October 5, 2012
I'd always wondered why conservatives are indifferent to Australia becoming an information, knowledge or digital economy. The indifference remains even though the resources boom is giving way to falling export prices and a slump in the development of mines.
Glenn Stevens, the Governor of the Reserve Bank of Australia, says:
Economic activity in Europe is contracting, while growth in the United States remains modest. Growth in China has also slowed, and uncertainty about near-term prospects is greater than it was some months ago. Around Asia generally, growth is being dampened by the more moderate Chinese expansion and the weakness in Europe. and, as a result, increasingly restrained government expenditure and declining standards of living.
That means restrained government expenditure and declining standards of living. Overall economic growth rate being essentially a composite of Australia's many different cities and regions in the context of the growth of emerging Asian economies.
Where to next to avoid declining standards of living in a reshaped economy? Should economic policy try to kick-start those areas of the economy that had been slowed down as part of the longer-term 'structural adjustment' to the mining boom? What do the conservative, free market economists say on this issue?
In The Australian, Henry Ergas is explicit. He says that Australia should stick with exploiting its natural resources:
It's hard to disagree with Ross Garnaut that China's slowing growth will place new pressures on our economy. But the implications he derives from that are wrong-headed...Garnaut's prescription is straightforward. It's time, he said on ABC1's Lateline program earlier this week, to shift our focus towards "high-value manufactures and high-value services".... Whatever Garnaut may think, the reality is that we are and will remain a commodity-based economy. Blessed with a natural resource endowment that is among the highest in the world and extraordinarily diverse, comparative advantage drives us to specialise in mineral resources and agricultural production. No surprise then that our prosperity has always rested on putting that endowment to good use.
He adds that the challenge is to ensure we continue to do so in the face of falling prices, slowing demand and the rapid development of competing sources of supply. A sharper focus is required on our cost competitiveness in every step of major resource projects, from initial exploration to construction and operation.
It follows that the Gillard Government should repeal the carbon tax, scrap IR laws and dump the mining tax. These are reforms designed to give big mining more money during a time of falling commodity prices. Straight forward really. The problem with the Ergas option is that the mining sector is expected to rise from 5 per cent of gross value added in the early 2000s, to around 10-12 per cent in the decades to come. What of the other 88 per cent?
Ergas is right to highlight that the demand for agricultural produce increases with the economic shifts in Asia. So we are likely to see a significant increase in demand, particularly from China, for high-end agricultural products like fruit, dairy, high-grade meat and seafood. Agriculture is around 20 per cent of Australia's exports. That takes us to less than half. Why ignore financial capital?
What Ergas doesn't mention is that the middle-class consumers in the Asia Pacific region will also demand better services, goods and experiences. This leads us to the Garnaut option, which is the high-value services, high-value manufactured goods one. This results from the shift to a knowledge economy--a high-tech knowledge economy as opposed to real estate development and expansion. The argument here is that it makes sense to focus the future economy less around housing, roads, and physical capital, and more toward the accumulation of human capital and knowledge assets.
What is surprising is that Ergas offer us yet another great either or divide rather than thinking in terms of an open economy that is in transition.