China’s economic control

I was chatting to a friend the other day and he mentioned this concept, but Andrew Charlton has written a great opinion piece explaining why our economy is Made in China.

Some key quotes that resonated with me:

The former prime minister John Howard claimed during the election that his fiscal discipline was keeping inflation and thereby interest rates down.

This was hogwash. Average inflation was relatively low, but this hid the bipolar nature of our economy. Non-traded goods suffered endemic inflation during the Howard years, but the problem was concealed by disinflation in the traded economy. It is easy to keep inflation low when every year China keeps shipping us more goods at cheaper prices.

I’d not really seen this before, but it makes sense to me. Especially the bit about Howard’s claims being hogwash 😉

He continues:

There are two ways to solve this problem. One is to passively sit back and let the Reserve Bank reduce demand by bludgeoning shoppers with repeated interest rate rises.

The better solution is to improve productivity in non-traded sectors so that our domestic production can grow to meet demand. A wave of competition policy in the early 1990s dramatically improved the efficiency of Australia’s traded economy, stripping away tariffs and opening up the sector to competition. The new Labor Government must now do the same for the non-traded economy. That means improving productivity in formerly neglected sectors like transport and logistics, education, utilities, health and many other services.

I would also add that perhaps we should turn around our long-neglected R&D-related activity, so that we can increase high-value technology-based exports in growth sectors too – like renewable energy and highly-efficient transport (hybrid cars etc.). The investment in education that Andrew mentions is part of this shift.

How often do we hear about bright ideas (and the people behind them) being picked up overseas when their attempts to get funding and support locally had run their course. It’s these ideas and developments that would increase the value of our exports – we have for too long been focused solely on the “resources boom”. Time to start moving eggs into other baskets methinks…