I was at the Roma Show today where I listened to a Rabobank expert talk about the macro state of the world economy. It was a rural show so the focus was on agricultural matters. We heard about the price of soy beans, Western Australian wheat, the link between corn and oil, and why there were smiles on the faces of cattle producers.
Yet the talk couldn’t help but look at the wider picture. Why Australia needs a free trade agreement with Korea as a matter of urgency, for instance. He also spoke about the importance of China which has grown from 6 percent of trade to 27 in 10 years. He spoke about Japan still a steady partner which has stayed at 19 percent in those 10 years. He mentioned the growth of Indonesia, which longer term may be more important to Australia than China or Japan.
Australia’s cosying up to the Asian economies has cosseted the country from the Global Financial Crisis. The rise of the BRICs (Brazil, Russia, India, China and South Africa if the ‘s’ is capitalised) has meant the world does no longer fall apart when there is a recession in the US and the EU.
The Rabobank man said the EU was improving under the leadership of Germany. To bring the European situation home to his rural audience he showed a slide of cockatoos on four wires. On the top wire was the fattest cockatoo – Germany. Bolstered by the union of east and west, it remains a strong, boisterous economy. Underneath it are France, Britain and Italy copping some of the shit and feathers from the German cockatoo. Below this trio are the vast majority of EU nations taking the manure from the four above. At the very bottom are the PIGS. Portugal, Ireland, Greece and Spain. These four manured-stained porcine cockatoos suffer every indignity from the 20 nations above them.
Australia doesn’t have to worry about different jurisdictions pulling in different directions but still suffers discordances. Our dollar is high as the two-speed boom overheats. The focus phrase of Treasurer Wayne Swan’s budget the other night was “someone else’s boom”. What Swan was describing was “Dutch Disease” which a Rabobank employee (the headquarters are in Utrecht) was well placed to talk about.
Dutch disease occurred in the Netherlands in the 1970s as the North Sea gas price soared. The guilder went up in consequence. The 1973 Oil Crisis led to a recession and high wages and high currency devastated the Dutch manufacturing sector and made tourism in the Netherlands more expensive. Nowadays the Dutch would be insulated from their own disease by the euro which is affected more by what the German Central Bank decides rather than what happens in Amsterdam.
The Aussie dollar is high causing similar problems to local industry and tourism. The Aussie used to be 70c to the US but has risen as high as $1.10 in recent months and is settling around parity at the moment. This means it is a great time to be an Aussie tourist in the US but a bad time to be sending chickpeas or corn to the US market.
Yet the high dollar is a worldwide tick of approval something must be going right here because investors see Australia as a safe haven. Maybe it is just Australia is a reliable quarry and food outlet with a settled system of government. But wages are high and there is massive correction happening as we get used to the new international prices in a painful one off transition.
Australian export businesses are suddenly 30% more expensive through no fault of their own. This can be a good thing if it makes Australian operators closely examine their value chain. Exporters and tourism operators bearing the pain of delivering a high-priced product now must be innovative to return to profits they used to take for granted. Having to find a saving of a third to cope with the more expensive environment employs the creativity of necessity. They either go under or they adapt.
Dutch disease is difficult to overcome but it is possible to hew a new economy out of it. There is nothing anyone can do to avoid the collateral damage, but there is no going back from the drift of the floated currency. China still resists the floating of the yuan and this failure will eventually hurt it. The market is far from a perfect instrument of equalisation but its groupthink is still relatively sane. Money follows the safest locations and China will not attract money despite its growth because the yuan is so grossly undervalued. Not until it is tested in the currency markets will a true signal of China’s position in the world economy emerge.
Australia floated the dollar in the mid 1980s in one of the Hawke/Keating era’s greatest gifts. It took a Labor government to do it because it was the only way a Labor Government could prove to a suspicious media it could run a market economy. The media remains suspicious today owned as it is by right-wing barons, but there is little vision to take the country forward from either side of politics. Simple policy matters such as a tax on mining earnings or on carbon production become mired in ideology and a lowest common denominator of least change based only on the desire to rule. Neither Julia Gillard nor Tony Abbott have any clue what Australia should look like in five years except that one of them should be in charge.
Labor has long since ditched Karl Marx just as the Liberals have eschewed Adam Smith. No one has articulated better political philosophies in the last two centuries. The power of the Greens is growing but no democracy yet is prepared to put the Greens in charge of the economy. And it IS the economy, stupid, but pointing out the obvious doesn’t make it the chaos of world markets any easier to manage.