Australia Must Wean Itself From China
Viewed from afar, even the bad news in Australia looks pretty good. Unemployment reached a three- year high last month and is now all of 5.6 percent. Leaders such as U.S. President Barack Obama and French President Francois Hollande would kill for such a number. Australia has avoided a recession for 21 years, boasts a budget remarkably close to surplus and continues to enjoy low inflation. On any economic report card, the country deserves a string of A’s.
That stellar performance should make Prime Minister Julia Gillard a shoo-in for another term, right? Oddly, the prospects for Gillard’s Labor Party in September elections appear to dim with each new batch of economic data. Less than 30 percent of Australian voters are satisfied with the prime minister -- her weakest numbers since September 2011. (Only 35 percent are satisfied with opposition leader Tony Abbott, according to a Newspoll survey published in the Australian newspaper on April 9.) Economic insecurity ranks as the main concern among voters. A reminder was delivered yesterday, when China reported slowing growth, sending Australia’s main stock index down the most in a month.
“I’m fed up with this government telling me, over and over, how lucky we are, how everyone is jealous of Australia,” Laurie Bracker, a 34-year-old insurance agent, said in Sydney last week. “We need less talk and more help dealing with rising prices, and more progress creating new and better paying jobs.”
Such concerns aren’t unique to Australia, of course, but they speak to Gillard’s paradox. Her almost three-year-old government has played by the rules: It has kept the national budget in, or close to, surplus, has conducted monetary policy credibly and has done more than others to tax the carbon emissions heating up our planet. And what thanks has Australia gotten for heeding the gospels the West once preached so piously? An overvalued Australian dollar that is hollowing out the country’s export industries.
When we think of economies vulnerable to the dark side of zero-interest rates, countries such as the U.S. and Japan, Brazil and Thailand, leap to mind. Yet Australia’s currency has soared 75 percent against the U.S. dollar and 89 percent versus the yen since the 2008 collapse of Lehman Brothers Holdings Inc. precipitated a global financial crisis. When I asked government officials and business leaders in Sydney last week why they were so glum about the future, three words kept coming up: the strong dollar.
Even so, it’s time for Australian leaders to stop complaining about the unfairness of the situation and start addressing the real weaknesses in their underlying economy. For years now, theirs has been, as the title of Donald Horne’s 1964 book had it, a “lucky country.” Arguably, no developed economy has benefited more from the reforms unleashed in China by Deng Xiaoping in the late 1970s. The Chinese boom has led to soaring demand for Australia’s natural resources, such as iron ore, coal and copper.
As a result, rapid growth has come almost too easily. Australia has benefited from skilled treasurers, including Gillard’s right-hand man, Wayne Swan, and former Prime Minister John Howard’s finance chief, Peter Costello. Yet they have only really had to manage good times. Meanwhile, elected officials have focused their energies on keeping the commodities boom going. Mining takes up a disproportionate amount of the government’s attention, for instance, even though it employs just 2.5 percent of the working population.
Politicians forget that Horne meant the title of his book sardonically. “Australia is a lucky country,” he wrote, “run by second-rate people who share its luck.” Instead of using the strong dollar as an excuse to wean themselves off China, politicians in Canberra and corporate executives from Sydney to Perth are urging the central bank to come to their rescue. Gillard and others are essentially abdicating their responsibilities to Glenn Stevens, the Reserve Bank of Australia governor.
Australian leaders should instead be using this time to prepare the country for the day when Chinese demand inevitably begins to dry up. The government should be taking advantage of the lowest benchmark rates in 53 years to borrow and invest. Funds are required to rebuild crumbling infrastructure and upgrade the education system, to encourage a shift to higher value-added manufacturing and to promote innovation.
Australian industry, too, must find ways to remake itself: ways to compete, create jobs, increase productivity and address the risks posed by climate change. At a time when the strong dollar is “decimating” exports, says Terry Davis, group managing director at Coca-Cola Amatil Ltd., “the only answer is better research and development.” As Swiss and German companies have, Australian firms must seek out value-adding niche industries that are more reliant on human capital.
Australian firms also should use the brawny dollar to start acquiring companies overseas. Nothing buys financial influence these days like a stable of multinational giants. If the Chinese can use their strengthening currency to acquire corporate gems, why can’t the Australians? Executives should zero in on the technology, science, finance and transport names they fancy and go after them.
Few doubt that Australia has great economic managers. But the Chinese boom has made the job far too easy. What the country needs now is for its leaders to start leading. Otherwise Gillard may find herself adding to that unemployment number in a few months.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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