration than the above address suggests, both in relation to resource industries and to the economic environment generally.

Resource Industry Complexities

Australia’s economic reform agenda since the 1980s primarily featured market liberalization to create a more competitive environment in which Australians would be forced and enabled to increase their productivity. This was supported because of the relative decline in Australia’s income levels for most of the 20^th century associated with heavy reliance on exports of basic commodities, and reliance on various forms of protection to develop other economic functions.

The above address suggested that the declining relative prices of basic commodities and possible 'Dutch disease' effects were no longer a problem. However the latter were only ever part of the story. There are other disadvantages traditionally associated with heavy reliance on commodity-based industries (eg their susceptibility to boom and bust cycles; and adverse effects on political and economic leadership - which is sometimes called the 'resource curse').

Elaboration:

• Resource industries involving simple commodities tend to be associated with boom and bust cycles. When supply exceeds demand, prices tend to be very low because producers of undifferentiated products have no basis for gaining competitive advantage / market power. Because prices are low, there is little investment, and demand eventually exceeds supply. Then many producers independently decide to increase their capacity in response to now-high prices, and over-capacity relative to demand then leads to a dramatic price decline and the cycle repeats. For reasons suggested below there are reasons to suspect that current levels of demand and prices for many commodities are unlikely to be maintained (with oil being a likely exception), and that current large investment programs will thus again result in overcapacity;
• resource poor regions often do better economically and politically than those which are relatively resource rich, partly because political and economic dominance can be achieved in the latter by those who promise easy gains from the sale of commodities (and perhaps personally profit) though they provide poor economic leadership of the community (see the Curse of Natural Resources). Though the latter notes that effective political institutions and accountability can reduce this risk, rich resources can undermine those institutions. This has clearly been a problem in Australia’s resource rich states (ie Queensland and Western Australia). For example: Queensland’s political leaders have long emphasised resource development; the state’s per capita GSP has long been below the national average; and its political system has traditionally been weak (see Queensland's Weak Parliament , 1999) and has continued to be compromised (see Reform of Queensland Institutions - or a Rising Tide of Public Hypocrisy?). And in Western Australia it was reported that a former premier and his business partner had secretly manipulated the mining approval process (Barrass T et al., 'Burke loots mining boom', Australian, 28/2/07).

If commodity boom and bust cycles are a risk, it is critical that an economy be well diversified if severe impacts on the economy as a whole are to be avoided. Moreover any emphasis on resource development as the major driver of Australia’s economic growth would seem to need to be accompanied by much more effective systems of political accountability and wisdom than Australia has achieved in the past.

There are moreover no guarantees that Australia will remain competitive in the resource industries that are currently attracting huge investments because of the potential emergence of new competitors and an apparent inadequacy in the institutional support required for competitiveness.

Elaboration: Commodity-based industries are often located in less-developed economic regions with relatively low wage rates. Australia’s ability to be competitive in mineral / energy / agricultural industries for most of the 20th century despite its relatively high wage rates had a great deal to do with constant innovation – rather than with the mere possession of natural resources [a conclusion the present writer drew from study of requirements for diversification into knowledge-intensive industries in the 1980s].

By the start of the 21st century there seemed to be widespread pessimism about the future prospects of resource production from Australia – and this was one of the reasons that the capacity and infrastructure required to supply the unexpected ‘China boom’ was not available a few years later.

Moreover, because Australia's recent efforts to develop its innovation capacity tend to have been more politically-motivated than market-driven, it is by no means certain that the institutions required to support innovation in these areas are still effective (eg see The Economic Futility of 'Backing Australia's Ability'). Emphasis in endeavouring to boost innovation has been on increasing 'smart' inputs (eg advanced education and research) to economic systems that are ill-equipped to use then productively, rather than using market-demand to drive the development of commercially-relevant innovation support competencies (which would in turn create a demand for, and give a relevant sense of direction to, the provision of 'smart' inputs).

Likewise infrastructure deficiencies have also been seen as a constraint, and Australia's machinery for developing infrastructure has apparently deteriorated badly (see Infrastructure Constraints on Australia's Economy). For example, capacity problems at the Dalrymple Bay Coal Loader gained national notoriety, and seemed to have their origin in the privatisation of a facility subject to market failures which required regulators to make impossible choices about pricing (see Privatisation of Monopolies Leading to Regulatory Failure).

There are many other potential suppliers of the resources on which Australia's economy has become increasingly dependent (ie iron ore and coal). There are potential suppliers with probably lower cost structures in Africa (where China has been encouraging investment), Latin America and Mongolia. 15 years ago Australia seemed well positioned in thermal coal exports, but the cost structure encouraged consideration of sourcing coal from Indonesia, and this undercut Australian suppliers.

Australia is unlikely to be competitive in the longer term merely on the basis of possessing resources and attracting investment in capital intensive production. The economic lesson of the shift by capital intensive manufacturing from Europe and North America in the 1960s and 1970s to low wage emerging economies (especially those in Asia such as Japan, and the ‘tigers’) was that primarily capital-intensive production was no longer viable in higher-wage regions.

Another complicating factor that needs serious consideration is that commodity-based industries related to both mining and agriculture tend to be heavily dependent on liquid fuels for efficient production. Such industries will thus presumably be impacted by the apparently-imminent global peak oil event, as this is likely to significantly increase the cost of liquid fuels and affect the viability of all industries and activities in which they are important (see General Notes on Peak Oil).

International Complexities

The global economic environment unfortunately appears anything but stable and sustainable, though many risks arise from problems in financial systems that are not revealed by conventional analyses of the ‘real’ economy, and thus tend to be 'invisible' to some analysts.

Serious current risk factors appear to include: the failure of the G20 to resolve constraints on global growth implicit in international financial imbalances; excessive public debts in some countries that raise risks of sovereign defaults; the probable ending of the era of cheap credit (which seems likely to have played a role in: the emergence of strong growth in emerging economies; an associated commodity boom; and the rapid rise in property values in many countries including Australia); and structural problems and potential political instability affecting China’s economy (see Economic Risks).

Moreover some changes in the global economy that the above address mentioned (eg the GFC and resource demand driven by extraordinarily high rates of capital investment in China) are arguably manifestations of a neo-Confucian challenge to the Western-style democratic capitalist basis of the international order, whose outcome, while anything but certain, has very significant implications. For example, the end point of that challenge might be either failure by the neo-Confucian systems of socio-political economy that characterise Australia's major commodity export markets (eg Japan and China) or the emergence of an international political and economic order around such countries that is incompatible with Australia's democratic and capitalistic institutions.

Elaboration: While the issues involved are anything but simple, it is noted that:

• the methods that have been the basis of economic 'miracles' in East Asia have been intrinsically macroeconomically unbalanced (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy).  Export-driven growth to defend poorly developed financial systems has been a central feature, because market-oriented industrial development was facilitated by the role of social elites in facilitating accelerated learning, rather than by calculation of financial outcomes. While ‘capitalistic’ economies are given direction by the decentralised initiative by independent profit-seeking enterprises, under neo-Confucian systems:
  • capital tends to be made available by state-linked banks to state-linked undertakings whose goal is to maximize market share rather than profitability, and
  • the bad balance sheets of banks that result from disregarding profitability are protected because domestic demand is constrained so that a current account surplus is maintained, and there is thus no need to borrow in international financial markets. Thus a demand deficit (ie the 'savings glut' that has concerned the US Federal Reserve) is vital under such systems;
• those methods lead to distortions in international financial systems (see Structural Incompatibility Puts Global Growth at Risk, 2003; and Impacting the Global Economy). Such systems:
  • are only sustainable if trading partners are willing and able to maintain large current account deficits, and continually increasing debts;
  • were significant in giving rise to the GFC because the excess demand that the US sought to provide to maintain strong global growth in the face of structural demand deficits elsewhere was achieved by easy money policies that inflated an asset bubble (see Financial Imbalances and GFC Causes); and
  • are also significant (though by no means the only factor) in the emerging risk of sovereign defaults (see The Asian Connection in the Public Debt Problems Facing Developed Economies and Comment on the European Sovereign Debt Crisis);
• there are massive cultural obstacles to adaptation by 'Asia' to traditional Western style democratic capitalist practices (eg see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems, 1998);
• in the medium to longer term the outcome seems likely to be either:
  • failure by the neo-Confucian systems of socio-political economy when they can no longer rely on export driven growth to provide sustained current account surpluses (ie when their trading partners, especially the US, cease to be willing or able to continue incurring large current account deficits to compensate for the demand deficits that are features of the neo-Confucian systems) - see Are East Asian Systems of Socio-political economy sustainable?); or
  • the creation of international political and financial regimes based on traditions that are are incompatible with the democratic capitalist principles that are the basis of current international institutions (and Australia's institutions) - see Creating a New International 'Confucian' Political and Economic Order (2009) and Some Thoughts on the 'China Era', (2010). The international financial system affecting countries such as Japan and China would need to cease to be based on democratic capitalist principles, but rather on a system under which the mercantilist consensus of social elites and their subordinates dominates over profitability considerations – and access to finance and other forms of state support is based on relationship with the elite, rather than on independent profit-seeking initiative and a rule of law.

Australia is anything but prepared to cope with the cultural and political implications of a transition to a neo-Confucian international order (eg see Babes in the Asian Woods). There are many examples even now of where dealing with ‘Asia’ without Asia-literacy would be hazardous to Australia’s interests (see Risks from Asia-illiterate Policy Making). The latter arguably includes:

• the expectation that taxing the profits associated with resource exports would significantly improve Commonwealth Government revenues in an ‘Asian’ business environment (see RSPT Won't Hurt Miners: But Pity Help Naive Australians);
• the Commonwealth Government’s response to increasingly assertive militarism by China (ie reviewing the positioning of defence forces) is anything but adequate in a region where ‘soft power’ is the central element in traditional Art of War strategies (see Comments on Australia's Strategic Edge in 2030).

Overall it seems highly unlikely that a major transition has occurred that will see strongest future economic growth in Asia (mainly China). It can be noted that China faces many difficult short term challenges (eg growth that is extra-ordinarily dependent on investment (ie >50% of GDP); an apparent property bubble and huge losses by provincial authorities; weak household income even though future export markets are unlikely to be able to sustain growth because of past international financial imbalances; and political instability) - see Heading for a Crash? Even if these can be overcome, the poor linkages between domestic supply and demand under non-capitalistic neo-Confucian systems seem likely to be a fatal constraint in the medium-long term (see Balancing Supply and Demand).

Likewise the suggestion in the above address that strong growth will be driven by demand from emerging economies more broadly is equally uncertain, because their ability to do so within current international political and financial frameworks is also often constrained by under-developed financial systems.

Elaboration:  Emerging economies outside Asia have tended to seek export driven growth as a defensive strategy because they have had poorly developed financial systems - see Leadership by Emerging Economies?  At the time of the Asian Financial Crisis, countries that relied on export-driven growth (especially Japan and China) were protected, and others whose crony-capitalist practices were not protected by such surpluses suffered a crisis, and subsequently sought the protection of export-driven growth, which added to the problem of international financial imbalances (see more in An invisible Clash of Financial Systems). Over the past decade emerging economies outside Asia with poorly developed financial systems have also adopted similar defensive tactics (see Resende’s comments). For such economies to provide the demand to drive global growth (a trend which the above address suggests is under-way) requires much more than increasing people’s incomes. There would also be a need to develop the capacity to import capital to offset current account deficits without experiencing financial crises, and this might be anything but straight forward.

Institutional Complexities

Institutional weaknesses that limit Australia's potential competitiveness in resource industries (ie those related to innovation and infrastructure) was noted above. However there are many other institutional constraints that need to be considered. For example:

• Australia's system of government generally seems to be failing to cope with its challenges (eg see Australia's Governance Crisis and the Need for Nation Building), and this will give rise to perceptions of sovereign risk - an outcome that seems to be becoming all too real [1];
• international economic / financial institutions seem also to be failing to cope. For example the G20, which was set up to coordinate global responses to economic challenges, seems to be unable to deal with problems associated with international financial imbalances (see G20 in Korea: Unreal Optimism and G20 in Washington: Waiting for Hell to Freeze Over?) Similar constraints seem to have afflicted the IMF (eg see Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems).  

There is unfortunately even a risk that the world could plunge into economic and political chaos because of the inability of international institutions to cope with current challenges.

It can also be noted in passing that severe limitations are likely in future on the methods that have been used by reserve banks in recent years for macroeconomic management (ie to counter the risks associated with booms and busts) - see New Methods for Macroeconomic Management?. The latter referred to: the timing problems that (in the 1970s) eroded confidence in the post-war emphasis on macroeconomic management by counter-cyclical public spending; the asset bubbles potentially generated by the use of easy monetary policy to boost growth; and the risks of inflation associated with easy monetary policy in future in the event that cheap imports cease to be available to deprive domestic producers of the ability to raise prices (ie if emerging economies try to increase incomes so as to make a much greater domestic contribution to demand).

Considering Economic Options

Because of the complexities outlined above, there is a need (even in regions with the richest natural resource bases such as Western Australia and Queensland) for communities to carefully consider which economic direction is likely to produce the best outcomes. Such communities need to be aware of their real economic options (and perhaps decide to ‘hedge their bets’)

There are alternatives to heavy reliance on basic commodity exports through processes to accelerate the development of industries based on the knowledge and skills of a community (eg see Lifting Productivity: Considering the Bigger Picture, 2010). In brief the latter suggests that, while the market-liberalisation approach to economic reform in the 1980s and 1990s achieved some gains, it also had undesirable side effects especially on the administrative competence of governments. Moreover merely requiring competition can not ensure that the capacity to compete successfully in high value-added activities exists. The adoption of more effective techniques for economic development should enable regions without strong resource-export prospects to cope with a strong currency without merely relying on spin-offs from resource exports.

Reliance on ‘comparative advantage’ (ie the pre-existing economic strengths of a region such as natural resources) is not necessarily the best economic option. For example, Japan was expected after WWII to rely on the 'comparative advantage' it then had in labour intensive industries. But following the economic wisdom of that day would have left Japan permanently backward, so an alternative path was chosen.

Since the 1990s pursuing ‘competitive advantages’ (ie those created by strategy related to the knowledge and skills of a community and effective economy-wide organisation) has been recognised as an alternative to reliance on a region’s ‘comparative advantages’. Doing so in Australia’s more resource rich regions would require communities to think and work harder, but would give them more mastery over their own fate and be more economically favourable.  If emphasis is placed on developing competitive advantages (ie by enhancing the communities' economic competencies), such regions would retain the benefit of resource strengths, but the reverse (ie giving primary emphasis to developing resource exports) would not ensure competitive advantages.

In simple terms an emphasis on 'comparative advantage' would involve those seeking to promote economic development in providing information to external investors about natural resources, while an emphasis on 'competitive advantages' would involve seeking to ensure that communities have the capacity to acquire information about available technologies and markets. And it would involve governments re-emphasising their core role of 'governing' (ie creating frameworks in which the community generally can 'do things'), rather than focusing on 'doing things' to facilitate individual projects while the community watches to see what happens. How a renewed emphasis on 'governing' (and a reduced emphasis on centralised micromanagement of 'things') might be achieved is suggested in A Nation Building Agenda.

There is undoubtedly a need, as the above address suggested, to boost community understanding of current economic challenges and opportunities.  However doing so can't just be the role of economists.

Why? Economics can only tell part of the story (see The Advantages and Limitations of Financial Criteria). For example, the latter draws attention to: (a) the need to take non-economic criteria into account; (b) the obstacles to rational decision making that complex financial arrangements can create; (c) problems generated by past attempts to improve the efficiency of government operations on the basis of conventional economic principles; (d) the need to change economic functions on the basis of strategic information, rather than merely analyse them; and (e) the potential weaknesses of policies based on rational economic expectations in an ‘Asian’ economic environment.

One possible broader approach to boosting a particular communities' understanding is suggested in Curing Queensland's Myopia.

More on the Limitations of Conventional Economics

Efforts in mid 2011 to develop proposals to strengthen Australia's economic performance again illustrate the limitations of conventional economics in identifying ways to significantly boost Australia's economic productivity.

In particular, in June 2011 the governor of the Reserve Bank of Australia presented a vision of Australia’s economic future based on the ‘stronger for longer’ resource boom hypothesis (see outline of ‘Economic Conditions and Prospects’ above). And in July 2011, a policy conference was hosted by The Australian and the Melbourne Institute of Applied Economic and Social Research, on the theme: Growth Challenge: Riding the Resources Boom to Lasting Prosperity.

The general view at the Growth Challenge conference about what was needed seemed be summed up in an address by the Secretary of the Commonwealth Treasury (Martin Parkinson). He noted that though the resource boom was useful, it had limitations, and that a new emphasis on boosting productivity was needed in Australia to avoid economic backsliding.

An overview of Martin Parkinson's address: The income boost from mining boom is ending and living standards will suffer unless decade-long slide in productivity performance is arrested. Treasury secretary, Martin Parkinson, said that political system needed to recover the reform spirit of the 1980s and 1990s to avoid falling down the world income ladder. Australia might not be the big winner from rise of China and India. Gaining advantage from them requires significant changes in business structure and mindset, long term vision by investors and new workforce skills. Mining boom has masked the decline in Australia’s productivity. A terms of trade shock can only provide temporary benefits. To get further gains requires productivity growth. Terms of trade are likely to fall 20% over 15 years. While mining boom is likely to continue, there is a need for productivity growth and coping with structural adjustment in other areas (eg avoid protecting failing businesses, while helping displaced workers adapt). There is a need for reform in health, education, state taxation and climate change, and for farm sector to wake up to the opportunities available from Chinese and Indian middle classes. Australia’s productivity performance over the past decade deteriorated more sharply than developed world average. There is a need for media to keep focus on reform. There is growing community awareness of the need for a reinvigorated microeconomic reform agenda, but populist media campaigns undermine this. While politicians need to focus on reform, they should not try to do too many things at once. Both prime minister and federal treasurer have recently endorsed reform proposals. (Megalogenis G., ‘We need s new wave of reform: Treasury chief Martin Parkinson’, The Australian, 1/7/11)

Moreover widespread frustration was apparently expressed at the Growth Challenge conference about Australia's failure to take the steps needed to boost productivity, and this was seen to reflect either problems in the political system or a lack of political leadership.

A commentary on the conference proceedings: Australia faces a trap – record commodity prices that undermine its resolve for productivity enhancing reforms. Chris Richardson (Delloitte Access Economics) noted that because 3bn people are having an industrial revolution demand for coal and iron ore is growing faster than the world can possibly supply. Yet concerns about Australia’s ability to profit from this pervaded a recent conference on Growth Challenge: Riding the resources Boom to Lasting Prosperity. Treasury Secretary, Martin Parkinson, argued that benefiting from the great Asian industrialization will only be achieved with a new emphasis on productivity growth, and that Australia’s recent performance in this respect has been poor because the resource boom has discouraged self-improvement. Many different views were expressed at the conference (eg government hasd met the challenge; carbon pricing deal is progressing; Australia has dropped the economic ball; populist media is frustrating reform; and both government and opposition are missing key points). If terms of trade decline slowly, living standards will fall without productivity growth. But there have been no significant productivity-enhancing initiatives since turn of the century, and there are time lags before benefits can be gained from reforms. Parkinson concluded that there was a need to embrace reforms and not resist the harsh structural changes driven by the resources boom. There is a risk with hung parliament that neither side will take risks on reform. The impact of populist media campaigns was lamented. The Opposition leader was accused of rejecting the Liberal Party’s economic heritage, while he suggested that the economists who claimed this were wrong (eg about the carbon pricing question). Various overlapping ideas on productivity improvement were offered. Gary Banks (Productivity Commission) said two-speed economy should be welcomed as this allows higher living standards to flow from terms of trade (a view that will horrify many businesses and rent seekers). He warned against many current proposals (eg keeping resources in sectors now under pressure; resisting the ‘Dutch disease’). He applauded end of ‘cash for clunkers’ scheme, expressed concern about expensive home-made submarines and suggested that industry assistance in the cause of job creation was futile and that high-cost carbon abatement programs should be ended when carbon was priced. Chris Richardson noted the need to look at where money is being spent, as there seem to be problems in middle-class welfare, defence procurement (submarines), industry welfare and tax breaks for the better-off (superannuation). Federal treasurer (Wayne Swan) argued that real revolution was middle-classing of Asia, and that this creates opportunities for Australia well beyond mining. He suggested that government is responding to three great events: shift in economic power to Asia; pricing carbon and population aging. Opposition communications spokesman (Malcolm Turnbull) suggested that NBN program would sustain government monopoly, while not provide consumers with competitive prices. The proposed carbon-pricing package was seen as critically important by Ross Garnaut. However the Greens (Christine Milne) saw a different outcome from this to everyone else at the conference (ie a decarbonised economy and a 100% shift to renewables by 2040). This was quite a different view to ALP, whose resources minister (Martin Ferguson) said that gas and wind would be the mature forms of clean energy. And that nuclear power should be considered. Treasurer suggested that 40% of energy might come from renewables by 2040. Both Ross Garnaut and Warwick McKibbin warned that Australia’s position could be fragile. McKibbin suggested the need consider risks such as: possible ‘slow motion train wreck from Greek crisis; the unsustainable situation in many nations (especially Japan and US); a euro area crisis that is being mismanaged; and inflation due to emerging economies and loose monetary policies. The recurring lament was about loss of bipartisan support for reform as had existed in Hawke, Keating and Howard years. There was a conviction that something had gone wrong with Australia’s politics. However the source of the problem is Labor’s weakness, and consensus for reform will emerge when one side suffers election defeat. (Kelly P., ‘The big trap’, The Australian, 2/7/11)

The problem with blaming the political system or political leaders is that the issues involved are much more complex than participants in the Growth Challenge conference seemed to realize, and the political system on its own can't realistically be expected to resolve this. For example:

• Australia's political system is experiencing difficulties across the board, not only in relation to initiatives to promote economic productivity (see Australia's Governance Crisis and the Need for Nation Building, and particularly the segment on Recognising the Need for Nation Building);
• there are intrinsic limits to the ability of democratic politics on its own to provide the lead in enhancing economic productivity (eg susceptibility to rent-seeking interest group pressure, and intrinsic lack of the necessary strategic vision - see Economic Solutions are Beyond Politics). Democratic politics emerged in its modern form in 19th century Britain at the time of the industrial revolution, partly as a means for sharing the new wealth being generated through capital in industrial economies (and also to put in place arrangements to allow wealth to continue to be generated). Leadership in the economic 'miracles' experienced in East Asia was taken by nationalistic neo-Confucian elites outside the democratic political process.  The project for European integration (Europe 1992) was seen as a method of significantly boosting productivity, yet it was constrained by (so called) 'Eurosclerosis' (ie the inability of the political systems to reach agreement) and action was arguably only possible because the reform agenda was devised outside the political process by the European Round Table of Industrialists [1, 2]. Some democratic governments in both Europe and North America currently seem to be having difficulties resolving pressures from interest groups to distribute tax revenues that exceed their economies' ability to generate;

There are moreover limits to the ability of conventional economics to provide a way to significantly boost Australia's productivity. For example:

• the main effect of economic reforms by the Hawke and Keating governments (reforms that seemed to be regarded as precedents to be copied by participants in the Growth Challenge conference) involved market liberalization (ie reducing the role that the political process and government generally) played in the economy. This process went about as far as it could realistically go, and (despite some backsliding) any further efforts to reduce the influence of politics on economic outcomes are likely to be marginal;
• far more could probably be achieved in future by boosting the productivity of Australia's economy through strategic information management (to change the way the economy as a whole operates) rather than by efforts to fine tune government operations (eg in, say, education and health) - see Accelerating Market-oriented Development of Economic Systems above. This option is however outside the scope of conventional economics (see Probable Breakthrough in Understanding Economic Development);
• the side effects of past attempts at micro economic economic reform are partly responsible for the difficulties that Australia's political system is experiencing (see The Advantages and Limitations of Financial Criteria above).  The latter refers, amongst other issues to the unintended side effects: (a) of applying competition policies and 'business-like' methods of undertaking governments' non-business-like functions (as this eroded the professional competencies and working environment that public services require if they are to enable governments to deal with the complex policy questions that are governments' 'core business'); and (b) of requiring universities to focus heavily on economic goals (as this eroded their ability to provide reliable inputs to public policy debates, and the humanities functions that are critically important to some current challenges).  Once again understanding these potential risks required information and experience that have been well outside the realm of conventional economics;
• the failure to apply the lessons of conventional economics (ie about the limits of centralised planning) to efforts by successful federal government to micro-manage constitutional state functions severely impeded the effectiveness of Australia's system of government;
• the international economic environment is far more complex and challenging in ways that can't be dealt with by the primarily-micro-economic-reform policy prescriptions discussed at the Growth Challenge conference (see International Complexities above, which forms part of a comment on the RBA's 'stronger for longer' resource boom hypothesis).  Moreover the causes of some of those complexities (eg the character and consequences of East Asian systems of socio-political economy) also lie well outside the scope of conventional economics.

Conventional economics and politics needs to be part of the solution, but are likely to be insufficient in themselves.

Progressive Economic Policy Options - email sent 23/8/11

Chris Lewis,
ACU Public Policy Institute

Re: Economic policy: The decline of the West?, Online Opinion, 22/8/11

I should like to try to add value to your constructive case for a progressive (rather than, say, a protectionist) approach to current economic challenges.

My interpretation of your article: Western societies (even Australia) face difficulties if current economic policy trends continue. Since the Bretton Woods monetary system folded in 1971 total credit to US GDP increased from 150% to 354% - thus boosting US and world economic growth. In Australia consumers and business could borrow / spend / invest more. Before the GFC this caused employment, income, profits and asset prices to rise. Governments increased social policy spending from 10% to 18.7% of GNI to soften the impact of economic reform. But there were adverse effects (eg declining housing affordability and economic diversity). But problems were even worse in Western nations that did not benefit, as Australia did, from mineral and energy exports to Asia (noting large numbers receiving food stamps in US, and riots in Europe partly due to severe budget cuts) . Western societies could become chaotic if cuts in government spending severely affect battlers most – and 17 OECD countries have public debts over 70% of GDP. There are limits to wealth and job creation through reliance on consumer spending and easy credit. Fair trade must be encouraged. But should counties with less transparent practices prosper? Authoritarian and mercantile China has increased its share of global GDP, while its corruption perception score remains unchanged. China causes most concern because of its mercantile economic approach, suppression of dissidents, gaining wealth from investing in US Treasuries, tying currency value to $US, and rapidly increasing share of global manufacturing. Manufacturing in US (which boosts global economy through large trade deficits) lost manufacturing. After centuries of considerable and positive influence by liberal minded nations (especially US and US) authoritarian China is expected to be seen as their equal. Western ideals of fair trade and democracy must not lead to tariff wars and international tension. Open markets are important – so Western societies need to give attention to competitive realities. Western societies need to change their approach, and perhaps adopt policies that force others (even powerful authoritarian nations) to adopt a different approach. As Richard Duncan suggests deciding the balance between government intervention and market forces is not easy. While increased government debt in US helped prevent global depression, it did not deliver growth. While some want cuts in government spending, Duncan notes that world economic growth will continue to depend on how much the US borrows and spends. And though Chris Berg expressed concern about the Coalition’s increasingly protectionist sentiment, the trend towards protectionism is increasing worldwide. There is an opportunity to promote effective change, and also a risk that public anger will lead to unsophisticated protectionism (or even hate).

In no particularly logical order I should like to submit the following comments for your consideration:

• It was appropriate to start your article with a consideration of how ready availability of credit has changed the global economy. However:
• it is necessary also to recognise that the systems of socio-political-economy that have been the basis of ‘economic miracles’ in East Asia contain financial distortions (ie investing to maximize economic turnover with little regard for profitability) that are both one foundation of their mercantilism (by subsidising industrial production) and a major driver of the international imbalances that have resulted from the dependence of global growth on high levels of credit creation and consumption in the US (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy, Impacting the Global Economy and Structural Incompatibility Puts Global Growth at Risk, 2003);
• The failure of the humanities and social science faculties of Western universities to seriously consider the practical consequences of differences in cultural assumptions has been a major factor in the inability of Western societies to anticipate the now-obvious challenges to their ideals (eg liberal democracy) that your article mentioned (eg see Competing Civilizations (2001) and Babes in the Asian Woods);
• Australia’s approach to economic reform in recent decades has been seriously deficient – because emphasis was placed on requiring competition without ensuring the emergence of the (often systemic) capabilities that enterprises need to be supported by if they are to compete successfully in high value-added activities. Far better methods have probably been, and remain, available (see Lifting Productivity: Considering the Bigger Picture). Moreover, serious side-effects have resulted from the approach that has been taken to economic reform. For example:
  • Many individuals and regions have had difficulty coping with economic change, and (as your article noted) government spending on social support programs has had to be increased significantly. Because of this there is a possibility that Australia is suffering from a structural budget deficit, though this has been and remains concealed by the revenue generated by a resources boom (see The Long Term Impact of the Global Financial Crisis). However that resource-related revenue is anything but assured because: (a) if resource development relies in future increasingly on ‘Asian’ (ie turnover-rather-than-profitability-oriented) investment, attempts to extract tax revenues from mining profits are likely to fail (see RSPT Won't Hurt Miners: But Pity Help Naive Australians) ; while (b) the necessity to now reduce the global economy’s dependence on credit creation and consumption in the US is likely to lead to serious problems for the major East Asian economies (especially Japan and China) who provide much of the demand for Australia’s mineral and energy exports (see Limiting the 'consumer of last resort');
  • The ability of governments to ‘govern’ effectively has been undermined. Seeking efficiency in the production of public goods and services via competition and ‘managerialism’ eroded the professionalism and knowledge base that Public Services required if they were to enable governments to cope with the complexity of their roles (see Neglected Side Effects of National Competition Policy and On Populism);
• The decay of public administration competencies is only one of the reasons that Australia’s system of government is proving increasingly ineffectual (see Australia's Governance Crisis and the Need for Nation Building, from 2003). While progressive economic policies are required to cope with current challenges, there is little prospect that these will be found and implemented successfully unless: (a) the quality of external and internal support to the political system is increased; and (b) the inadequacy of expecting central ‘authorities’ to provide solutions to all problems is recognised;
• Some speculations about dealing with the challenges facing heavily indebted Western countries are in Preventing Economic Stagnation. This highlighted the fact that the problem is structural (because of existence of large international financial imbalances) rather than merely cyclical – and thus requires much more than deciding whether public spending should be increased or decreased. In fact leadership in finding ways to resolve the problem your article outlined arguably can’t be expected of democratically accountable institutions at all, though their endorsement of such solutions (once found) would be highly desirable;
• While your article suggested that ‘authoritarian and mercantile’ China causes most concern, Japan’s role should not be neglected (see Comments on Australia's Strategic Edge in 2030 )

I would be interested in your response to the above speculations.

John Craig

Keep Politics out of Economic Strategy - email sent 5/9/11

Tim Soutphommasane

Re: Mine wealth may end up being curse, The Australian, 3/9/11

I should like to try to add value to your constructive suggestions about basing economic strategy on creating ‘competitive’ advantages, rather than simply relying on pre-existing ‘comparative’ advantages. The basic idea outlined in your article is excellent, but politicians can’t succeed as the ‘catalysts and challengers’.

My interpretation of your article: Does the death of Australian manufacturing matter? 200 years ago David Ricardo proposed the law of comparative advantage (ie that a country should specialize in the production of goods and services in which it has a cost advantage and trade with other countries. There has been intense recent debate about whether government should protect manufacturing. But manufacturing has been in structural decline since the 1960s (when it accounted for 30% of employment, compared with 10% now). Australia has no comparative advantage in manufacturing. China’s lower labour costs and scale gives it comparative advantage in manufacturing. Australia’s lie in mining (and perhaps tourism and higher education). There is no point in trying to resurrect Australian manufacturing through protection. But should Australia merely be a quarry for the world? What should Australia do if the resource boom falters of ends? Australia already shows signs of the ‘Dutch disease’ where high commodities income raises exchange rates and hollows out other sectors. The idea of competitive advantage could be considered as an alternative to comparative advantage. Michael Porter proposed the idea of competitive advantage by suggesting prosperity does not come from a country’s natural endowments, but out of its capacity to innovate or upgrade. Governments should act as ‘catalyst and challenger’ doing their best to spur companies to produce sophisticated high quality goods and services that can be sold at premium prices. Australia needs to do more than rely on mining alone, as mineral wealth might turn out to be a competitive disadvantage.

The alternative notion that Australia should simply adapt its economy to rely on its comparative advantage in export of mineral and energy commodities was the basis of the Reserve Banks’ argument about relying on a ‘stronger for longer’ resource boom associated with industrialization and urbanisation in Asia. However as your article noted, resource wealth can sometimes be a curse. Some reasons for this are suggested in Do Blind Spots Cloud the RBA's 'Lucky Country' Vision? . The risk is not only that high exchange rates squeeze out other industries and that commodity-based industries are typically subjected to boom and bust cycles, but that communities gain very poor economic leadership where rich natural wealth is available because political and business elites exploit their positions to gain a share of that wealth while the community as a whole does not prosper. This was the basis of the problems that long faced the (so called) ‘banana republics’ in Latin America and oil rich nations in the Middle East.

However democratic governments are intrinsically unable to act as ‘catalyst and challenger’ in relation to the development of industries based on competitive advantages. Reasons for this are suggested in Economic solutions are beyond politics (1995). Those reasons relate to: (a) the need to stimulate action on opportunities that are not yet widely (and thus politically) understood; and (b) the way democratic politics attracts rent-seeking interest groups.

Most Australian governments have been trying to catalyse the development of industries based on competitive advantage since the 1980s but success has been elusive because of the attempt to drive change politically (eg see The Economic Futility of 'Backing Australia's Ability 2'). Governments have been lobbied to provide ‘smart’ inputs (eg advanced education and R&D) into economic systems that are insufficiently developed to use them productively, and have tried to provide ‘assistance’ to potential innovators through politically-accountable agencies which lack the necessary commercial competencies and aspirations.

The need to now cease playing political games and get serious about developing the real economy is increasing because: (a) there is a risk that the RBA’s wish for a ‘stronger for longer’ resources boom will not be granted (see International Complexities in Do Blind Spots Cloud the RBA’s Lucky Country Vision?); and (b) the federal government seems to face a structural budget deficit when / if the resources boom busts (see The Long Term Impact of the Global Financial Crisis).

Fortunately there are other ways of achieving the goal your article suggested.

Stimulating the development of high productivity industries based on ‘competitive advantage’ should be possible using methods suggested in A Case for Innovative Economic Leadership. The latter suggests an arrangement (based on ideas developed, and experiments conducted, in the 1980s) whereby governments approve the protocols under which those with relevant market-oriented capabilities might ‘catalyse and challenge’ clusters of existing enterprises to develop new capabilities. Michael Porter’s ideas about competitive advantage it may be noted apply to complementary capabilities within many different enterprises and in the overall economic environment, rather than capabilities within individual enterprises.

Australia’s system of government is not working well in many respects largely because of the expectation that all problems can be solved politically and should be micromanaged by the federal government (see Australia's Governance Crisis and the Need for Nation Building). The latter suggests the need to boost the support available to the political system in many respects (including enabling leadership in economic and community development by apolitical institutions). There are well recognised reasons for keeping politics out of business and governments usually simply determine the rules under which businesses operate through legislation and regulation. The same needs to apply to new institutions that would be enabled to catalyse the development of competitive advantages in clusters of enterprises.

I would be interested in your response to the above speculations.

John Craig

Politicians Can't Take the Economic Lead - email sent 17/12/11

John Durie
The Australian

RE: Business to politicians: time to lead as boom 'won't last forever', The Australian, 17/12/11

Your article recorded concerns by numerous business leaders about the present economic environment, and their view that politicians need to take the economic lead because the international environment is unlikely to permanently support the boom that has been so favourable to parts of Australia’s economy.

There is no doubt about the need to do more than rely on a commodity boom (eg see Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?, 2011)

However those business leaders are merely passing the buck, because: (a) there would be productivity and competitiveness advantages in leadership of change in systems in the real economy in response to likely changes in economic circumstances, and such leadership is intrinsically impossible for democratic governments; and (b) ideas about complementary policy responses have to be developed and publicised by others, before there is any prospect of appropriate action being understood by opinion leaders and then politically understood and accepted. My reasons for suggesting this are outlined in A Case for Innovative Economic Leadership (2009).

There is a vital need for economic leadership – but politicians can’t be expected to provide it.

John Craig

A Smarter Country? - email sent 21/1/12 (with minor modifications)

Paul Cleary
The Australian

Re: Road to a Smarter Country, The Australian, 21-22/1/12

Your article has made a useful contribution by highlighting some of the issues related to whether, and if so how, Australia might maintain a relatively diversified economy.

I should like to draw your attention to some thoughts which parallel yours, Do Blind Spots Cloud the RBA's 'Lucky Country' Vision? This suggested:

• That the RBA’s endorsement of a primarily resource-oriented economic future economy was overly simplistic (eg because of such industries’ susceptibility to boom and bust cycles; and the adverse effects on political and economic leadership - which is sometimes called the 'resource curse');
• new options for developing industrial competitiveness are available that go beyond the structural reforms of the last couple of decades, and are needed to complement those reforms (eg because the market-liberalization thrust of reforms required individuals / enterprises to compete, but did not ensure that they have access to the often-systemic capabilities required to do so successfully).

In relation to the positive points raised in your article, it is submitted for your consideration that:

• despite good intentions and a strong basis in mainstream economics, Australia’s economic reforms in recent decades have been inadequate. For example:
  • competition policies that have been intended to increase the efficiency and effectiveness of governments in the delivery of goods and services have had the unforseen and counter-productive effect of reducing their ability to govern effectively, ie to develop relevant policy and coordinate diverse functions (see Neglected Side Effects). Similarly reforms intended to provide infrastructure more effectively have often been counter-productive because they sought to apply 'business-like' methods to functions that are often subject to serious market failures (see Infrastructure Constraints on Australia's Economy, 2005);
  • Government efforts to boost Australia’s innovation capabilities (which are critical to increasing industrial competitiveness) have been ineffectual because they have involved ‘political push’ to provide ‘smart’ inputs (education, training, R&D) to economic systems that are insufficiently developed to use them productively. It would be smarter to place emphasis on creating a demand for those inputs by a primary emphasis on developing stronger market-oriented commercial competencies and organisation (eg see The Economic Futility of 'Backing Australia's Ability 2', 2004 and Commentary on 'Smart State': Illustrating Queensland's Lack of Serious Public Policy, 2003)
  • The ‘assistance’ to industry (eg in the form of support services intended to fill what are seen as market gaps) that governments have often provided (eg 'support' for innovation) is the opposite of, and a major obstacle to, real industrial development (see Problems with Direct Government 'Assistance');
  • there is arguably a need to look beyond mainstream economics to provide a theoretical basis for seriously developing Australia’s industrial capacity (eg Philosophical Principles in Lifting Productivity: Considering the Bigger Picture, 2010 as well as Fixing Australia: Do the Econocrats have the Right Answers? and A Case for Innovative Economic Leadership, 2009);
• the problems that mining service companies now find in getting a ‘slice of the action’ is only a small part of the ultimate problem in benefiting from resource-extraction industries in a ‘Asian-style’ business environment (see RSPT Won't Hurt Miners: But Pity Help Naive Australians, 2010). This suggests that overall tax revenues are likely to be very low if based on profitability as future investments are increasingly made with a view to building economic power, rather than capitalistic profitability.

Good luck with your efforts to promote debate about Australia’s strategic economic options. ..

John Craig

Global Problems Need a Big Picture Perspective - email sent 23/1/12

Dr John Tomlinson
QUT

RE: It's the same the whole world over, Online Opinion, 23/1/12

Your article realistically highlighted various social problems (eg unemployment and inequality) affecting Australia and Western societies generally, and also pointed to debates about issues such as: aborigines; gays; asylum seekers arriving by boat; terrorism; drugs; “culture wars”; and social welfare systems.

I should like to suggest for your consideration that such issues cannot be realistically dealt with as purely internal matters, or as simply the outcome of ideological biases.

In particular increasing unemployment and inequality in many Western countries (which motivates the Occupy movement to blame Western-style capitalism) is largely a consequence of effective competition from low wage emerging economies, and a failure of economic adjustment in higher wage economies. The phenomenon of de-industrialisation in Europe and North America was well recognised in the 1960s and 1970s – and arose because Japan and the Asian ‘tigers’ developed capital intensive mass production industries with relatively low wage rates and thus transformed industries which had supported high productivity / wage rates in developed economies into low productivity sectors that were incapable of providing the incomes expected in Europe and North America. Market liberalization policies were widely adopted as a response in order to speed economic adjustment, and for a time changes in economic organisation (ie a shift from hierarchical to network organisation) reduced this problem – see New American Economy (1997). Arguably there is now a need for other tactics to generate the productivity needed to sustain high middle-class income levels – see suggestions about what this might require in Lifting Productivity: Considering the Bigger Picture. A change in attitude by governments towards the disadvantaged will not solve the problem.

Another source of current constraints on dealing with unemployment and inequality problems lies in the international financial imbalances that have resulted from suppressing demand in order to protect poorly developed financial systems in East Asia and emerging economies (eg see Structural Incompatibility Puts Global Growth at Risk, 2003; Understanding East Asia's Neo-Confucian Systems of Socio-political Economy, 2009; and Impacting the Global Economy, 2009). Those structural imbalances involve demand deficits in countries with poorly-developed financial systems and require their trading partners to be willing and able to perpetually increase their debt levels if global growth is to be maintained – a requirement that they are unlikely to achieve much longer. The problem is not just a ‘crisis of capitalism’ but also a ‘crisis of non-capitalism’ (see World facing 'Crisis of non-Capitalism': Non-economist, 2011). As the latter suggested the failure of humanities and social sciences faculties in Western universities to consider the practical consequences of cultural differences is arguably the reason that what is happening is not generally understood (eg see also Misunderstanding the 'Asia' Factor in GFC and Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems).

Similarly I suggest that there are complexities in various other issues that your article mentioned that make it unrealistic to view them as simply a product of elite conspiracies. For example:

• The difficulties facing Australians with indigenous ancestry seem to be due to features of their cultures as well as the environment they operate in (see The Challenge of Aboriginal Advancement, 2002);
• The public acceptance of homosexual behaviour seems to be morally dubious (eg see Don't Ignore the Link Between Homosexual Behaviour and Child Abuse );
• There are better alternatives to people smuggling in dealing with the humanitarian disaster reflected in the world’s umpteen million refugees (see Complexities in the Refugee Problem , 2001);
• The risks associated with terrorism (which primarily at present arises from Islamist extremism) could be best reduced by the social sciences and humanities faculties of Western universities (rather than by military / security action), and their failure to look seriously at the practical consequences of cultural differences leads Islamist extremists to misunderstand the causes of their nation’s problems (ie they are seen as the result of external oppression) – see Discouraging Pointless Extremism (2002).

I would be interested in your response to the above speculations.

John Craig

The Parallel Between Bob Katter's Australian Party and Pauline Hanson's One Nation - email sent 14/3/12

Editor
The Australian – not for publication

Re: Marriage debate must be allowed to speak its name, The Australian, editorial 14/3/12

Your editorial was useful in drawing a parallel between Bob Katter’s Australian Party and Pauline Hanson’s One Nation, and in suggesting that views such as Mr Katter’s opposition to same-sex marriage must be able to be expressed without personal attacks against those involved in doing so.

Extract: “……, Mr Katter's appeal to the regional residents of Queensland has some similarities to the alienation that underpinned Pauline Hanson's One Nation phenomenon. Far away from the cafe strips, hybrid cars and dog-poo bags of the inner-city elites, suburban and regional voters often bristle at the way their views are derided. They know that unfashionable positions, including scepticism about climate change, resistance to gay marriage or dismay at government waste can be intelligently formed and rationally justified. Yet the response they receive from the entrenched political class is often dismissive, antagonistic or patronising. People who hold a traditionalist view about marriage, for instance, are best placed to know their own hearts and whether or not they oppose gay marriage without wishing ill upon, or inciting hate against, gays. If good-hearted people are branded homophobic or hateful for daring to express their views, it will serve only to drive them to maverick political parties such as Mr Katter's - just as similar disdain nurtured One Nation.”

One Nation appeared to primarily represent those in marginal regions who were disadvantaged by economic change which was necessary for reasons they did not really understand and which they were often poorly equipped to deal with. When they expressed disaffection with the ‘elite’ policies they believed responsible for their predicament, they attracted abusive responses, eg ‘racist’ labels (see Assessing the Implications of Pauline Hanson's One Nation, 1998). It is further noted that:

• There were good reasons for their concerns as economic change had been ineptly managed – ie market liberalisation policies required individuals / enterprises to be more competitive, but too little was done (especially in marginal regions) to ensure that the systemic support required to compete successfully became available (see Defects in Economic Tactics, Strategy and Outcomes, 2000);
• Australia’s democratic political system was disrupted for a time by the disadvantaged groups that One Nation represented, but ultimately proved resilient. One Nation gained significant electoral support and placed members in Parliament. This then enabled the disaffected they represented to gain a better understanding of the economic problem as they tried to explain their ‘solutions’ and discovered that these would probably not work. Interestingly variations of some of their ‘politically-incorrect’ views gained mainstream support, though no one publicly admits this.

The parallel between One Nation and Bob Katter’s Australian Party is strong not only in the fact that both criticised ‘politically correct’ views, but that the Australian Party also seems to represent those in marginal regions who are exposed to economic changes that are hard to deal with because of inept efforts to develop economic capabilities. Lifting Productivity: Considering the Bigger Picture (2010) suggests why established economic policies have been inadequate, and that social disadvantage and political instability in marginal regions are predictable and avoidable consequences.

Thus (as your editorial implied) suppressing politically-incorrect views with personal attacks is anything but constructive. And, in relation to the anti-same-sex-marriage advertisement, I suggest that:

• The same-sex-marriage issue is probably more complex than is recognised by either side in the public debate (see An ABC Witch-hunt?), and as the latter also suggested;
• There seems to be a need to mobilize support for an ABC staff member who was peripherally involved in producing the advertisement, and has been abused and subject to a witch-hunt as a consequence.

John Craig

Tony Webber
Webber Quantitative Consulting

Re: How long can Australia piggy-back off China?, Business Day, 1/6/12

Might I respectfully suggest that the answer to this question can’t be realistically answered on the basis of econometric analysis (eg see Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics)? This is because of the importance of cultural factors both to the methods that have been used to accelerate development and to the consequent structural constraints that China now faces.

The cultural issues that I am referring to are very difficult to get to grips with (for reasons suggested in Understanding 'Asia').

However an attempt to outline what this seems to lead to in practice is in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, while the resulting economic and political challenges that China faces (if my theories are valid) are suggested in Heading for a Crash? (in China’s Development: Assessing the Implications).

John Craig

Autocratic Asian States and Australia's Economic Options (email sent 6/5/12)

The Editor
The Australian - not for publication

Re: China and mining boom crucial for future success, editorial, The Australian, 2/6/12

I must submit that your editorial presented an overly-simplistic view of Australia’s economic options in a world in which autocratic East Asian states could become dominant.

In brief I interpreted your editorial as suggesting that;

Australia benefits from the China-driven resources boom. Xenophobia about 'invading Asian hoards' should have long gone. A ‘big Australia’ policy is needed, but is not politically supported. Foreign investment benefits Australia. Australia’s mineral exports face tough and increasing competition. It will be harder to manage the resources boom than the GFC, and mishandling Enterprise Migration Agreements was unfortunate. The Asian century that the prime minister speaks about requires (not xenophobia but) exploiting the mining boom, supporting immigration and diversifying the economy (see also a more complete outline of the editorial on my web-site).

While it is useful to confront directly the question of the impact on Australia of China and the mining boom, I submit that a more Asia-literate approach is needed to take account of the challenges posed by autocratic neo-Confucian states whose influence is potentially incompatible with Australia's institutions and current capabilities.

This needs to be the subject of informed debate rather than being dismissed as unnecessary on the basis that raising such questions simply reflects ‘xenophobia’. In brief my reasons for suggesting this are that:

• An ‘Asian century’ implies the dominance of systems of socio-political-economy based on autocratic ethnic groups, rather than on rational / responsible individuals in a liberal Western-style environment;
• Features of those systems are partly responsible for current weaknesses and instabilities in Australia’s and the world’s economic environment, and also pose serious risks to the economic prospects of the societies they affect (eg China);
• Even if China avoids an economic crash landing, necessary changes to make its economy more sustainable are likely to undermine Australia’s mining boom.

Similarly Australia’s economic options appear to be nowhere near as clear cut as the editorial suggested. For example:

• The mining boom has been an uncertain blessing (eg because of the boom / bust character of such industries, and the so-called ‘resources curse’);
• There are options for improving Australia’s economic performance that go well beyond the simple market-liberalization emphasis that has applied since the 1980s, and generated side effects including periodic political disruptions (such as that associated with One Nation) and a partial breakdown in effective government;
• Without the China-driven mining boom, Australia might have taken a systematic approach to economic development more seriously;
• Regional development does not need to depend solely on a region’s mineral and agricultural potential; and
• A ‘big Australia’ option is not necessarily economically beneficial (eg because it may exacerbate skilled labour shortages).

It is counterproductive to (as the editorial seemed to do):

•  suggest  that what Australia mainly needs is openness to investment and migration; and
• try to inhibit mention of the more complex and sensitive issues that need to be debated if real progress is to be achieved. 

The above concerns are outlined more fully on my web-site.

John Craig

Outline of 'China and mining boom crucial for future success' (editorial, The Australian, 2/6/12): 

Without China-driven resources boom, Australia would be different. Manufacturers would not be affected by a high $A - but would face weaker global / domestic demand. There would be high unemployment and a skills shortage - and a need to beg companies to invest. Treasury would not be planning on a budget surplus, but concerned about debts associated with the GFC stimulus. Even with the good fortune of the mining boom, Australia is not immune to global economic uncertainty. China has been Australia's saviour (eg by boosting: exports; mining investment; tourism; and student numbers). It is thus wrong to complain about Chinese workers in Australia or selling land to China. 19th century xenophobia about invading hoards was raised again by One Nation, but should now have been gone. Both the Prime Minister and Opposition leader should quell these outbursts. Both took 'small Australia' policies to the last election, but should have promised continued high migration and robust national development. Coalition is starting to discuss opportunities from developing the north for agriculture and mining. so that more population and non-mining output can shift closer to the economic centre of gravity. Australia's wealth has always come from toil, ingenuity and foreign investment. Foreign investment does not lead to the takeover of regions, but to opportunities and jobs. The Prime Minister, in telling miners that they don't own the resources, failed to mention that coal and iron ore are not in short supply globally - and others could meet those demands. Australia's advantages are proximity, cost-effective operations and economic / political certainty. Mishandling of the Enterprise Migration Agreements is troubling. Managing Australia's resources boom will require more deftness that was shown during GFC. The Prime Minister speaks of the Asian century. Being enmeshed in the dynamic growth of East Asia requires exploiting mining boom and expanding Australia's horizons. Government should harness this to support immigration and diversify Australia's economy (eg into training / education foreign workers / students). Xenophobia is bad for social cohesion and economic progress.

Detailed Comments (Working Draft)

The issues are nowhere near as simple as the above editorial suggests.

Autocratic Asian States

While it was useful to directly raise the question of the impact on Australia of China and the mining boom, a more Asia-literate approach is needed to take account of the challenges posed by autocratic neo-Confucian states whose influence, if dominant, is potentially incompatible with Australia's institutions and beyond current capabilities. In particular:

• in simple terms an 'Asian century' arguably implies that intuitive, hierarchical and autocratic ethnic groups would prove better able to deal with ongoing economic and political challenges than rational / responsible individuals operating within a Western-style  framework of individual liberty, a rule of law, democratic governance and profit seeking enterprises (see What does an Asian Century Imply?). An 'Asian century' also seems to imply that:
  • Australians would struggle to cope with cultural traditions that are not properly understood even by those supposedly most expert in the area (see Babes in the Asian Woods) and are intrinsically difficult to understand (eg because this requires understanding traditions that: (a) do not rely on, and actively seek to prevent, understanding; and (b) long caused the 'East' to be described as inscrutable);
  • significant business activities (and even many individual dealings) would not be separated from more-or-less authoritarian / elite dominated states. Moreover such dealings can have mercantilist implications in terms of the relative power of particular national / ethnic  groups. The present writer encountered strong indications of state-linked factions from the darker side of Japan influencing economic and political outcomes in Queensland in the 1980s.  Even in the case of relatively-liberal Singapore such considerations could not be ignored (eg ASX Merger with Singapore Exchange, 2010). And the potential involvement by the Chinese state in the NBN project (via Huawei) clearly raised security issues in a region where control of access to information is the primary means whereby power is exerted (eg see China's Bigger Secret, 2010). The declaration by a former Australian prime minister that China is a true 'market economy' [1] was unrealistic, as are claims [eg 1] that it is 'capitalistic', ie that investment decisions are based on expectations of profit by independent enterprises (see Eyes Wide Shut at Davos and Is China becoming Capitalistic?) ;
  • Australia's ability to extract profit-based tax revenues from mining related developments to fund government transfers to other areas would probably be very limited (eg see RSPT Won't Hurt Miners: But Pity Help Naive Australians, 2010);
• weaknesses in the world economy and the GFC-induced debts facing the federal government are partly a consequence of the international financial imbalances that were induced by features of 'successful' East Asian systems of socio-political economy (ie of mercantilist state-linked-and-financed economic activities that sought to maximize market-share / economic power with limited regard to profitability, and thus required that domestic demand be suppressed) - eg see Structural Incompatibility Puts Global Growth at Risk, 2003+; GFC Causes; Sovereign Defaults: Stage 2 of the GFC?; and Are East Asian Economic Models Sustainable?, 2009);
• as the latter suggests there are fundamental structural obstacles to the sustainability of the neo-Confucian systems of socio-political-economy that have been the basis of rapid growth and development in countries such as Japan and China. And in China also those constraints are starting to become obvious (see Heading for a Crash?). The latter referred to:
  • the cultural difficulties in adjusting to a requirement for domestically-driven demand in an environment in which: (a) international financial imbalances have left many developed economies too heavily indebted to continue compensating for domestic demand deficits in countries such as China; and (b) other emerging economies do not have well enough developed financial system to absorb China's exports in the absence of strong net demand from developed Western economies (see Leadership by Emerging Economies?);
  • destabilizing domestic reactions that are emerging to the 'Confucian' social inequalities that: (a) the Communist revolution in China had sought to eliminate; but (b) have been recreated because of the way China's rapid economic advancement has been engineered;
• even if China avoids a 'crash', significant changes are apparently intended changes in its future economic directions (ie away from infrastructure and property investment which are generating huge debts for government partly because of bad-debts in state-linked banks). Such changes mean that much of Australia's massive resource investment pipeline could emerge as future loss-makers for investors, and Australia's income tax collectors;
• thus implying that it is xenophobic to critically consider whether an 'Asian century' is likely and if so what Australia's role in it should be is no more realistic than:
  • the pervasive claims of racism that were directed from 2001 on against any who questioned whether encouraging people smuggling was the best response to the humanitarian disaster represented by the world's umpteen million refugees (see Playing the "Racism card" in Complexities in the Refugee Problem); and
  • the abuse that often seems to directed against any who question claims about the reliability of mainstream science in relation to climate change (see Bias is Possible, 2006+).

Arguably Australia requires a process of nation-building to overcome current failures in its system of governance, and this is would be particularly important if an 'Asian' century emerges (eg see Comments on Australia's Strategic Edge in 2030, 2011).

It is counterproductive to suggest that all that would be required would be openness to investment and migration, and try to inhibit mention of the more complex and sensitive issues that need to be debated if real progress is to be achieved.

Australia's Economic Options

There seem to be similar over-simplifications implicit in the editorial's comments on Australia's economic strategies and options. For example:

• Australia's dependence on the mining boom has been an uncertain blessing for reasons suggested in Do Blind Spots Cloud the RBA's 'Lucky Country' Vision? . The latter referred (amongst other things) to:
  • the strategic disadvantages traditionally associated with primarily commodity-based resource industries such as boom and bust cycles and the so-called ‘resource curse’ (ie the tendency of resource riches to undermine the quality of governance and economic leadership in a community because of the almost effortless riches they offer to some insiders);
  • potential loss of markets to competitors - in relation to which it is noted that primarily capital intensive industries (eg mass production manufacturing) have tended to migrate to low-wage regions since the 1960s, and this seemed likely to afflict mineral production at the end of the 1990s;
• Australia's efforts at economic reform from the 1980s had a primary goal of facilitating diversification away from dependence on commodity-based exports as that dependence combined with efforts to diversify through protectionist policies had led to a steady decline in Australia's per capital income by international standards for all of the 20th century. However market-liberalization reforms were inadequate (see Beyond Market Liberalization) because requiring people / enterprises to compete does not ensure that they gain the ability / support required to compete successfully in high productivity industries;
• the inadequacies of past reform efforts led to political difficulties as factions (especially in marginal regions) who were concerned about their poor economic prospects, but had no real idea of how to improve their position, gained significant electoral support (see Assessing the Implications of Pauline Hanson's One Nation). And similar political complexities may be re-emerging (The Parallel Between Bob Katter's Australian Party and Pauline Hanson's One Nation). Simple market-liberalization tactics also contributed to problems in achieving effective government, because the nature of 'governing' was not seriously considered (see Neglected Side Effects of National Competition Policies); 
• without the China-driven resources boom Australia could have taken a systematic approach to economic development seriously (eg as suggested in Lifting Productivity a Bigger Picture View and A Case for Innovative Economic Leadership). There have been various suggestions that an economic reform agenda is now needed (eg a focus on taxation, industrial relations and welfare was suggested in Thornton H., 'As storm clouds loom, miracles can disappear, The Australian, 5/6/12). However, while changes in government policies are necessary, there are other important options to improve productivity and competitiveness, as the latter are heavily affected by the competencies and level of development within industry clusters;
• similarly regional development does not need to depend solely on natural resource strengths (eg on mining and agriculture) - see Reinventing the Regions (2010);
• a 'big Australia' option is not necessarily economically beneficial (quite apart from its environmental implications). High rates of migration seem very likely to have been a cause of shortages of skilled labour, rather than being part of the solution to have such problems because of the very significant labour demand of 'migration industries' (see Developing Australia's Economy: The Economic Role of Migration, 2010+).

Australia's Federal Budget Surplus?

Finally it is noted that very few observers seemed to believe official claims about the federal government's 2012 budget achieving a surplus, as that surplus relied on projections of rapid global and domestic economic recovery that bore little relationship to what actually seemed to be happening in the apparently unstable and uncertain international economic environment characterised by risks such as:

• constraints on economic growth due to international financial imbalances, which: (a) constrain demand because of high and growing debts in deficit countries; and (b) have received no serious attention because of the complex cultural issues involved (eg see Waiting for Hell to Freeze Over? and Creating an Effective International Financial System?)
• a sovereign debt and political crisis in Europe (see Sovereign Defaults: Stage 2 of the GFC?);
• uncertain economic recovery in the US because of: (a) its apparent dependence on sustained quantitative easing / money printing; and (b) the risk of a ‘fiscal cliff’ which has the potential to lead to problems like those in Europe towards the end of 2012 [1];
• extremely high public debt levels in Japan, which are only sustained because a unique degree of social cohesion leads households to continue buying government debt;
• potential economic and political problems in China (as above);
• increasing uncertainty about the sustainability of the global commodity boom [1], noting:
  • the massive investment in new capacity worldwide, which history would suggest is likely to lead to a bust when demand eases;
  • concerns about Australia's competitiveness relative to other producers; and
  • corporate intentions to ease investment [1, 2, 3].

While this primarily raises the risk of financial crises and monetary policy methods have been used since the late 1980s to insulate the real economy from the effects of financial problems, these methods are approaching their 'use by' date (a situation that the US Federal Reserve seems to accept). The problem is arguably that those methods:

• were a significant factor in generating a GFC in the first place (see Impacting the Global Economy); and
• rely on boosting demand on the back of rising asset values in countries affected by current account deficits, and thus rising debt levels (see  Booms and Busts: Unsatisfactory Tools for Macroeconomic Management?). 

There are thus probably no counter-cyclical policy tools available (eg see Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems and Ending Policy Paralysis). And at the same time, as noted above, there has been essentially no attention to the structural causes of the international financial imbalances that render counter-cyclical policies ineffectual.

Thus a more realistic interpretation of Australia's 2012 federal budget in the light of the global economic crisis that is almost certainly emerging is that it is likely to constitute yet another unfunded stimulus package.

Developing Economic Game Changers - email sent 15/6/12

John Daley
Grattan Institute

RE: Economic game-changers ignored, Australian Financial Review, 13/6 12

Your article suggested that the Prime Minister’s Economic Forum should be judged by whether it identifies concrete government actions that will make a big economic difference, and that the Forum did not seem to have achieved this. In particular you drew attention to three overlooked initiatives identified in your Institute’s Game Changers report that might each add about $25bn to GDP (ie increased workforce participation by women and older persons, and a shift towards consumption taxes).

I should like to submit for your consideration that: (a) at least two (and perhaps many more) other potential economic game changers are being ignored; and (b) there might be value in developing Australia’s capacity to formulate such options independent of political considerations.

The ideas submitted to, and the priorities emerging from, the Economic Forum were outlined by the Prime Minister’s closing remarks.

Summary: While the economy is strong, there is a need (because of difficult global conditions) to deal with hard questions to boost jobs, growth and productivity. The Forum has raised issues related to: boosting confidence; structural shifts; high terms of trade / dollar; normalisation of wealth accumulation / consumption; population aging; investing in human capital; education systems; R&D; and proposals by the Productivity Commission; infrastructure; construction costs; collaboration across economy; the way in which technology is changing life / work / productivity and driving innovation; the deregulation / competition agenda under COAG. The Productivity Commission proposes 17 deregulation initiatives that might add $6bn to GDP. Skills development initiatives it endorses are underway (eg VET reform). Priorities for attention include: business tax reform (eg lower tax rates offset by other business taxes) through Business Tax Working Group; labour mobility (to match labour demand with excess supply in some areas through greater mobility eg by recognition of occupational licenses and different approaches by job-services); relating income support and training; small business training; and capturing the opportunities of the Asian century (eg by better people-people links and participation in global value chains). These ideas will be progressed through the manufacturing taskforce, the Business Advisory Forum and the Asian Century White Paper process.

While there is value in the initiatives suggested by your Institute and through the Prime Minister’s Economic Forum, two other potential economic ‘game changers’ are suggested on my web-site, namely:

• whole-of-economy actions that can’t be undertaken by government, but that could potentially add (say) 2% pa to GDP growth; and
• adopting a more Asia-literate approach to the possible Asian century than seems to be associated with the Asian Century White Paper process.

More generally I submit that there are limits to which democratic governments can deal with ‘game changers’ of any sort, because they are bound to stay close to what is already widely known and well accepted in the community (see Economic solutions are beyond politics, 1995).

Thus, just as major companies may need ‘skunk works’ to develop new innovations, there is arguably a need to improve Australia’s institutional capacity to develop and build understanding of ‘game changing’ policy options without such efforts being easily suppressed by established interests. Some suggestions about ways to improve the availability and acceptability of potentially ‘game changing’ inputs to business, the community and ultimately the political process are in Australia's Governance Crisis and the Need for Nation Building (2003+).

John Craig

Other Possible Game Changers

A Broader Approach to Economic Development

Government actions (eg through the legal and taxation systems and by the provision of goods and services) can make a positive economic difference if they support the market economy, or a negative difference if they (say) discourage initiative or economic change. However the support (or otherwise) that individuals and enterprises receive from within the market economy itself (eg from other enterprises) is at least as important (maybe twice as significant as) the support (or otherwise) that governments provides (as governments only account for about 30% of GDP).

The possibility of going beyond conventional approaches to microeconomic reform, ie by establishing mechanisms to accelerate the development of the capacity of industry clusters to support enterprises in pursuing market and technology driven opportunities is suggested in Lifting Productivity: Considering the Bigger Picture (2010). The latter refers to:

• empowering civil institutions to accelerate development of market economic systems (eg by strategic management methods suggested in A Case for Innovative Economic Leadership, 2009) - methods which: (a) require care to ensure market-responsive outcomes; (b) can’t work through democratically accountable institutions, because of the influences governments are established to be responsive to; and (c) would be most effective and satisfactory if the protocols under which they operated were democratically endorsed (as is the situation for companies under Corporate Law);
• breaking down the centralization that distorts and incapacitates the public institutions involved in developing infrastructure and encouraging economic development.

Over the past 2-3 decades emphasis has been placed on developing innovation systems as the best path to strengthening Australia’s economic capabilities. However, in reality, despite huge public spending Australia’s capability to benefit economically from innovation has not significantly improved because emphasis has been placed on what government could do (eg fund education / skills / research or provide ‘assistance’) rather than on developing the capability of the market economy to profit from innovation and thus provide viable and sustainable support to potential innovators and well-direct demand for education / skills and research). This point is further developed in: The Economic Futility of Backing Australia's Ability 2 (2004+) and Investing in science / innovation (2012).

Economic ‘miracles’ (ie rapid economic development and growth) in East Asia have been associated with methods to accelerate market-oriented economic learning by non-democratic elite-dominated states. An effective process to accelerate market-oriented economic development that can work in an egalitarian democratic context should be capable of adding at least 2% pa (ie about $25bn pa) to Australia’s GDP.

An Asia-literate Approach to ‘Asia’

A well-intended effort to explore Australia’s opportunities from engagement with what is seen as the ‘Asian Century’ is the subject of an ongoing white paper process (see website). However despite those good intentions the process seems to suffer from a lack of real Asia-literacy, and is thus unlikely to be particularly effective or beneficial.

For example, a summary of submissions on improving Asia-literacy (Improving Australians' Asia-relevant Capabilities) referred to: enhancing Australians ability to engage with people in Asia; language training; cultural literacy; the particular importance of China; and potential jurisdictional barriers. It also highlighted the fact that ‘Asia literacy is more than language fluency’.

However there was absolutely no indication of any real understanding of what ‘cultural literacy’ actually meant in the potentially-dominant societies in Asia (ie of the intellectual basis of East Asian societies with an ancient Chinese cultural heritage, rather than the West’s classical Greek, Roman and Christian heritage – and of the practical consequences of those differences).

An undoubtedly inadequate attempt to suggest what this means is in Babes in the Asian Woods (2009+). The latter suggests that, in relation to the East Asian states that have been most economically successful and are seen as potentially dominant, an 'Asian century' implies that intuitive, hierarchical and autocratic ethnic groups would prove better able to deal with ongoing economic and political challenges than rational / responsible individuals operating within the framework of individual liberty, a rule of law, democratic governance, freedom of speech and profit seeking enterprises that Western societies have adopted. Such societies take a quite different approach to epistemology (ie to the way knowledge is used - see East Asia in Competing Civilizations). They thus do not rely on rational / responsible individuals and or on institutional frameworks to reduce the limits to rationality that Western societies have adopted (eg a rule of law that allows individuals to make decisions without needing to second-guess the reactions of political and social elites / authorities). Thus effective participation in an ‘Asian century’ on the basis of East Asian traditions would be incompatible with Australia’s current social, economic and political systems (see also Autocratic Asian States and Australia's Economic Options).

Also it was recently reported that a member of the Asian Century white paper group (John Denton of Corrs Chambers Westgarth) recommended that Australia have closer law-regime ties with Asia (eg in terms of financial rules and corporate governance) – see Dodson L. Daley G., Greber J., and Massola J. ‘Dovetail laws with Asia, leaders told’, Australian Financial Review, 13/6 12.

One problem is that, while there are various legal systems in ‘Asia’, those in the region’s dominant economy do not provide rules that all citizens and the state are bound by (because, as noted above, there is no Western-style endorsement of universal values or rules). Rather selectively applied 'law' tends to provide one of the means whereby social elites ensure compliance by their subordinates. Australia’s legal system is derived from that in Britain and places both individuals and the state under the law. This is in marked contrast to the system of Roman Law which prevails in much of Europe – under which the state is legally prior to individuals and is expected to be concerned with the culture and functioning of the society as a whole. The not-inconsiderable difficulties of harmonising laws between British and Roman law systems would be trivial compared with those involved in dovetailing with those in neo-Confucian systems of socio-political-economy. There is a need for real understanding of the foundations of Asian ‘legal’ systems before dovetailing Australia's system into them can be sensibly discussed.

Moreover, while there is a need to harmonize Western and East Asia approaches to financial rules and corporate governance, it needs to be recognised that the systems adopted in East Asia seem to require suppressing demand and thereby played a major role in generating the international financial imbalances that contributed to the global financial crisis (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, Impacting the Global Economy and Creating an Effective International Financial System?). It seems highly unlikely that there would be value in ‘dovetailing’ Australia legal system (in terms of financial rules and corporate governance) into those in the currently-dominant economies in Asia – quite the reverse in fact (see Should Fixing the International Financial System Start in Asia?, 2011).

Significant economic pay-offs from a more realistic approach to Asia-literacy would include:

• avoiding costly mistakes - as suggested in Economic and Geo-political Risks from Asia-illiterate Policy Making. The latter refers, for example, to the large reduction in government revenues that is likely to result in an 'Asian' environment from  taxing mineral resources on the basis of profit (as the federal government recently decided to do);
• potentially allowing significant savings in defence expenditure - for reasons suggested by Broadening the Scope of National Security (in Comments on Australia's Strategic Edge in 2030). For example, traditional East Asian Art of War tactics are based largely on deception (including inhibiting others' understanding what is going on) - so real understanding provides huge potential advantages.

A Strategic Approach to Asia-Literacy provides some suggestions about what might be required to achieve this.

Rethinking Economics in the Light of the Global Financial Crisis - email sent 21/6/12

Victor Becker
University of Belgrano and University of Buenos Aires

Re: Rethinking macroeconomics in light of the U.S. financial crisis, Real World Economics Review, No 60, 20/6/12

I was interested in your paper because of my own speculations about the need to rethink macroeconomic management (see Booms and Busts: Unsatisfactory Tools for Macroeconomic Management). The latter pointed to the fact that Keynesian countercyclical fiscal policy action had lost credibility some decades ago (because of the difficulty of actually achieving counter-cyclical, rather than pro-cyclical, outcomes) and that its successor, countercyclical monetary policy, had been associated with the emergence of the asset bubbles that led to the global financial crisis (GFC).

In seeking explanations of the GFC I submit that it is more important to consider the character of financial systems which have led to international financial imbalances, than simply to look for defects in traditional macroeconomic theories about the stability of market economies. My reasons for suggesting this are outlined in  Structural Incompatibility Puts Global Growth at Risk (2003), Financial Market Instability: A Many Sided Story (2007), Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009) and Impacting the Global Economy (2009). Unless and until the problem of financial imbalances related to poorly developed financial systems is overcome, macroeconomic management based on either fiscal or monetary stimuli must just make the situation worse (eg see China and Japan Need to Do More Than Contribute to Europe's 'Begging Bowel').

In relation to the broader issues raised in your paper about economics, I should like to suggest that:

• the problem seems to be that economists have sought to regard economics as a science (like physics) with definite laws – whereas it might be better regarded as dealing with systems subjected to varying relationships. The latter point is suggested in Probable Breakthrough in Understanding Economic Development; and
• the role which money plays as a means of exchange and a store of value is constructive when it is subordinate to the ‘real’ economy (because it provides a means to facilitate rational decisions), but potentially damaging when separated from the ‘real’ economy (because it can then lead to the creation of complex feedbacks that inhibit rational decision making) – see Restricting the Role of Financial Services?.

I would be interested in your response to my speculations.

John Craig

Fixing Economics - email sent 22/6/12

Dr Geoff Davies

Re: Eight ways economists are getting it wrong, Business Spectator, 22/6/12

I noted with interest your suggestions about what is wrong with economics (ie inadequacy of GDP; poor performance in neo-liberal era; failure to consider debt; false ideas about equilibrium; collective inability to guess the future; limited rationality; ignoring market dominance and spill-over benefits to land-owners).

Some alternative suggestions are in Rethinking Economics in the Light of the Global Financial Crisis. The latter suggested, for example, that economics has been inadequate, not just in relation to assumptions about equilibrium, but more fundamentally in assuming that it should seek to be a ‘science’ concerned with discovering ‘laws’, rather than recognising that it is dealing with systems subject to varying relationships.

And in relation to the other points suggested in your article it is submitted that:

• While GDP (a measure of value added) is an inadequate measure, it also has advantages because: (a) value added does have an important role in resource allocation and driving economic change (eg see The Advantages and Limitations of Financial Criteria); and (b) the absence of concern for value added in the systems of socio-political-economy that have been the basis of economic ‘miracles’ in East Asia has played a significant role in the international financial imbalances that contributed to rising debt levels in their trading partners, and in the GFC (see Are East Asian Economic Models Sustainable?, 2009). The latter suggests that the failure to take value added (and therefore GDP) seriously is a major constraint on the sustainability of such systems in the longer term. Thus while GDP is an inadequate measure, it is none-the-less a necessary measure;
• The ‘poor performance’ in the neo-liberal era raises complex questions because:
  • globalization of market economic models shifted billions out of poverty in emerging economies in recent decades – so from that point of view performance was not poor;
  • neo-liberal policies were adopted in Western societies in the 1980s because state intervention (which sought to protect traditional industries or force a shift into ‘trendy’ new industries) was having a major negative effect on the diversification into viable new industries that was needed because of competition from Japan and the Asian tigers in capital intensive manufacturing – which until the 1970s had been the highest productivity sectors in Europe and North America;
  • neo-liberal policies were inadequate in practice because they required individuals / enterprises to be competitive without ensuring that the support required to do so existed or emerged (eg see Defects in Economic Tactics, Strategy and Outcomes , 2002; Impact of Economic Liberalism in Australia, 2002; and Probable Breakthrough in Understanding Economic Development, 2004);
  • the greatly increased size of economies (eg in East Asia) whose poorly developed financial systems required them to suppress demand so as to generate current account surpluses made sustainable global growth essentially impossible (see Structural Incompatibility Puts Global Growth at Risk, 2003 and Economic Recovery is Constrained by Dead Weight Economies, 2011);
• While failure to consider debt was a major problem, the failure to consider the character of financial systems (eg in East Asia) which depended on their trading partners being willing and able to take on every-increasing debts was an even bigger failure (see China and Japan Need to Do More Than Contribute to Europe's 'Begging Bowel');
• Our collective inability to foresee the future is the usual (Hayekian) argument favouring a market economy (as an alternative to central planning) – because it enables decentralised rational decision making to be synthesised into a reasonable coherent outcome. The ability to mobilize individual rationality (by the creation of supportive social arrangements, such as reliance on profit seeking enterprises) has been the foundation of Western strength in recent centuries (see Cultural Foundations of Western Strength). However there are alternatives – such as: (a) the methods deployed in East Asia through intuitive, authoritarian social hierarchies based on a modified version of Confucian traditions (see East Asia in Competing Civilizations); and (b) the methods suggested in A Case for Innovative Economic Leadership (2009) that should work in an egalitarian democratic environment;
• Market dominance and spill-over benefits need more consideration. However they all that have been ignored. The adverse effect of foreign investment on economic leadership in countries (such as Australia) that are ‘cursed’ by rich natural resources is arguably a more important limitation of a liberal market economy (see About the Curse of Natural Resources, 2004).

I would be interested in your response to my speculations.

John Craig

New Economics: Some Pragmatic Suggestions - email sent 30/6/12

Professor John Wiseman,
University of Melbourne

RE: Building the new economy: alternative strategies for the 99%, The Conversation, 29/6/12

I should like to provide some feedback on your account of the recent Strategies for a New Economy conference.

My interpretation of your article: CEO of New Economics Institute (Bob Massie) suggested that major social progress (eg democracy, women’s suffrage, civil rights, end of apartheid) resulted from changes in values, rather than from detailed policy recipes. Conference was intended to build on debate generated by Occupy movement. Links exist between European problems (where economic slowdown increases unemployment and inequality, while faster growth risks running out of planet) and US. Principles likely to lead to a more just, sustainable and democratic future include: (a) replacing corporate control of key economic / financial decisions with democratic institutions and practices noting: suggestions by Gar Alperovitz that financial problems facing US / Europe are mainly political; anger about unjust distribution of the costs of austerity; and options for regulatory / public ownerships solutions (eg as suggested by Institute for Local Self Reliance); (b) re-emphasising local rather than global production and distribution (especially for finance / energy / food) – noting the resurgence in US of local / community based enterprises, and a number of collaborative projects; (c) rapid shift from fossil fuels to renewable energy’ (d) shifting priorities from consumption of energy and materials to ecological sustainability, health and wellbeing. Bob Massie also noted: (a) the importance creating sustainable, long term meaningful jobs that are rooted in real place; and (b) that t the environmental community needs to demonstrated that prosperity can be created without the damaging side effects of growth.

While I am anything but an expert on how the desirable social and environmental aspirations reflected in the search for a ‘new economics’ will be achieved, I should like to put forward some suggestions in relation to the concluding comments by Bob Massie that your article referred to (ie about the need for pragmatic realism in giving practical effect to environmental aspirations and those of the Occupy movement).

Massie’s suggestion about this is particularly important.

In the past social progress could be achieved simply by engaging public support, because of the global economic dominance of democratic societies that would respond to such pressures. However this is not sufficient in an environment in which the economic foundations of democratic political systems (and thus their capacity to do what public opinion concludes is the ‘right thing’) are at risk. There is also a need to rebuild those economic foundations, ie to strengthen economic productivity and competitiveness and to end the escalation of private and public debts that arise where national aspirations (to consume and provide public goods and services) are greater than national income. This constraint is increasingly apparent in Europe – though it is not the only cause of concern (see Sovereign Defaults: Stage 2 of the GFC?) and will again become apparent late in 2012 when the US faces its ‘fiscal cliff’ (ie the need to either significantly impede economic activity by increased taxes / reduced spending, or to suffer a likely downgrade in the US’s credit rating in a decade of so). Moreover it is not only fiscal capacity that is being eroded, as it seems that:

• governments in Western countries are increasingly ineffectual – or at least this is the situation in Australia prehaps for reasons such as those suggested in Australia's Governance Crisis and the Need for Nation Building (2003+). The latter referred, amongst many other things, to the increasing difficulties democracies are experiencing in dealing with complex / highly interconnected problems;
• questions are being asked by some observers about what is needed to ‘save democracy’ (eg see Saving Democracy).

The other side of the eroding fiscal capacity of democratic societies is the increased financial status of non-democratic systems (eg China) that do not respond to what the 99% believes is the ‘right thing’ to do. In East Asia it is considered normal to ‘do things’ before / without getting agreement or announcing what is being done (as illustrated by China’s President in a 2003 speech to Australia’s federal parliament in which he referred enigmatically to building on points of agreement and not debating differences – see China as the Future of the World). Whereas western societies identify ideas before putting them into practice (eg by democratic debate), the reverse applies in East Asia, and the latter societies are given direction behind the scenes by social elites with the aid of their social subordinates rather than by public debate or the search by independent enterprises for profitable opportunities (see also What Does an Asian Century Imply?).

The concerns expressed by the Occupy movement (ie about poor economic opportunities for many and the consequences of financial crises - including the transference of banking losses to the public sector) are neither solely, nor even primarily, a consequence of the characteristics of democratic capitalism. There are many other factors involved (eg see Global Problems Need a Big Picture Perspective and World facing 'Crisis of non-Capitalism': Non-economist). The former referred to:

• the challenge to the economic status of developed economies (eg in Europe and North America) in the post WWII decades particularly by Japan and other economies in East Asia (eg by the so-called ‘tigers’ initially and by China since the 1980s as the latter adopted variations of the Neo-Confucian methods that had been the basis of Japan’s post-war economic ‘miracles’);
• the market liberalization strategies that were believed in the 1980s to be the best way to ensure the economic competitiveness and productivity needed to maintain good job prospects and a strong tax base in developed economies; and
• the international financial imbalances that: (a) arose largely because the systems of socio-political-economy that were the basis of East Asian economic ‘miracles’ would face crises if domestic demand were not severely constrained; and (b) thus required that trading partners be willing and able to continue increasing their debt levels if global economic growth was not to stall; and (c) contributed to the global financial crisis (GFC) – see also Structural Incompatibility Puts Global Growth at Risk, 2003; GFC Causes; Understanding East Asia's Neo-Confucian Systems of Socio-political-economy and Impacting the Global Economy; and Comment on the European Sovereign Debt Crisis.

As noted above, I am in no position to suggest how to achieve the desirable social and environmental goals reflected in the search for a ‘new economics’, however some partial suggestions which are limited to how economics may need to evolve in order to ensure that democratic governments retain the capacity to respond to pressures to ‘do the right thing’ in social and environmental domains are in:

• Fixing Economics – which referred, for example, to issues such as: whether economics is realistically regarded as a ‘science’; recent poor economic performance based on mainstream economic ideas; the need to pay more attention to financial systems; and ways to overcome the limits to rationality;
• Getting out of the economic quicksand – which suggested methods that democratic societies could use to counter the effect of what effectively amount to mercantilist economic tactics that have had the effect of escalating their debt levels.

I would be interested in your response to my speculations.

John Craig

Economics Beyond the Limitations of Science? - email sent 6/1/13

Justin Fox
Harvard Business Review

Re: The End of Economist’s Imperialism, Harvard Business Review, Jan 4, 2013

My attention was drawn to your article about the confusion amongst economists about their discipline, and would like to suggest a possible way to move forward.

My interpretation of your article: Economics used to be claimed to be the premier social science (eg by Edward Lazear, Stanford) – because it was scientific (ie involved stating formal refutable theories, testing them and revising theories based on evidence). Though it has been challenged (eg by behavioural economics - Daniel Kahneman, Princeton) this has have not prevented the mainstream view remaining central to economic management. The financial crisis and subsequent economic downturn have put a big dent in this – and Andrew Lo (MIT) found that there is massive disagreement about what this all means – which suggests that economics may not be a science. A scientific approach to economics does not work for once-off events – such as a financial crisis. Thus while microeconomics could follow statistical and mathematical paths, there is a need for dramatic change in macroeconomics (eg to include ethics, philosophy and politics) – according to Robert Skidelsky. This does not seem to be happening despite the efforts of Institute for New Economic Thinking. But those who study economics through other disciplines are bolder. Business historians are challenging economic orthodoxy (eg Dan Carpenter (Harvard), Greta Krippner, Tim Buthe and Walter Matti), as are anthropologists (eg Peter Fisher – Blackrock and David Graeber – Occupy Wall Street)

While the issues involved are complex, one option to revise the way economics is regarded is to recognise that there are limits to science (and thus to economics if it tries to be a ‘true science’).

The laws of physics (for example) seek to explain the future of a system based on knowledge of its initial state and time-reversible deterministic laws. Such laws (which do not allow any loss or gain of information) do not explain the qualitative changes that we can observe to occur in nature and society – and this strongly suggests that information / free energy / neg-entropy from a system’s environment is required to explain change (eg see Problems in an Internally Deterministic Scientific Worldview, 2004).

A possible implication for economics is that information /knowledge (which is validly seen as the key factor in economic growth) should not be treated as simply an input to a fixed production function (as growth theory traditionally does) but rather should be viewed primarily as a means for changing the production function (eg see Probable Breakthrough in Understanding Economic Development, 2004). The practical relevance of this in terms of economic competitiveness can be recognised because economic ‘miracles’ in East Asia have been based on a radically different way of thinking (one that does not recognise ‘laws’, and where the methods used to accelerate economic adjustment have involved stimulation of change in whole economic systems by the introduction of new information) – see East Asia in Competing Civilizations (2001+). And in China now, in response to nostalgia for the social equality of the Maoist era, it is pointed out that Mao was unable to ‘break any rules’ (eg ‘laws’ of economics) – see Communism Versus Confucianism: The Continuing Contest in China (2011).

In practice looking beyond the limitations of science would require an active (rather than a simply analytical) approach to economics (eg like the experiments with the development of industry clusters in the 1990s). Possible protocols to neutralize the limitations that democratic government imposes on achieving market-oriented economic ‘miracles’ are speculated (in an Australian context) in A Case for Innovative Economic Leadership (2009).

Some broader implications for economics are suggested in Rethinking Economics in the Light of the Global Financial Crisis (2012) and Fixing Economics (2012). These refer (for example) to: (a) the inadequacy of traditional economic management tools; (b) the need to pay attention to the character of financial systems (especially under neo-Confucian systems of socio-political-economy in East Asia) that have depended on the financial imbalances that were a factor in giving rise to the financial crisis and subsequent global stagnation; (c) the obstacles to success in Western-style economies that are created by complex financial systems; and (d) the inadequacy of market liberalization as a means for ensuring economic competitiveness.

In another article (What Will Make These Fiscal Showdowns Stop?, Harvard Business Review, Jan 2, 2013), you implied that dealing with the US’s fiscal challenges is simply a political problem. However developing a new approach to economics (and to other matters) is arguably required for a solution (see Progress Towards Ending the Global Financial Crisis?, 2012). The latter suggests (for example) that: (a) international financial imbalances need to be considered in relation to the fiscal crisis and subsequent economic stagnation; (b) these imbalances make changes to US fiscal policy almost irrelevant from a macroeconomic viewpoint; and (c) there are options that go beyond traditional monetary and fiscal policies to both reduce fiscal constraints and to promote sustainable global economic growth.

I would be interested in your response to my speculations.

John Craig

Comments on Dow's Advanced Manufacturing Plan for Australia (March 2013)

Dow's Proposals

In an address to Australia's National Press Club in October 2012 the Chairman and CEO of Dow Chemicals (Andrew Liveris) made a case for Australia getting its economic act together through  advanced / innovation-linked manufacturing.

Outline of Key Points in Address: China is suffering problems. Europe is in trouble. US is a brighter spot but is fragile; Australia has done well since 2008 – but this masked underlying weaknesses which are now being exposed by problems in manufacturing; resources sector prospects now seem weaker; there is a need for rapid action – eg in considering prospects of natural gas for domestic use rather than just for export; resources boom has distorted perceptions of Australia’s economy; trade deficits and household debt are negative indicators; the challenge is structural; manufacturing is important – in terms of jobs / value-creation / multipliers / innovation / productivity; Australia needs advanced manufacturing sector; this requires innovation; natural gas resources could be foundation for manufacturing renaissance through using it in advanced chemical processes to create high-value chemicals / plastics / composites / materials etc; this is what Dow does – but this is only possible where top level policies encourage value-added processes; many countries with hydrocarbon resources are developing comprehensive national manufacturing strategies – and implementing them; thus China is no longer a place where people do business, it is becoming a place where people create businesses. Other countries doing this are Singapore, Thailand, Saudi Arabia and Brazil; the US is also acting (eg via president’s Advanced Manufacturing Partnership); Dow has put forward and advanced manufacturing plan for Australia; natural gas can benefit manufacturing both as a source of energy and as feedstock; countries like Saudi Arabia and Canada can see this; Canada is working to add value to natural gas with reduced taxes; promoting partnerships and ensuring domestic supplies; the US is headed In same direction; Australia is not because 90% of natural gas is exported; natural resources should be seen as foundation for competitive advantage – but Australia is contracting local supply by encouraging exports; the cost of constricted supply exceeds the benefits of exports; it is time for a change.

This presentation related to an Advanced Manufacturing Plan for Australia the Dow has produced (in addition to parallel plans for the US, Europe and Kenya). Key point in a synopsis of that plan are outlined below.

Key Points in AMP-Aus: Synopsis: Australia has problems with employment; exchange rates; competitiveness; and manufacturing productivity. A shift to a balanced sustainable economy is needed – and an advanced manufacturing base creating high value-added products could be part of this. Comparative advantages need to be considered. Strategic priorities include: (a) value-add to resources; (b) renewable / alternative energy; (c) water management; and (d) medical / agricultural sciences. AMP-Aus involves: maximizing value added from energy feed stocks; boosting innovation and access to capital; education and attracting / retaining talent; real business / government partnerships; access to critical markets. Key themes of AMP-Aus include: (a) national energy strategy to enable advanced manufacturing (as well as conservation / boosting renewables; transition to sustainable energy; and reducing GHG issues) which ensures balanced / diversified use of Australia’s hydrocarbon resources; (b) promote innovation by increasing R&D spending to match / exceed OECD levels and improve commercialization capacity (eg by overcoming limited capital access and regulatory barriers); (c) high level process for education and skills development – especially related to science, technology, engineering and management ; (d) improved trade prospects via bilateral agreements (eg with China / India / South Korea and the Gulf Cooperation Council) / regional trade agreements (eg building off APEC) / better approach to anti-dumping system; and (e) forming public private partnerships so as to promote collaboration in identifying priority industry sectors and develop strategies to propel future technologies into the market place. PPPs and an efficiently operating free market do not have to be mutually exclusive. PPPs could be useful in relation to: strategic priorities; research collaboration; commercialisation potential and infrastructure.

CPDS Comments

There is no doubt about the need for a significant transformation of Australia's economic capabilities as Dow suggested (for reasons suggested in Lifting Productivity: Considering the Bigger Picture, 2010+). However more consideration is needed of the methods by which this can be achieved because:

• the present writer had the opportunity to study international debates about such options over several years, and to experiment with several practical projects in the 1980s (see CV). Methods such as those outlined in Developing a Regional Industry Cluster: A Possible Generic Process (2000) were used with reasonable success in enabling diverse / complementary market participants to discover value in particular options and potentially take commercial initiatives. The following observations are based on reflection on that study and experience;
• Though there were some apparently successful public private partnerships for the development of industry clusters in the US in the 1990s, there are constraints on the ability of such partnerships to boost economic productivity in a democratic context (eg see Keep Politics out of Economic Strategy, 2011 and Economic solutions are beyond politics, 1995). The latter points to the fact that there is not only a problem with rent seeking but that commercially viable / economically productive opportunities will tend to require leading edge / complex knowledge and this will not be widely known (or else the opportunity would not be profitable / productive) and thus genuinely profitable / productive options won’t tend to be politically understood / accepted - but the democratic process may none-the-less tend to force outcomes to converge on options that are understood. The issues raised in  The Industry Policy Debate: a brief introduction (1997) and The Seven Secrets of Failure (2000) are still relevant. All of the options that are mentioned in AMP-Aus are probably worth considering and perhaps acting on – but the actions that are taken need to be market-driven if they are to contribute to improving productivity (eg capital needs to become available because there are profitable opportunities, rather than because it is mandated to be available). Unfortunately most attempts that have been made to achieve similar goals in Australia over the past two decades have failed because the actions taken were politically-motivated ie driven by public resources in giving effect to the good intentions of interest groups, rather than by the more-economically-sustainable demands of their potential customers (eg see The Economic Futility of 'Backing Australia's Ability 2', 2004);
• The methods that have enabled more-or-less successful industry policy to be used in selecting and implementing strategic targets in East Asia have been based on entirely different cultural traditions (see East Asia in Competing Civilizations). The key feature of those traditions is that there is little reliance on abstract understanding (which was a problem-solving tactic that Western societies inherited from their classical Greek heritage) and power is associated with position in a social hierarchy rather than with making decisions. Thus more-or-less market oriented consensus could be bureaucratically-orchestrated without being over-ridden by overly-simplified political understanding. However the financial systems used for resource allocation under those traditions led to imbalances and distortions that affected both:
  • the countries involved (eg see Are East Asian Economic Models Sustainable? 2009; Japan’s Predicament; and China: Heading for a Crash or a Meltdown); and
  • their trading partners (see Structural Incompatibility Puts Global Growth at Risk, 2003+; Impacting the Global Economy, 2009; and Debt Denial: Stage 3 of the GFC?);
• A Case for Innovative Economic Leadership (2009) put forward some suggestions about how innovation capabilities might be improved (or other strategic options explored) in a democratic context – by democratic endorsement of protocols for industry-cluster-oriented partnerships without direct political involvement. This involved something like the creation of a legal framework for companies, rather than expecting that government itself would be involved in running companies. Political support (ie the endorsement of interest groups) should be sought after a market-oriented ‘vision’ exists as part of a process for stimulating initiatives within a market framework – rather than being allowed to distort the formation of that ‘vision’ or dictate the initiatives to be considered / taken. The document also included speculations that the following strategic opportunities might be worth considering:

“The methods suggested here have relevance beyond the development of innovation systems. For example they might constructively be used in Australia's case to explore options for strengthen industrial clusters related to: agribusiness; functions linked to mineral and energy resources; globally-oriented small and medium enterprises; existing embryonic industry clusters in various regions; opportunities in Asia and emerging economies; and functions linked to solving social and environmental challenges “ (see Beyond Innovation Systems).

The methods for accelerating economic development in Australia that are mentioned above were being developed within Australia’s bureaucracies in the 1980s – but this prospect was demolished when ‘reforms’ were introduced to make public services more politically responsive (ie to ensure the dominance of ‘yes men’ and thereby inadvertently eliminate governments’ access to any reality-check on foolish policies) and ‘efficient’ in the provision of public goods and services. That ‘reform’ process not only eliminated the prospect of significantly improving Australia’s economy but also contributed to a couple of decades of very bad / wasteful government (eg see Decay of Australian Public Administration, 2002 and Reforming State Governments: Does Queensland's Commission of Audit Have the Answer?. 2013). 

Australia not only needs to develop a balanced sustainable economy, but also to create a competent system of government. What the latter might require is suggested in Australia's Governance Crisis and the Need for Nation Building (2003+).

'Australia's Competitiveness': Some Suggestions - email sent 14/5/13

Professor Michael Enright
University of Hong Kong

Professor Richard Petty
Macquarie Graduate School of Management

I should like to offer suggestions in relation to the worthy aspirations of the book that you recently wrote in collaboration with CPA Australia (ie Australia’s Competitiveness: From Lucky Country to Competitive Country). A brief scan of the synopsis suggests that it is likely to contain useful information and ideas.

However similar information and ideas that were up-to-date at the time were advanced in the 1980s, and while Australia’s economic competitiveness and resilience has since improved as a consequence of market liberalization, there has been no fundamental or adequate breakthrough.

This implies the need to do things differently and better this time.

Progress has arguably been frustrated by weaknesses in Australia’s institutions that arise partly from its ‘Lucky Country’ heritage. Thus I would suggest that success in achieving the goals you advocate requires:

• a strong focus on the effectiveness of economic systems / industry clusters as a whole (rather than on particular opportunities or elements of those systems / clusters);
• the use of methods that are likely to result in practical market-oriented initiatives (rather than in politically-motivated programs and rent-seeking) – which requires that Australia’s civil society take responsibility for achieving those outcomes, rather than lobbying governments to take that responsibility; and
• simultaneous efforts to strengthen the foundations of Australia's economy by promoting: more effective and efficient government; a capable / responsible community; and better access to strategic intelligence (especially in relation to Asia).

These suggestions are elaborated on my web-site, and I would be interested in your response.

The alternative I suspect is to continue down the self-destructive path towards the 'banana republic' that Paul Keating foresaw as Australia's future.

By way of background I note that I authored one of the early proposals for diversification of Australia’s economy from reliance on existing comparative advantages (which had long been based on natural resources) by the development of knowledge-based competitive advantages (Towards a Strategy for Technological Development in Queensland, 1983). I also had the opportunity over several years to study international debates about economic strategy and experiment with several initiatives that suggested ways to make practical progress - and have followed subsequent progress and debates.

John Craig

Making Australia's Competitiveness Everyone's Business - email sent 20/5/13

Alex Malley
CEO, CPA Australia

I have been privately advised that CPA Australia is taking the constructive view that boosting Australia’s competitiveness is ‘everyone’s business’ and that there is a need to ‘get on with it’.

That feedback followed my email ('Australia's Competitiveness': Some Suggestions) which had commented to Michael Enright and Richard Petty on their useful research into competitiveness indicators and requirements in conjunction with CPA Australia.

I should like to provide further feedback in relation to ‘making competitiveness everyone’s business’ and on CPA Australia’s suggestions in response to that research (eg in CPA Australia's call to action) and CPA Australia’s response to the 2013 federal budget (eg in Forget the Minutia – where is the vision?).

Unfortunately it seems unlikely that what is currently being done will be sufficient to achieve a major breakthrough, because:

• Over about a decade in the 1990s I sought to engage business associations in Queensland in taking action to address competitiveness issues – and their response was always limited to lobbying governments about what the latter should do. This lobbying potentially generated benefits for business at the expense of the community generally, and was quite unlikely to significantly boost competitiveness. My previous email had suggested reasons to expect that democratic governments (which were created to stabilize society and redistribute wealth) would be, and have proven to be, incapable of doing what is needed. Governments’ most useful contribution under past economic reform agendas (which featured market liberalization) was to stop doing what they had been trying to do to help in the past;
• It is not at all clear that the apolitical working groups that are needed to stimulate real-world initiatives are being established. CPA Australia’s primary target for distributing Australia’s Competitiveness: From Lucky Country to Competitive Country seems to have been Australia’s political leaders – which again runs up against the fact that a key obstacle to boosting Australia’s competitiveness over the past 2-3 decades has been the expectation that it is the political system that needs to take the lead in doing this. Though it is understood that the competitiveness research and the need for action have also been circulated to and discussed with business groups, unless the constraints on what the political system can do are made clear to business those groups are likely to continue to see lobbying governments as the limit of their responsibilities;
• CPA Australia’s well-intended responses to research into the requirements for competitiveness seem to suffer from some technical weaknesses. For example, those responses:
  • Implied again in any information made available to the public that lifting Australia’s competitiveness primarily required political decisions (eg that the federal budget should provide the plan to achieve this);
  • Welcomed the budget’s extra $9.8bn for schools – though that program seemed to have been very poorly considered (see National Plan for School Improvement: An Example of Bad Policy?);
  • Endorsed the federal government's involvement in regional infrastructure investment and the role of Infrastructure Australia in identification of projects – though such actions further contribute to the obstacle to effective and efficient government that are implicit in Australia’s extreme federal fiscal imbalances (see Infrastructure Magic?);
  • Suggested the need for significant investment in support of the goals of the Australia in the Asian Century White Paper – though the latter seemed quite naïve (see Strategic Intelligence, Australia in the Claytons Century and The Infantile US vs China Debate).

John Craig

Beyond Strategic Navel Gazing - email sent 24/5/13

Rob Burgess
Business Spectator

Re: Partisan Stories leave Australia defenceless, Business Spectator, 23/5/13

Your article is spot on in relation to the lack of attention to Australia’s strategic position in the introspective and partisan approach that is being taken to the 2013 federal election. However, while the risks that you outlined are all too real, the situation is even more complex (eg see Fasten Seat Belts: Rough Weather Ahead).

My interpretation of your article: The lead up to 2013 election will be divisive and inward looking – though Australia’s fortunes are being determined externally. Recent attack in London by so-called Islamists could stir racist reactions. So much emphasis has been placed on budget cuts, that international context has been ignored. Conservatives don’t acknowledge that GFC was the major recent global economic event, and isn’t over. Progressives give little credit to China’s role in getting Australia through this. If our biggest customer had not been a centrally planned economy willing to pull out all stops, nothing Labor could have done would have saved us. Abbott plan won’t save us, as Australia has become a virtual casino for global traders looking for solid assets in a world awash with newly minted money. QE is keeping $A high and undermining Australia’s exporters. And there is a risk of a new bond bubble that could lead to a ‘new GFC’. ABARE has declared the resources ‘super cycle’ dead. Southern Europe is on crisis point – with 50% unemployment. Disaffected youth will be easy to radicalize. While northern Europe is doing better, it is in no position to resume its role as China’s biggest customer (so China’s manufacturers can continue to pay high prices for Australia’s commodities). China’s official 8% growth data shows that mandated investment and consumption can’t go on forever. Market forces luck below the surface of any centrally planned economy. But neither party can win votes by acknowledging this. Andrew Bolt’s ‘solution’ is to slash migration – though this would crash housing market and eliminate young population to care for aged. 2014 will be a horrible year for whichever party wins government.

The biggest issue that is being overlooked is arguably that China (which kept Australia’s economy afloat as a strong customer for the first few years of the GFC) is anything but a ‘centrally planned economy’.

Rather, like Japan, China has a neo-Confucian system of socio-political-economy (though in China the central catalytic role has been played by the so-called Communist Party, rather than by the bureaucracy as it was in Japan). And that system not only accounts for the economic ‘miracles’ that have been achieved in East Asia, but also for much (though not all) of the global financial and economic crises and disruption of recent years because the neo-Confucian systems involve investment on the basis of elite consensus rather than calculations of expected return on capital (eg see Evidence; Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009; Impacting the Global Economy, 2009; World facing 'Crisis of non-Capitalism': Non-economist, 2011; and The Infantile US vs China Debate, 2015).

The second biggest issue that is being overlooked is that Japan (Australia’s second biggest customer) could well be on the point of national ‘bankruptcy’ because of its neo-Confucian financial arrangements (see Japan's Predicament). And while China’s position is not yet quite as bad, it faces a far broader range of obstacles (see China: Heading for a Crash or a Meltdown).

If any attempt had been made to understand how East Asian systems worked, it would have been obvious for years that the favourable international financial imbalances that are required to reduce the risk of financial crises in neo-Confucian systems were likely eventually to disrupt the global economy and thus Australia’s ‘stronger for longer’ resource boom (see Structural Incompatibility Puts Global Growth at Risk, 2003; GFC Causes, 2008; The ‘Bigger, Longer and Better’ Resource Boom Hypothesis; 2010, and Counter-cyclical policy can't solve structural problems, 2011). Unfortunately ‘strategic navel gazing’ has long been seen as all that a ‘Lucky Country’ needs (see Inadequate Intelligence and Strategic Assessment, 2003+; and Babes in the Asian Woods, 2009+).

Some suggestions that may be relevant to dealing with the politically-ignored crisis that now seems likely in 2014 are in A Nation Building Agenda (2010); Comments on Australia's Strategic Edge in 2030 (2011); and 'Australia's Competitiveness': Some Suggestions (2013).

John Craig

Australia's Hazardous Foreign Liabilities in an Unstable International Environment - email sent 27/6/13

Kellie Tranter

Re: Lurking beneath Australia’s AAA Economy, Online Opinion, 25/6/13

Your article raised concerns about the risks associated with Australia’s very substantial foreign liabilities in an environment in which it will be much harder to attract capital inflow to roll over existing liabilities and balance Australia’s persistently-large current account deficits.

My interpretation of your article: A recent article suggested that Australians are worried about the financial crisis. Do they have more sense of what lurks below Australia’s AAA economy than the country’s pundits? Gross debt is often noted to be $255.7bn, but few mention gross foreign liabilities. Australia’s gross foreign liabilities (public and private) are $2.224tr, while gross foreign assets are $1.347tr (including uncertain derivatives). Australia has had current account deficits since 1980s. We spend more than we earn. The net international financial position is not strong and the gross foreign liabilities are alarming. Banks are the mediators between foreign lenders and Australia’s spenders. If there is a world-wide recession banks could be called to pay up. The banks have borrowed short (overseas) and lent long (eg for mortgages). The IMF warned government in 2009 to minimize borrowing in case it needed to bail out the major banks. Professor Ross Garnaut suggested in 2009 that the big Australian banks were essentially insolvent at the time of 2008 crash – because of problems in rolling over their huge external debt. The fact that government then stood behind them has reduced their need to be responsible. Professor Garnaut now argues that end of mining boom requires Australia to get cracking on other industries that Australia is going to get growth from. Specialised manufactures and non-resource tradables as well as a reduced exchange rate and import replacement are needed to lower the current account deficit. But reform is not currently likely. There are uncertainties about Australia’s foreign liabilities related to: derivatives; and borrowings by Westpac and NAB from US Federal Reserve at the height of the financial crisis. The RBA has set up a $380bn bailout fund in case banks are insolvent or illiquid. This suggests that it realizes there is a possible problem. However that might not be enough.

A parallel speculation appeared on my web-site in 2008 (see Defending Australia from the Financial Crisis?). The problem that appeared likely at that time was averted because strong fiscal and monetary policy responses elsewhere (especially in China and the US) maintained demand for Australia’s commodity exports and capital inflow.

You validly endorsed Professor Garnaut’s view that because the international environment is changing Australia needs to get cracking on "the other industries we're going to have to get the growth from".

Some suggestions about how the development of new high value-added tradeable industries might have been accelerated are in Lifting Productivity: Considering the Bigger Picture (2010). However it will probably be much harder now to put such innovative tactics into practice as the international economic environment is unlikely to be supportive (see Credit Bust First: 'Sixth Revolution' Later, 2013). Countercyclical fiscal and monetary policy measures that kept the global economic boat afloat were not sufficient or sustainable in the face of fundamental structural obstacles (eg see Counter-cyclical policy can't solve structural problems, 2011). There has been little progress towards making global economic growth sustainable, and those primarily counter-cyclical responses have arguably; (a) escalated the financial / economic risk; and (b) almost reached their ‘use by date’.

I would be interested in your response to my speculations.

John Craig

You must be psychic - email sent 22/8/13

John Quiggin

Re: The land of the long white mirage, Inside Story, 21/8/13

Your article suggests that Abbott and Hockey believe that NZ’s economic strategy has been excellent and worth copying. You are better than me. I have been quite unable to deduce anything about their economic logic.

However they are going to be confronting a very difficult (perhaps impossible) economic challenge in the next year or so (assuming that they get elected) because the factors that have made Australia’s economy look good (ie a commodity boom and very low federal government debts) seem to be unwinding. I strongly suspect that the global economy is finally going to go into reverse because debt levels can’t be increased indefinitely (see Debt Denial: Stage 3 of the GFC?) and that Australia’s economic dependence on the ‘stronger for longer resource boom’ hypothesis will prove to have been unwise (as suggested in 2011 in Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?). And, even though Costello engineered a near zero net federal debt on the basis of strong capital gains tax receipts in the early stages of the China boom, it seems that the federal government already had a structural deficit the last time the Coalition was in power (because boom-time revenues were committed to ongoing tax reductions and middle class welfare) – see The Long Term Impact of the GFC. And politics since then (from both Labor and the Coalition) seems to have been focused on increasing that structural deficit – even before the risk of a revenue collapse associated with the end of the China boom became apparent.

Boosting productivity is going to be vital to avoid an economic, fiscal and political crisis. I don’t see any sign that either Labor or the Coalition has the slightest idea how to achieve this. And the external environment is unlikely to allow even the best tactics that might have been used under normal circumstances (see some speculations) to be effective.

Whoever wants to be in government in 2016 would probably be well advised to do their best to avoid getting elected on September 7^th.

John Craig

The most difficult five years except for the next Five?? - email sent 22/8/13

Fabrizio Carmignani

Re: Doing the Maths on the Coalition’s Job Figures, Business Spectator, 21/8/13

Your article suggested that there was nothing ambitious about the Coalition’s claim to create 2m new jobs over the next 5 years. This is valid so long as it is presumed that similar outcomes were achieved under Labor “during the most difficult economic time since the Great Depression”.

However it seems to me to be likely that the most difficult economic time since the Great Depression has not happened yet because measures put in place to deal with the global financial crisis provided a temporary boost to economic activity while doing nothing about the underlying problems (especially the structural international financial imbalances that make continually escalating debts by countries with current account deficits an essential, but unsustainable, foundations for growth in the global economy).

Some reasons for suggesting that the next few years are likely to be far more challenging (so that creating 2m new jobs, or perhaps any net new jobs, may be essentially impossible under any government) are outlined in the attached email.

John Craig

Stimulating Practical Action on Productivity - email sent 1/9/13

Christopher Findlay
University of Adelaide

Re: A more sustainable Australia: let’s get creative about productivity, The Conversation, 29/8/13

I should like to make some ‘left field’ suggestions in relation to your article about a creative way to boost Australia’s productivity.

My interpretation of your article: Productivity is now important. But what drives it? Labour and capital productivity have been declining. Incomes grew faster than labour productivity because export values have risen faster than imports. With this now falling there is a need for 3%pa productivity growth. Productivity requires innovation and churn (ie strong performers to replace weaker). Churn depends on incentives for, and resistance to, change. There is a rich agenda for policy reform (eg from Productivity Commission and Asian century White Paper). Issues include: incentives (eg trade policy); capability (eg education policy); and flexibility (eg workplace regulation). Innovation requires doing things differently. Businesses break up their operations as they shift functions around the world (and some functions might suit Australia). Successful firms respond to market changes. Innovation comes partly from within firms, and partly from whole communities (ie from absorption of externally generated knowledge). The institutions and forces that create / transmit knowledge are thus important. Governments can change performance with subsidies, but can’t get value for money. Some call for company clusters to promote information sharing – but specific selection of business is unlikely to succeed. It is better to focus on removing impediments to generating / transferring ideas. This suggests a focus on: cities, universities and research funding. Cities contribute through interaction amongst people – but some are better than others, and why requires attention. Universities play a key role as information brokers (between raw and applied knowledge). In universities, funding systems matter. Currently universities are funded by students – and this supports research. But teaching-only universities may alter this. More direct public and private research funding will then be needed.

My basic suggestion is embodied in a number of documents on my web-site (namely A Case for Innovative Economic Leadership, 2009; Lifting Productivity: Considering the Bigger Picture, 2010; Fixing Economics, 2012). However it needs a little explanation. It also needs enhancement as proposed more recently in 'Australia's Competitiveness': Some Suggestions (2013) - eg by measures to make governments more effective, reduce social dysfunctions and improve access to strategic intelligence about an increasingly difficult international environment.

Your article referred to numerous possible options to improve Australia’s productivity through innovation (eg the proposals in various reports, and measures that would boost information interchange).

However, while there are policy options to improve the situation that can be identified through various studies, the most effective way to identify and implement productive changes would probably be through a process of ‘strategic management’ / ‘indicative planning’ in a market context. This would involve stimulating / enabling all components of various industry clusters and regional economies to identify the options available to themselves to benefit in taking advantage of major (market or technological) opportunities that seem plausible to those with a leading role in those clusters / regions. How this might be achieved to speed ‘learning’ / development within such clusters / regions was outlined in A Case for Innovative Economic Leadership. Experiments with the use of such methods have been reasonably successful in the past – though experience also shows that productivity gains are unlikely if political ‘push’ is able to dominate over market ‘pull’ in determining outcomes (see Creating a Fertile Environment for Innovation Requires Politics to Take a Back Seat).

The goal of such processes would be real-world opportunity-focused market-driven action / initiative, as well as identification of additional supportive policy options for governments to consider.

The alternative (ie relying on studies of the requirements for boosting productivity / innovation capacity in the abstract and the deliberation of committees) would be neither able to take account of real world considerations that are unknown to analysts / committees nor mobilize constructive and complementary real-time initiative. The importance of complementary / simultaneous initiative within different segments of an industry cluster / regional economy can’t be overstated. As your article highlighted, innovation depends not only on what happens within an enterprise but on support from its economic / regional environment. For example a key feature of a region that can support innovation will be a large pool of people with various types of experience relevant to the successful development of innovative businesses. Individual enterprises acting in isolation can’t create the support systems on which their ability to succeed depends. Creating scope for complementary and simultaneous initiative potentially overcomes such ‘chicken and egg’ constraints.

Merely removing constraints on initiative by enterprises / individuals has been the main thrust of Australia’s efforts to boost economic productivity in recent decades, but has been insufficient (see Review of National Competition Reforms: A Commentary, 2004).

I would be interested in your response to my speculations.

John Craig

Achieving Stronger US Export Growth Perhaps Requires Rethinking Economics - email sent 22/10/13

Diane Schumaker-Krieg
Global head of Research, Economics and Strategy
Wells Fargo Securities, LLC Economics Group

Your group’s recent analysis suggested that US export performance primarily depended on the strength of growth in trading partners' economies and on exchange rates, and that seeking better international trade agreements would be the most useful policy option. However this presumes that nothing can be done to alter international competitiveness – an assumption that, though valid under mainstream economics, may not actually be correct.

Conclusion in 'Can America Achieve Stronger Export Growth?'

"Following the bounce that occurred when the global economy pulled out of the deep 2008-09 downturn, U.S. export growth has slowed over the past two years as economic growth in many of America’s major trading partners has turned sluggish. Because foreign economic growth and the real value of a nation’s currency are the primary determinants of its export growth, stimulating economic growth in the rest of the world and depreciating the dollar would be the most effective ways to accelerate American exports. Unfortunately, these variables are largely beyond the ability of U.S. policymakers to effect.

Perhaps the best way to bring about stronger export growth would be to successfully conclude the U.S.-E.U. Free Trade Agreement as well as the TPP. Our analysis shows that the economies of developing Asia and the advanced economies, which include the individual countries of the European Union, represent export opportunities for U.S. exports. Unfortunately, these trade agreements, should they be successfully concluded, would not go into effect for years. In the meantime, U.S. export growth will continue to limp along if, as we expect, economic growth in the rest of the world remains lackluster.”

The productivity and competitiveness of an enterprise can be increased by innovation – ie by gaining the higher value added that can often be associated with emerging market-attractive products and services in the interval before they can be provided by competitors. It is submitted that (providing great care is taken) that it is possible to achieve similar transitory gains by systematically stimulating market-oriented and apolitical learning / adjustment within industry clusters / economic systems as a whole. How this might be achieved is suggested in Developing a Regional Industry Cluster (2000), which describes a generic process in a very rudimentary way, and A Case for Innovative Economic Leadership (2009), which makes a case for using that generic process in relation to specific requirements for economic development in an Australian context. The former includes suggestions about the ‘secrets of failure’ (which include many conventional ‘industry policy’ tactics), while the latter points to the breadth of potential areas in which the suggested generic process could be used.

Some comments on the implications of this for economics generally are in Fixing Economics (2012) and Probable Breakthrough in Understanding Economic Development (2004). In brief these suggest the economics conventionally seeks to be a ‘science’ like physics and thus to ‘understand’ how an economy works, whereas the real challenge (and the key to economic development / competitiveness) is to ‘change’ the way that it works. While change can be achieved through the initiative of individual enterprises, such initiative can often be constrained by the absence of support from the rest of an industry cluster / economic system as the latter’s support may not exist until large numbers of enterprises exist who demand that support. Overcoming such ‘chicken and egg’ constraints is the potential advantage of the methods that I have suggested.

Something like this seems to have been foundational to the achievement of catch-up economic ‘miracles’ in East Asia in recent decades - because of radically different ways of thinking and using information in such societies (eg see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy).

Another option to boost US export performance is arguably to draw the attention of international economic forums to the non-transparent trade-distorting financial systems that have been part of East Asian economic ‘miracles (see Resist Protectionism: A Call That is Decades Too Late, 2010 and China may not have the solution, but it seems to have a problem, 2010+).

I would be interested in your response to my speculations.

John Craig

Can America Achieve Stronger Export Growth? (email from Wells Fargo Economics Group, 22/10/13)

After strengthening sharply in the immediate aftermath of the global recession, U.S. export growth has slowed over the past two years, as global economic growth has downshifted. If our forecasts of global economic growth and the real value of the dollar come to pass, then our model suggests that real exports of U.S. goods and services will grow roughly 7 percent per annum in 2014 and 2015. Although these forecasted growth rates are twice as strong as the 3.5 percent rate that was registered in 2012, they are well short of the 15 percent per annum growth rates that are needed to reach the goal of doubling U.S. exports in five years that President Obama set nearly four years ago. Is there anything that policymakers can do to achieve stronger growth in U.S. exports?

Doing More for the Car Industry - email sent 4/11/13

Tony Weber
Federal Chamber of Automotive Industries

Re: Car loss would be devastating, Financial Review, 4/11/13

Your article pointed to the costs to Australia’s economy if car manufacturing were to cease (eg in terms of investment, employment, skills, training, technology transfer, research – as well as spillovers to other sectors).

I should like to draw your attention to the apparent rationale that seems to be the basis of the Communist Party’s willingness to sustain an ongoing process of heavy industrial / infrastructure investment in China – even though individual projects may not meet normal financial criteria (see Outline of 'Rise of the Ferro Dollar'). This refers both to the sorts of ‘real economy’ impacts that your article mentioned and to the synergies between various functions that can be created but are not captured in the accounts of any particular undertaking.

However it also seems likely that those benefits (while real) will not prove sufficient to compensate for the rapidly escalating debts that the Chinese state is accumulating in under-writing such efforts.

The latter link includes reference to alternative methods of promoting additional economic value-adding within industry clusters that could be used without reliance on state transfers and might usefully be considered in relation to Australia’s car industry (see A Case for Innovative Economic Leadership )

I would be interested in your response to my speculations.

John Craig

Reform: It's Not That Easy - email sent 16/12/13

Professor the Hon. Stephen Martin
CEO CEDA

Re: Stop the reviews, start the reforms, Business Spectator, 16/12/13

I should like to suggest that the ‘reforms’ that are needed are not as obvious as your article implied. Others have pointed to the morass of ‘reviews’ that the federal government risks getting bogged down in – and some comments on why this is probably inevitable with the poor institutional support that Australia’s political system has available are in The Choice Between Evils that Governments Now Face: 'Process Addiction' or Bad Decisions

Everyone knows what reforms are needed from their own point of view. In an election campaign candidates seek to be ‘all things to all people’ to build support. But in government they can discover that there are many different significant viewpoints that need to be taken into account. And unless there is existing machinery to deal with this (eg a professional public service or effective communication / coordination amongst well-developed civil institutions so that there are no major surprises in store), these differences can make the direction of reform that is needed much less obvious than it previously seemed. The more complex the situation is the more this is a problem.

For example some of the issues mentioned in your article are arguably not as simple as you implied.

Taxation reform is vital. But if the shambles that Australia’s system of government has become is to be overcome, a primary focus of such reform needs to be on overcoming federal fiscal imbalances (for reasons suggested in Fixing Australia's Federation, 2010). However many analysts who have been concerned with taxation reform do not seem to have considered this dimension.

Increasing innovation has been an obvious priority for diversification of Australia’s economy for the past 30 years. Yet little has been achieved because attempts to create an environment for innovation have been politically motivated and politically driven. The greatest obstacle to innovation has been and remains the lack of commercial competencies and organisation to support innovative individuals / enterprises. Where attempts are made politically to overcome such obstacles the result tends to be government ‘assistance’ of various sorts – whereas what is needed is real economic development (which government ‘assistance’ impedes). How real development might be achieved was suggested in A Case for Innovative Economic Leadership (2009). A key requirement for success is that the political system creates an environment in which apolitical market-oriented leadership across industry clusters / economic systems as a whole is possible. The things that government itself can do are of much less potential benefit.

The car industry is an excellent example of Australia’s failure to develop an environment supporting innovation. However this failure needs to be viewed in context. Manufacturing was the highest productivity economic sector in the early 20^th century – and was the core of highly developed economies. However from the 1960s this started to be challenged as low wage economies developed the skills required to support capital intensive production and obtained the capital (by savings or foreign investment) to capture markets for manufactures. This led to the phenomenon of de-industrialization in Europe and North America in the 1970s and 1980s – and for a need for diversification into new (often knowledge-and-skill-based) functions if relatively high wage rates were to be sustained. Market liberalization strategies were widely put in place to facilitate such adjustment (as politics would otherwise impede change). Even though Australia had never had a highly productive manufacturing sector, market liberalization was also favoured here from the 1980s to facilitate diversification from Australia’s traditional ‘lucky country’ reliance on resource wealth. However while market liberalization requires individuals / enterprises to compete, it does not ensure the existence of a supportive environment in which they can do so in highly productive activities (see Beyond Market Liberalization, 2010). Australia’s car industry apparently suffered from: (a) being an ongoing ‘political’ project; and (b) Australia’s failure to establish market-oriented arrangements to develop the economic systems and capabilities in which competition could help very large numbers of individuals / enterprises to develop highly-productive economic functions.

I would be interested in your response to my speculations.

John Craig

Further observations

Response from Stephen Martin (17/12/13) - reproduced with permission and a note that CEDA welcomes broad debate

Thank you for your email.

CEDA has never indicated that reforms are easy, but we are advocating reform is necessary. I would refer you to our research publication of August this year entitled Making Public Policy. The road map we presented at least sought to show the “how’ and ‘why’.

I hope you find this a useful adjunct to other research work we have published such as Australia Adjusting- released in November.

Finally I would point out that the views I expressed captured the concerns of CEDA’s broad membership and others in the business community. Perhaps it is they who should press the reform button with our elected representatives.

Professor the Hon. Stephen Martin | Chief Executive
CEDA – the Committee for Economic Development of Australia

Reply to Professor the Hon. Stephen Martin (CEO CEDA) - 18/12/13

Thanks for your reference to CEDA publications concerning which I have appended a couple of comments below. I would greatly appreciate permission to reproduce your comments on my web-site with Reform: Its not that Easy.

Your response highlighted the importance of initiative by CEDA members and the broader business community. In relation to this I would primarily suggest that CEDA’s broad membership could make the greatest difference by not ‘pushing the reform button with our elected representatives’ but rather pressing strategic learning / change buttons with industry clusters or real world economic systems as a whole (using methods such as those suggested in Developing a Regional Industry Cluster, 2000). This would involve: (a) encouraging a focus on emerging opportunities which can become more feasible if there is complementary initiatives across numerous organisations; (b) networking organisations that could potentially take initiatives; and (c) allowing a market-driven response. Experience suggests that this can have huge potential economic impacts. However this will only work if politics is kept at bay.

Efforts are being made by the federal government to engineer a forward-looking response to new opportunities in regions affected by car-industry decline. This is great in theory. But in practice even well intended political leadership will be economically damaging (for reasons suggested in Economic solutions are beyond politics (1995) namely that: (a) anything that is widely enough known to be politically understood can’t be a commercially-successful and economically productive new option; and (b) politics attracts rent-seekers rather than market-oriented initiative).

The political system can help, not by trying to lead a reform process, but rather by: (a) creating an environment in which apolitical leadership of learning / change within industry clusters / economic systems is possible (eg by approving appropriate protocols in the same way that government determines company law without trying to set the directions for all companies) and (b) responding constructively and in the public interest to whatever implications emerging from such apolitical processes in terms of required government programs or policies. Attempts by governments or committees to come up with a ‘reform’ agenda without the drive of real-world economic opportunities will lead nowhere.

John Craig

Detailed Comments

Comments on Setting Public Policy (CEDA, August 2013): CEDA Overview

• Australia’s 2 decade economic expansion has been driven by the reform agendas of the 1980s / 1990s – and by a two decade long global boom driven by various factors (including easy credit) which have contributed to past, and potential future, global instabilities. In this environment Australia did relatively well because: (a) those reforms helped; (b) efforts to reduce government debts helped to protect Australia from the GFC; and (c) the China-boom generated massive investment / export growth for several years. However: (a) there were significant problems prior to the China boom; (b) no real progress was made in creating an environment supporting innovation (see Aiming at the Wrong Target); and (c) productivity growth stagnated;
• The quality of policy making has undoubtedly declined largely because the bureaucracies that had played a major role in the development of adjustment policies in the 1970s and 1980s were politicised in an effort to overcome ‘bureaucratic resistance’ to reform and make governments more business-like in undertaking their primarily non-business-like functions (eg see Decay of Australian Public Administration). There were limits to the economic reform agenda that was put in place (eg see Beyond Market Liberalization, 2010). Ways to overcome those limitations were being developed by bureaucracies in the 1980s – but politicisation brought this to a halt;
• The white paper on Australia and the Asia Century does not seem to be an example of useful policy development – as it reflects a virtual complete lack of realistic Asia literacy (eg see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century in Babes in the Asian Woods );
• The experience of successful politicians and public servants that CEDA has distilled in relation to economic reform may not be adequate for the future, because of the limitations of past ‘success’;
• There is value in study of what has allowed reform to be progressed through the political process. However there is also value in recognising that the political process is not able to deal with productive economic change – and is best involved by empowering others to take action while not attempting to dictate outcomes;
• There is undoubtedly a close parallel between economic reform and organisational change management. The methods suggested in A Case for Innovative Economic Leadership were essentially identical to those I saw used in fairly successful attempts to give direction and cohesiveness to Queensland’s public sector in the 1970s, and which I subsequently used internally to stimulate change while working with Queensland’s most senior bureaucrats and in a market context in efforts to stimulate economic change in the 1980s. It is also worth noting that the methods used to promote strategic change in bureaucracies (ie access to strategic intelligence, collegiality and consensus) are also the neo-Confucian methods that have been the basis of ‘economic miracles’ in East Asia in societies that can perhaps best be conceived of as ‘whole of society’ bureaucracies.

Comments on Australia Adjusting: Optimising National Prosperity (CEDA, November 2013): CEDA Introduction

This report constitutes a valuable collection of insights into the sorts of changes that will achieve the necessary goal of boosting Australia’s competitiveness productivity. A couple of observations on the basis of only a very brief (and inadequate) scan of the start of what is a quite substantial document it is suggested that:

• Comments on economic flexibility appears excellent – though there is a need to recognise the limitations of the National Competition Policy not to merely adapt it as a NPP (see The Inadequacy of Market Liberalization in Review of National Competition Reforms: A Commentary, 2004);
• Innovation requires a well-developed innovation system to provide support to potential innovators (not just incentives by government for individuals / enterprises to try to innovate in a non-supportive poorly developed economic environment);
• Capability and workforce development would probably best be achieve by decentralization / competition rather than through seeking ‘national’ policies which can do a lot of damage when they are founded on ideologies that make sense from one viewpoint but don’t reflect all requirements (eg consider A Case for Restoring Universities, 2010 and Proposed National History Curriculum: Information without Understanding?, 2010).

Non-CEO tells business to get on with reforms - email sent 6/1/14

Patrick Durkin
Australian Financial Review

Re: CEOs tell government to get on with reforms’, Australian Financial Review, 6/1/14

Your article recorded calls by various business leaders for government to ‘just get on with’ what those leaders believe to be a fairly obvious economic reform agenda. However such calls seem a bit simplistic, as the challenges facing the federal government are not straight forward (eg see The Choice Between Evils that Governments Now Face: 'Process Addiction' or Bad Decisions and Reform: It’s not that Easy). The complexities that governments face and the weak institutional support that is now available (eg as a result of public service politicisation) are significant constraints.

However if business leaders want an improved economic environment (and one is definitely needed) then they themselves are arguably the ones who could do most in the short to medium term to achieve this (eg see Making Australia's Competitiveness Everyone's Business and Stimulating Practical Action on Productivity).

One problem has been, and remains, that business / community leaders are so busy lobbying for political changes that they never seem to stimulate the development of industry clusters and economic systems as a whole. Doing so could arguably make at least as much difference to the operating environment businesses face as government policy changes – and would provide a clear publicly-saleable motivation for complementary policy reforms. Political leaders are intrinsically incapable of taking the lead in such systemic economic development (because of the pressures they respond to). Moreover without encouragement they are unlikely to get out of the way (ie to approve protocols under which others could act).

John Craig

Family Issues - email sent 8/1/14

Warren Entsch

Re: Harrison D., Liberal MP Warren Entsch attacks Cory Bernardi on 'gay obsession', The Age, 8/1/14

You were quoted as criticising Cory Bernardi for having an obsession with gay people and for writing a book which expressed concerns about abortion and non-traditional family arrangements.

While I have not followed Senator Bernardi’s arguments in detail, I should like to suggest that you may be on the wrong side of history in this respect. Australia seems to be experiencing severe social dysfunctions which: (a) arise in part but not only from dysfunctional family arrangements; and (b) have the potential to adversely affect our economic prospects and government budgets.

Indications of those social dysfunctions are in Erosion of the Moral Foundations of Liberal Institutions (2003+). The latter was introduced by the suggestion that:

“Conspicuous amongst those dysfunctions are: sexual abuse of (perhaps) 20% of children (and official resistance to examining this phenomenon); child neglect; the breakdown of up to 50% of marriages; the freedom from family and other responsibilities that men gained (at the expense of women and children) as result of the sexual revolution; the escalation of single parent families in which children tend to suffer disadvantages; and increased domestic / random violence.”

Social dysfunctions are economically significant because they undermine individuals’ / communities’ ability to contribute to a productive economy (see Capable and Responsible Community in ‘Australia’s Competitiveness: Some Suggestions). The latter suggested that economically significant social dysfunctions are arising as a consequence of: (a) an unbalanced approach to economic reform; (b) individual irresponsibility- eg as reflected in dysfunctional family arrangements; (c) official emphasis on rights rather than responsibilities; (d) public welfare support for individual irresponsibility; and (e) official cover-ups of social dysfunctions. For example, despite official obsession with investigating child sexual abuse in institutions it seems that the vast majority of cases (eg over 99%) arise in dysfunctional family settings (see The Problem). And it seems that many (most?) of those who are ‘gay’ were the victims of abuse and neglect as children (see A Comment on Causality).

There have recently been proposals (through the Gonski review) for substantially increased public funding for education partly to overcome very real problems of regional inequality in educational outcomes. However this represents far too narrow a view of the problem (see Gonski Review: An Example of the Limitations of Government Initiatives). Problems in educational outcomes do not simply reflect deficiencies in the education system – as poor educational outcomes seem to disproportionately affect children from families affected by other stresses.

I submit that it would be desirable to seriously consider such issues rather than criticising those who try to raise them.

I would be interested in your response to my speculations.

John Craig

Spilling the Beans on Government 'Assistance' - email sent 2/2/14

Rob Burgess
Business Spectator

Re: A rogue Liberal spills the beans on SPCA, Business Spectator, 31/1/14

Your article suggested that a structural adjustment subsidy to SPC Ardmona has been quickly and incompetently dismissed as corporate welfare (which would be incompatible with open markets) – even though compelling arguments for providing such support have been put forward by Sharman Stone, the local member in the Goulburn Valley and a Liberal backbencher. The case for assistance would rest on the jobs involved, the impact on the supply chain, the costs of retraining, lost tax revenues, wastage of past irrigation investment and the adverse effect of high $A due to mining boom.

However there are ‘big picture’ considerations related to the economic impact of government ‘assistance’ that also need to be considered.

Manufacturing industries had long been the backbone of the high productivity achieved in European and North American economies. However their competitiveness was eroded increasingly from the 1960s as low wage economies (especially in Asia) developed the skills required for capital intensive manufacturing – and de-industrialization became a major concern in the developed northern hemisphere. The response in ‘Europe’ tended to involve government adjustment assistance. In the early 1970s the OECD produced analyses which suggested that the effect of this was to slow adjustment dramatically – and to lead to high unemployment and considerable budgetary costs. This recognition of the consequences of supposedly-constructive ‘assistance’ was the foundation of the market liberalization economic reforms that were widely endorsed worldwide in the 1980s and 1990s. The notion of 'industry policy' which had been proposed as an alternative in the 1980s lost credibility because it was recognised that it was impossible in democratic systems to disentangle rent-seeking politics from such policy (see The Industry Policy Debate, 1997).

However while market liberalization reforms eliminated some of the adverse consequences that can arise when ‘assistance’ is on offer and companies focus more to political lobbying than on market opportunities, they were by no means enough to ensure the emergence of a highly productive and competitive economy. Reasons for this were outlined in Review of National Competition Policy Reforms: A Commentary (2004) – which referred for example to the fact that:

• in the economy generally, competition creates an incentive for individuals / enterprises to succeed but does not necessarily ensure the emergence of the capabilities required for success (eg the mutual support amongst enterprises within industry clusters);
• in the public sector, competition disrupts governments’ ability to carry out their primary function (ie governing).

There has long been a need to move beyond both government ‘adjustment assistance’ and idealistic market liberalization. How this might have been achieved was suggested in Developing a Regional Industry Cluster (2000); A Case for Innovative Economic Leadership (2009) and Non-CEO tells business to get on with reforms (2014). Robert Gottleibsen recently pointed to the possibility that SPC Ardmona’s problems might be overcome by the complementary interests of other enterprises (eg see How SPC can be saved, Business Spectator, 31/1/14). While I have no way to know whether or not this is correct, I submit that: (a) endorsing protocols under which such potential complementarities within economic systems and industry clusters as a whole are more likely to be discovered can potentially make a difference to industrial competitiveness and the prospects of individual enterprises; and (b) those methods, if regionally focused, could be expected to create much stronger regional economies (eg see Reinventing the Regions,2010).

I would be interested in your response to my speculations.

John Craig

Introducing Social Equity into the Economic Agenda - email sent 6/2/14

Veronica Sheen
Monash University

Re: Why Abbott can’t delete ‘society’ from his economic growth script, The Conversation, 5/2/14

Your article suggested that the Prime Minister’s address to the World Economic Forum (WEF) was deficient in not referring to ‘social’ issues. I should like to suggest some other aspects that also need consideration.

My interpretation of your article: Mr Abbott’s address to the WEF suggested that free markets and minimal government intervention were the best remedy for uneven global economic recovery. There was no mention of ‘society’ (eg in terms of social contract, social inclusion or social equity – or equality of opportunity). However many organisations have pointed to the need for governments to tackle social inequality. In the US President Obama emphasised social equality a few days later in his State of the Union address. A divide in US has been growing for 30 years – exacerbated by GFC and unresolved through recent growth and high business profitability. There have been widespread losses of middle income jobs and reduced opportunities for social mobility. Inequality has reduced demand, as the super-rich have different requirements to large numbers of middle income consumers. The political process has been captured by the wealthy – and this has distorted policy. Australia has a lower, but still significant, problem with income inequality. The ‘small-government-free-market’ solution that the Prime Minister advocates has passed its ‘use-by’ date.

The ‘small-government-free-market’ solution is also constrained by the existence of unresolved structural problems in the international financial system. Even if the equity issue is ignored, there is an ongoing risk of financial crises which would dislocate economic growth and create massive problems for low and middle income earners (see Trade is not Enough for Global Economic Progress). The latter highlights the fact that:

• many economies with poorly developed financial systems (including especially those with the non-capitalistic neo-Confucian systems of socio-political-economy such as Japan and China) have required current account surpluses to avoid the risk of financial crises – and have thus depended on the willingness and ability of their trading partners to tolerate ever rising debt levels (a trend that has reached its use-by date);
• the non-capitalistic financial systems have also constituted an unrecognised form of industrial protectionism (which has helped erode the job prospects of employees in their trading partners’ economies);
• there is an ongoing risk of financial crisis everywhere because of the failure of the G20 to address these structural problems. [It can also be noted that the use of counter-cyclical methods (ie easy monetary policies) in an effort to restore growth has merely exacerbated the problems of doubtful debts in banks / companies in emerging economies and in the governments of some developed economies. An Approaching Crisis? suggests resulting risks];
• capitalistic financial systems have also been a source of problems because of the complexity of some financial products and the feedback effect of more readily available finance on asset values.

The erosion of middle class job opportunities has been contributing to inequality and reducing opportunities for social mobility in developed economies because of the increasingly successful competition for such roles from low wage economies since the 1960s. The problem was reduced to some extent in the 1990s by the fairly rapid growth of post-industrial (ie knowledge intensive) economic functions.. However one of the most significant of these new functions involved financial services (the complexity of some of whose operations have, as noted above, contributed to the instabilities of global financial systems). Also the erosion of high wage job opportunities was exacerbated as: (a) hierarchical organisation styles that had been associated with mass production were replaced by networked styles with fewer middle management positions; and (b) businesses increasingly operated globally so that in all but one or a few locations there would only be relatively low-level / branch-office job opportunities.

Australia has been protected from the economic dislocations suffered in most high wage economies since the start of the GFC by a strong demand for commodities (especially iron ore) from the non-capitalist neo-Confucian Asian economies (especially China). Furthermore some years ago the federal government used the capital gains tax revenues generated by the commodity investment boom to reduce the risk of social inequality by increasing government transfer payments (and reducing tax rates). However this depended on one-off revenue sources and thus seemed to create a structural budget deficit (see The Long Term Impact of the Global Financial Crisis, 2009). This problem has been exacerbated (and finally even been officially acknowledged) as the resource investment boom has come to an end (op cit).

In the US it has now been recognised that the federal government will face a fiscal crisis in a few years if structural budget deficits are not reduced. Thus whatever President Obama intends to do to reduce social inequality must presumably be associated with a reduction in government transfer payments. And, though Australia’s problem is not yet so severe, there is arguably a need to move in the same direction (ie to reduce social inequality by increasing the wealth-generating capacity of middle-and-low-income earners while reducing their reliance on transfer payments). Thus in some ways, though Mr Abbott did not mention social equity his ‘solution’ was probably a contribution to that goal.

However additional options for creating increased numbers of high-wage job opportunities have long been available (eg as suggested in A Case for Innovative Economic Leadership, 2009 and Developing a Regional Industry Cluster, 2000). The problem has been that these methods have not been used – and can’t be successful if democratically-accountable interest-group-responsive political elites are expected to dominate the process. Some suggestions about how changes to Australia’s tax system might also be of value in boosting the availability of high-income job opportunities (and thus in reducing the risk of inequality) are outlined in Economic development incentives.

I would be interested in your response to my speculations.

John Craig

Modernizing Australia - email sent 10/6/14

Paul Wallbank

Re: Tony's partying like it's 1979, Technology Spectator, 10/6/14

Your article suggested amongst other things that:

“In Britain, even Her Majesty is getting into the act of promoting tech start-ups, on Monday hosting Tech At The Palace which showcased 350 British entrepreneurs. The Guardian quotes the Duke of York as saying he unashamedly pushes UK tech companies in the US.

To understand Australia’s priorities, it’s worthwhile contrasting the Irish and British initiatives against the Australian Prime Minister’s North American visit.

While in Ottawa yesterday, Tony Abbott begged Canadian fund managers to take stakes in resource companies, toll roads and government guaranteed infrastructure. The ABC reported the Prime Minister as saying: “The Canadian pension funds are already significant infrastructure investors in Australia -- the M7, the desalination plant -- and I see that as continuing. Pension funds typically want long-term secure investments with stable rates of return and infrastructure certainly offers that kind of potential.”

Tony Abbott’s view is the kind of strong vision that delivered the Cahill Expressway to Sydney and the West Gate Bridge to Melbourne. It’s a strong vision for a nation striding confidently towards the 1970s.

While the rest of the world offers tech friendly investments, Australia offers toll roads -- something that Jack Lang would have been comfortable doing in 1931.”

A parallel suggestion that there is something a bit dated about the federal government’s 2014 spending priorities in Australia is in And the Winner of the 2014 'Pink Batts' Award is ....

The main theme of your article was that Australia needs to create a venture capital capacity that is not (as one observer suggested) ‘an unmitigated disaster’. Some suggestions about how an environment that would support viable venture capital operations were outlined in A Case for Innovative Economic Leadership (2009).

John Craig

The Australian Economy: Alternative Reform Options - email sent 15/8/14

Gene Tunny
Queensland Economy Watch

RE: The Australian Economy: Where we’ve come from, where we’re going, Queensland Economy Watch, 2014

I was interested in, and would like to comment on, your observations about Australia’s economy (which, for convenience, I have reproduced below with comments inserted). It is extremely valuable to set out a well-considered account of economic history and prospects as you have done. Doing so provides a starting point for refinement – and I should like to suggest both that refinement is necessary and what changes might be appropriate. Some of the latter (eg at end of the document) you may find quite radical. However they are the product of working on these issues fairly consistently for over 30 years (see CV).

I would be interested in your response to my speculations

Regards

John Craig

Copy of recent speech by Gene Tunny - The Australian Economy: Where we’ve come from, where we’re going (reproduced with permission) – with comments inserted

Good morning. You may have seen it reported last week that Australia’s unemployment rate has increased to 6.4%, the highest rate we’ve seen in twelve years, and there is some concern over the short-term economic outlook. There’s certainly a risk that Australia’s dream economic run, of unbroken economic growth for more than two decades, may come to an end if housing construction doesn’t replace the economic boost provided by mining investment in recent years. But it’s too soon to tell how long the weakness in the labour market will continue, or whether it’s a sign of worse to come.

Over the last decade or so, Australians have typically been used to good economic news, or at least better economic news than in other countries. Since the financial crisis of 2008, the Australian economy has been a standout performer among the advanced industrialised economies that make up the OECD. Of course, this was not because our economy has been performing exceptionally, but because we avoided a recession unlike the US, UK and Europe.

Partly this may have been luck, partly good management. There have been arguments about the effectiveness of the short-term fiscal policy response – Keynesian pump-priming through the stimulus packages, incorporating the Rudd money, Pink batts, school halls, et cetera – but there is a lot of agreement that the Australian economy has been made much more resilient through reforms to our economy that have occurred, particularly since the 1980s.

As well as making our economy more resilient, these reforms have led to a material increase in our living standards, particularly relative to our OECD peers.

Australia has done quite well since the GFC started also because of three booms: (a) high levels of investment in developing mineral / energy export capacity that was stimulated by China’s initial GFC response (ie a massive increase in property / infrastructure investment); (b) a significant increase in infrastructure spending to address backlogs – which contributed to cost blow-outs because it coincided with the mining / energy investment boom and in Queensland’s case contributed to an unsustainable level of public debt; and (c) very high rates of immigration.

After starting in the top third of the OECD when it was set up in the 1960s, we had dropped down to the bottom third by the 1980s, before regaining a top third position in the 2000s. In my view, and that of the Commonwealth Treasury and Productivity Commission, economic reforms since the 1980s have been important to achieving this.

Those reforms achieved some, but not enough, benefits perhaps for reasons suggested in the ‘Alternative Conclusions’ at the end of this email. Productivity growth stalled.

Today I’m going to touch on the reforms that I think were most important. It’s important to consider these reforms because their benefits will endure and will not be erased by any short-term downturn the economy may come to experience if our luck finally runs out.

But before discussing the important economic reforms we’ve seen in Australia, I’ll give a sketch of Australia’s economic history since 1788. This will allow us to understand how profound the changes we’ve seen have been.

As we catch up to the present, I’ll then turn to where the economy is going. I’ll refrain from commenting on the short-term outlook, which is typically highly uncertain, and instead focus on the longer-term. This will allow me to discuss some profound trends, including:

• Collaborative consumption or the sharing economy, 

• Rapid technological change, including massive improvements in artificial intelligence, automation, and robotics, and

• Growing inequality of income and wealth.

Sketch of Australia’s economic history

We are all broadly familiar with Australia’s history since 1788, and Australia’s history of convicts, soldiers and settlers coming to a land sparsely inhabited by its Indigenous population. Our first economic success was in agriculture, and in the 1820s and 1830s there was a pastoral boom based on merino sheep.

While Australia developed at a reasonable pace in the early nineteenth century, it was gold that transformed Australia, with the gold rushes in Victoria in the 1850s encouraging mass migration to Australia, from Europe but also from China and elsewhere. In the 1850s, Australia’s population nearly trebled from 400,000 to 1.1 million.

Much of the prosperity of the late nineteenth century was based on gold, and its benefits are reflected in the lasting grandeur of the city centres of Melbourne, Ballarat and Bendigo, among others. Closer to home, the discovery of gold in Gympie in 1867 saved the Queensland economy from depression and the Government from bankruptcy.

So mining has always played an important role in Australia’s economic history, although, its importance has waxed and waned over time, fluctuating in a range from 2-10% since Federation, and for a good part of our history Australia has ridden on the sheep’s back, particularly in the 1950s when we benefited from the wool boom associated with the Korean War. Economic historians have shown that agricultural industries contributed 20-25% of Australia’s GDP for the first half of the twentieth century, but this share had dropped to 5% by 1980 and is even lower now.

As agriculture declined in importance, other sectors rose to prominence, particularly manufacturing, which increased from around 12% of the economy at the time of Federation to 25-30% of the economy in the fifties and sixties. However, its share dropped to around 20% in the early 1980s and has progressively declined even further.

Australia’s manufacturing sector, to a large extent, particularly for the automotive and textile, clothing and footwear industries, was supported by tariffs. For example, at one time, the tariff on passenger motor vehicles was set at 57%.

Australians have always had a mixed attitude to free trade, accepting its importance in some circumstances – for example, the desire to have free trade among the Colonies motivated federation in 1901 – but protection from foreign manufactured goods has often been seen as desirable. The infant industries argument for tariff protection was very fashionable for a time – we just needed to protect our infant manufacturing industries long enough so that they could become economically viable.

As an island nation with a small manufacturing base, Australia has always been heavily dependent of overseas trade and overseas investment – indeed, Australia has traditionally imported capital from overseas, borrowing money or receiving investment dollars from other countries, traditionally the UK, but also the US and Japan, and now China is playing a huge role. Broadly speaking, Australia gets the foreign exchange we need to import the goods and machinery we need by exporting minerals and agricultural goods (now much less important than the minerals) and also from foreign investment and borrowings from overseas.

Having lived through the 1980s and Paul Keating’s period as Treasurer, you will be well aware of Australia’s persistent current account deficit, which is a reflection of our position as a small country with lots of investment opportunities that is reliant on foreign capital.

We can’t consider Australia’s economic history without acknowledging that Australia has suffered from some significant financial panics and economic depressions, particularly the great depressions of the 1890s and 1930s, each of which was associated with very high unemployment and each of which in its own way transformed Australia. The 1890s depression helped foster the growth of the Labor Party and the trade union movement, and arguably contributed to the very rigid, centralised industrial relations system we eventually found incompatible with the dynamic prosperous economy we want to be.

The Great Depression of the 1930s, of course, profoundly altered the attitudes of the population and contributed to the creation of the welfare state after the Second World War, where the Commonwealth Government, in particular, assumed greater responsibilities for social security. This was aided by the Commonwealth having assumed income taxation powers during the war, and the High Court decision in the Second Uniform Tax Case in the 1950s, in which the Court decided it was too late to turn back the clock and return income taxation powers to the States. This along with a number of other High Court decisions, including the Tasmanian Dams case, has entrenched Commonwealth dominance in federal-state relations, which desperately requires reform, as I’ll discuss later this morning.

Apart from our strong population growth and changing population composition, one of the most remarkable changes in the Australian economy in the last 100 years has been the massive expansion of Government in terms of its spending, regulation of the economy, and intervention into the social and family realms on a previously unimagined scale. This occurred with largely bi-partisan support in the post-war period, with significant expansion of education, health and social security under conservative governments in the post-war period. Of course, as is well known, the Whitlam Government of 1972-75 was responsible for a big leap in Commonwealth involvement and spending, particularly through offering free university education.

In his fantastic overview of Australia’s political history in the 1980s and 1990s, The End of Certainty, former editor of the Australian newspaper Paul Kelly described the critical elements of Australia’s economy for much of the twentieth century, which he defined as the Australian settlement. Those elements included:

• Heavy industry protection based on tariffs – indeed after the war we tried to create a car industry through encouraging foreign direct investment in Australia as the only way car companies could sell into Australia as we had very high tariffs, tariffs which reached 57% at their peak as I noted earlier;

• A centralised industrial relations system based on arbitration;

• State paternalism – a philosophy that underpinned Australia’s welfare state and also the Government effectively acting as an employer of last resort in the post-war period, often through State-owned businesses such as railways, right up to the 1970s, when the policy was no longer economically viable; and

•  Imperial benevolence, most important economically as the preferential tariff treatment of Australian goods exported to Britain, which ended when Britain joined the common market in 1973.

The need to reform the Australian settlement was probably already clear when Britain joined the common market, particularly as Australia’s relative economic performance was deteriorating and the age of stagflation, with simultaneously high unemployment and inflation was beginning. We were slipping down the OECD table in living standards, as we were being overtaken by recovering European countries and Japan, and we had restricted the dynamism and productivity of our economy through heavy regulation and government ownership.

The 1970s saw the end of the long boom we had enjoyed since the end of the war. The long boom was propelled by strong population growth due to the baby boom – with the fertility rate reaching over 3 children per woman in the early 1960s – and strong immigration particularly from war-ravaged Europe. Australia’s population grew from 7½ million at the end of the war to 14 million in 1975 and now 23 million in 2014.

Pressure for economic reform arose from belated recognition in the late 1970s that Australia had been in long-term relative economic decline since the start of the 20^th century (eg in terms of GDP / capital relative to advanced economies). The core problem was: (a) high dependence on natural resource wealth (ie on natural comparative advantages) though the productivity of commodity-based industries had been in long term decline relative to those involving competitive advantages (ie advantages created by strategy and initiative); and (b) being content to rely on natural wealth (as Paul Kelly suggested) to benefit the community generally and in trying to diversify the economy through tariff protectionism

The end of the long boom forced Governments starting with Whitlam’s to consider hard policy choices. Whitlam, despite his faults on economic policy, actually did make a number of sensible policy choices. For example, the 25% tariff cut in 1974 and the breaking up of the old Postmaster General’s Department and the creation of Australia Post and Telecom, which ultimately led to greater efficiency in postal and telecommunications services.

But there was much more reform to be done. Whitlam was too beset with political and pressing macro-economic problems to do much in the way of micro-economic reform, and unfortunately the Fraser Government largely wasted its opportunities for reform, with Fraser apparently acting as a block to his reform-minded Treasurer John Howard (although Fraser denies this). Regardless, economic reform was on hold under the Fraser Government. It was with the election of the Hawke-Keating Government in 1983 that Australia’s major economic reforms began – reforms, which in the interests of being non-partisan and balanced, were largely supported by the Liberal Party.

Australia’s transformation since the 1980s

These reforms were well intended and appropriate in terms of conventional economics. However not enough attention was paid in developing the reform agenda to what had actually been happening in the world economy (eg see Defects in Economic Tactics, Strategy and Outcomes, 2000+ and A Simplified Historical Context, 2014)

Australians were probably unprepared for the economic policies of the Hawke-Keating Government, not suspecting that a Government that won office largely on the basis of a public health care scheme, Medicare, would engage in such significant market liberalisation, approaching though not as radical as what happened under Thatcher in the UK and David Lange and Roger Douglas in New Zealand.

Economic reform in the 1980s really began with the floating of the Australian dollar in December 1983. Previously the Reserve Bank of Australia maintained a fixed exchange rate but there was huge pressure for the dollar to devalue as the rate was too high and foreign investors were pulling their money out of Australia.

There was a lot of debate about whether floating the dollar was a good idea, and it’s been reported the then Treasury Secretary John Stone was concerned that a floating dollar would be a speculator’s plaything, and that Australian industry would suffer due to large swings in the dollar that would result from speculation. But eventually pressures from financial markets were too strong to resist floating the dollar, and the Government decided to float in December 1983.

Floating the dollar probably emboldened the Government for further reform and indeed helped show the need for further reform as the currency fell and concerns over Australia’s economic future and living standards intensified. Pretty soon, as Paul Keating famously noted, every pet shop galah was talking about microeconomic reform – meaning the reform of markets, regulations affecting businesses, and government-owned businesses.

Major reforms undertaken by the Commonwealth Government included financial market deregulation –the relaxation of many restrictions on financial markets in the mid-1980s, which led to the establishment of many new providers and the entry of foreign banks into Australia, and the privatisation of the Commonwealth Bank in the 1990s.

The Commonwealth also sold Qantas and State Governments privatised or corporatised a number of their businesses, particularly utilities and railways. The pressure for further market-oriented reforms eventually led to the high watermark of microeconomic reform in Australia – the Hilmer Report and the adoption of National Competition Policy in the early 1990s. This committed governments across Australia to removing unwarranted restrictions on businesses and to competitive neutrality with business – i.e. so government businesses don’t gain unfair advantages such as not paying tax when competing with private businesses.

These reforms led to the abolition of a lot of uncompetitive practices, many of which were promoted by State Governments, particularly marketing boards, such as the Queensland Sugar Board. Marketing boards, while supporting prices for primary producers, by controlling the supply of products in an economy, were costly to consumers, who paid the price of support to producers. Some uncompetitive practices died hard, however. Government-imposed restrictions on sugar marketing lasted until 2006 in Queensland.

Queensland had long practiced a form of state-corporatism – also referred to as ‘agrarian socialism’. In Europe ‘state corporatism’ had been linked with fascism.

“Corporatism is one of the three main Western traditions of political economy (the other two being liberal capitalism and socialism) (Williamson, Varieties of Corporatism). Traditional state corporatism was mainly a European phenomenon from the industrial revolution up to 1940 (when credibility was lost due to its association with Mussolini's regime). It involved rejection of both socialism (ie state ownership of the means of production) and of the individual liberty required for market capitalism (initially because of concern about moral laxity which liberty was seen to imply). Under this politically authoritarian system, the means of production were privately owned, but represented and regulated by 'corporations'. The economy was administered, rather than being organised through market relationships amongst firms. This system was deployed most noticeably in Queensland in: the organisation of agriculture; the highest level of economic regulation in Australia; the past protective ownership through Treasury financial institutions of controlling interests in major Queensland firms; and (to some degree) in the corporatisation of government owned enterprises and in the means used to orchestrate responses to major investments.” (from Assessing the Implications of Pauline Hanson’s One Nation, 1998)

“Despite 'free enterprise' rhetoric many firms look to government for assistance when difficulties arise (not to one another or to market opportunities). Local firms have at times been systematically protected. For example, 'agrarian socialism' protected rural producers from commerce by regulation; and government investment supported 'private' firms (eg 45 of 60 listed companies had Suncorp, a large state owned financial conglomerate, as a major investor - Buckley A., 'Suncorp gives the lie to Joh's Promises', Financial Review, 2/3/87). As with tariffs, such protection discouraged innovation to build competitiveness. This protection reflects `traditional corporatism' where privately owned firms are viewed virtually as an extension of the state (see Williamson P., Varieties of Corporatism: Theory and Practice, Cambridge University Press, 1985; Stewart A., 'Private has a Different Meaning in Queensland', Canberra Times, 19/9/88; and Demster Q. 'Waiting for Benefits from Corporate State', Sunday Mail, 1/2/87). Government financial strength has been seen as a measure of economic performance, though it was sometimes achieved at the expense of developing the economy; (from Notes on SEQ 2001: A Plan for an Under-developed Economy - SEQ Economy, 2001)

The main centre of state corporatism in Queensland (and of resistance to liberal market reforms) was the State Treasury – eg via its financial subsidiaries. Treasury apparently saw the state economy as a source of public revenue through its fairly narrow tax options that bore little relationship to the economic 'value added' (which would be the criteria for rising community incomes and a stronger federal income-tax base)

Microeconomic reform was also seen in the reform of many government-owned businesses, many of which were eventually corporatised, such as Queensland Rail and our power businesses Energex and Ergon which you may recall were once electricity boards such as SEQEB and NORQEB. Corporatisation led to much cost-cutting as government-owned businesses strove to cut costs and improve productivity.

‘Corporatization’ was simply a continuance of Queensland’s traditional state-corporatism (agrarian socialism) in another way. Such entities remained politically accountable – and thus not genuinely market responsive. There are massive obstacles to really increasing productivity through proclaiming that politically-accountable organizations are ‘commercial’ (see The Limited Economic Effect of Commercialization, 2001).

The main effect of corporatization seemed to be that Treasury gained direct control of all GOCs and was able to use them as to boost state revenue – often by dubious means (eg in the 1990s by requiring entities to borrow large amounts to pay special dividends to boost government ‘revenue’). The outcome of ‘corporatization’ in Queensland has been a serious lack of transparency about Queensland’s capital account which may have much greater problems than have been acknowledged (eg see Recovering from Queensland’s Debt Binge, 2012)

Finally, the Hawke-Keating Government committed to cutting tariffs and industry protection, which was particularly high in the automotive industry and the textile, clothing and footwear sector. The Government’s commitment to reducing industry protection, a move that would significantly reshape our economy in the 1990s, especially so as tariff reductions at the start coincided with a major recession that led to a large loss of manufacturing jobs. You may recall commentary in the early 1990s about Victoria being a rust belt, and certainly weak economic conditions in Victoria led to strong interstate migration to Queensland.

The combination of economic reforms in Australia in the 1980s and 1990s translated into historically high productivity growth in the 1990s. Productivity can be thought of as a measure of how much we can produce with one labour hour, and this measure grew strong in the 1990s.

Australia’s reported ‘productivity’ rose strongly in the 1990s. However it is difficult to be sure how much of this was due to economic reform and how much was due to steady and significant devaluation of the $A (eg see Analytical Complexities, 2002). There were certainly many indicators in 2002 of quite poor economic performance in Queensland

This was possible due in part to people being worked more intensively, a point repeatedly made by John Quiggin, but there’s no doubt the increase in productivity markedly improved Australia’s economic performance, particularly relative to the traditional productivity leader, the US.

Although many major reforms had already been undertaken by the Hawke-Keating Government, as John Howard took office in 1996, there was still urgent need for reform in two key areas: the tax system and industrial relations.

Howard and his Treasurer Peter Costello did well to convince Australians that we needed to reform our tax system to introduce an efficient Goods and Services Tax (GST) and to replace a range of less efficient taxes, such as sales tax. Unfortunately the States didn’t abolish all the inefficient taxes they should have and we still have stamp duty in Queensland, which creates a significant restraint on property transactions, reducing the mobility of people to where jobs are, and leading to higher insurance bills. Also, in bringing in the GST, a deal with the Democrats led to exempting fresh food and many health and education items, reducing somewhat the efficiency of the GST.

Regarding workplace relations, while the Keating Government undertook significant reforms in the early 1990s, bringing in Enterprise Bargaining, much remained to be done. Truly flexible workplace agreements between businesses and employees couldn’t be reached because of the no-disadvantage test, which meant agreements couldn’t leave workers worse off than previously. But in some workplaces, particularly some public sector agencies or government-owned businesses, workers had very favourable agreements that probably needed some reform. Also, unfair dismissal laws were a major disincentive for employers to hire staff, because they’d worry that if they hired a bad staff member it might be very difficult to get rid of them.

WorkChoices was hence a much-needed reform, in my view, but was very unpopular with the electorate and arguably cost John Howard the Prime Ministership. With the election of the Rudd Government, WorkChoices was substantially unwound. But with unemployment increasing and business concerns about the cost of employing people in Australia, no doubt industrial relations will re-emerge as a major policy issue sometime in next decade.

Where are we going from here?

So that brings us up to the present day, and it’s time to consider where is the Australian economy going from here?

There’s significant concern over the immediate outlook with mining investment dropping and unemployment rising. Many commentators are worried about what happens after the mining boom, and they’re asking where will the jobs come from?

Various other observers’ views about this are outlined in How Durable is Australia's Strong Economic Performance (‘Luck’)? in The Challenge and Potential Cost of Inequality and Insufficient Income (2014)

But there will always be jobs for people to do, especially in the services sector, which now accounts for over 75% of the economy. Recent forecasts from Deloitte Access Economics suggest strong jobs growth over the next few years in services, particularly in health, education and aged care, the latter a result of the ageing of the population, as the large baby boomer cohort moves into retirement age.

There may be a ‘need’, but the federal government seems unwilling / unable to pay for a boost in health, education and aged care jobs. If they don’t / can’t, who will?

Incidentally, this has implications for consumption patterns and the types of goods and services in demand. There will be a great emphasis on cost-effective lifestyle and wellness goods and services by baby boomers. People who can help baby boomers age gracefully and keep fit and healthy will do well. I expect personal trainers, yoga instructors and other service providers will respond to the demands of retiring baby boomers with time on their hands, many of whom would have significant disposable incomes. Tourism providers will also benefit, and not just from grey nomads, but they will need to provide superior and interesting tourism experiences for baby boomers, many of whom have already traveled to many interesting places around the world.

In the medium to longer-term some important global trends will be important in shaping our economy.

First I’ll discuss collaborative consumption or the sharing economy – “what’s mine is yours” as Rachel Botsman, the expert on collaborative consumption, describes it. We’re realising that it no longer makes sense to own as many things as we once did, as the internet makes it so easy to find people who own something we want to borrow or hire, such as a motor mower or car.

Think about the ride sharing service Uber, for example, which now threatens the traditional business model of the taxi industry, which is protected by government regulation. Similarly Air BnB is providing an emerging threat to hotels and serviced apartments, by making it easy for home owners to temporarily rent out their houses or rooms.

The internet also makes it easy to find people who might want to barter or offer services in the expectation they’ll eventually be rewarded – an economy that operates on karma. An example of this is couch surfing websites that let people find places to crash in foreign cities.

Another important global trend is that technology is improving at an incredible rate in a wide range of areas. Longevity may increase significantly owing to medical advances, meaning that the growing senior section of population will have an even greater transformative impact on our economy. There are also potentially large implications from wearable technologies, such as Google glasses or wearable computers that constantly monitor our health and alert us or medical authorities to possible heart attacks or strokes.

Automation and robotics are also profoundly important. Major car companies such as Volvo have invested billions of dollars in developing driver-less cars, which will lead to great efficiencies on the roads and in car parks, as cars drive closer together, have fewer accidents, and find car parks for themselves, so you can spend more time doing what you want to do rather than parking a car.

Regarding robots, if you see the quality of robots being developed in Japan, it’s not unreasonable to expect in a few decades perhaps robots will undertake a wide variety of jobs as well as our housework. Some people worry about whether this will cause mass unemployment, but I’m not so worried about that.

Robots will massively increase the productivity of our economy and will mean that, in theory, we can all work fewer hours to enjoy the same standard of living as robots will be doing a lot of the work. Of course, much will depend on who owns the robots and its possible robots could create further inequality if the rich own the robots and a large segment of the population don’t have robots and can’t find employment. This is a possibility, but because society would be richer we could afford to spend more on welfare and I expect wealthier robot owners would have to support the losers in the robot age. Hence it’s possible we could see further expansion of the welfare state. As with the internet and globalisation, improving technology such as robotics would add to inequality – a global trend recently highlighted in French economist Piketty’s best-selling book Capital in the 21^st Century.

It is appropriate to dismiss robotics as a threat. Mechanized production at the start of the industrial revolution (of which robotics is basically an extension) actually boosted higher wage job opportunities – because reducing unit costs stimulated a sufficient increase in demand to increase overall labour demand.

So as long as Australian Governments remain committed to a progressive tax system and income redistribution, it’s possible Australia could remain reasonably egalitarian and meritocratic despite these trends, although of course there has been a significant bulge in the incomes and wealth of the people at the top end, the so-called 1%, in recent years.

The challenge of inequality seems very real and to have its origins in the international economic environment (see Who Is Failing the Lower and Middle Classes? , 2014). It seems most unlikely to be resolved by government income redistribution (see Supporting the Disadvantaged when Governments Can't Afford to Do So, 2014).

Finally I think market reforms and the trend toward deregulation will continue. People are demanding greater choice in their lives and greater responsiveness from businesses and service providers. People expect a 24/7 economy, and regulations that are incompatible with this, such as Queensland’s archaic retail trading hours restrictions, are bound to be reformed sooner rather than later.

‘People’ are probably in for a shock because they haven’t put in much effort to understand what is happening in the broader world – eg as suggested below. 

Conclusion

To conclude, Australia has transformed itself over the last few decades, both as an economy and as a society. We have less government intervention in business, but in some social and family areas there is a growing reach of government, particularly in childcare. Our future looks bright but requires careful management and an ongoing commitment to reform, particularly in the areas of taxation and industrial relations, which will remain controversial economic issues over the next decade at least.

Alternative Conclusion: An alternative conclusion is that ‘economics’ (as conventionally understood) seems no longer to be a sufficient basis for understanding where the economy has come from or where it is going to.  This point is developed further in Towards a New Economic Paradigm

Australia's Crisis is Broader than Economics - email sent 14/10/14

Sean Barry
Griffith University

Re: The economic crisis a complacent Australia has to have, The Conversation, 13/10/14

Your article highlighted indications that Australia’s is facing serious economic problems (such as a shrinking tax base; an aging population; a lack of infrastructure; poor productivity growth; and increasing inequality) and the lack of serious efforts to confront these problem in the absence of (as yet) of an obvious crisis.

While agreeing that Australia is headed for an economic crisis, I should like to suggest that there is a need to rethink the nature of the reforms that are needed because:

• Australia also seems to suffer from increasingly ineffectual governance (which necessarily undermines governments’ ability to support appropriate economic reforms). An attempt to suggest the causes of these problems and what might be required to remedy them are in Australia’s Governance Crisis and the Need for Nation Building. The latter refers, for example, to the need for:
  • stronger support to the democratic political process in terms of: (a) more reliable inputs to policy debates; and (b) the empowerment of apolitical machinery to develop economic and community abilities to deal with emerging challenges without making those issues ‘political’;
  • efforts to understand what is really happening in the external world rather than reliance on theories about how the world worked in the past and on copying policy ideas developed elsewhere 10-15 years after they were relevant;
  • real Asia literacy;
  • the restoration of a professional basis for public services;
  • decentralization of governance and dramatically reduced federal fiscal imbalances;
• Increasingly ineffective governance has been in part the result incompetently managed reform to government machinery. Past efforts to apply what many still regard as adequate options to boost economic performance (eg to make government machinery more efficient and productive though what was the National Competition Policy in the 1990s) seriously eroded government agencies’ ability to support governments in undertaking their primary function - governing (eg by eliminating knowledge and skills whose relevance was not understood and applying business-like methods in undertaking governments’ primarily non-business-like functions) – see Governing is not a business and Neglected Side Effects. Future economic reform needs to start with an understanding of what is required for effective governance – an understanding that most current proponents of continued economic ‘reform’ seem to lack;
• There is a need for a broader view of options to improve productivity. For example:
  •  While creating an effective / liberal market is a start, this creates an incentive for improved competitive performance but does not ensure that the capabilities required to succeed in highly productive functions exist (see Impact of Economic Liberalism in Australia). What is required for success will often be a mix of complementary functions across different sectors – and there can be a ‘chicken and egg’ constraint on creating the necessary complementary functions. Options to overcome this constraint through accelerating market-oriented ‘learning’ within whole industry clusters / economic systems has the same potential as innovation within an enterprise to raise regional economic productivity. ‘Economic miracles’ can arguable be achieved even in a democratic political environment providing the process is not politicized (eg as suggested in A Case for Innovative Economic Leadership, 2009);
  •  State governments that have the greatest impact on economic development need to be given financial incentives for success in raising economic productivity and the overall tax base – an incentive that is lacking under current federal financial arrangements (see Economic development incentives);
•  Machinery that is capable of competently planning and developing infrastructure needs to be created. There is a serious infrastructure backlog – but this can’t be solved through provision of federal funding (or seeking private funding) for a list of projects that a ‘central planner’ guesses might be appropriate. Planning and implementation of infrastructure has to be done by agencies responsible for other aspects of the function of which infrastructure is the capital component and who are able to integrate infrastructure effectively into their regional context (see Sorting Out Australia's Infrastructure Mess Needs 'Government' not Micro-management). Private funding and control of goods and services that are subject to serious market failure (which is a characteristic of much infrastructure) is a formula for problems such as: (a) an inability to develop infrastructure systems as a whole; and (b) potential distortion / corruption of the policy process (see Distorting Government).

An attempt to place Australia’s economic challenge in a broader context (involving growing debates about the need to rethink democratic capitalism itself as a system of political economy) is in Restoring the Viability of Democratic Capitalism. This points to: the strength of democratic capitalism from the time of the industrial revolution; post WWII challenges that have arisen from ‘bureaucratic non-capitalistic’ economies in East Asia; the financial / economic disruptions that have occurred in recent decades / years because of incompatibilities between Western-style democratic capitalist systems and ‘bureaucratic non-capitalistic’ economies in East Asia; and the rising global risks of economic instability and conflicts.

Some (working draft / incomplete) speculations about the probable need for a new economic paradigm to overcome the challenge to liberal institutions from the authoritarian alternatives that have been emerging are speculated in Towards a New Economic Paradigm.

I would be interested in your response to my speculations.

John Craig

Some Suggestions to Complement: An Action Plan for Australia's Future - email sent 14/10/14

Ian Macfarlane

Thanks for the reference to the government’s new strategy to promote competitiveness.

While the proposed initiatives seem reasonable in themselves, I should like to submit that there is a need for complementary initiatives that go beyond the bounds of conventional economics to achieve the government’s aspirations because:

•  the effectiveness of Australia’s system of government needs to be raised if it is to play its role in a stronger economy; and
•  the world economy (and Australia’s regional economic environment in particular) now involves features that are not able to be appreciated within a conventional economic framework.

My reasons for suggesting this are outlined in Australia's Crisis is Broader than Economics. The latter was written today - though not in the context of the government’s proposed competitiveness agenda.

John Craig

Turning Australia Around - email sent 10/12/14

William Pesek,
Bloomberg

Re: Australia adrift: Lost decade beckons as good fortune wanes, Business Day, 9/12/14

I should like to suggest for your consideration that, while your observation about the fact that Australia has an economic challenge is undoubtedly valid, some local knowledge is needed in prescribing solutions.

My Interpretation of your article: Australia could be headed for a lost decade. It has avoided recession for two decades. The government has a sound fiscal position compared with others. Vast resource deposits exist with infrastructure to support exports in place. But China's slowdown due to government efforts to rebalance the economy have devastated commodity prices. The federal government has reduced Australia's ability to deal with a difficult future. The budget has been needlessly austere - cutting education / health / welfare spending. Nothing has been done to diversify from dependence on China. Government has encouraged the reserve bank to loosen money policies - which may be pushing Australia towards a subprime crisis. There has been apathy about frothy real estate prices. The Financial System Inquiry called for reductions in housing tax breaks. Austerity policies need to be reconsidered - as large spending on education and training as well as on infrastructure may be the only way to turn Australia around.

Some points that might be worth noting in relation to your suggestions are that:

• While the debt levels of Australia’s federal government are relatively low by international standards, the federal government is confronting a very serious budget deficit which is escalating because commodity prices are declining. A structural deficit was put in place several years ago by fully committing (to tax breaks and transfer payments) the then-huge revenues coming from capital gains at the peak of a resource investment boom. Now that the resource boom capital gains are a thing of the past and even ongoing resources revenues are weakening, the community can no longer expect to receive such generous treatment from governments (see also The Challenge and Potential Cost of Inequality and Insufficient Income, 2014). And state governments, who carry most responsibility for infrastructure investment, generally face debt levels that constrain necessary further infrastructure spending without asset sales that are of dubious benefit (see Privatisation of Public Assets);
•  Australia has been attempting to diversify its economy away from resource dependency since the early 1980s. This primarily involved market liberalization to reduce political constraints on structural adjustment towards new higher productivity functions that were generally expected to be knowledge intensive. Governments contributed with large investments in research and education. However the economy remained insufficiently developed to make productive use of the increased ‘smart’ inputs that it had available (see Defects in Economic Tactics, Strategy and Outcomes, 2000 and The Economic Futility of 'Backing Australia's Ability 2', 2004). Rather than increasing ‘smart’ inputs (ie more education and training spending) progress still mainly requires serious efforts to ‘develop’ the market economy’s ability to benefit commercially from such inputs (eg as suggested in Developing a Regional Industry Cluster, 2000; A Case for Innovative Economic Leadership, 2009; Lifting Productivity: Considering the Bigger Picture, 2010; and Innovation-led Growth Requires Business (Not Government) Leadership, 2014);
• Any actions by governments are severely constrained by the deterioration in administrative machinery that has resulted from politicisation and attempts to make it more business-like over the last 2-3 decades (see How Governments Conned Themselves by Eliminating 'Public' Services, 2014). There have been significant wastage of resources as a result of attempting to undertake major new programs through ineffective machinery. In particular Australia’s machinery for dealing with infrastructure is more in need of serious reform than it is in need of political decisions to undertake major new infrastructure spending (see Infrastructure Obstacles and Opportunities: Submission to Productivity Commission, 2014);
• Australia’s problem with low interest rates has been imported through carry trades, rather than being a product of politically-compliant decisions by the Reserve Bank of Australia (RBA). Australia traditionally runs a significant current account deficit which has been counter-balanced by bank borrowing and the latter has been largely directed towards real estate (see Maintaining Capital inflow, 2008). The fact that ‘carry trades’ from countries with ultra-low interest rates (particularly Japan in the 1990s and then increasingly the US) were available allowed Australia’s banks to be highly profitable because the RBA did NOT maintain a very low domestic interest rate policy. Quantitative easing (and ultra-low interest rates) elsewhere had complex causes and are arguably now past their ‘use by’ date (eg for reasons suggested in Will China's Presidency in 2016 End the G20's Chronic Failure?). The ending of cheap carry trades is likely to have serious adverse impacts on Australia’s property market and banks. It was presumably not for nothing that the recent Financial System Inquiry went to such lengths to argue that Australia’s banks’ ability to withstand a financial crisis needs to be increased;
• Changing the tax breaks that supposedly favour property investment are by no means simple. Some years ago, negative gearing for property investment was eliminated in Australia. The availability of properties for rental collapsed and rents increased – so the policy was reversed. Negative gearing helps keep rentals much lower than they would otherwise be. Moreover there is nothing wrong with allowing the cost of borrowing for investment to be treated as a tax deduction. This is appropriate in all sectors. Australia’s problem is that its economy remains relatively under-developed – so there is a lack of profitable investment options (ie apart from property, banking and resources). And the concessional tax treatment of capital gains is also a reasonable practice. It encourages longer-term investment as well as providing some protection against being taxed on long term inflation. The way capital gains are taxed could be changed, but eliminating concessions would be foolish.

I would be interested in your response to my speculations

Regards

John Craig

Develop a Productive Economy - But Don't Pick Winners - email sent 17/12/14

Robert Gottleibsen
Business Spectators

Re: Hockey must revive Andrew Robb’s vision, Business Spectator, 15/12/14

Your later article (Australia is Drifting Into a Perfect Economic Storm, Business Spectator, 16/12/14) was a reasonable account of Australia’s complex economic challenges. However its endorsement of ‘Andrew Robb’s vision’ which had been outlined in the above earlier article requires caution.

My Interpretation of your earlier article on ‘Andrew Robb’s Vision’: The deficit blowout means that the federal government no longer has the money to drive the economy. The Coalition recognised this in opposition and Andrew Robb (as shadow finance minister) developed a plan to cope. This has been pigeon-holed. Bad government by past and current administrations has contributed to the deficit blow-out and Australia’s deep economic problems. Years of government mistakes have been compounded by dramatic terms-of-trade changes. The Treasurer and Treasury have ignored the Robb plan. The latter did not envisage big falls in oil / coal / iron ore prices but could still restore Australia to health. Robb’s plan was based on recognition that continued Australia prosperity required two basic elements: (a) taking advantage of the emergence of an Asian middle class; and; (b) stimulating those who will employ Australians in future (ie small enterprises / independent contractors). Government also needed to be more efficient to reduce need for tax rises. The Robb plan had 9 points: (a) end federal / state duplication in education and health to save $10-20bn pa; (b) ensure banks can lend to SMEs (as Murray inquiry also suggests) by ending large enterprises’ unfair contracts with SMEs; (c) ensure that ATO complies with law in taxing independent contractors; (d) realign university system as future supplier to Asian market; (e) promote the benefits that could come from FTA’s with Japan, South Korea and China; (f) reconsider whether motor vehicle industry might be saved by employing robots and supply chain technology to become efficient; (g) support direct action on the environment; (h) increase infrastructure investment, while involving the states more and emphasising water infrastructure / northern development; and (i) addressing the looming gas shortage.

There is no doubt, as your article suggested, that Australia’s economic capabilities and government effectiveness need to be enhanced.

However it is extremely dangerous for central authorities to ‘pick winners’ in an economic context – and the ‘Robb plan’ as you outlined it seems to do so. Australia needs infrastructure to be developed but it does not need central authorities to ‘pick infrastructure winners’ whether they be the federal government’s current preference for roads (see And the Winner of the 2014 'Pink Batts' Award is ....) or an alternative preference (eg for water infrastructure and northern development). Infrastructure should emerge from well developed machinery to identify and act on projects that accord with regional needs not from central authorities’ guesses (see also Infrastructure Obstacles and Opportunities: Submission to Productivity Commission).

Australia’s Reserve Bank was quite convinced a few years ago (see Do Blind Spots Cloud the RBA’s ‘Lucky Country’ Vision, 2011) that the was no need to do anything about the risk that Australia’s commodity boom might be followed by a bust (as such booms always have been before when rapidly escalating supply encountered stagnant / falling demand). The RBA’s expectation that Asia’s growth guaranteed a ‘stronger for longer’ resources boom ultimately proved to be wrong.

And while an emergent Asian middle class may offer huge opportunities to Australia, it is also possible that it will not. Japan’s position is desperate (see Japan’s Predicament) and China seems to be headed for the same sort of debt-driven financial debacle that crippled Japan’s prospects in the early 1990s (see Heading for a Crash or a Meltdown?) and to be trying to avoid this fate by creating an international ‘Asian sphere’ that would neither be compatible with Australia’s liberal political and economic systems nor necessarily involve a consumer ‘middle class’ (see Creating a New International 'Confucian' Financial and Political Order). Australia needs an economy that is not targeted at any particular politically-favoured ‘winners’.

Elements of another possible ‘plan’ for dealing with Australia’s challenges are briefly alluded to in Turning Australia Around.

Regards

John Craig

Beyond Competition Policy - email sent 27/3/15

Professor Ian Harper

Re: Kelly J., ‘Ian Harper competition policy review’s path to growth’, The Australian, 27/3/15

I should like to try to add value to what (the above article suggests that) your review panel is recommending to boost Australia’s economic growth.

There is little doubt that tidying up Australia’s competition laws would be a useful step. However there are significant limits on what can be achieved by a focus on creating an effective competitive environment – for now-somewhat-dated reasons that were outlined in Defects in Economic Tactics, Strategy and Outcomes (2000). A basic constraint is that while market liberalization / competition policy requires and makes it possible for individuals / enterprises to compete, this does little to ensure their ability to compete successfully in the high value added industries that a high-wage economy such as Australia’s requires. A whole range of complementary economic capabilities have to exist within an industry cluster to maximize the prospects of any individual enterprise and there is a ‘chicken and egg’ constraint on the emergence of those complementary capabilities.

The use of modified versions of the ‘bureaucratic’ methods of government that were traditional in East Asia prior to Western expansion allowed economic miracles to be achieved in that part of the world in the late 20^th century. Some experiments in achieving similar results in ways that would suit a democratic capitalist environment were reasonably successful in Queensland in the 1980s – but never actioned on a large scale because of the across-the-board politicisation of public services.

Options to accelerate the development of the complementary capabilities that are required for high productivity internationally-competitive industry clusters to emerge were suggested in Developing a Regional Industry Cluster (2000); Probable Breakthrough in Understanding Economic Development (2004); A Case for Innovative Economic Leadership (2009); Lifting Productivity: Considering the Bigger Picture (2010); and Reinventing the Regions (2010).

Thus I submit that it would be desirable to consider ways to complement the development of a finely-tuned set of competition laws.

I would be interested in your response to my speculations

John Craig

Creating an Environment in Which Australians Can Succeed if They 'Have a Go' - email sent 23/5/15

Robert Wickham
Salesforce.com

Re: For Australian start-ups, it's more than just ‘having a go’, Technology Spectator, 22/5/13

Your article validly identified that the component that is missing from the federal government's exhortation for Australians to ‘have a go’ is any serious attempt to create an ‘ecosystem’ that shifts Australia towards an innovation and knowledge-driven economy. It then suggests various programs that government could put in place (eg a national innovation agency, increased venture capital funding and incentives) to achieve that goal.

I should like to suggest for your consideration that, while your goal is highly desirable, political attempts to lead the transformation must result in failure. Reasons for this are suggested in Economic solutions are beyond politics (1995). This draws attention to the interest group entanglements that inevitably affect any political program and the inadequacy of ‘what everyone already knows’ (that must characterise the political system’s understandings) in leading change in economically productive directions.

By way of background, I note that in 1983, while working for the Queensland Government, I wrote one of the very first proposals for achieving the goal that your article referred to. And in fact that proposal (‘Toward a Strategy for Technological Development in Queensland’) identified the need for an effective innovation system (which you called an ‘ecology’). However, despite government enthusiasm for an innovative / knowledge-intensive economy, politically driven efforts have achieved very little because the political system always wants to control outcomes – rather than allowing them to be market driven.

Ways to get around this were suggested in A Case for Innovative Economic Leadership (2009). This basically required that the political system get itself out of the way by empowering apolitical leadership in the development of an appropriate economic ‘ecology’ – using methods that had been trialed with some success in Queensland in the 1980s (eg see Developing a Regional Industry Cluster, 2000), before the politicisation of Australia’s public services put an end to such efforts.

Progress now also requires that apolitical groups (eg business) are willing and able to take the lead in making change. However does not happen (eg see Making Australia's Competitiveness Everyone's Business, 2013). Business in Australia sees that its contribution is limited to lobbying the political system - even though programs to support innovators can’t succeed if they are provided by democratically accountable institutions. Direct government 'assistance' is an obstacle to the emergence of the sort of 'ecology' that is needed, rather than a path to real economic development.

Thus, while your goal is to be applauded, I submit that some reconsideration of the methods used to achieve it is needed.

I would be interested in your response to my speculations

John Craig

Are Service Exports to Asia Australia's Best Economic Options? - email sent 12/11/15

Gene Tunny,
Queensland Economy Watch

Re: Great presentation by HSBC’s Paul Bloxham on the economic outlook to ESA Qld, Queensland Economy Watch, 11/11/15

I would suggest that there is a need to consider the context to HSBC’s argument that service exports to Asia are Australia’s best economic option.

HSBC may be presenting an argument that would benefit itself – rather than necessarily being most beneficial to Australia. HSBC’s ’s base and major commercial interests are in China. HSBC Australia is a subsidiary of HSBC Holdings PLC - a British multilateral banking and financial services company headquartered in London. However HSBC Holdings was established there and is dominated by the Hong Kong and Shanghai Banking Corporation whose prospects depend primarily on China’s future success.

The data HRBC emphasised (ie that in Australia’s next growth driver: The role of the services sectors) took the view that China’s prospects are great and suggested how Australia could prosper in that environment through service exports – presumably with HSBC’s help in arranging deals. However the presumption seems overly simplistic. It can be noted, for example, that:

•  The world is on the point of a major transition, and it is unwise to presume that China’s past growth (and its stimulatory impact on neighbours and the world) can be maintained (see As Power Shifts from the US to the Soviet Union, to Japan, to China, to ....). Many observers believe that that China is not coping well with the economic transition from export and construction driven demand to domestic consumption that its government has been trying to engineer (eg see references);
•  China’s major problem lies in its financial systems (see Financial Systems: Where the Rubber Hits the Road) and HSBC’s presentation said nothing about those issues. China’s problem (like Japan’s) is that under the neo-Confucian methods for stimulating economic ‘miracles’ introduced into China in the late 1970s credit is provided (presumably by groups including HSBC) for state-favoured investment on the basis of elite / political consensus rather than by consideration of likely return on capital (see rationale for this in China: Sustaining Growth by Neglecting Profitability). China’s economy has been driven (especially since the GFC) by the explosive growth of credit and bad debts. These have been reaching dangerous levels, and this is one of the reasons that China’s leadership described its earlier growth model as ‘unsustainable’. China’ regime has apparently tried to find a way around this problem (which had derailed Japan’s economic ambitions in the 1980s) over the last 2-3 years by generating profits in state-manipulated real estate and share ‘markets’ – but this has not worked (see Context to China's Sharemarket Boom and Bust). And, as China’s real-economy growth also started collapsing a few months ago, China reverted to its post-GFC (ie ‘let’s just expand credit and bad debts’) strategy – and even this is apparently no longer working (see China is experiencing the dismal effects of the law of diminishing returns, 12/11/15);
•  China’s efforts to create ‘markets’ in which the capital required for investment might be gained without simply escalating debts seems to have spilled over into international state-encouraged property investment – and this may also prove unsuccessful (see Are Unfinished Apartments A Risk in Australia Also?);
•  China’s contribution to global growth (which was the subject of the much-admired slides 10 and 11) may not be sustainable. It may not even be reliable (because of widely-suspect unreliability of China’s official statistics);
•  China has been seeking to promote a new international order which it would dominate and in which investment would be orchestrated through elite consensus rather the calculations of profitability (eg see Creating a New International 'Confucian' Financial and Political Order). Under that system, China would (as it did in Asia prior to Western expansion) be the ‘big man’ who could organise anything – and would benefit from doing so because China’s insiders would be able to profit as the middle-men in doing so. The fact that China seems to be trying to create an alternative to the liberal post-war international order was noted recently by one of Australia’s leading strategic analysts (see A New Security Plan Needed);
•  Power is traditionally exerted in East Asia by methods that are quite unlike those in Western societies. It primarily involves establishing a high social status and providing subordinates / enemies with ‘information’ that has the character of propaganda. ‘Information’ provided does not seek to enable those who receive it to understand their best options, but rather to encourage them to take action that is likely to be beneficial to those who provide it. In the 1980s Japanese groups with criminal and dubious political connections provided ‘information’ to Queensland’s government which demonstrated the benefits of establishing resource / tourist industries. This convinced Queensland political establishment to support them (and the investments they facilitated) even though Queensland had much better economic options that had not been considered, and the factions who provided the pro-resource-tourism ‘information’ had hidden agendas;
• Success in high productivities industries (ie those that are likely to support high wages / business profits / tax revenues) typically requires ‘competitive’ advantages (ie those related to strategy / knowledge / skills) rather ‘comparative’ advantages (ie the natural or stable pre-existing advantages of a region). In the 1980s Queensland’s GSP per capita had long been low by national standards and Australia’s GDP/ capital had itself been declining by international standards since the start of the 20th century. Queensland’s relative position was not changed by exploiting new ‘comparative’ advantages in the 1980s (ie in resources and tourism). The other service industries that HSBC has suggested that Australia now focus on also involve ‘comparative’ (but usually not ‘competitive’) advantages.

For reasons suggested in Lifting Productivity: Considering the Bigger Picture (2010), Australia could have many excellent economic opportunities that are not simply related to service exports to Asia that might be facilitated by HSBC. The latter should be considered – but not in the absence of an understanding of Australia’s economic environment and opportunities that is much broader than HSBC has provided.

I would be interested in your response to my speculations

John Craig

Playing Political Games When Major Economic Reforms are Needed - email sent 27/9/16

Ross Gittins
Fairfax Media

RE: Global Leaders Change Direction While We Play Political Games, Brisbane Times, 25/9/16

Your article (which I have outlined here) suggested that there are weaknesses in the federal government’s policy agenda and that it needs to recognise that a new sense of economic direction is being recommended by the ‘trumps’ in the OECD and IMF (ie collectively increasing growth friendly government spending to counter a current global trend towards economic stagnation). I should like to suggest that there is nothing new about insubstantial populism dominating Australia’s political system / economic agenda and that the new fiscal policies that the OECD and IMF ‘trumps’ are advocating would be no more constructive.

Lightweight policy has been a constraint on progress in Australia for some decades (see On Populism, 2007+).

The Problem: As the latter noted, this constraint arose largely because naive ‘reforms’ were put in place from the 1980s to deal with 1970s’ political frustrations and emerging economic challenges. Governments’ ability to devise / implement constructive policies collapsed (see Evidence of Dysfunctions, 2001+, Decay of Australian Public Administration, 2002; and Australia’s Governance Crisis and the Need for Nation Building, 2003). Australia’s policy development capacity had always been weak and reliance was often placed on OECD / UK / US leadership. Little of real significance was known about Asia whose global economic and political influence was rising. Governments’ incompetence was further increased by trends towards ‘political correctness’ (ie by claims that ‘something’ would be a constructive change and criticisism of / attacks on those who dispute that claim to prevent the claim being examined in depth - see The Church of Political Correctness Threatens National Progress, 2016).

In the increasingly dysfunctional government environment that emerged from the 1980s, Australia adopted an economic reform agenda that suffered huge limitations (see Broken Governance and Ineffectual Economic Strategy: Two Sides of the Same Coin?).

For example: Market liberalization increased the need for competition but did not ensure the development of environments in which firms / individuals could do so in high value-added activities (see Defects in Economic Tactics, Strategy and Outcomes, 2000 and Lifting Productivity: Considering the Bigger Picture, 2010). Attempts to create a supportive economic environment (eg by providing ‘smart’ economic inputs and government ‘assistance’ to firms) were ineffectual (see The Economic Futility of 'Backing Australia's Ability', 2004 and What is Wrong with Government ‘Assistance’ to Fill Market Gaps?, 2002). ‘Political push’ (rather than ‘market pull’) could not create the commercial competencies that international competitiveness required. The importance of building a supportive environment for innovation had been recognised since the 1980s – but little was achieved.

Increased efficiency in public goods and services was sought by introducing competition / commercialization without recognising that: (a) governments’ primary function (‘governing’ – ie creating an environment in which others can ‘do things’) requires collaboration and quite different knowledge and skills to those needed for production efficiency; and (b) government goods and services tend to be subject to market failures that competition / commercialization aggravate - thus offsetting the benefits of efficiency gains (see Neglected Side Effects of National Competition Policy Reforms, 2004). A new resources’ boom driven by emerging economies came to be officially expected to last indefinitely (see Do Blind Spots Cloud the RBA’s ‘Lucky Country’ Vision?, 2011). Further reforms were neglected even though 1980s’ reforms had been advocated because dependence on resource booms and busts (and on services and subsidised manufacturing) had led Australia to a century of falling per / capita GDP by global standards.

Unfortunately the new ‘growth friendly public spending’ strategy that the global ‘trumps’ (OECD and IMF) have now advocated (and which both the RBA and your article have endorsed) can’t be effective for reasons suggested in Alternatives to Monetary Policy (2016).

Why? Firstly the ultra-low interest rates that would seem to make ‘growth friendly public spending’ affordable are unsustainable. They have: encouraged high debt levels; distorted investment; increased social inequality / political instability; and have also created risks of an uncontrollable bond market crash. Secondly Australia’s machinery for planning and developing infrastructure is a shambles (because of the effect of naïve public sector ‘reforms’) and now seems often to produce proposals for wasteful spending. Substantial changes are needed before ‘growth friendly public spending’ options could be reliably identified and implemented.

Alternative to Monetary Policy also suggested that, instead of increasing public spending on infrastructure, it would be better to:

• restore competence in Australian governments’ administration;
• boost the supply side of Australia’s economy through an emphasis on using strategic market and technological information to accelerate the development of market-oriented internationally-competitive regional industry clusters (ie to democratically endorse public-interest protocols for apolitical processes to stimulate region-level change equivalent to innovation within enterprises); and
• encourage attention by the G20 to the distortion in some financial systems that have adverse effects on global economic growth prospects and the stability / efficiency of international financial systems.

The latter relates mainly to the non-profit-oriented / non-transparent financial systems associated with the achievement of ‘real economy’ miracles in major East Asian economies – and their adverse side effects such as requiring: (a) domestic demand deficits that are a structural obstacle to global economic growth; and (b) monetary policy responses that risk financial system instabilities. How this probably also makes the ‘trumps’ proposed collective ‘growth friendly government spending’ option unworkable is outlined on my website. International Regulation of Lending Standards (2016) suggested how the G20 might have addressed that constraint.

As your article suggested, it is disgraceful that Australia’s elected leaders are content to play political games when there seems to be a need for a significant change in economic direction.

John Craig

It is the Economy, and It Needs More Than the PM's Attention - email sent 2/1/17

Professor Peter Van Onselen,
University of Western Australia

Re: It’s the economy, Malcolm, and it needs the PM’s undivided focus, Weekend Australian, 31/12/16

Your article suggested that the federal government needs to focus on the economy. But your article itself focused on budgetary challenges rather than on the national economic problems that are the main source of the budget problem.

A way is suggested below to: (a) identify realistic solutions to the economic challenges; (b) create an environment in which they can be politically accepted; and (c) support credible projections of rising government revenues and reduced spending. This involves encouraging various groups of experts and practitioners with diverse specializations to openly and realistically identify and analyze economic challenges and other complex / contentious issues - in ways that would: (a) boost public understanding; (b) facilitate useful non-governmental initiatives almost immediately; and (c) identify public policies and programs for political consideration.

My Interpretation of your article: ‘It’s the economy, stupid’ was a campaign slogan used successfully by Bill Clinton against George HW Bush in 1992. It needs to be the Turnbull Government’s focus. Australia is approach a technical recession. The budget is worsening. Growth is weak and tricky accounting was needed to avoid an even slower projected return to surplus. To capture support from older Australians and sell tougher budgets requires government to be all about the economy. Australians need to embrace tougher measures or the ALP will confuse people with magic pudding solutions to budget problems. Turnbull’s support has fallen amongst older Australian – especially in Queensland which is critical for PMs to win. The problem is that Queenslanders are swayed by populism which has little to do with budget repair. Older Australian are concerned about superannuation / pension changes which are the bare minimum needed to fix the budget. PM is seen as failing by moderate Liberals – and conservatives are most vocal in seeking change and influential in marginal seats. The right of politics has fractured. Economic liberals want budget repair without blatant populist politicking. Many conservatives have ideas that won’t fix the budget – but rather focus on increased populism, more spending on niche issues and ‘culture wars’ distractions. Economists will say that government and opposition are each half right in repairing the budget – yet Turnbull needs to achieve this in 2017. ALP wants to remove / cut tax concessions (eg negative gearing / capital gains). Government wants to restrain spending. But how can this be done while rejecting ALP policies to target the wealthy and cutting company taxes? 2017 will see a showdown between political leaders. Whoever can repair the budget should win.

Australia has a significant economic problem. Attempts from the 1980s to diversify its historical reliance on natural resources towards higher value-added (especially knowledge intensive) functions were of limited benefit. Market liberalization created incentives to compete without overcoming the ‘chicken and egg’ constraints on the development (especially in economically marginal regions) of the support functions often needed for competitive success (see Defects in Economic Tactics, Strategy and Outcomes, 2000). The inadequacy of reliance on mainstream economics' assumptions about economic development in a free market has been further increased by the distorting effect of reserve banks' ultra-easy monetary policies (ie encouraging investment in paper assets that will benefit from ever-lower interest rates rather than from development of 'real' economic capacity).

Over the past decade growth has depended on a resource investment boom driven largely by China’s massive industrial, property and infrastructure investment (including an initially-emergency response to the disruption of export-oriented manufacturing by the GFC). Dependence on massive often-wasteful investment to maintain growth created financial risks for China’s economy and attempts were made from 2013 to diversify it towards reliance on domestic demand to drive growth. This invalidated many analysts’ ‘stronger for longer’ resources boom hypothesis.

At the height of the resource investment boom, the federal government received huge capital gains tax receipts. These were committed to reducing tax rates and increasing welfare transfers. This ensured a structural budget deficit if and when the resource investment boom eased – as it has now done (see Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government, 2009). The latter again pointed to the need to adopt a more sophisticated approach to developing a broader base of internationally competitive high value added economic functions – and suggested how this might be achieved (eg by creating financial incentives for state administrations, that have the greatest influence on economic development, to encourage high economic value added functions rather than those with the high economic turnover that existing arrangements favoured. Doing so would have: (a) reduced demands on government spending (eg in meeting the welfare needs of those who could not find well paid employment in poorly developed regional economies); (b) increased governments’ tax base / income; and (c) reduced dependence on China’s economy. Dependence on exports to China is becoming hazardous because of its slow economic diversification and its risk of a debt crisis due to chronic reliance on over-investment to maintain the rapid growth that has been its authoritarian regime’s main basis for ‘legitimacy’ in the eyes of its people (see Importing Risks from China, 2016).

As the resource investment boom eased, Australia’s growth came to depend on high rates of investment in real estate which: (a) created immediate jobs; (b) significantly increased national debt levels; but (c) contributed relatively little to future national income or tax receipts. Due to prolonged reliance on growth driven by unproductive investment, Australia (like China) now has a national debt / GDP ratio which suggests that a debt crisis is possible – especially as probably-rising interest rates globally will now increase the cost of debt service and refinancing (see Australia's Risk of Financial / Banking Crises as Growth is Driven by Rapidly Rising and Often Misdirected Debt, 2016). Federal government budget deficits are relevant to Australia’s risk of a national debt crisis (because of their effect on the credibility of government guarantees of Australia’s banks that seem to be exposed to the risk of what has become a real estate bubble). However the key to avoiding a national debt crisis is to focus on strengthening the economy – not just on balancing the federal budget. And projections of favourable future government budget outcomes can be highlighted, if a realistic strategy for development of Australia’s economy has been identified and started to be implemented independently of governments.

Moreover, as your article indicated, the issues that Australia’s political leaders have to contend with are not limited the economy. For around 2 decades political stability has been undermined largely (though not only) because of concerns by disadvantaged groups in economically-marginal reasons about their predicament (see Assessing the Implications of Pauline Hanson's One Nation, 1998). Now in Australia (as in Europe and America) large segments of the grassroots community are becoming concerned about issues where there has been a refusal to allow realistic assessment of elites' assumptions about necessary policy responses to complex issues (see Incorporating the Alienated: A Challenge to Australia's Civil Society, 2014 and The Church of Political Correctness Threatens National Progress, 2016).

In order to create an environment in which realistic solutions to Australia’s economic challenges can be found and politically accepted, it would probably be desirable to encourage the establishment of competing politically-independent panels with expertise and experience in diverse areas to:

• Openly identify and study Australia’s actual economic environment, challenges and opportunities, so as to: (a) promote realistic community understanding; (b) enable community / business groups to take independent initiatives to stimulate stronger whole ‘real economy’ systems and regional industry clusters almost immediately; and (c) identify complementary public polices and programs;
• Open up the most contentious ‘politically correct’ and 'politically-incorrect' assumptions to some depth of publicly-accessible analysis.

A focus on economic challenges and opportunities themselves should allow Australia’s budgetary difficulties to be reduced (eg by giving credibility to projections of increasing revenues and declining spending). However the reverse is unlikely to apply. Some earlier suggestions about dealing with Australia’s economic challenges are outlined on my website.

I would be interested in your response to my speculations.

John Craig

Big Four Bank Chairmen Need to Get on with Federal Budget Repair - email sent 4/1/17

Richard Gluyas,
The Australian

Cc: Catherine Livingstone (CBA), David Gonski (ANZ), Ken Henry (NAB) and Lindsay Maxsted (Westpac)

Re: Big four bank chairmen plead for federal budget repair, The Australian, 3/1/16

Your article highlighted major banks’ call for political bipartisanship in repairing the federal budget to avoid losing Australia’s AAA credit rating.

This is foolish. Is it is the major banks and other significant business groups who are best placed to actually repair the budget – ie by taking the lead in enabling a vision of ways to strengthen Australia’s ‘real economy’ to be identified and become the target of non-governmental initiatives to achieve practical improvements. The federal budget problem is a reflection of weaknesses in Australia’s economy. Exposure to yet another commodities investment boom encouraged government fiscal generosity which is unaffordable as that boom is ending. The gap between spending and revenue could be significantly cut by reducing current economic weaknesses (ie an economy overly-dependent on commodities’ exports) thereby: (a) strengthening the tax base; and (b) reducing demand for government transfers to those who are struggling to cope.

How change might be achieved was suggested in It is the Economy, and It Needs More Than the PM's Attention .

There are severe limits on what Australia’s politicians can do to solve the budgetary problem, or reduce weaknesses in Australia’s ‘real economy’. They are bogged down in infighting about sharing out what has become an inadequate ‘pie’, and can’t take the lead in stimulating the developments in the ‘real economy’ that are needed to make the ‘pie’ bigger because of the interest group pressures they are subjected to.

Australia’s major banks can’t themselves know details of how to strengthening the ‘real’ economy because their emphasis is on the ‘financial’ economy. But they are well placed to recognise the need to strengthen Australia’s ‘real economy’ and to create a framework within which those with the necessary information and experience can identify likely ‘real economy’ answers and thus give direction to almost-immediate independent / collaborative initiatives to try to strengthen existing economic systems and regional industry clusters.

Australia’s big banks and other major businesses need to be pressured to ‘get on with it’. Lobbying politicians for budgetary changes in the hope that this will overcome weakness in Australia’s ‘real economy’ is a cop-out.

John Craig

GDP is a Critically Important 'Sustainable Development Goal' - email sent 9/1/17

Tani Shaw,
Sydney University of Technology

Re: How and why we are moving beyond GDP as a measure of human progress, The Conversation, 4/1/17

Your article pointed to the development through the UN of Sustainable Development Goals (SDGs) that would be used as a measure of economic progress in parallel with GDP.

I would like to submit for your consideration that: (a) a prevailing failure to genuinely measure GDP has become an obstacle to human progress that is as severe as (and much more immediately dangerous than) the risks associated with any of the SDGs; and (b) it is necessary to devote a lot of effort to ensuring that the SDGs genuinely represent ‘progress’, rather than just being assumed to represent ‘progress’.

GDP measures overall value added in an economy. This mainly involves business profits, employee wages and government tax receipts. However, in what is now a large segment of the world economy, ie East Asia, ‘profitability’ has often not been taken seriously for decades (see Evidence) because of distortions in national financial systems (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy). Resource allocation has not been based on assessment of return on / return of capital by independent enterprises, but rather on a consensus about the use of national savings held by state-linked banks based on consideration of a diversity of factors (eg market share, national power, employment – and environmental goals recently in China).

This has caused serious international and domestic problems (see More on: Should Donald Duck?). Those consequences have included: (a) an effective subsidy on production which distorted industrial competitiveness; (b) a need to suppress domestic consumption to ensure current account surpluses to provide capital for investment without international borrowing; (c) international financial imbalances – and a dependence on trading partners’ willingness and ability to sustain ongoing current account deficits and rising debt; (d) a need also for trading partners to adopt ever easier monetary policies so as to maintain demand in excess of income – policies which: distorted investment; increased social inequality (because gains mainly came to those with significant existing assets); and political instability; and (e) eventual financial crises in the countries where profitability was not taken serious (eg first Japan in the late 1980s and various emerging Asia economies in 1997-98).

The current consequences include: (a) a threat to economic globalization similar to that at the end of the 19^th century that led to WWI; (b) increasing geo-political tensions; and (c) a likely financial crisis in China which has become a major driver of global economic growth (see Importing Risks from China). Unless these problems are remedied, economic progress in terms of any of the SDGs is now highly unlikely.

While there is undoubted value in examining other indicators of economic progress, a very high priority needs to be given to ensuring (eg as suggested in International Regulation of Lending Standards) that GDP (especially business profitability) is actually reliably measured so that distortions in international financial systems (and their economic, social and political consequences) can be eased.

Finally I submit that it is necessary to devote a lot of effort to ensuring that the SDGs genuinely represent ‘progress’ because there are some areas in which the assumed nature of ‘progress’ is uncertain and where there has often been a reluctance to evaluate whether those assumptions are reliable (see The Church of Political Correctness Threatens National Progress).

John Craig