Australian Broadcasting Corporation
Broadcast: 01/10/2012
Reporter: Emma Alberici
Economist, climate change adviser and former ambassador to China, Professor Ross Garnaut, discusses the likely effects on the Australian economy of slipping commodities prices, China's higher labour costs and less spectacular growth.
Garnaut says salad days are over:
Transcript
EMMA ALBERICI, PRESENTER: Here is tonight's guest and to what some politicians and commentators are signalling as the end of the China-driven mining boom.
Ross Garnaut is a distinguished economist, a former ambassador to China and an advisor to prime ministers dating back to Malcolm Fraser.
Most recently he was the author of the Government's Climate Change Review. He's currently Professorial Fellow in Economics at the University of Melbourne.
Professor Garnaut predicted the rise of China, but is now warning Australians to prepare for a serious decline in living standards as the resources boom gives way to falling export prices and a slump in the development of mines.
Ross Garnaut joined me a short time ago from our Melbourne studio.
Ross Garnaut, welcome to Lateline.
ROSS GARNAUT, PROFESSORIAL FELLOW IN ECONOMICS, UNI. OF MELBOURNE: Hello, Emma.
EMMA ALBERICI: Now you've spent a great deal of your career studying China and its economy. In fact you've just come back from a trip just recently. I want to know first off how you explain why we're seeing such a dramatic drop in the prices of our main exports to China.
ROSS GARNAUT: Well it's the confluence of three big forces. One is a long-term structural change that started clearly in about 2004. Labour's become scarce, real wages are rising quite rapidly and they have steadily ever since - wages rising 15 to 20 per cent a year since then, except for the time immediately after the financial crisis.
The second force is driven by policy. Over the last few years and especially in the period covered by the current five-year plan - 2011 to 2015 - we see a deliberate attempt by the Government to shift income and resources towards consumption, towards services, including public services like education and health, deliberate attempt to raise the priority of environmental amenity, reducing energy use, reducing emissions.
And these policy developments are also reducing growth in demand for energy, especially emissions-intensive energy like thermal coal and metals, including steel, which is responsible for our big exports of iron ore and coking coal.
And we're seeing a cyclical downturn now, and it's never easy for the authorities to finetune these developments. And it looks like there's going to be some overshooting on the downside and this is always damaging for exports of raw materials into industrial production and infrastructure.
All pointing in the one direction at the moment: if you like, a perfect storm, which is pushing down the prices of the three commodities which have done most to boost Australia's terms of trade in the last seven or eight years: iron ore, thermal coal and metallurgical coal.
EMMA ALBERICI: If we just explore sort of one-by-one these factors that you attribute to this downturn in prices. First off if we just look at what you discussed there about labour shortages, one might never have considered that a population of - a country with a population of 1.2 billion could end up with a labour shortage.
ROSS GARNAUT: Oh, especially when you think of the starting point of reform and rapid growth 30 years ago when there was a huge abundance of labour in the countryside. But when you get rapid growth averaging nearly 10 per cent per annum over more than three decades, you get an accumulation of demand for labour, and at the same time you've had China going through a big demographic transition.
One element of that was the one-child policy which dramatically reduced fertility in the reform period. It came in with the reforms 30 years ago. And then that's been reinforced in the usual way by rising incomes, better education of women, greater feelings of family security, which leads people in any case to want to have less children. So, right now, we're looking at a peak labour force.
EMMA ALBERICI: So is the downturn in construction and infrastructure spending in China, is that a temporary freeze, or really, is this the end of that phase of China's development?
ROSS GARNAUT: I think it's the end of that phase of China's development. It's deliberate government policy. This is the second of the three elements I talked about. It's widely recognised in China that the increases in inequality of incomes has gone too far.
There's a strong wish to correct the growing widening of income disparities which characterise the period roughly from the mid-'80s until about half a dozen years ago. And there's also recognition that now that China is wealthier, it's appropriate to spend more on public services, improving generally health and education, investing in a cleaner environment, both domestically and China's contribution to the global environment.
So, even if the first factor wasn't going on, the structural one, the second would be very important. And it's the second that will make sure that we won't see a return to the pattern of growth of the first 11 years of this century.
EMMA ALBERICI: So if the Chinese no longer need our resources or certainly not in the quantities that they have or that they once did, what are the implications for Australians who've become used to this sort of easy money flow, if you like?
ROSS GARNAUT: It happens that iron ore, metallurgical coal and thermal coal have been the biggest elements in the lift in the terms of trade - export prices compared with import prices - in the last eight or nine years.
That lift in the terms of trade allowed Australians to spend increasing amounts every year, expenditure increased at quite a rapid rate, without producing any more.
Well all that goes into reverse now. We'll have to produce more to stay where we were in terms of living standards. So, I set this out in a speech for the annual dinner of the economic society at the end of 2004.
I said now we're living in the salad days. In the salad days, ordinary economic policy looks good and good economic policies look stellar. But it won't be very many years when the salad days turn into the dog days, when good economic policy looks terrible and ordinary economic policy looks in the dogs.
EMMA ALBERICI: Are Australians now, do you think, sufficiently aware of what's coming in terms of this reversal of economic fortunes?
ROSS GARNAUT: I don't think the community as a whole is. Certainly the rhetoric from the Government about restraint in government expenditure is consistent with what's required, and in fact in the last couple of years we've run very tight budgets by long historical standards.
But this has to be maintained now for quite a long period of time and I think lots of Australians haven't assimilated that. We've got elements of the Australian community thinking that economic reform now is what gives more money to them. That's the main refrain from the Business Council when they talk about economic reform.
It's not like the Business Council in the '80s and '90s where there was recognition that there had to be shared restraint if we were going to have productivity-improving reforms. Reform to the Business Council today is ordinary people pulling in their belts and business incomes being given extra boosts.
And similarly other elements in the community are recipients of tax cuts, of government expenditure, have come to expect a continuation of what could be delivered in the short term in the salad days.
It actually would've been wise, as I've pointed out, in 2004, 2005, 2006, every year up to the great crash, actually - if we'd taken it a bit easier on tax cuts and expenditure increases in those days, we wouldn't have such a big challenge now. But what we're left is a considerable challenge in the period ahead.
EMMA ALBERICI: Well given the economic challenges ahead, is it right for the Government now to be making spending commitments out to 2016 and beyond for things like the Disability Insurance Scheme, dental care, aged services, education reforms?
Is it right to be pushing those expenses out into the future when those other economic challenges will also be apparent?
ROSS GARNAUT: Well that's a matter of priorities. It's going to be very important to have tight restraint on total expenditure. In this context, the biggest single vulnerability of future budgets is the unreal discussion of carbon pricing. Quite large increases in family payments, even larger cuts in income tax were paid for of an increasing carbon price.
But a lot of people in the community think, "Oh, I love the tax cuts, but I don't like the carbon tax, so take away the carbon tax, but leave me the - take away the carbon price, but leave me with the tax cuts." And we've got to get past that unreality. If we are going to talk about withdrawal of carbon pricing, we've got to talk about withdrawal of the tax cuts.
EMMA ALBERICI: And I wanted to also ask you about - given we were talking about China and about where Australia would be taking - where Australia is going in respect of taking advantage of these other opportunities that present with the mining boom practically over in those three main commodities of which we've been so dependent, how is Australia placed to take advantage of those non-mining opportunities in China?
ROSS GARNAUT: Well there will be a lot of other opportunities. Growth in demand will continue, but more of it will be focused on high-value services, high-value manufactured goods.
Now Australia has some strengths in these areas. We had tremendous growth in high-value manufactures and high-value services from the mid-'80s until about eight years ago, eight or nine years ago, roughly coinciding with the beginning of the resources boom. Now that's all been choked off by a number of factors, the most important of which is the rise in the exchange rate and increase to the cost level that is associated with the resources boom itself.
Now in a sense that will be self-correcting. The easing of the resources boom will lower the nominal exchange rate, the exchange rate you see on the TV every night. And, so long as we don't let incomes blow out, we will become more competitive in those high-value manufacturing and service industries.
There'll be a lot of opportunities in Asia, first of all in China, for these industries. But we've got to be ready to put resources back into those sectors and the worry is that they've taken a pretty big hit during the period of the high exchange rate during the resource boom and so it'll take a time to get momentum back into them. But there's a chance there if we're clever enough and fast enough.
EMMA ALBERICI: Now finally, Professor Garnaut, I wanted to ask you to reflect on the nature of public discussion in this country after those comments about the Prime Minister's father by broadcaster Alan Jones.
Now I'm asking you this question because you yourself were a victim, if you like, of some abuse by Alan Jones, who has called you in relation to your Climate Change Review for the Government, he's called you a "galoot" and a "dunce", labelling you also the "Federal Government's climate change headkicker".
He's also called the notion of global warming a "hoax" and "witchcraft". What do you think that says about the level of debate in this country given he has an audience of listeners something like half a million - in Sydney, that is?
ROSS GARNAUT: Yes. Well on the hoax and witchcraft, there's no doubt what climate science says and the people who are clinging to the false hope that it's all a hoax and a bit of witchcraft are diminishing. There's a few still kicking and screaming, and increasingly, sadly, it will become clear that they're really on the margins of things.
But more importantly, Alan Jones is a manifestation of a serious degeneration of Australian media and political culture in the last few years. The degeneration's associated with the crowding out of information and analysis by noise, by abuse, by thuggery. If we don't correct this degeneration of our political culture, Australia's got no hope of dealing with the serious problems in the period ahead.
EMMA ALBERICI: What do you mean by the culture that's emerging? What do you mean by that?
ROSS GARNAUT: Oh, it's much more difficult in the last few years to seriously analyse a serious issue like the ones we're talking about tonight without the thugs and headkickers, Alan Jones and their ilk. There's quite a number of them around in parts of the print media, parts of the electronic media, and they somehow have a legitimacy, that sort of noise, abuse - thuggery has a legitimacy now that wasn't there in the '80s and '90s.
I don't think the great reform period in Australia from '83 to the end of the century would've been possible if we had had then today's abusive media and political culture.
EMMA ALBERICI: OK, we have to leave it there. Ross Garnaut, thank you so much for your time tonight.
ROSS GARNAUT: Nice to be with you, Emma.
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Lateline - 01/10/2012: Garnaut says salad days are over
