Two speed economy,one track mind

Australia is beginning to feel the heat from the resources boom. Jobs are now being lost in the export-led manufacturing economy because ,driven ever upwards by the demand for and speculation around, its coal,iron copper,gold ,gas , uranium ,you name it , the dollar exchange rate has reached dizzy levels. It’s now at 1.05 to the US dollar when the historic average is just over 70 cents , and 1.55 to sterling when less than 3 years ago it was at 2.50 to the pound. This is a seismic shift in a short period. If only federal government economic policy had moved as quickly – and in the right direction.

Distracted by the carbon issue ,and cowed by how the mining lobby disposed of Kevin Rudd for having the temerity to propose taxing the mining windfall, the Gillard government has sat back whilst the miners filled their boots.It is now clear that policy needs to change swiftly – not just to tax them more to extract long term benefit for the rest of Australia from a short term boom but also, now ,to actively suppress the exuberance of the resources sector as its self-interest no longer coincides with the overall economic interest of Australians.There is no sign of this government doing anything of the kind.

This is partly because of fear of the political and media clout of the mining companies.But it is also rooted in an intellectual error associated with the usual flaw of centre-left governments in these matters. They are in thrall to economic liberalism and the idea that the alternative to their hands off approach to the miners and the damage they are doing the national economy is ‘protectionism’. Apart from noting how well the protectionist ,interventionist , command economy of China is doing at the moment and how few of the developing economies are following the high capitalist/non interventionist approach of the surely now discredited Washington Consensus,I would suggest that the alternative to hands-off is hands-on , not protectionism. It is richly ironic – and not a little sad – that a government in the West is saying it can ‘do nothing’ for the manufacturing economy when the crisis for that sector is being created by the demand for resources of economies in the East which are anything but ‘laissez faire’. They think we are idiots.

I am not arguing for manufacturing companies to be protected from foreign competition(although that is precisely what China is doing through its own management of its currency and its preference for world markets to be open to its products whilst effectively maintaining its own import barriers). I’m arguing for those companies and exchange rate policies which are causing them harm to be stopped by a more active central government fiscal and economic policy. Essentially the sector needs to be taxed properly and the money used to set up a sovereign wealth fund and currency stabilisation fund just as other resource rich countries such as Norway, Chile and some of the middle east oil exporters have done.This will suppress the currency impact of the resources boom and help enable the income to be available for public benefit long after miners have decamped.

The ‘do nothing’ scenario – which in reality is a ‘help the miners and no-one else intervention’ is damaging Australia . And I don’t just mean damaging those states – Victoria and New South Wales for example – where the ‘two speed economy’ means high exchange rates and interest rates kill their manufacturing industries whilst stoking up the resources boom in Western Australia or Queensland. Queensland’s manufacturing and tourist economies are also wilting under the pressure from the high dollar and property values on the Gold Coast are on the slide. Apart from the 170,000 miners and their families – in a country where 5 times more people work in the Not for Profit sector – , BHP and the airlines flying in and flying out workers each week – meaning country towns and indigenous communities near the mines get few benefits and all the environmental problems – it’s now beginning to be easier to spot the victims of this narrow economic,short term, focus than the beneficiaries.

We have seen the rise and fall before of nations who tie their economic destinies to a single market or sector. I come from two of them and their fates are entwined. Whilst people know that Wales went through a remarkable, heady and short period of mining boom followed by a very long bust , they tend not to see the links in that process to the financial services sector in England or indeed how that latter industry is now going through its own long decline having been favoured by government policy(and active subsidy) for the best part of 150 years.

The Welsh story is simple and mind-blowing. No coal industry to speak of in 1840 ,world dominance in the coal trade by 1900 and collapse in the 1930s .At its peak 150,000 miners were employed in South Wales alone in a population in 1931 of just under 3 million.The collapse saw more than 400,000 people leave Wales and the nation’s population only reached 3 million again in 2010. In the same period the population of England almost doubled.

South Wales did not use the money which made it one of the UK’s richest region to invest in infrastructure or diversify its economy. Despite some government investment in the 50s and 60 s Wales has never managed to escape its fate as a once booming now bust extractive economy with little value added activity- kept afloat frankly by welfare transfers from the English economy . That economy itself became ever narrower in the same period and reliant on a single industry for a massive part of its trade and indeed income. That would be the financial services industry now in some travail in its home-town, the City of London.

Britain as the homeland of economic liberalism and a touching if erroneous belief in Adam Smith’s ‘Hidden Hand’ has never really understood the origins of the financial services dominance it once had in acts of state rather than the free market. Key City financiers’ activities have always been to fund British wars and imperial expansion. At the same time ,government fiscal and economic policy has always been to favour financial services over manufacturing . The former led to and required a high sterling exchange rate and higher interest rates than servicing the domestic or manufacturing economy would have required. The high price of sterling over 150 years –until the GFC – had much more impact on the decline of UK manufacturing than simply competition from abroad. Free trade was only beneficial to UK competitiveness in sectors in which the UK had a comparative advantage. Hence financial services benefited from that too at the expense of manufacturing. That advantage is now receding in financial services too.

The long term result of the favouring of financial services at the expense of manufacturing has not only been to unbalance the economy as was noted by the incoming Tory /Liberal government of 2010, and make it vulnerable to a geographical shift eastwards of financial power ,out of the country.There was also a long term internal geographical effect too,with the manufacturing economies of northern England,the Midlands, Scotland,Wales and Northern Ireland,losing wealth,share of GDP and indeed population , to the expanding south-east and the City. The fact that central government than shipped back quite a lot of the lost wealth to those regions by the tax system to support welfare and a state-dominated economy in those areas in no way compensated for the collapse in manufacturing.Moreover,without manufacturing the UK has struggled to create well paid jobs for the relatively un-educated , leaving pockets of worklessness in former industrial regions of 40 and 50% with all the social problems and costs of that .

I assert that whilst some of that decline was inevitable the extent of it has been bigger than it should have been if fiscal and industrial policy has been supportive of manufacturing – as it has been in Germany for example. All my life the ideologues of economic liberalism have been warning of the collapse of manufacturing in Germany and the death of its socio-economic model and all my life Germans have got richer whilst the Welsh got poorer.Moreover, despite financial services being at the apex of the ‘liberal’ economy it has clearly benefited from both direct subsidy – Canary Wharf gave new life and capacity to the Citttivity any and was only feasible because of a £2b public investment in the Jubilee Line connecting it to the City and labour markets – and light-touch regulatory frameworks which greatly reduced commercial risks and costs and attracted investment from more punctilious regimes. Government has played a massive role in the UK in the success of the financial services market.Bad government oversight played a big role in its recent crisis. Whicever way you look at it,the ‘free market’ even in western societies is reliant on state activity and policy and it is a self-delusion to believe otherwise. The developing economies and the BRICS are not deluded.

An interesting comparison between China,Australia and the US shows the differences between them as regards the role of government. Whereas China has spent ,annually, 9% of its boom income on infrastructure – those roads,airports,trains and cities are a product of wise long term investment by the government and its partners – the US and Australia have spent about 2%. According to an excellent book just out by Paul Cleary called ‘Too Much Luck:the mining boom and Australia’s future’, Australia today spends £25b a year less on infrastructure than it did in the 60s and 70s despite it being infinitely richer today. This means that the mining boom is both damaging the non-mining economies and not being used to fund infrastructure or diversify the economy. This is like Wales on a continental scale.

In the case of Australia of course ,being independent and having all the policy levers in its control, it’s not too late to change course. It can reverse its current policy and intervene – to tax the miners, off shore some of the inflationary consequences and embark on a long term investment in infrastructure to provide the basis of a future economy. I have no confidence that the Gillard government or an Abbott government will do anything of the sort. Despite the lessons of the GFC and indeed of China’s progress, and despite the evidence before their eyes of the damage of current policies to the non-mining economy and states , they both remain wedded to a laissez faire approach to the Australian economy when that’s so last century – and not in the national interest. Two speed economy,one track mind.

I’ve just been looking at some before and after photographs of the Cwm Coke Ovens in Beddau, my home village in Wales. The photos show it in its mining era heyday and now when the whole place is in ruins. Have a look at these links (http://www.derelictplaces.co.uk/main/register.php?do=addmember

http://archive.rhondda-cynon-taf.gov.uk/treorchy/index.php?a=forward&s=item&key=FYTozOntpOjA7aToyMzk1MjtpOjE7aTozO2k6MjtzOjQyOiJMb2NhbGl0eSBpcyByZWxhdGVkIHRvIHRoZXNlIExpYnJhcnkgSXRlbXMiO30=&pg=3)

I’m reminded of Ozymandias , the poem by Shelley – a reminder to princes , paupers and politicians of the transience of greatness and wealth,unless they watch out! .

‘I met a traveler from an antique land
Who said: Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them, and the heart that fed;
And on the pedestal these words appear:
“My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!”
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away’.