The contradictions of the Abbott Government

In a new federal government which has mostly been a huge disappointment, Joe Hockey stands out as being closest in it to a rational politician. Too often, the government has tended to prioritize a “tea partiest” social reform agenda (driven mostly by Abbott himself), while often eschewing the urgently needed economic reform agenda, which has always been the hardest, and most important area to tackle in Federal politics.

Abbott seems ready to implement a baffling array of side issues, long being championed by the looney right in Australia, like the Institute of Public Affairs, who are well outside the main stream, but who nevertheless are listened to by the ideological, ultra conservative, mostly conservative Catholic, cabinet of Abbott. To list them all would take up more space than desired, but just consider these:

  1. apparently it is now “ok to be a bigot” (according to the chief Law Officer in the land George Brandis), no matter how this might offend others or diminish their space under the Australian sky;
  2. nobbling the ABC, with apparently the eventual intention of selling off, at least parts of it, to News Limited;
  3. bringing back the British honors system (what a joke!);
  4. insisting on implementing the most expensive paid parental leave scheme in the world (and most eschewed to the rich);
  5. refusing to consider a free vote on gay marriage; and
  6. dismantling a website developed by the Federal Department of Health to inform consumers of the the most fattening and least fattening foods and have that reflected in food labeling – a very effective way of tackling the obesity epidemic  and one fought tooth and nail by the fast and packaged food industries. The fact that this was traced back to the assistant Minister for Health’s senior staffer, who happened to be a former lobbyist for these said industries, did not concern Abbott one iota. It is difficult not to contrast the behavior of Barry O’Farrell and Abbott and his ministers. The Abbott Fedral Government seems to be more captive of vested interests than any in living memory – and it has not even been in office 12 months yet.

Joe Hockey, on the other hand,  has exhibited mature leadership in not pandering to the nay sayers in the face of closure of smoke-stack and un-economic industries like cars, alumina and uncompetitive manufacturing. He has tabled a visionary process to funnel Superannuation monies into new infrastructure builds by effectively bribing the states to sell off their mature infrastructure assets and then put the proceeds into new start-up programs in return for the Federal government providing 15% of their cost. Now 50% of Super Funds go offshore, because they do not want to invest in start up infrastructure projects, but are more than prepared to invest in mature assets with proven revenues.

This will revolutionize the way infrastructure is financed and built in this country, at a time when construction in the mining industry is winding down. A sensible, common sense, and economically rational way of tackling this problem.

 

What Could China look like in the year 2040? A perspective for the next 30 years

from my book “Australia and the World in 2040“. Complete copies available in February 2018

In the early part of the 21st century, China was the fastest growing economy in the world and overtook the US in GDP terms in 2015. It also had the greatest foreign surplus in the world, and was the largest lender to the US, the biggest foreign debtor nation in the world.

When Xi Jinping came to power in 2011, the per annum growth of China’s economy was beginning to slow from the heady 10-15% rates for most of the 25 years to 2012 to a more modest 6-8%. Although still very high by world standards, slow growth in China meant a lessening of the Communist Party’s legitimacy (at least that was the fear in the minds of its leaders). Much of the high growth in that 25 year period had come from the rapid industrialisation brought about by Deng Zou Ping’s reforms at the 1979 plenum which turned the country into a market economy, at least for manufacturing products.

This resulted in about 400m people migrating from the country sides into cities where they manned the new factories, often in very primitive conditions. It nevertheless saw most of those 400m people go from rural poverty to earning a living wage – an unheard of event anywhere in the world up until that time. By 2010, though, much of China’s advantages in basic manufacturing were eroding with higher wages, higher costs and a higher exchange rate. Many factories were moving to lower cost countries such as Vietnam, the Middle East and Africa.

China now faced new reform challenges, which would see itself move up the “food chain” from low skill manufacturing, to high tech, innovative design and manufacturing. It also needed to rapidly develop its services sector such as education, finance, medical, bio-technology.

They also needed to rapidly reform agriculture where there was no private ownership of land (it was largely controlled by regional party chiefs), so there had been nothing like to development of rural land under private ownership equivalent to what had happened with city dwellings. As a consequence, Chinese agriculture was low tech, low productivity, and the peasants had little incentive to develop their land.

They also singularly lacked what most western countries took for granted, and which China’s rapidly growing and well educated middle class were demanding: rule of law, modern government services such as a social security safety net, modern hospitals, pensions, consumer laws, environmental laws. Most of all though, what Chinese people most wanted was a society free of corruption, especially by part bosses.

At the historic plenum in 2013, Xi Jinping discussed and flagged a number of reforms which in many ways exceeded Deng Zou Ping initiative in the early 1980s. For the first time, the Plenum’s official document committed  for markets to play a “decisive” role in the allocation of resources in the economy. In the coming years this lead to the role of state own enterprises being considerably diminished, with many of them being privatised or closed (if they were too inefficient).

The SOEs, which in 2013 represented over 50% of economic output, were also expected to stand on their own merits in terms of funding, and banks were liberalised and skilled in terms of their commercial lending activities in order for this to be brought about. These reforms resulted in a number of enterprises going to the wall (bankruptcies in SOE’s were allowed for the first time in 2016), but it also resulted in a number of them becoming internationally competitive, and a number of them grew into major global corporations. In 2014, there were 2 Chinese companies in the top 1000 companies (outside the US) by capitalisation. By 2030, there were 55, all growing out of reformed SOEs of 2014, and all public companies floated on the Hong Kong and Shanghai Stock exchanges

To support the 2013 reforms, financial institutions were up-skilled in money market operations as the Party announced that as of the end of 2014 there would be a partial float of the Yuan and a full float by 2016 when it would become the single Chinese currency, both domestic and international, and would be fully convertible. When this came about in January 2016, the currency rose by 25% against the US dollar. Interest rates became market determined by the beginning of 2015, the Chinese Central Bank was made independent of day to day government directive, but was required to work within parameters determined by the government to achieve certain economic outcomes such as exchange rate bands, inflation and unemployment had to be kept within certain bands. Between 2015 and 2020, the government also spent $250m in computerizing their services, particularly to online services, and in boosting the activities and sophistication of the Chinese Bureau of Statistics.

All these changes were primarily designed to make the economy more transparent, less corrupt,  and oriented to moving away from growth coming from investment in export industries to growth coming from productivity improvements and rapidly expanding consumer demand at home. The reforms included:

  1. key economic reforms such as liberalising the setting of interest rates (ie to the market), incentivising innovation, loosening the grip of competition-stifling state-owned enterprises (SOEs) on vital areas of the economy;
  2. allowing private ownership of rural land, and removing the ban on rural residents buying land in cities, which would allow peasants to cash in on the value of the land they work, and thus bring them up to the status of their urban equivalents. It was also hoped that this would unleash a flood of new investment in rural areas, modernising agriculture, and unleashing a further round of rapid growth, It is also seen as a key way to unleash pent up spending from rural areas which would become a major area of growth in consumer spending. This is exactly what happened from about 2018 onwards; and
  3. setting up an independent judiciary at local, regional, and national levels

While at the same time as bringing these economic reforms into being, Xi signalled there would be no political liberalisation following the Plenum in 2013. In fact he considerably strengthened the state security apparatus, doubling its budget between 2013 and 2020. Real political reform would not come until Xi successor came to power in 2023. Over Xi’s time in office, political reforms did take place mostly in the countryside, starting with the election of party officials on local councils. To stand you had to be a member of the communist party, but there were real secret ballot elections as early as 2015 in a number of rural areas. This soon spread to provincial governments by 2020, and the party then formalised its already existing factions of conservative, moderates, modernisers and liberals. If a citizen wanted to vote or stand, you had to be a member of the party. This meant that by the time the President and polit-bureau was elected by all party members in 2028, the party itself had grown from 40m members in 2013 to 750m members. 85% of these members voted in the 2028 elections.

China had always thouight of itself as a great power, it is just that western countries had not allowed it to take what regarded as its rightful place in world affairs. Since 2015, when it became the biggest economy in the world, it began to re-assert itself in the manner of a great power: by 2018, it had 4 million men under arms, 30 nuclear powered submarines and 5 nuclear powered aircraft carriers, and over 5000 supersonic strike fighters which many in the west regard as superior to the US F35 Joint Strike Fighter. It also had a global network of weapon carrying drones controlled out of Hong Kong, and a formidable international spy network.  As a great-power, it had considerable reach, but saw its primacy as being in the AsiaPacific region. The Americans also thought of themselves as an AsiaPacific power, particularly since Barrack Obama refocused them away from Europe and onto Asia in about 2010. Since then, the Pacific became the primary battleground. Interestingly though, it was not the Pacific but the Indian Ocean where tensions initially first came to boiling point between the world’s two superpowers.

Being the largest trading nation in the world, China in 2015 had built its navy into a significant blue water force, although it was still some way behind the US and even India, whose navy was by far its most significant military force. China was determined to make sure all its sea-lanes were kept open, and that trade could flow in and out of China without interference.  In 2015, the most significant of these was not in the Pacific, but in the Indian Ocean. Or, more specifically, the Arabian Sea. This had been for a century or more, one of the busiest sea highways in the world, and was critical for China in particular as the Persian Gulf was its major source of oil and gas. Since the early 1990’s, there has been a great deal of lawlessness around such states as Somalia, Yemen, and the Sudan, in many ways failed states. Somalia also played host to a network of pirates who specialised in boarding western (and sometimes Chinese) freighters, taking their crews and passengers hostage, and then demanding and getting tens of millions of dollars in ransoms.

By 2015, China had just about enough of this. In spite of a large of navies – British, French, German, Italian, American, Australian, Indian, Scandinavian and Japanese – patrolling the Arabian Sea, these hijackings persisted, and were even becoming more daring. China decided to act. First, in the face of mounting international criticism, they sent several divisions of para-troops into Somalia and effectively destroyed the pirate’s operating bases, and killed many of them. Secondly, they put pressure on world banks to freeze their assets. And thirdly, they captured and banished their leader, Jacda Bashire, to the international court in the Hague to be tried (ironic, since they were not a party to the treaty which set the Court up, and did not recognise it as a legitimate legal entity which could preside over its citizens – the same as the US). This effectively ended the pirate operations, at least for some time.

There still remained a core group of criminals who had a organisational structure, and significant wealth through ransoms. On June 5, 2017, one of China’s increasing number of cruise ships was streaming through the South China Sea 2000 kilometres south of Hong Kong and 1000 km east of Vietnam. I was 5.13am. There was an explosion. All 4232 people on board perished, 96% of them being mainland Chinese.

…..to be continued

Further to the North Korea discussion…..

An interesting additional dimension to my entry earlier in the week on North Korea  appeared in “The Age” this morning (Saturday 9/3/2013) It states:

Missile Shield Spurs China’s Korea Stance

BY JOHN GARNAUT CHINA CORRESPONDENT BEIJING

CHINA’S support for tougher sanctions against North Korea has been prompted in part by concerns of an evolving USanchored missile defence system on its borders, say Chinese and Western analysts. The missile defence systems involve new land and sea-based radar systems, missile interceptors and intelligence sharing between the US and its regional allies aimed at shooting downa North Korean missile during the relatively lowvelocity launch phase. Analysts note that these systems could also be used to shoot down missiles launched from China’s eastern regions.

 Australia is building three air warfare destroyers with Aegis radar and missile control systems that can be potentially integrated into the US system. ‘‘ North Korea’s test of a nuclear warhead and missile may not bring much of a [direct] threat to China,’’ said Cai Jian, a North Korea expert at Shanghai’s Fudan University. ‘‘ But the response from Japan or South Korea, or America’s strategic advances into the region, are more disadvantageous to China. These are the reasons China opposes North Korea’s tests.’’

 The sanctions against last month’s nuclear test by North Korea were jointly drafted by China and the US and endorsed by the UN Security Council on Thursday night. They will make it more difficult for Pyongyang to shift money and technology in aid of its nuclear program.‘‘ These sanctions will bite and bite hard,’’ said Susan Rice, the US ambassador to the UN. The UN resolution follows Pyongyang’s successful ballistic missile test in December, as well as a stream of bellicose invective. Prior to the agreement, Pyongyang threatened to turn South Korea into ‘‘ a sea of flames’’ .

 Responding to the resolution, Kim Jong-un’s regime said on Friday it was nullifying all agreements of non-aggression and denuclearisation with South Korea and was cutting off the North-South hotline. Officials in Seoul said they were on the alert for any possible attack as Pyongyang seeks to vent its anger. ‘ The higher decibel of invective isa bit worrisome,’’ said Bill Richardson, the former governor of New Mexico, who has travelled to North Korea eight times, most recently in January. ‘‘ It’s the highest negative level I’ve ever seen, and it probably means that the hardline elements, particularly the military and not the Foreign Ministry, are in control.’’ On the other hand, Mr Richardson said, ‘‘ China is part of asignificant sanctions effort, and this may cool the North Koreans down, may temper their response.’’

 Several analysts said the effectiveness of the sanctions would depend on China adopting a far greater level of enforcement than it had previously. Regional missile defence systems are evolving in response to North Korea’s weapons program and also to increasing concerns about China’s military intentions. ‘ It allows Japan to say, ‘We’re buildinga missile defence system against North Korea but we can also use it to defend ourselves against China,’’’ said Scott Harold, a security expert with the Rand Corporation in Hong Kong. Dr Harold said the US had been strongly encouraging South Korea and Japan to engage in defence cooperation . ‘‘ Beijing is worried that this is a prelude toa trilateral alliance or a Pacific version of NATO.’’

 Those defence systems may, in turn, prompt China to build more missiles  ‘ The overall direction in which missile defence is going means the US, Japan, probably South Korea and Australia, get used to and work on the basis of integrating their systems ,’’ said Stephan Fruehling, an expert on missile defence systems at the Australian National University’s Strategic and Defence Studies Centre.

 ‘ This has political implications and symbolism, and that is what is causing China grief,’’ he said.

 Sam Roggeveen, editor of the Lowy Institute’s The Interpreter website, said there was a risk of a regional ballistic missile defence race: ‘‘ The easiest way to defeat ballistic missile defences is to overwhelm them with numbers.’’ Chinese analysts say Beijing’s backing of the new round of UN sanctions reflects frustration with North Korea but not a shift in its underlying strategic calculus. ‘‘ People are fed up with North Korea, but I’m not sure this signifies a new age,’’ said Jia Qingguo, professor of international relations at Peking University. ‘ China’s policies are in atransitional period, China is in a transitional period, andI think this period might be quite long.’’

With NEW YORK TIMES

Copyright © 2013 Fairfax Media

In other words, there is nothing like self interest to spur action. It seems China thinks that the possession of ballistic missiles by North Korea is spurring on the western allies in the Pacific: South Korea, Japan, US. Australia, to do something about protecting their population by building additional alliances and technologies which will negate the affects of the North Korean missile capabilities. This in turn would also negate the effectiveness of China own arsenal.

This is the last thing China wants. Up until now there has been a willingness on both sides – particularly the US and China  to try and work through their differences in order to come to a peaceful accomodation in the Pacific. The growth of a new military  alliance, facilitated by North Korean intransigence, just might make the Chinese come to the same accord I described in my article earlier in the week i.e. a historical agreement to dismantle the North Korean regime in return for with drawal of US troops from South Korea, declare the Korean peninsula politically neutral enforced by UN troops (not including the US), and hold free and fair elections.

The alternative to this will not only be the development of a military alliance of democracies in the Asia Pacific, but the other action mooted in my earlier articel i.e. the withdrawal of the nuclear guarantee to Japan and South Korea meaning they will acquire nuclear weapons aimed straight at China.

These moves might be just what the new Chinese Premier will need to build a case with the PLA, and the remaining hardliners in his cabinet, to move on North Korea.

It would be both historical and highly statesman-like, and may be the dawn of a new Chinese democracy and peace in what is now becoming an unstable part of the world.

It also happens to be the world engine room for growth in the forseeable future. The stakes are high to get it right…

The Rapidly Changing Education Model

Further to my piece yesterday, where I suggested the debate around the implementation of the Asia in the 21st Century Report, there is a discussion this morning in the Fairfax Press in “the zone” where Ernst & Young outline the finding of their research into the education sector.

http://www.theage.com.au/victoria/full-transcript-peter-rohan-20121014-27kwz.html

Clearly the revolution is coming, but so are amazing opportunities. Implementing across the country Asia language skills is surely doable over the next 20 years off the back of thesE changes.

A very interesting comment buried in the narrative is “that both political parties have beenengaged and thoroughly understand what is coming in Education” what does this mean? It means that this criticism of the Asia White Paper by the Opposition is yet another one of Abbott’s scare campaigns. You would have though there would be a rethink by now in the Coalitionthat they need to switch the debate to one based on policy difference rather than their knee jerk negative reaction.

The coming together of two visionary ideas…..

As regular readers of this blog will realise, I am a great admirer of the Federal Government’s NBN policy – one of the most visionary policies I believe from the Federal Government in recent memory and one which has the potential to greatly change the way we operate as a society for the better.

Some of you also may not realise that I am “an old Asia hand” ie someone who has lived and worked in Asia for almost a decade in my career, so I was delighted to see the Government initially commissioning their “Asia and Australia in the 21st century” White Paper, and releasing it so competently over the weekend. Having now read it thoroughly, I think the authors have done a great job, and deserve due consideration on both sides of politics, as well as in academia and the media.

Imagine my horror today, when listening to the ABC at lunchtime, when the government has allowed themselves to be marginalised by the vested interests on this issue, particularly on their commitment to Asian languages and the line from the opposition “it means nothing without extra funding”.

This is a nonsense. The extra funding comes from the NBN. Sometimes I wonder whether the Government even realises what a revolution they have started in this area.  They certainly did not explain it as they should, something they also have  a habit of doing in other areas of policy.

It started off this morning in “The Age” with one Professor Adam Chen suggesting the commitment to Asian languages “will cost billions”. This was followed up during the morning by the usual procession of vested interests with their hands out (of which as usual the Teachers Unions are the most vocal with their baseless breast beating about class sizes echoed by the Federal Opposition).

Education is the sector, along with Health, which will be most profoundly affected by the NBN. In 10 years’ time, when the NBN will be fully implemented, education will be profoundly changed.  Teaching at universities will be largely done online, when the most important things  for them will not be the size of their campus, but the quality of their teaching and the prestige of their Brand. The NBN will provide virtually unlimited capacity to teach. Rather than a university lecturer being limited to the student numbers dictated by the size of the lecture theatre, it will be restricted by the size of the demand as these services will be delivered via a limitless capacity on the internet.

As with universities, the same will apply to schools. An excellent teacher of Mandarin, rather than being restricted to a classroom, will be able to take regular classes with unlimited capacity via a very fast broadband. It will revolutionize schools, and greatly improve teaching standards to all sectors of society in all subject areas.

It is possible the Federal Labor Government would prefer to take “stick” from the Opposition, than to have to explain this fact to their constituency in the Union movement, most of whom do not appear to understand this profound change (along with most of the Press). Nevertheless, it is coming down the track, and will greatly expand the policy options for government in all sort of areas, not least Education.

In my view, it will be a revolution even more profound than the internet itself.

Overseas Graduates – yet another great chance for Australia

Everyone is aware of the devastation which the GFC and now the euro crisis (s) have brough on Europe. These are dramatically illustrated by the trends in youth unemployment across Europe, particularly since Lehmann’s collapse. In most European countries, graduates make up between 20-30% of youth unemployed. Similarly in the US. Unemployment amongst college graduates is the highest in half a century.

What does all this mean for Australia? It means yet another incredible opportunuity.

Australia, through its good fortune to be one of the strongest economies in the OECD, has an unprecendented opportunity to attract the best and the brightest graduates from countries with high education levels and high graduate unemployment rates ie countries like Spain, Portugal, France, Italy, Greece and the US. Without wishing these countries mis-fortune, the fact is they have some very smart young people bereft of opportunity and many will become “the lost generation”. Australia desperately needs skilled people to provide the energy and drive for the future. Although a properly structured program would be quite expensive, in the longer term it would pay off handsomely, and would be a sensible way to spend any future surplus to set the country up as a brain driven environment to drive innovation, creativity and wealth creation.

This plays to one of the over-riding but unstated tenents of our immigration policy post While Australia i.e. although the policy is non-discriminatory from race, religions and sexuality, it definitely favours the better educated on the basis it is education which is the biggest driver of assimilation and job security. In an environment where our universities are bursting at the seams, and we can’t get enough of graduates, particularly those related to the sciences, why wouldn’t we take the best and the brightest from abroad. Much cheaper than financing additional Phd places, although that should be done as well.

A related issue to this, it was dissappointing to see that there has been a considerable tightening up on criteria for entrepreneurs from abroad immigrating here. Somewhat short sighted I would have thought.

Europe – what a mess

In retrospect, it was a big mistake to think that the Euro could work across diverse economies, without fiscal and monetary union. But that in itself was impossible because of the very diverse ideas in Europe about economic responsible economic management and fiscal discipline. Indeed, the formation of the Eurozone encouraged all the member economies that they could have German style living standards, but without the disciplined, focussed and skilled German workforce and economy, and without the economic management which has charactarized the German government, at least for the last 10 years.

Many countries, led by the French, have believed they could run economies with very generous social benefits without the hard economic management and decision making which so charactarizes successful economies. For instance, when the last president of France hesitatingly tried to instigate mild economic reforms such as raising the retirement age from 60 to 62 there were howls of protest which forced him to back down. This does not even go near economic distorting policies like the Common Agriculture Policy (CAP), exorbitant pension and social welfare provisions, industry subsidies, and unaffordable internal and external deficits. In spite of the fact that the IMF, ECB, World Bank, and Germany have been handing out enormous bail outs to many broke countries in southern Europe, nearly all of them have been unable to fully implement them because their electorates will simply not wear them.

The only way is for the market to force it on them ie leaving the euro zone and issue their sovereign currencies. How might this work? Take Greece. Greece in the current circumstances will never pay back its debts. It will be saddled with such stringent provisions that it could remain in recession for 20 years. Time for a change in direction.

If Greece, without warning, announced that henceforth the Greek currency would be in drachma, and all international debts would be written off,  then there would be short term pain, but eventually the market would kick in (probably 18 months to 2 years), and the Greek economy would begin to recover. There would undoubtedly be a 50% plus devaluation against the euro, which would make Greek exports cheaper, and imports more expensive. It would also allow the Greek central bank to recapitalise the Greek Banks by printing more Drachmas. This, though, would all end in disaster if it were not accompanied by drastic economic reforms to the social welfare system, collection of taxes and other charges, removal of distorting government subsidies of various kinds, reform of the legal system and a crackdown on the corruption which so distorts the efficient running of the Greek state.

Within five years, the Greek economy will recover, the debts will be written off, and the competitive advantages of Greece will start to kick in in a much more  growth friendly environment than before. The low growth, deficit cutting and low investment environment which ios the consequences of the European bailouts, will be delivered via a market mechanisms and will not therefore be the subject of the political vastitudes currently underway in Greece.

No-one though sees this as pain free. It is not. It will be very painful indeed, but in the medium term it will be less so than 20 years of recession, and it will give hope to a population sadly lacking in it, especially the young. It is somethingthe population and government can galvanise around, and on which it could build a prosperous future.

It is also something the other southern European governments such as Spain, Italy and Portugal would also likely copy once the benefits become apparent. The French, well they will remain French, and keep their heads buried in the sand, even though the economy distorting welfare state, government subsidies, the CAP, and unreformed labour, capital and distribution markets are worse than almost anywhere in the EU, and France’s economic performance reflects that. They should also take the economic medicine, and return to the Franc. But they won’t of course!

How Will Japan Pay For Reconstruction

Comment on Economist article (March 16, 2011) “How Will Japan Pay for Reconstruction?”
This is the sort of quirk of economics that makes it be known as “the dismal science”. Nevertheless, it is certainly true that Japan is in the much better position than the US or Europe to finance a rebuild. If they can unlock domestic savings, and provide market based mechanisms for the allocation of resources above the obvious need to renew destroyed infrastructure, they will benefit the economy enormously.
In the meantime,quantitative easing (ie printing money) via the Bank of Japan to kick-start spending on reconstruction seems like a sensible thing to do without the inflationary pressure apparent in other first world countries. Since Japan appears to be in a deflationary environment, a boost to NGDP growth could only be a beneficial thing. These policy changes may indeed kick-start the Japanese economy back to life to the considerable benefit of the rest of the world.
If they do this, I predict they will return to more “normal” growth of 3-4% quite quickly and reduce their deficits very rapidly. No other countries have these opportunities in this way. Notwithstanding the tragic loss of life, in the long run for Japan it may open up a new chapter in their proud history, not all of it bad.