Category Archives: Economics

THE ROHINGYA – IMPEDIMENT TO DEVELOPMENT November 2017

DOWNSIDE OF FOREIGN INVESTMENT

Gas & Oil
FIG. 1   GAS & OIL PIPELINES FROM RAKHINE TO SW CHINA                               (Shwe Gas. The Conversation)

Much has been written on crimes against the Rohingya people in Rakhine state, Myanmar, but muted are the issues swirling round the genocidal activity of the Myanmar military.                                        Much has been written on the Rohingya refugee camps around Cox’s Bazaar, Bangladesh, but there has barely been mention of refugee concentration camps ringing the oil and gas installations owned by the China National Petroleum Company some 250 km to the south.

The international community has been well informed by vested interests, that military action in northern Rakhine state was due to the attacks on police posts last year by the Arakan Rohingya Salvation Army who were  fighting to improve the condition of the Rohingya people.  The bottom line of this discussion (mentioned in advance) is that the Rakhine-Yunnan oil & gas pipe lines are indispensable to the Chinese economy. The oil pipe line transfers oil from the Middle East to the east coast industrial regions of China. (The Truth Seeker, UK)

Pipelines
FIG. 2   OIL & GAS PIPELINES FROM RAKHINE TO YUNNAN, CHINA (thetruthseeker.co.uk)

Vindication for this infrastructure is China’s concern for the security of oil supplies from the Middle East through the Malacca Strait choke point. Also, there was concern over the long haul through the Indonesian archipelago and the South China Sea. Recently, Indian submarine activity has been detected in the Malacca Strait approaches. Considering the fraught situation between India and China in the Himalayas, China’s program seems justified.

Placing the violence in Rakhine state into context, it must be recognised that there are vested powerful economic interests involved.  Land-grabbing in Rakhine and globally is endemic when major infrastructure projects are planned. In 2011, Myanmar enacted political and economic reforms to encourage foreign investment in the country. Shortly afterwards, in 2012, violent attacks against the Rohingya commenced concurrent with Chinese and Korean interests acquiring timber, mineral and agricultural assets in the region.

The recently commissioned oil & gas pipe lines by CNPC will benefit Myanmar through transit fees, energy revenues and  satellite industries springing up around this energy hub, serviced by a deep water port and eventually, a rail link into China. There will be little benefit for locals. The construction and commissioning has involved forced land acquisition, unsatisfactory compensation, environmental degradation and an influx of foreign workers. The importance and vulnerability of the project is illustrated by the concentration of military depots deployed along the pipelines. (Figure 1)  The concentration of refugee camps, distant from the violence in the north, around the oil and gas coastal infrastructure    is indicative of corralling and a subsequent relocation program. (Figure 3)

Refugee Camps
FIG. 3   RAKHINE REFUGEE CAMPS.   KYANKPYU (KYAUKPYU) CLOSE TO OIL/GAS TERMINAL  (Rohingya-American Society)

 

In 2015, the Myanmar government revoked the citizenship of many Rohingya ensuring forced removal could be facilitated.
(The Conversation, September 2017)

Such has been domestic outrage at the exploitation of Burmese resources and increasing Chinese influence during and following the completion of the energy installations, that a long-planned $20 billion Chinese rail link between Kunmin and the port of Kyankpyu (Kyaukpyu ) has been delayed. In this regard, the Chinese ambassador recently made two interesting announcements: “unrest in Rakhine is an internal affair and the work of the security forces is justified” and “the Myanmar government assistance to the displaced people is welcome and China will donate $147 million toward this work”. (Reuters & Hindustan Times 17 September) This donation could well be an encouragement to the Myanmar government to expedite approval for the rail link. Compounding the violence against the Rohingya, the coastal region of Rakhine is increasing in strategic and commercial importance with both India and China seeking to exploit the economic potential of the region. To this end the Myanmar government has a vested interest in clearing the land (depopulation plus scorched earth) in order to encourage foreign investment. (The Conversation, 12 September 2017)


SILENCE IS GOLDEN
Myanmar.
The silence of Aung San Suu Kyi is understandable. The current violence in Rakhine is not simply due to ethnic or religious animosity. This ethnic cleansing is generated by a desire for economic and industrial development. In previous decades all industrialised countries have forcibly ‘relocated’ or killed indigenous people to further their own economic or strategic imperatives. Unfortunately Myanmar is in the 21st century’s spotlight. Developing nations in the 19th and 20th centuries, however, have been able to develop their economies prior to the instant news cycle.  This problem cannot be solved by Aung San Suu Kyi or General Min Aung Haiang, Chief of Armed Forces. There are about 1.1 million Rohingya – nearly half must be in Bangladesh or Myanmar refugee concentration camps. If the International Community will not provide relocation then the situation might subside into silent exhausted hatred, with the rump of the Rohingya moved away from valuable coastal areas.

Australia.
At a ‘working’ lunch in New York on the 18th September 2017, the Australian Foreign Minister spoke on the violence in Rakhine. (Parliament of Australia Briefs)  Condemned in equal amounts were the ARSA attacks on police posts and the military for their attacks on the Rohingya. The Minister noted “something was wrong and called for a cessation of hostilities”. (Naive in the extreme!!!).
The Minister further noted that Australia had donated $65 million to alleviate suffering. (Little is solved by only throwing money at a problem!!!) All good motherhood stuff, but it was a speech of no moment. There was no mention of unrest due to foreign investment, dispossession or environmental damage. There was no suggested solution; a capitulation to an inevitable.  Unfortunately our ‘national’ hands are tied. Australia can say nothing to jeopadise our coal, iron ore and tourism exports but Australia must, perforce, inevitably permit a perceptible colonisation of Australia’s higher education instituions.

As Napoleon Bonaparte famously noted: “China is a sleeping giant. Let her sleep, for when she awakes she will move the world”.

Current Affairs Flash Points   towardsthefinalhour.com                          John Hill      Email: lurgashall@westnet.com.au

 

AUSTRALIA – Unsustainable Social Security. July 2017

 

AUSTRALIA’S  UNSUSTAINABLE HEALTH AND SOCIAL SECURITY SYSTEM.

 Living and housing
FALLING LIVING STANDARDS & UNAFORDABLE HOUSING (44092248)

PREAMBLE                                                                                                                          The catalyst for this offering is a statement by John Roskam, Institute of Public Affairs, to the effect that after twenty years of economic growth, the Australian welfare state is becoming unsustainable particularly since 51% of the work force is not paying tax. (Between the Lines, ABC RN, 9 July, 2017) This is a significant statement when taken in conjunction with other economic and  social factors bedevilling the Australian nation.                                                                    The inescapable fact is currently that Australian living standards are drifting lower,  under employment is drifting higher and the natural resources ‘boom’ has peaked. Social security and health expenses have risen strongly over the past decade and are becoming unsustainable. No political Party has admitted to this over arching consolidating situation.
In the foreseeable future Australians will face the choice of whether to massively increase export income, tighten the collective belt or borrow money from overseas to maintain an unsustainable life style. The following comments are an attempt to define issues that singley are manageable  but collectively will make it difficult to “put another prawn on the barbie”, unless solved.

THE LUCKY COUNTRY                                                                                               Re-enter Donald Horne, author of The Lucky Country. In 1964, Horne warned Australians were not appreciating that their apparent good luck was built on ephemera that could not last. First gold, then the sheep’s back, then followed the curse of natural resource endowment and finally a growing dependency on the welfare state. Horne wrote “Throughout the world the basis of material prosperity is likely, for the first time in history, to be with clever educated people. The need to build cleverness is considered to be unAustralian.” In 2017, this sentiment has been repeated – see Education in the next section. Historically, politicians and the media have deliberately misconstrued the title, resulting in Australians being lulled into a false sense of security. For a quarter of a century Australians have basked in steady, stable growth (GFC excepted) due to a demand for minerals from global growth not from their own intellectual effort.

Trickle down

Materialising from subliminal shadows are recurring budget deficits to $30 billion a year, rising national debt of $474 billion and increasing (Jan. 2017) and serious personal debt of 123% of GDP, third highest in the world. (macroeconomics.com, Feb. 2017) In a buoyant manufacturing export oriented economy, the above data would not be of critical concern but in an economy stressed by the curse of natural resource endowment, this is a serious situation. Somehow, somewhere Government expenditure must be reined in, taxation increased or export income generated.

EDUCATION AND COMPETITIVENESS                                                             “Lets start at the very beginning” so trills “The Sound Of Music” and so it should be, but an OECD report places Australia 27th out of 35 advanced countries in terms of expenditure on early childhood education.  (Education at a Glance, 2014)                                                               The above situation is reflected in the OECD PISA  for surveys between 2000 and 2012 which confirmed Australian declining education ratings namely, Maths – 6 to 19, Science – 8 to 16 and Reading – 4 to 13. (OECD Australian PISA Rankings) The falling standards reinforce comments by the former Chief Scientist, Professor Chubb, who warned about Australia’s declining STEM ability. Among the findings of the Davos Economic Forum (January 2017) was the conclusion that Australia’s ability to benefit from automation and artificial intelligence developments would be hampered by lack of preparation and a deficiency in STEM ability. A contributing nail to this educational coffin is the current Government budget that is reducing university income and restricting 457 visas to academic staff – another impediment to creating innovative exports.

Schools
ILL PREPARED PRODUCTS  (heraldsun.com.au)

A final word on education by Professor Greg Austin, Centre for Cyber Research, Australian Defence Force Academy, is instructive –  “Over the past twenty years Government has been fostering a culture of incompetence in training and computing skills in cyber security” – which brings Australia back to the full meaning of The Lucky Country!

TAXATION  AND EMPLOYMENT                                                                       The recent ‘Between the Lines’ program indicated 51% of the work force is not paying tax. Digging deeper it is recorded that 48% of Australians, 12.2 million ‘income units’, pay no tax. Further, the top 10% of income earners contribute 47% of national income tax. After welfare payments the average Australian only pays $3,424 in tax after deducting welfare benefits. (National Centre for Social Economic Modelling, The Conversation, July 2015)                                    In a population of around 24 million, the low ‘income units’ become understandable when it is revealed that there are 1.1 million registered under-employed while the unemployment rate has risen from 5.7 to 5.9%. (SMH, March 2017) In the youth sector, the jobless rate at 13.5% is at the highest level in forty years  while under-employment hovers round 18%. (The Guardian, 27 March 2017) The continuing rising under-employment trend will continue to reduce ‘income units’ and increase demand on the social security and health budgets.                                                                                                         To compound this problem of rising under-employment and social security costs the BIS Oxford Group have forecast a serious slump in building activity within the next two years. This will reduce Australia’s declining ‘income units’ and impose a downward pressure on GDP.

income units
DECLINING “INCOME UNITS’ (34490643)

Australia, blessed with the curse of natural resources, despite excellent research institutions, has languished in developing industries driven by technological advancement capable of replacing export income from natural resources. As the Davos Forum concluded, Australia’s collective skills are not yet in place.                                 While a high value export industry can absorb above-average wage rates, it is concerning that Australian rates, within a relatively unskilled work force, is significantly higher than rates in competitor manufacturing countries. (Table 1)

COUNTRY$A per hourCOUNTRY$A per hour
Australia17.70United Kingdom14.66
New Zealand14.22France14.18
China1.68Germany13.17
United States10.08

 

SOCIAL SERVICE AND HEALTH COSTS                                                       The preceeding  information provides a backdrop to forecast unsustainable social security and health costs. The Australian Institute for Health (2014) reported health costs have increased from $4,600 per person per year (2002) to $6,400 per person per year (2012), that is from 8.6 to 9.7% of GDP and costs are still increasing by around 4% year on year. The projection of Government spending by portfolio (Table 2), provides a funding challenge for those born today who will be forty-something  in 2060 – the ‘sins of their fathers ‘ will indeed weigh upon them. In confirmation, the Institute of Actuaries determined Health Cover costs will rise from 6.5% to 10.8% of GDP over the next 50 years.

Health
REDUCING THE HEALTH BUDGET (forn 2209)

T2  Projection of Government spending (% GDP)                               Productivity Commission

CATAGORY2011 - 122059 - 60
Health Care6.511.0
Age Pension3.03.8
Age Care0.82.5
Health Education5.55.0
Disability11.510.5
TOTAL27.332.8

 

NATIONAL BUDGET 2017–18
The summary below illustrates the impact of Social Security and Health on the National budget.

NATIONAL BUDGET 2017- 18

EXPENSE$A billionREVENUE$A billion
Social Security164Private Tax210
Health75Fringe B Tax4
Education33Superannuation Tax9
Defence30Company & RR Tax80
Public Services 21OtherTax8
Other Functions48Excise4
Other Purposes93Sales Tax67
Fuel Excise19
Non Tax Items29
Customs15
TOTAL464TOTAL445

 

Deficit is 445 minus 464 = ($19) billion. The combined Social Security and Health budget totals $329 billion, which is equivalent to 51% of expenses or 54% of revenue. With a population of 24 million, this equates to a cost per person per year of $9,900, say $10,000. Budget deficit projections in billions for years 2018-19 ($16), 2019-20 ($3), and 1920-21 ($11). The Grattan Institute forecasts that deficits will continue until at least 2025. (Australia Exports and Budget, June 2017). The deficit will be under additional pressure due to declining corporate tax rates from 30% to 25% over the next few years.

AUSTRALIAN TRADE BALANCE                                                                       For the year 2016-17, the Australian terms of trade were in the red. (DFAT) Total exports were $259 billion and total imports were $267 billion, therefore a trade deficit of $8 billion. For three years from 2013, Australia’s terms of trade were negative to the tune of billions of dollars. Since late 2016, terms of trade have dramatically improved but this may not be all good news. The trade surplus is, in part, due to a decline in imports which reflect a softening in domestic demand due to weak wages growth and increasing under-employment. A dangerous sign – Australians were using savings for the Christmas splurge. Based on this information, Christmas 2018 might be a commercial disaster. There has also been a small rise in commodity prices – the economy again saved by the curse of natural resources endowment. (CNBC-Economy, April 2017)

Terms of Trade
TERMS OF TRADE 2013 to 2017 (DFAT)   Quarterly & Trend                                         Is the declining trend real or just an inflexion on an upward trend?

The Australian economy requires a strong positive terms of trade to offset budget deficits – major contributors being social security and health, and to assist in the annual interest payments of $16 billion (and rising) on the $474 billion (and rising) of national debt. (DFAT: The Treasurer, smh, 29 January 2017)
Australia’s salvation must primarily rest with a strong terms of trade generated by STEM, artificial intelligence and automation. And so again to “The Sound of Music”, “Lets start at the very beginning.”!!

 

POSTAMBLE                                                                                                                   The purpose of this article is to present a snapshot or illustrate a trend that will create a problem funding increasing Social Security and Health portfolios. This situation has already been described as unsustainable.                                                                                                                  For an economy able to fund its own operating expenses, excluding infrastructure improvements, revenue from terms of trade, tax and other sources should cover other outgoings. We have heard the Government bleat “we must live within our means”. It is not doing this.
Australia is in an invidious position for several cogent reasons:

  • under employment is increasing,
  • ‘tax units’ are decreasing,
  • export income is still reliant on natural resources,
  • export income to replace natural resources is not being generated fast enough,
  • the education system is not adequately preparing the young Australian workforce skills in STEM, artificial intelligence and automation.

The rising trend in social security and health costs, if continued, will be a contributing factor to jeopardising Australia’s AAA credit rating. If savings cannot be made to the budget or income boosted by exports then Australia’s living standards will decline further, then interest rates on the national debt will rise.
The 2017 budget levy on banks to raise $6 billion over four years does nothing to offset the $239 billion (and increasing) social security and health budget.

Do something
‘SOMEBODY SHOULD DO SOMETHING   (forn265)

John Hill                                                                                                                                     Current Affairs Flash Points                                                                                                           towardsthefinalhour.com                                                                                                         lurgashall@westnet.com.au

 

 

 

 

 

 

AUSTRALIAN EXPORTS & 2017 BUDGET June 2017 Pt 1

 

Mercury
Mercury – God of Commerce and Financial Gain (Walkers 541482)


Preamble
“Exports and Education” should be the Australian Government’s budget mantra, not “Jobs and Growth” or “Fairness, Opportunity and Security”. Neither defines the Australian problem as does “Education and Exports”.

Export income is the key to Australia’s future prosperity and the control of its annual deficit. The problem is Australia does not produce enough income to meet its expenses. Australia’s national debt as at April 2017 now stands at $552 billion (RBA) and the Reserve Bank of Australia must keep interest rates down in order to minimise interest repayments and to promote economic activity. It is not enough to promote jobs without putting the emphasis on export income which will create a strong balance of trade to reduce the monthly trading deficit. Unless this happens, there will be a slow devaluation of the currency which will only assist the export industry if it does not rely on overseas inputs. Strong exports are the key to Australia’s future.

Australia’s problem is well illustrated in the population density map of this island continent. The virtually unpopulated inland produced 60% in 2014 of Australia’s export income derived from natural resources and farm produce (beef and wheat). Another 9% was derived from education and tourism. The remaining 31% came from financial services, agriculture, chemicals, pharmaceuticals and specialised engineering products.

Australian Population
Australian Population Distribution (ABS) 1Dot = 1000 People.

 

Australian Exports
Australia’s top goods and services exports (DFAT 2014) are set out below:

AUSTRALIA”S TOP GOODS AND SERVICES EXPORTS (DFAT 2014)   TABLE !

EXPORTS$A billionPercent of Value
Minerals, Oil, Gas15246
Beef, Wheat145
Education, Tourism319
19760
TOTAL EXPORTS326100
OTHER EXPORTS12940

Natural resources are still the economic pillar but will have to be replaced if Australia is not to become a Chinese quarry to be mothballed at will. Agricultural products will become more important but will be unable to fill the void should natural resource exports decline. Unfortunately educational exports may be held back due to budget restraints placed on universities, the unfavourable Davos report and the declining OECD education ratings. (See May Blog – Education)

Currently, significant export growth can only come from non-labour intensive industries such as specialised engineering, medical advances, pharmaceuticals, chemicals, food products and legal services. The financial services sector will face increasing competition from Singapore and Hong Kong.

The ABS 2016-17 Budget Figures for Australia define a problem: within the expenses are costs for health – $71 billion, social security – $158 billion,  that is $229 billion which is 55% of Government revenue. In the long term this is unsustainable, clearly export income is a priority. The Gratten Institute (CEO, John Daley, April 2013) has concluded that Australia will face a decade of budget deficits,  adding to this problem the proposed corporate tax cuts could exacerbate this problem if the American experience is considered – see below.

TABLE 2 THE ABS 2016 – 17 BUDGET SUMMARY

Budget Item$ billion
Revenue416
Expenses450
Deficit(34)
Capital Investment3
Final Deficit(37)

In assessing Australia’s long term export potential, two factors will ensure interest rates will remain low due to a continuing sluggish economy and the continuing  annual deficits which will put Australia’s credit rating at risk. These factors are the explosion in public and private debt and the Government debt to GDP ratio and its relevance to Standard and Poor’s ratings – see below.


National Financial Problem
Australia’s looming problem is the inexorable rise of the Public (Government) and Private. debt, as far back as 2007 the RBA warned of this dangerous situation  when debt was only $58 billion. As of April 2017 this figure has risen to $552 billion while Private debt stands at $2.7 trillion and both rising, (RBA and Debt Clock).

Australian Debt
The Rise of National and Private Debt as a Percent of GDP (AFR 12 May 2015) Red – National Debt         Black – Private Debt    ( AFR, 12 May 2015)

Interest payments on Government debt will rise from $17.6 billion in 2016-17 to over $20 billion on a projected debt of $659 billion by 2020 (The Australian, MYEFO 20 December 2016). The continuing low interest rate (1.5%) and the sluggish economy are not conducive to generating a strong export-led economy. The opinion emanating from Union Bank of Switzerland is that increasing debt and continuing budget deficits might place further pressure on Australia’s AAA credit rating. Should there be a downgrade there would be a serious rise in annual interest payments. The figure below illustrates Australia’s vulnerability to a credit rating adjustment leading up to 2020.

AAAShould Australia Really be a AAA Credit?     ( AFR 12 May, 2016)
 S & P  AA                               AAA       AAA                                           ???


A Snapshot of Exports Past
Data on Australia’s top ten trading is revealing – there is imbalance and emerging concerns.

 TABLE 3 AUSTRALIA’S TOP TEN TRADING PARTNERS (DFAT-Business Insider, 8 August 2014)

COUNTRYEXPORTSEXPORT VALUEIMPORT VALUETRADING BALANCE
ChinaIron Ore, Coal, Gold1024953
JapanIron Ore, Coal, Beef502129
United StatesBeef, Aircraft/Space Parts, Alcohol1539(24)
South KoreaIron Ore, Coal, Petroleum251015
SingaporePetroleum, Gold917(8)
New ZealandComputer Parts, Vehicles, Pharmaceuticals1111_
BritainCoal, Gold, Lead812(4)
ThailandGold, Petroleum, Aluminium814(6)
MalaysiaPetroleum, Copper, Nickel710(3)
GermanyGold, Oil Seed, Fruit711(4)
TOTALS24219848

There are two concerns. Firstly, there is obviously a disproportionate reliance on coal and iron ore for export income. There will be a slow global decline in coal usage as alternative energy sources come on stream. With iron ore there are vast new iron ore deposits being opened up in Africa and South America. Regarding iron ore deposits in Brazil, it is concerning that the Chinese government has indicated it is increasing production from this source in order to reduce Australia’s near monopoly on iron ore supply. Secondly, the Australian services sector representing 49% of export income, employs 80% of the work force. By implication, natural resources and agriculture which produce 51% of export income employs only 20% of the work force.  (See Table below). If Australia is to prosper these statistics must change. It is well documented that the “trickle down” effect does not apply to nations blessed but ultimately cursed with natural resources.

Australia’s reliance on natural resource and farm product (DFAT, 2014) is illustrated below:

TABLE 4  AUSTRALIA”S NATURAL RESOURCES EXPORT IMBALANCE (DFAT 2014) (Repeat of Table 1)

EXPORT CATEGORY $ BillionEXPORTS PERCENT
Minerals, Oil, Gas15246
Beef, Wheat145
Education, Services319
TOTAL19760
TOTAL EXPORTS326
OTHER EXPORTS12940

Future Exports
The next decade is slated to be one of immense growth opportunities for Australian export industries which are food manufacture, oil and gas extraction, education, tourism and legal services promoting south-east Asian industrialisation.  With a growing Asian middle class around 750 million, annual growth rate of these industries will be baby foods – 2.9%, dairy/processed foods – 2.1%, education – 3.1%. (NAB-IBIS World 13 November 2013)

The above projected growth rates are significant taken in conjunction with the extent of Chinese investment and obviously ongoing acquisitions of Australian assets. Examples are – the dairy,  wine, beef and power industries. (See Chinese Foreign Investment, May Blog, 2016) It should now be clearer why Darwin port is currently controlled by Chinese interests. Darwin will become an important periphoral to the Chinese One Belt One Road expansion policy.

If Australia is to increase export income and provide secure power for its export industries, it will have to take a more hard-nosed approach towards the  oil, coal and gas potential of this continent. One of Australia’s problems is the rising under-employment and slowly falling standards of living among the citizens, not the political elite. Queensland is desperate for coal development and jobs in the Galilee Basin; South Australia would benefit from oil exploration in the Bight (abcnews.com 16 November 2016); New South Wales, Victoria and Western Australia would no longer be facing a power crisis if shale gas production was encouraged.  When only a few hundred jobs may be created in any part of the country becomes newsworthy, one wonders how thousands of jobs and billions in export income can be foregone by lack of firm Government policy. The Government is desperate to encourage “Jobs and Growth” and yet projects are stalled or delayed despite stringent safeguards.

Postamble                                                                                                                    Australia has been blessed with the curse of natural resources. The past is now stalling our future. Global studies have proved that economies with abundant natural resources tend to industrialise less rapidly than natural resource-scarce economies (NBER Working Paper 5398, 1995). For Australia to materially generate nation wide export growth, OECD education ratings must be significantly improved, the Davos findings on STEM expertise must be addressed and university funding must be increased to permit export directed research.

Exports
Australian Exports, the National Objective (Exports-shipping-trade.jpg)

While the 2016-17 Budget does promote export growth, there appears little specific short term incentive that encourages exports. Long term corporate tax reduction, existing trade deals and promotion assistance are peripherals to the core problem of education improvement, university funding and innovation. Concerning corporate tax reduction, both President Regan and Bush reduced corporate tax rate to stimulate the American economy, the result was devastating budget deficits. President Clinton raised taxes, created jobs and reduced the deficit. Has the Government considered this vignette? (The Conversation, 13 May 2017)


Postscript                                                                                                                         
This month much has been made of Australia’s recession-free growth during the past two decades by the Treasurer. Looking behind this soothing statement there should be concern not euphoria. The construction industry did indeed inflate the GDP, however, it did not contribute to export income unless there was massive foreign investment. The image below illustrates Australia’s dangerous reliance  on mineral exports over the past twelve years. Currently the value of mineral exports is decreasing as China’s demand weakens and this will reinforce the  inexorable slow decline in Australian living standards, this will continue unless alternative exports can be generated. The Treasurer’s statement obscures this real unpalatable truth but is in keeping with my September 2016 article ‘The Australian Economy – Stupid’.

       AUSTRALIA’S MAJOR EXPORTS  1997 -2009
Key:  Mineral Resources,  Rural,  Manufacturing

Commodity Exports
Australia’s major commodity export earnings 1997 – 2009 (abate.gov.au)

“The latest resource boom which commenced in 2003 has already doubled Australia’s terms of trade and is slated to go higher due to oil and gas exports. The growth in mineral commodity exports since 2003 has been phenomenal. Iron ore increased from $5.3 billion to $34 billion (2009) while coal (steaming and metallurgical) increased from $10.9 billion to $34.7 billion (2009). This cannot continue.

On the future of coal – “Some 41% (2009) of global electricity is generated using coal and this proportion is continuing to increase. The trend is towards an increasing use of coal, despite climate change concerns, and the transition away from coal may take decades.”(M Roarty, Resources sector and its contribution to the nation. Parliament of Australia, 23 September, 2010)

Australia has to throw off the curse of relying on natural resources and encourage specialised manufacturing, rural production, university research and education export income otherwise Australia’s standard of living will continue to decline. With inflation at 1.5%, wage growth at 1.9% and a sluggish economy at 2.4 % growth, the May budget may do little to lift Australia out of Government’s current fiscal morass.

Last Word                                                                                                                                             Professor Greg Austin, Centre for Cyber Research, Australian Defence Academy in a radio interview commented that over the past twenty years the Government has been “fostering a culture of incompetence” in relation to training in computing skills and cyber security. The current budget arrangement to implement restrictive policies on the 457 Skilled Visa program will add to the dearth of Australian STEM expertise. This policy does reinforce the Davos findings on Australia’s ability to benefit from automation and artificial intelligence developments. All this does lead back to a budget that does not adequately address poor OECD education ratings and a continued reliance on natural resource exports. (Background Briefing, ABC RN, 11June 2017)                                                                                                                                                                                                                                                                                                                                                          

John Hill                                                                                                                                     Current Affairs Flash Points                                                                                                   towardsthefinalhour.com                                                                                        lurgashall@westnet.com.au

 

 

 

 

 

 

 

 

 

 

 

 

AUSTRALIAN EDUCATION BUDGET May 2017

 

 

Minerva
MINERVA MEDICA, ROMAN GODDESS OF WISDOM, SCIENCE, COMMERCE, MEDICINE AND ULTIMATELY WAR.(crystallinks.com)

Preamble

Two pillars fundamental to Australia’s survival are education and export income; the May budget apparently does not  recognise this fact. Today, comment will be confined to the education budget while the June contribution will examine  the budget implications for Australia’s export income.

Before discussing budget issues it is useful to recognise where Australia is situated vis-a-vis global education standards and our national degree of preparation to embrace the current reality of automation and artificial intelligence. On education standards the OECD  (March 2015) league tables indicate Australia ranks 14th behind Poland, Vietnam and Germany. Australia ranks 19th behind the United States and United Kingdom in secondary school enrolment rates. The Program for International Students Assessment (PISA) shows a striking decline for Australia between years 2000 and 2012 – for Maths down from 6th to 19th, Science from 8th to 16th and Reading down from 4th to 13th. The results speak for themselves. However, the burning question is – are competitor countries improving or is Australia just getting worse?

PISA
Australia. Decline in OECD-PISA Ranking in Reading, Maths ,Science (OECD)

At the Davos Economic Forum in January, the Committee on Artificial Intelligence noted Australian business is not ready to embrace the concept or the mathematics of artificial intelligence. The rate of Australian skills uptake and its poor grasp of STEM subjects increases the risk of its industry becoming uncompetitive. In recent years Professor Chubb, former Chief Scientist, frequently mentioned Australia’s serious STEM deficit.

STEM
SCIENCE, TECHNOLOGY ,ENGINEERING, MATHS – THE HOLY GRAIL FOR AUSTRALIA (Shutterstock)

Secondary Education.

There are five problems Australia must solve if it is to improve OECD rankings:

  • Teachers must obtain a Masters degree or higher.
  • Teaching must be raised to the status of the medical and legal professions.
  • The fractious State Education Departments must be replaced by a unified Federal system.
  • Australian parents must exert greater discipline on home studies.
  • Universities must be recognised as integral to Australia’s future and funded to recognise their export reality and innovation potential.

In assessing the OECD rankings of other countries, it is relevant to know which operate under a unified education system. Endeavouring to read between the lines of the Budget discussions, the Budget does not appear to be addressing Australia’s fundamental education problems.

A cunning Plan
BUDGET 2017. A CUNNING PLAN TO STEM THE SLIDE (abc.net.au)

A weakness of the budget forecast is it extends beyond the forward estimates period and is thus vulnerable to regime change. Below is an attempt to distill the core of the budget:

  • There will be an attempt to halt declining academic standards. This policy will be funded by an $81.1 billion expenditure over  four years boosted by $18.6 billion over ten years.
  • Professor Gonski has been reappointed to decide on expenditure priorities and to direct the program. From this, it implies the Government is unsure of its own priorities.
  • The School Reserve Standard (SRS) grants seek to ensure all schools provide education on a level playing field, an important issue but on its own will have little effect on overall ranking.

Prior to the budget, The Australian (9 November ’16) under the banner ‘How to improve teacher performance’  provided a glimpse into State education plans –all disparate:

  • NSW – is attempting teacher improvement through a ‘Great Teaching Inspired Learning’ initiative.
  • Qld – is targeting teacher quality to attract the best and is introducing teacher training modules.
  • SA – is offering 200 scholarships of $20,000 each towards Masters degrees. This appears to be attacking the root of the problem.
  • WA – is providing more teacher training internships.
  • Vic – is working on a policy to enhance teacher quality to improve student outcomes.

Dr G Craven, President of the Catholic University and Chairman of the Federal Government Teacher Education Advisory Board, has provided an insight into the problem bedevilling the system. There is an obsession with new teachers which is that young motivated teachers are showing under-performing teachers in a bad light. This obsession is part of an ‘industrial surrender’ by the State Education Ministers, all preoccupied with the blame game instead of investing in education.  There are education unions who do not wish to see innovation or improvement rolled out through the entire teacher population.

The Federal Minister for Education, the Hon S Birmingham, supports Dr Craven’s comments under the mantra ‘Quality Schools – Quality Outcomes’. This would hopefully produce effective policy and changes to the industrial relations agreements which will link pay progression  to nationally agreed professional standards.

The  initiatives of the State Education Departments will not solve the problem of Australia’s declining OECD rankings or STEM deficiency rankings. This problem will only be solved by raising the status and standards of teachers, amalgamating State  education departments under a unified system, and learning from those countries that are more highly ranked. This problem cannot be solved during the life of a single parliament.

Tertiary Education

The University of New South Wales Chancellor, Dr Ian Jacobs, (UNSW News Room, 9 May 2017) has commented that current Government policy on universities is not in Australia’s long term interest. The policy implies universities are an expenditure problem not a long term investment. A recent OECD global study indicated that six Australian universities were in the top one hundred in the world. A Deloitte study recently concluded university research accounts for 10% of Australian GDP, that is $160 billion per year.

The remarks by Dr Jacobs are in response to the 2017 Budget which has cut funding to Universities by $384 million over two years. The mechanism for this reduction is an ‘efficiency dividend’ of 2.5% and a reduction in student contributions of 1.8%. (The Conversation, 9 May 2017)

It is unsurprising Australia is in free fall on the OECD league tables. The funding history and current policy illustrate why. In 1974, the Commonwealth provided 90% of university income. By 2010 this had reduced to 42% and by 2014 it was 20% for the major research universities. This hollowing out of a principal driver to the Australian economy has been supported by both Labor and Liberal to the present day. In 2016 the Government proposed a 20% funding cut in  science, engineering, social science and arts education – this during a STEM controversy.

 

Parliament of Australia Budget Office

Projection of Nominal Government Higher Education Expenditure to 2025 ($billion nominal terms)

University Funding
PROJECTION OF NOMINAL UNIVERSITY FUNDING (ABS)

The big picture is that Australian spending on higher education has remained static at 1.6% of GDP for some years while the figures for Canada and the United States is around 2.6 to 2.8% of GDP. Australian student fees are now the highest in the OECD – and that does not include the 2017 budget increase.

This ‘penny pinching’ must be viewed against the value of export income derived from the value of international student education. This constitutes Australia’s highest value services export and third most valuable export after coal and iron ore. Data published by the AFR (3 Feb. 2016) indicate Australia hosts 555,000 foreign students in a population of 1.3 million students, i.e. 46% worth, an amount of $19 billion which is ahead of tourism at $16 billion.

Export income from students is increasing.

Foreign Students

Dr Jacobs further indicated that Australia’s high academic ranking and proven track record proves there is enormous potential for economic diversification and growth. This is being destroyed by short sighted budget cuts and proposed visa restrictions on well educated foreigners. It is a sad commentary when the Federal Government is in sync with One Nation on its policy to the entry of foreigners to Australia.

Australia’s mantra  should be “education, innovation, exports”,
NOT 
 “jobs and growth” or “fairness, opportunity, security”.

John Hill                                                                                                                                     Current Affairs Flash Points                                                                                                 towardsthefinalhour.com                                                                                                         lurgashall@westnet.com.au

 

 

 

 

 

 

 

 

Free Trade Agreements & Australia. November 2016

 

 

Free Trade Agreements
Globalisation & Free Trade Agreements – What a mess!
(ssc.wise.edu)

History  In recent times Australian Government Ministers and media have commented upon problems and benefits with Australia’s Free Trade Agreements (FTA). There appears to have been little clarification on the pros and cons of these far reaching agreements. This essay seeks to throw light on some of the issues and how they may affect Australia.

In the age of modern empire (16th to 19th centuries) world trade was constrained  by the Mercantilist theory by which governments regulated the empire’s economy such that state power was augmented at the expense of rival maritime powers. The policy reduced imports from rival nations and maximised exports which, in part, fuelled the Industrial Revolution. The effect was to remove subject peoples and colonists from foreign products; this policy was a trigger for the American War of Independence.

Prior to the Second World War, European and American industry imported raw materials from colonies and exported manufactured goods to tied markets round the globe – it was a closed trading loop.

Due to the two ‘World Wars’ in the first fifty years of the 20th century, global trade was severely disrupted. The European empires and Mercantilist trade vanished and trading patterns were ad hoc. The mid-century post-war reconstruction boom generated unprecedented factory growth across the Western world that generated high labour costs and this has sown the seeds of serious labour pains in the industrialised West in the closing years of the 20th century and the opening years of the 21st century.

From mid-20th century, Western world companies commenced a slide towards low-cost labour in Asia and South America causing closure of many Western world factories. This resulted in an inexorable under-employment or job losses that is now bedevilling the working class of the Industrialised world. The flood of cheap imports to the West from industrialising Third World countries has skewed world trade, created trading surpluses, particularly in China. This situation has contributed to low global inflation, deflation, low interest rates and under employment This global situation has contributed to the rise of European Right Wing parties: the popularity  of Mr Trump, the Brexit vote and the phenomena of Bernie Saunders (Democrat,USA) and Jeremy Corben  (Labour, UK).

Free Trade Agreements  Economic theory suggests free trade agreements are the best way to proceed to raise global living standards, particularly in the Third World.  However, not all in the Industrial West benefit. In effect, the practice is producing interconnected global trading blocks with reduced tariffs and quotas. With increasing complexity of trading blocks, the process might spawn the rise of mercantilist groups by another name. Negotiations by nations are complex as each participant endeavours to maximise trade benefits. Currently the advantages of free trade  over mercantilism are:

  • nations benefit from a greater source of goods at lowest prices
  • mercantilism restricts imports resulting in high prices
  • the free trade system makes the nation, not necessarily  the individual, more prosperous
  • mercantilism forces nations to fight over resources – under free trade goods and services are peacefully traded. Since globalisation is not a homogenous process, rival free-trade blocks could have designs on the same resources.

World Economy  The world economy has been moving towards an interconnected globalisation. In today’s world no national economy is completely immune to the health or sickness of other national economies:

  • Globalisation ensures a majority of people benefit through new investment, but high labour costs in outdated industries can create unemployment. The Brexit ‘leave’ vote was lead by those who were ‘left behind’. Mr Trump’s support is, in part, from the disaffected working class.
  • Globalisation can produce lopsided unstable capitalism. There is, within Western World, unease that infrastructure and industrial projects  will proceed in Third World countries where labour costs and tax rates are low.
  • Since Britain’s Brexit vote in June to leave the EU, five industrialised European nations anti-establishment parties are clamouring to erect trade barriers (tariffs) and close borders to immigrants.
  • Increasing globalisation has established that the real incomes of 66% of households in advanced economies have fallen between 2005 and 2014. The few gains have gone to the ‘salaried gentry’. (McKinsey Global Investments)
  • There is growing belief that globalisation benefits elites but much less so for the broader population in advanced economies.
  • China’s integration into global trade, by joining the the WTO, has caused lasting damage to workers in the Industrialised Economies.
  • China’s global penetration of low cost goods has risen from 2% (1991) to 20% (2013).
  • Of the six million American job losses in recent years, 29% are directly related to the import of Chinese goods.
  • With globalisation and increasing free trade, there is clear evidence in the Advanced Economies that wage inequality is growing with growing risk for low and mid-skilled workers.
  • Advocates for free trade admit gains come from greater manufacturing and productivity efficiency not from additional jobs. However, imports are cheaper.
Imports and Exports
Hidden Agendas.  Cheaper Imports – Fewer Jobs
(behindtheline.com)

American Trade Agreements  As a backdrop to Australian trade agreements, the American experience is reviewed. Since 1985, fifteen separate free-trade agreements with twenty countries involved the export of high-value products. Note that these were one-to-one trade agreements not an international consortium master-minded by an American panjandrum. Employees benefited as wage premiums of up to 18% were paid compared to those in non-export industries who were unable to compete with cheaper imports.

In 1998, the United States and China signed a trade pact whereby American export tariffs were reduced from 24% to 9% while import quotas were abolished. Subsequently there were huge job losses in the American industrial heartland, but millions of Americans benefited from cheaper products. Bernie Saunders, a Democrat Presidential aspirant, noted that trade deals are a disaster for American workers.

Trans Pacific Partnership (TPP) Twelve countries have been co-opted and others are being cajoled to join. Negotiations have continued over five years. It was hoped to sign a binding document in 2016 but Partners have delayed until 2017. The TPP was the initiative of President Obama to counter the growing economic might of China. The current membership represents approximately 40% of global GDP and is summarised in the table along with some critical  economic indicators. The Philippines, South Korea, Thailand and Taiwan have expressed an interest in joining. China is specifically excluded as its financial controls and social issues are not considered acceptable. (geopolitical futures.com, 8 August, 2016)

TABLE 1 Trans Pacific Partnership. Members Economic Indicators.

CountryPopulation (m)
GDP (tr) & RankingBudget as % of GDPAverage Wage $'000Unemployment %
United States32418,561----1-3.258.74.9
Australia241,256----13-2.350.25.6
New Zealand5 179-----53-27.737.85.7
Canada361,532----10 -2.643.27.0
Chile18 234-----45 -2.513.47.1
Peru32 180-----52 -2.16.16.5
Mexico1241,063----15-3.09.03.7
Brunei0.4 10---134-16.036.66.9
Malaysia31 302-----38-3.49.83.5
Singapore6 296-----40+0.752.92.1
Vietnam94 200-----48-6.42.12.1
Japan1264,730-----3-5.032.53.0
The table provides an insight into market potential, economic health and probable wage transfer from industrialised to developing economies. (World Bank, International Monetary Fund, The Economist)

Clouds on the horizon are an antagonistic American Congress that is required to enact the TPP into law, while both Trump and Clinton are opposed to this trade deal. Malaysia, Canada and New Zealand have delayed ratification until 2017.

The Roosevelt Institute has poured cold water on the proposed Partnership (DrJ Stiglitz, Columbia University):

  • middle incomes will be suppressed
  • tariffs are already low (average 2.7%) so a strong American dollar will swamp benefits
  • the World Bank opinion is that the proposed Partnership will have zero effect on the American economy
  • the inequality jeopardising the American middle class is a defining challenge to social instability.

The Australia-China Trade Agreement  Before commenting on the TPP, a smidgin of history. This agreement came into force in June 2014. It is a contentious document as revealed on ABC News, October 2015.  (abc.net.au/news) Benefits are summarised as:

  • Benefits
  • Australians will enjoy cheap Chinese Imports, a 5% tariff will apply.
  • Within 2-4 years, Chinese tariffs of between 3-10% will be eliminated on imports of coal and aluminium.
  • Within 9 years, Chinese tariffs of up to 30% will be eliminated on dairy and animal goods.
  • Australian aged-care homes and some hospitals can be established.
  • Improved access to legal and financial partnerships will be expedited.
  • The Foreign Investment review Board will scrutinise all investments by Chinese State owned companies.
  • Problems
  • There is excessive leeway for years and tariff adjustments.
  • No tariff reduction for sugar, rice, wool, cotton, wheat, maize, canola.
  • Customs duties will apply on beef and milk powder if quotas are exceeded.
  • For Chinese investment projects exceeding $150 million temporary workers will be permitted.
  • Under ISDS legislation, the Australian government can be sued if Chinese interests are damaged by subsequent legislation.
  • Acquisition/investment limits  have been raised from $252 million to $1,094 million – excluded are investments in media, telecoms and defence.

 

Hidden Agendas
TPP The Role of Corporate Objectives?
(herinst.org)

Trans Pacific Partnership  (TPP)  The Prime Minister spoke briefly, in glowing terms, on the benefits accruing to Australia from its membership of the TPP. (ABC rn, 7 November 2016) There is growing unease in Australia and among other participants on the conditions of and fall-out from the TPP once it is possibly ratified in early 2017. This concern is a realisation that the trade initiative may be  politically designed to corral Pacific rim nations to further the corporate interests (hidden agendas) of United States industry. (The Drum, June 2015) The twelve nations involved, but not all irrevocably committed, account for 40% of global GDP. (geopolitical futures.com) For Australia, this Partnership does appear to be a lifeline for its economic growth and stability since 70% of its trade passes through the east Asian region. The long-term growth projections based on the TPP for participating countries have been assembled by the World Bank. (June 2016), Table below:

TABLE 2 Modelling Projection under Trans Pacific Partnership to 2030

CountryGDP Growth %Exports %
United States
0.48.0
Australia0.85.0
New Zealand2.912.0
Canada1.66.0
Chile1.35.0
Peru2.39.0
Mexico1.83.0
Brunei4.47.0
Malaysia7.719.0
Singapore2.86.0
Vietnam9.830.0
Japan2.723.0
Modelling Projection of Trans Pacific Partnership to 2030.
World Bank, 10 June 2016
Australia and Mexico appear to have similar disappointing growth projections.

Reports favouring the TPP from the Australian perspective have been issued by the Department of Foreign Affairs and Trade (16 July 2016 ) and the Parliamentary Joint Standing Committee on Treaties (2016). Summarised, their conclusions are:

  • there is a great potential to drive job-creating growth across the Australian economy
  • there is new market access for Australian exporters and investors
  • there will be transparency of regulations of the twelve participating nations, hidden agendas excepted
  • there will be certainty for business, cost reductions and consolidation of supply chains
  • tariff elimination
  • Australian competitiveness will be enhanced which will promote Australia as an investment destination.

Government agencies, being politically controlled, have painted a soft rosy glow on the advantages of the TPP. Disadvantages of the TPP have been expressed in unequivocal terms. Dr M Rimmer, ANU College of Law, states “Australian consumers have been deluded. The intellectual property chapter of the TPP is a monster. The proposals in regard to copyright law, trademark law, patent law and data protection would hit Australian consumers hard.”

Getup (getup.org.au), the Australian political commentator, noted in 2016:

  • the TPP represent a ‘closed door’ deal driven by big business, pharmaceuticals and tobacco
  • foreign companies will be able to sue the Australian government for loss of earnings under the Investor-State Disputes Settlements (ISDS) scheme
  • significantly, the proposal deals extensively with investment not trade.

The Drum (29 June 2015) noted: ‘preferential trade deals, not free trade, add to the complexity of international trade. In this, the Productivity Commission and the Australian Chamber of Commerce agree. It is the opinion of the World Bank that the TPP will have zero effect on the American economy.’

The last round of the TPP talks were concluded in New Zealand during August 2016 with 98% of the deal agreed to. Sticking points are monopolies demanded by the pharmaceutical companies requiring twelve years exclusivity on their products, while other members require only a five year period. This issue has significant ramifications for Australian health costs. The next TPP meeting is scheduled for November in the Philippines.

Apples upsetting the Cart  Recently, four potential Partners and/or angry citizens have had second thoughts or condemned the TPP document:

  • New Zealand. The New Zealand Herald (July 2016) reported wide-spread opposition to pharmaceutical and sovereignty issues, It was reported over 170,000 citizens were involved in the rallies.
  • Canada. The Council of Canadians (November 2016) has held a number of protest rallies that has delayed a Government decision on the TPP until January 2017.
  • Malaysia. Officials have announced that the Government has delayed a formal decision until sometime in 2017.
  • Australia. In May 2014, unions, church groups and community organisations endorsed a letter prepared by the Australian Fair Trade Network to Trade Minister Robb warning of draconian and unfair clauses dealing with public health costs, ISDS provisions, workers rights, environmental protection, copyright provisions and Australian media content. Currently, cyber space across Australia is clogged with damming reports on a poor outcome for Australia if the Trans Pacific Partnership is ratified. The latest word from the Government, risking repetition, was on the 7th November (ABC rn) when the Prime Minister extolled the virtues of the TPP but none of its iniquities.

What to think. What to do.  There are very clear messages of concern coming from across the globe; the Australian government is publicly studiously ignoring them. There are two factors to the TPP. Firstly, it is a political construct to counter the growing might of China and secondly, it is perceived  by the Australian government as a life-line for the nation’s future prosperity.

The attached tables can generate some uncomfortable deductions. From Table 1 the average wage ratio to GDP is instructive. Results are United States 316, Japan 145, Canada 35 and Australia 25. Australia’s productivity has been a concern; this data supports that contention. Table 2 provides an uncomfortable World Bank projection to 2030 of Australia’s growth compared to other members of the TPP.  Australia’s GDP growth % and exports % are among the lowest among the industrialised cohort. Australia’s salvation has to to lie with high-tech exports on the back of its existing exports.

For Australia, there will be further job losses as GDP increases with the development of high-tech industries in the years to come. Is the TPP, with associated noxious clauses but associated with 40% of world trade, the real issue or is there an advantage in developing comfortable individual trading agreements with many nations?

The Australian Economy, Stupid. September 2016

Terms of Trade
Terms of Trade over 15 Years (ABS/Comsec}

PREAMBLE

  • A Pleasing set of Numbers (Hockey – September 2014)
  • A Terrific set of Numbers  (Hockey – June 2015)
  • The Best Growth Rate since 2012 ( Morrison – September 2016)
  • Then why oh why are:–
  • Australian living standards falling?
  • Young Australians unable to afford to buy a home?
  • Interest rates at 1,5%, the lowest ever?
  •  Salvation lies in consistent positive Terms of Trade.

What is the proper message we should hear from Australian Government Treasurers? Below is a potted summary of the Australian financial situation from mid-2014 to mid-2016. It will be shown that the above adjectives tend to disguise the situation. This is a call  aux armes citoyens to drive up our Terms of Trade and  to ensure we are not bamboozled by misleading commentaries from  our ruling elite.

The catalyst for this offering is Treasurer Morrison’s embrace of Australia’s mid-2016 accounts. To place his enthusiasm into context, we start with Treasurer Hockey in mid-2014.

DISCUSSION

In September, 2014 Mr Hockey indicated the National Accounts were “a pleasing set of numbers” which confirmed a consolidating economic momentum. As Mr Hockey was speaking, the Reserve Bank Governor, Mr Stevens, was warning of a dangerous bubble in the housing markets. It was ingenuous of Mr Hockey to indicate the GDP figure had risen by 0.5% in the June quarter but he had omitted to indicate that the real GDP had fallen by 0.3% due to the unfavourable Terms of Trade. The Reserve Bank of Australia considers the real GDP is a more meaningful measure of economic health. Treasurer Hockey knew this well. Was this deliberate omission or a senior ministerial moment? (SMH, September 2014)

Now forward to June 2015. The National Accounts for the the quarter ending June 2015 indicated GDP rose by 0.1% with an annual growth of 2.3%. (ABS) Treasurer Hockey enthused “a terrific set of numbers”. He indicated the Australian economy was among the fastest growing in the world. What Mr Hockey did not mention was that this period constituted the fifth quarterly drop in the Terms of Trade which was squeezing company profits, taxes and wages and that real net disposable incomes was now less than that in the September quarter 2008. (GFC) Australian living standards were falling for the first time in fifty years – and this is not a short-term trend. People are now spendings savings to make ends meet. This reduces domestic demand which knocks on to fewer job opportunities. (Financial Review, 3 June 2016)

Concurrent with Treasurer Hockey’s  upbeat comments the Boston Consulting Group, Sydney, opined that Australia’s low interest rates (then 1.75%) and Government spending was producing a potential spiralling national debt burden. Compounding this fragile transition away from resources investment, the non-dwelling construction activity declined by 4.9%. What is happening in the economy is that national productivity is falling as growth moves away  from low labour profitable  mining to low paid  intensive labour in  tourism and hospitality. These are issues lurking behind the Treasurer’s enthusiasm. (Financial Review, 3 June  2015)

Forward again to September 2016. Treasurer Morrison has commented with gusto on the National Accounts for the June quarter. We are told there is no sign of a downturn in the economy which has grown by 3.3% – the best growth since 2012. There was also fulsome comment that the growth rate is a tribute to hard working Australians. No where, apparently, was there reference to a need to encourage exports and thus improve the Terms of Trade. Mr Morrison noted that the Terms of Trade for July showed a $285 m reduction on the June figure (ABS 5368.0) due to slightly increased exports and decreased imports which might indicate  less disposable income was available for overseas goods.

  • Exports.  June $25,706m. July $26,425m
  • Imports. June $28.957m. July $28,835m

What was not made clear by the Treasurer was that the 3.3% GDP growth was boosted by pre-election Government spending and, curiously,  on increased expenditure on hepatitis C drugs. (SMH, 7 September 2016) Currently brakes on the economy are weak household spending, weak wages growth and a decline in the national hours worked. Irrespective of encouraging statements by the Treasurer, the historic low interest rate, now 1.5%,  and low inflation rate of 1.0% (RBA band 2 – 3 %) is indicative of a sluggish economy.

 

CONCLUSION

The tentative conclusion, is that statements by recent Australian Treasurers cannot be accepted at face value. Their statements must be evaluated within the wider picture of the Australian financial situation.  The driver for the future is a positive Terms of Trade that, initially, balances the  budget from this jobs and growth  and other benefits will follow.

 

 

JOBS and GROWTH August 2016

 

Future Employment
Future Employment
(Dave Granlunp, politicalcartoon.com)

JOBS AND GROWTH

Prologue This offering attempts to place the ‘Jobs and Growth’ song line into Australia’s current and projected economic situation. Background is Australia’s terms of trade,  past innovations,  the imperative for export  income and closes with comment on poor academic achievement and Government funding as drivers for growth into the 21st century.

Preamble The slogan, ‘Jobs and Growth’ generates two issues:

  • If Australia is to prosper ‘growth’ must be directed toward generating export income.
  • In an expanding 21st century, economy improving education is necessary but unemployment is still forecast.

The policy of encouraging domestic employment will not increase the national wealth in an expanding population –  it will merely churn the money supply. This activity will encourage quantitative easing, a devalued currency, deflation and more expensive imports – as experienced in Europe today.

‘Growth’ for Australia must be directed to generating export income. Much has been made of a ‘transitioning economy’ but the Government has apparently not articulated a specific sense of direction, although small business has been given a boost – but how much product is export oriented?

For Australia to prosper, the monthly terms of trade must be returned to positive, such that the national budget at least returns to break-even; this will stabilise the national debt. The flip side is that high tech export industries do not require a large relatively unskilled work force. Canada found transitioning toward a high tech economy does not substantially reduce unemployment but it does increase GDP.

Australian Exports, Imports and Terms of Trade  In 2013, Australia produced a positive terms of trade (DFAT April 2016, dfat.gov.au/trade):

  • Top Exports – $329 billion. Iron ore, Coal-Gas-Petroleum, Wheat, Copper, Aluminium, Cotton, Wool, Gold, Financial services.
  • Top Imports – $318 billion. Travel-Freight-Transport services, Motor vehicles, Computers, Refined petroleum, Furniture, Telecommunication equipment, Heating/Cooling equipment, Iron-Steel-Aluminium structures, Professional services.
  • Terms of Trade + $11 billion. Additional impost is the interest on National Debt – $16 billion.

Since 2013 the terms of trade have moved into deficit. In the first half of 2016, the terms of trade ($ billion ) were:  January 3.42, February 3.41, March 2.16, April 1.58, May 2.22, June 3.19 – that is around $15 billion. (tradingeconomics.com)

 

Terms of Trade
Terms of Trade and Iron Ore Price
(ampcapital.com.au)

The budget deficit for 2016-17 is $37.1 billion which is forecast to decrease to $6 billion in 2019-20. (Australian Government Budget 2016-17) It is these deficits, among other factors, that provoked a warning from the Ratings Agencies on Australia’s AAA credit rating.

Jobs and Growth  Australians cannot maintain their living standard by creating domestic jobs thereby churning the money supply. Our Nation must export more to improve the terms of trade. Government policy appears to be promoting any jobs rather than export oriented jobs – possibly a hidden agenda to reduce unemployment and maintain social stability. The main game is jobs that create export income. It is a sad fact that successive Australian governments have presided over the closing down of labour- intensive manufacturing industries, in part due to thin internal markets, high production costs and a strong currency boosted by a vibrant natural resources industry. To illustrate past, current and probably future closures, below is an incomplete list;
Ford-Toyota-Holden car plants, SA/Vic; Electrolux, NSW; Smiths Crisps, WA; Amcor, Vic/Qld; Buizen Yachts, NSW; Arrium, SA; Blue Scope Steel, NSW/WA and food producers Rosella, Windsor Farm Foods, Dairy Bell.

The picture is concerning despite, during 2015, over 300,000 jobs were created. Unfortunately, many were part-time and there was a trend for monthly hours worked to decrease. (Fact Check March 2016 and ABS June 2016) Critical missing information is the distribution of labour between domestic and export oriented jobs. ABS should collect this information.

Export industries up and running and with scope for immediate  expansion are tourism and education:

  • Tourism, year ended June 2016. Recorded 7.85 million visitors – conservative income $6 billion.
  • Education for 2015. School/University students 270,000, Vocational students 70,000. (AFR December 2015)

To promote export industries, Australia has a rich gene pool of scientists, engineers and lively minds to draw upon. Examples of Australian brilliance are:

  • Science and Engineering.  Aircraft Black Box, Electric Drill, Winged Keel, Frazier Lens, Racecam, Refrigerator, Splayds, Triton Work Centre, Atomic Absorption Spectrometer, Permaculture, WiFi, Underwater Torpedo, Photo Lithography, Stump Jump Plough, Mitchell Thrust Block Bearing, Humespun Pipes, Dethridge Wheel, Self Propelled Hoe, Coupé Ute, Froth Flotation, Quantum Bit, Anti-hacking Software, Blast Glass.
  • Medical. Spray-on Skin, Pacemaker, Cochlear Implants, Ultrasound, Plastic Lenses, Zinc Cream, Gene Silencing, Pollilight Forensic Lamp, Blood Test for Still -borns.
  • Commercial. Polymer Bank Notes, Feature Films, Si-Ro-Set Creasing, Tank-bred Tuna, Wine Casks, Coolgardie Safe, Automatic Totalisator, Surf Ski.

Australians are innovative and growth should be directed towards universities, research establishments and selected ‘garage’ entrepreneurs in a bid to improve Australia’s terms of trade. Despite the Turnbull quote “Innovation is the critical aim of the Administration”,  both the Abbott and Turnbull Governments have reduced the influence of the CSIRO by budget cuts and retrenchments. Recently however, the CSIRO has been boosted with a $300 million Innovation Fund to promote a data driven economy, co-investment and an acceleration program.

Universities have also endured funding cuts in the 2016 Budget. A recent Vice-Chancellors’ meeting recorded “a deep disappointment at the proposal to reduce public investments”. Among the reductions was a $2.5 billion cut over the forward estimates to 2019-20 and a withdrawal of an efficiency dividend of $1.2 billion. These cuts are inexplicable in the light of a statement by Professor Ian Jacobs, Vice-Chancellor, UNSW who indicated on ABC RN (18 August) that in 2014 Australian universities contributed $60 billion to the Australian economy by way of innovation and commercial research.

The dilemma for the Australian Government’s  ‘stairway to the stars’ is financially compromised by the competing requirements of Health, Social Security, NDIS and Education,; the latter, perversely, being critical.

Another brake on Australia’s drive toward an innovative future (jobs and growth) is the poor uptake by Australia’s youth in the STEM subjects. The OECD global education ranking for Australian fifteen year olds in maths and sciences was 14th. Rankings are: 1 Singapore, 2 Hong Kong, 3 South Korea, 4 Japan, 5 Taiwan——- —11 Poland, 12 Vietnam, 13 Germany, 14 Australia. As if on cue, there has recently been disappointing comment on NAPLAN tests in Australia.

In transitioning to a 21st Century high-tech industrial economy, Canada announced in 2015 their GDP increased but  with little opportunity for increased employment.

 

Modern Car Plant
21st Century Vehicle Plant (cis.org.au)

A critical driver in the 2016 Budget to promote ‘jobs and growth’ is the reduction of tax rates from 30% to 25% over the forward estimates such that by 2026-27 cost to the taxpayer will aggregate $48.2  billion. (theaustralian.com.au/budget, 6 May: Smart Company, 3 May 2016) If the principal outcome of this initiative is to boost domestic employment supplying a domestic market, it will increase GDP but the terms of trade will deteriorate as business imports will increase, it is vital these tax benefits promote export growth. To round out this policy, the Government must actively encourage Australian industry to establish export markets and reward successful companies for this. This must become the mantra for ‘jobs and growth’ otherwise living standards will continue to fall.

Epilogue  This opinion piece has attempted to examine issues lurking behind the Government’s song line ‘jobs and growth’.