Sunday, 23. May 2010 21:39
The next installment in my investigative series examines what props up our lifestyles in Australia, in other words, exports. Because we could but we don’t make everything we need. We all like cheap toothbrushes, televisions and cars. For us to enjoy these products, we need a country to produce them relatively cheaply where people are cheaper and currencies are kept deliberately low by their government (i.e. China). The reason we have enjoyed a boom in our ‘material well being’ whilst avoiding inflation is largely due to cheap Chinese imports keeping this low.
However, nothing comes for free. Australia must give something in order to get something.
So what pays for all these goodies that we enjoy today? My computer I am writing to you, the gadgets and boxes that make up the Internet, the fridge that cooled my wine for me.
According to the Australian Department of Foreign Affairs, in 2008-2009, in order of importance, Australia’s exports were:
1) Coal ($54.7 billion)
2) Iron ore & concentrates ($34.2 billion)
3) Gold ($17.5 billion)
And (spot the odd one out)
4) Education-related travel services ($16.6 billion)
So it ends up looking like this:
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Australia’s Composition of Trade (DFAT, 2008)
Now notice the growth particularly in iron ore, and the backbone of our country, coal. Notice the massive increase year on year, and remember how “coal jobs” featured so prominently in the governments efforts to bring in carbon trading. Coal is, for all due purposes, carbon. So not only are all our fancy toothbrushes, TV’s and cars all paid for with coal, it makes Australia possibly one of the biggest polluters of carbon on the planet. If you believe the evidence for global warming, and support limits on carbon pollution, then that is a lot of carbon pollution that our export funded lifestyles are responsible for. However, I am not supporting any side of the argument. I am merely presenting some interesting facts that few Australians seem to fully understand.
Now the next graph is also interesting. Take a good look at this:
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IndexMundi (2010)
What this graph shows the value of commodities (being Australian exports) over 25 years. Notice the recent spike in the last decade. How many of us remember the time before the ‘boom’? To many of us, it would seem to stretch back forever, and we would be forgiven for believing this would stretch long in to the future. I, however, remember the Banana Republic statements in the 1980s and the difficulty in finding work in the early 1990s.
If we look back even further, the pattern continues:
(Full size version here)
Apart from a ‘small’ dip in the Great Depression (notice the bump around this time) and the GFC, it’s been going bang busters in the last 15 or so years. But for most of human history, commodities have been, well commodities. No more valuable or important than the potatoes you buy at the supermarket by the kilo. Sure they are important and needed, but it would be a stretch of the imagination to see a country basing a whole economy off growing potatoes.
By good fortune however, the commodities that we dig out of the ground, are now incredibly valuable. Possibly until the world or China realises that a new super tanker is not required every two weeks, neither are cities and skyscrapers every week or so, or cities with no people in them. China, is an export driven economy. However China primarily saves, while we mostly consume (import), leading to Australia actually being more in debt than Greece, except ours is all private debt (i.e. credit cards and mortgages). China relies very heavily on foreign demand for its goods and on the deliberate efforts of the Chinese government to keep its currency low (and inflation subsequently high). Australia relies on the goodness of strangers to keep funding our lifestyles while demand of our commodities inclines them to keep doing so.
So who is indulging our lifestyles of fancy toothbrushes and big TV’s? You guessed it, Japan, China and Korea. In other words, all those coal hungry people in Asia who want our carbon to heat their floors, to fire their power plants and smelt their steel to pump out super tankers and sky scrapers at a rate unimaginable only 15 years ago. China loves our coal, almost as much as Japan does.
So where is all this taking us? Well Australia is a consumption driven economy. What does that mean? It means we love debt, we love consuming and we just can’t get enough of it. Australia is a seen as a reasonably safe place to throw money at willing consumers who just keep asking for more.
What these graphs suggest, is that the Australian economy basically consists of digging up coal and ore and selling it to the highest bidder, so we can indulge our envious lifestyles while squirreling more away in to the value of residential homes. The only problem with that is that if your grandmother is ill, it’s a little more difficult to withdraw money from an un-needed (likely still indebted) bedroom than from a savings account or even liquid shares.
The fundamentals of our society and our economy have altered dramatically in 15 years, and strangely few of us seem to remember anything different to now. We save less, we spend more, and we borrow more to buy ever more expensive houses, bigger TVs and bigger and better cars, funding all this to a significant degree from Chinese savers and consumers of coal and ore.
If you believe the reports on China, we have nothing to fear, this will continue for at least 50 years (by which time a home loan will be measured in generations).
If you believe some other suggestions .. I’ll leave that up to speculation.
What I do know is that if I owned a sandwich shop called Australian Sandwiches, and most of my income was from one type of sandwich to one very generous customer, I would be wondering if I should look at spreading my business out a little in case that one customer suddenly changed their tastes or decided to buy sandwiches from someone else. With kids to feed, I would be wondering very much about this.
However, we seem to take this for granted. This explosion in wealth appears to have shortened our memories so that we do not seem to clearly recall the times when commodities like coal and iron were not so valuable. As I keep saying, nothing lasts forever.
However, I would not write this without balancing this with some good news, as to use my analogy of a sandwich shop, I could look at the strengths of my business and wonder if there is any reason why I should stick to only making sandwiches. Granted, the mining sector driving up the Australian Dollar can make life very difficult for other exporters, but even so, many countries would love to have the problems that we have. Greece being one of them.
And I will lead in to my next blog post which will touch on our education exports, and what this means for Australia as a services economy as a whole. I believe that Australia, this time by good management rather than just good fortune, has built up an asset that money can’t buy, and that resources can’t provide. As long as Australia recognises and nurtures this strength, there is no reason why a post-mining Australia can not be even wealthier while contributing to making the world a better place.
It will, however, require Australia to shed the cultural cringe and recognise its strengths. It will require us to become a nation of smarter savers, and smarter investors. We already have the foundations in place.
One of which, possibly one of the most important to our future, is illustrated in this diagram that I will discuss in my next post.
This is a map of perceptions of corruption care of Transparency International, which is but one of many indicators of corruption, transparency and general friendliness to business and investment that Australia excels at. I believe following the GFC, Australia was left at about number 3 in the world (reference required).
You will notice that the countries in light blue that are resource rich like Canada and Australia are also the countries that receive the greatest interest from mining investors. This is no coincidence. It makes one wonder what else these low corruption nations like Australia can achieve if they put their minds to some creative ideas. The converse is that Australia is a victim of its own success, as foreign investors are only too willing to keep shoving foreign money to Australian consumers who are more likely to repay debt than (apparently) consumers in many other nations. It would be preferable if Australian consumers were a little less willing to consume debt, as this may lead to significant economic instability if left unchecked or if we experience a ‘correction’, however as mentioned previously, many nations would be only too happy to suffer from these problems.
The once bastions of the financial world, the USA and the UK, due to the fallout from the GFC are now regarded as significantly more prone to corruption than Australia. This is more a positive reflection on Australia than a poor reflection on other nations.
One has to dig deep to find this. It is not reported widely, although (thankfully) our willingness to consume debt now is reported more widely.
However, this window of opportunity will not be open for long. I will explain what I mean by this in my next article.
For a full breakdown of countries by perception of corruption, see this table.
