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November 4, 2009
The Secretary to the Treasury, Dr Ken Henry, delivered an important speech entitled The Shape of Things to Come for Australia: Long Run Forces Affecting the Australian Economy in Coming Decades to the Queensland University of Technology Business Leaders' Forum in October this year. Henry spells out what I've been haphazardly grappling with on this blog in a clear and concise way. It helps to clear away some of my fog.
The core statement is this:
As the Global Financial Crisis hit our shores, the Australian economy was in structural transition in response to four large, long term forces: (1) population ageing; (2) climate change adaptation and the prospect of climate change mitigation; (3) the information and communications technology revolution; and (4) the impact on Australia’s terms-of-trade of the re-emergence, as global economic powers, of China and India. Over the past year, the shockwaves from the global financial crisis have obscured the intensity and scale of these forces. But as growth resumes, they will re-assert themselves. And, as they do, the Australian economy will undergo a set of structural changes more profound than anything in its history.
He adds that over the past year, the shockwaves from the global financial crisis have obscured the intensity and scale of these forces. But as growth resumes, they will re-assert themselves. And, as they do, the Australian economy will undergo a set of structural changes more profound than anything in its history.
His argument is that Australia can look forward to a long period of unprecedented prosperity - provided we accept a raft of unpopular economic reforms that will hurt us, and don't seek to resist the change being thrust upon us. I'm more pessimistic than this.
Take the first structural trend. Henry says that Treasury had been thinking about population dynamics in terms of ageing and a rising dependency ratio, but there is now a need to factor in the long term projection for Australia’s population increasing from 28.5 million in 2047 to more than 35 million people in 2049 (due to higher immigration and increased fertility). That increase of 13 million people, or around 60 per cent, over the next 40 years, has implications for our cities (Sydney, Melbourne, Brisbane) and the environment.
How will the capital cities cope with a rapidly growing aged population? By expanding their geographic footprints at the same rate as in the past several decades, loading more cars and trucks onto road networks, continuing the traditional patterns of land use and using up natural resources. Climate change means a drier Australia, which in turns means ever more stretched water resources, the decline of the Murray-Darling Basin as a food bowl, and a population shift from the south east corner of Australia to the north. It means lots of public investment in infrastructure.
Judging by our previous history on managing water and biodiversity it will be more business as usual than adapting to climate change by the cities becoming more sustainable. the main reason why am I pessimistic is that the impact on Australia’s terms-of-trade of the re-emergence, as global economic powers, of China and India takes the form of the capital-intensive, mining sector dominating the economy, the structural decline of manufacturing, and flat to declining real wages outside the resource sector. Henry put it this way:
standard economic theory tells us that if the terms-of-trade remain at high levels, not only will the resources sector command more capital and labour, manufacturing and other industries whose relative output prices are declining will command less, even as our total stock of capital expands. Furthermore, as the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a ‘two speed economy’; and real wages growth and labour productivity growth will be weak – possibly even negative.
The resource sector, we should never forget, is fundamentally opposed to Australia mitigating and adapting to climate change and to the development of renewable energy. And the mining sector has captured state and federal governments to such an extent that they are able to shape the direction of public policy.
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Ken Henry doesn't say that much about the the information and communications technology revolution does he?
What this means for Australia is reducing the ‘tyranny of distance’ that separates Australia from major global markets; have profound implications for the way in which government services are provided to a rapidly growing aged population;entails substantial additional investment.
Nothing about the knowledge economy or the emergence of the creative industries. Strange.