Friday, October 23, 2009

China and India at the End of the Rainbow

Two contributions to the long-tern economic policy debate in the last week are must reads for those interested in Australia’s political economy. The first contribution came from Treasury Secretary Ken Henry and the second from BHP Billiton Chairman Don Argus.

The first from Henry, The Shape of Things to Come: Long Run Forces Affecting the Australian Economy in Coming Decades provides a wide-ranging contribution on Australia’s future. Henry discusses (1) population ageing; (2) climate change adaptation and the prospect of climate change mitigation; (3) the information and communications technology revolution; and (4) the impact on Australia's terms-of-trade of the re-emergence, as global economic powers, of China and India.

No one could accuse our key economic policy figures Henry, Stevens, Rudd and Swan of not being big thinkers (and with the exception of Swan all have a fairly high opinion of their own brilliance).

Henry’s mid-week comment to a Senate estimates hearing received many headlines.

It now appears the impact of the global financial crisis on the Chinese economy and the Indian economy hasn't been nearly as large as many feared … It seems that's likely to support relatively high commodity prices, that is prices for Australian export commodities, for a considerable period of time, quite possibly for some decades.
The second from Argus mulled over China’s foreign investment in Australia. Like many people Argus is worried about the Chinese state’s ownership of what he calls our “endowment assets”. I’ve tried to find a transcript but there’s not one available yet although audio is available. Barry Fitzgerald and Mathew Murphy report on the speech in The Age

“Mr Argus suggested at the Melbourne Mining Club luncheon that one response from the Federal Government could be to allow foreigners to acquire ''green fields'' or early stage resource projects, but only on the basis that half of the project is floated off to Australian investors, say, 15 years later.
Mr Argus has long raised concerns about the lack of policy on the ability of state-owned enterprises and sovereign wealth funds to buy up the resource endowment of a host nation without there being reciprocal investment rights. His 50 per cent, 15-year suggestion is his ''lateral'' response.
''We can't get complacent from a competitive point of view because we have had a good run with China,'' Mr Argus said. ''China is now going out and branching out to try and lock in resources themselves.'' He emphasised that he was not anti-Chinese investment or anti-foreign investment ''because Australia does need foreign investment''.
But he does not want Australia to end up like Canada, where foreigners have replaced local owners of the resources industry. ''Canadian investors certainly don't have the same holdings in their endowment assets that they might have had 10 years ago,'' he said.
As far as I know the Australian mining industry is already majority foreign owned, but it’s likely, as Argus suggests, to get even more so in the future without a strategic approach from Australia’s policy-makers.

Ultimately, what matters is that the benefits of Australia’s resources go to their owners – the Australian people, with obviously suitable compensation for those risking their capital and using their endeavour. Australians should be wary about the need to always act quickly to ensure continuing investment. I for one think the Foreign Investment Review Board provides for necessary review of important investment issues for Australia’s future. Let’s not forget that China does not believe in open slather in its own industries, particularly in its mining sector. The argument that Chian will be offended by a strategic approach is laughable. Indeed, anything but a strategic, discriminating approach is likely to invoke derision amongst Chinese authorities.

The thing that interests me most in both posts, however, is the unflinching assumption that China’s growth will necessarily continue onwards and upwards, seemingly without any faltering at all. Over the medium term, there is indeed much to be confident about. China and India have huge growth potential and both, while having grown significantly in recent years are still poor countries (their GDP per capitas are very low).

The major issue is whether commodity prices will stay high or whether they will revert to the long-term trend decline that has been going on for the last 150 years. (For weights see The Economist and here)

It’s possible that China and India’s rise will reverse this trend for the foreseeable future. But even if Asia continues to expand without major reversals or periods of stagnation, it’s likely that resource prices will decline as their supply increases. And it’s possible that technological change will undermine demand as happened to Australian’s pre-eminent export until the 1950s – wool. One only has to think about the impact of the Internet and mobile phones to realise how technology came change the game very quickly indeed. Mobiles in particular have changed communication in countries without the old telephone infrastructure in ways that was impossible to imagine even a few years ago.

There is also the problem of climate change that may make even more urgent the need to find replacement technolgies for resource intensive development.

For some more coverage on Henry's optimism in comparison to the pessimism of Ross Garnaut see Tim Colebatch "Balance of Power".

No comments:

Post a Comment

Please be civil ...