It should therefore be no surprise that most developing countries at first viewed modern economic growth with caution in the aftermath of the collapse of imperialism following World War II. It was the failure of the alternatives, and the prosperity and power of those countries that experienced economic expansion over long periods, that gradually caused developing countries to seek deep integration with the international economy.
Speed limits are imposed by the quality of policymaking within government; the effectiveness of institutions, business leadership and organisation; the education and training of the workforce; and the capacity of all to accept and manage change.
Several East Asian economies were pioneers of modern economic growth in the post-war period: Hong Kong, Taiwan, Singapore and South Korea. Their success was influential in other countries, at first especially in Southeast Asia – most decisively Malaysia and Thailand.
The impact of modern economic growth increased immensely when it put down roots in the three most populous of the world’s developing economies. The shift crystallised in China in 1978, Indonesia in 1985 and India in 1991. There was a much stronger reliance on markets and a deeper integration with the international economy. This led over time to a shift in the centre of gravity of the global economy towards Asia – a development that set the scene for the Asian Century.
Since 1978, China has experienced consistently rapid economic expansion, for longer and more strongly than any country in history.
India’s inward-looking policies in the early decades after Independence generated growth rates around 3–4 per cent. Market-oriented reform with greater integration into international markets saw this rate double in the two decades after 1991.
Indonesia, the third-most populous of the developing countries, has experienced even stronger growth than India, thanks to its adoption of outward-looking policies in the late 1960s and then again in the mid-1980s. Indonesia, like much of Southeast Asia, grew especially rapidly in the 1990s, until the Asian Financial Crisis of 1997–98 provided a lesson about speed limits. The catastrophic decline of output in 1998 destroyed the authoritarian Soeharto government and led to a swift and remarkably smooth transition to representative democracy. The new political foundations were sound enough for Indonesia, like China and India, to experience only a modest downturn after the Great Crash.
DEVELOPING COUNTRIES GROW FASTER IN THE TWENTY-FIRST CENTURY
The big Asian countries were the largest part of a more general shift. The elites of more and more countries came to view the pain and disruption of sustained rapid growth as preferable to the poverty and strategic weakness that accompany the alternatives. Developing countries generally – most powerfully in the rest of Asia and most surprisingly in Africa – experienced higher rates of growth in the early twenty-first century and maintained much of their momentum despite the aftermath of the Great Crash of 2008.
I call this period of widening participation in rapid economic growth the Platinum Age, following what economists came to call the Golden Age of the immediate post-war decades.
Before the Great Crash it seemed that the Platinum Age was also to be enjoyed by the developed countries, helped by the availability of cheap capital from the savings of China and the resource-rich developing economies. There were also expanded opportunities for trade with Asia. Australia and other suppliers of energy and metals experienced a large increase in their terms of trade. Suppliers of capital goods for which there was Chinese demand were also well placed, Germany and Japan most of all.
For reasons that we do not yet understand fully, productivity growth slumped in the developed countries from the beginning of the twenty-first century. For a while, the effects of this decline were obscured by a debt-funded housing and consumption boom. Extremes of financial deregulation and a lack of prudence and morality contributed to a historic lift in asset prices and consumption.
THE GREAT CRASH SLOWS THE DEVELOPED WORLD
From 2007, the flaws in banking were revealed in the failure of one financial institution after another in the United States and Britain, and then on the mainland of Europe. The collapse of one of the largest American banks, Lehman Brothers, in September 2008, precipitated a general disintegration of confidence in financial institutions. Banks would not lend to one another. For a while in late 2008 and early 2009, international trade shrunk more rapidly than in the early stages of the 1930s Great Depression. This was the Great Crash of 2008.
In contrast to what happened after the Great Crash of 1929, governments and their central banks moved quickly. They guaranteed the massive debts of large private institutions and provided them with cash. They reduced interest rates and loosened budgets. Heads of government attended meetings of the G20 group of major economies in an effort to build support for concerted action. The scale and speed of the implementation of anti-recessionary policies was greatest in the Western Pacific, with China’s response being crucial to the containment of the downward spiral, and then to the recovery of regional and global economies.
In some countries – notably Spain – recession turned a sound public fiscal position into a catastrophically weak one. In a number of countries, concern about public debt led to policies of austerity, leading to another slump in activity and even higher budget deficits. The US Federal Reserve, the Bank of England, later and less enthusiastically the European Central Bank, and later still but more enthusiastically the Bank of Japan stimulated their economies through an unprecedented purchase of private assets with cash created for the purpose.
The Great Crash of 2008 ended the artificial boom and left the developed world to live with the reality of low productivity growth. Conditions were made more difficult in many countries by an overhang of public and private debt from the Crash. In the Eurozone, the crisis laid bare unresolved problems of managing a common currency area without a common budgetary system.
Beyond the crucially important possibility of an increase in employment, there is no prospect in the foreseeable future of average living standards rising in the developed countries of the North Atlantic. Indeed, a focus on the average obscures declining living standards for large numbers of people. In the United States, for example, high incomes have risen strongly through this period, while those of ordinary citizens have fallen.
This tendency in most of the developed world has its origins partly in structural features of contemporary economic growth, and partly in changes to regulation and taxation. Jeffrey Sachs and the Nobel laureates Joseph Stiglitz and Paul Krugman are among US economists with high reputations who attribute the latter changes to the increased influence of money in the democratic process.
The rising living standards of ordinary people in developed countries in the decades after World War II supported the legitimacy of capitalism and liberal democracy in competition with communism. Now, if living standards for ordinary people continue to fall, this will have large and unpredictable ideological and political effects.
The large developing countries were affected much less by the Great Crash of 2008. The financial crisis therefore was an inflexion point, after which the relative shift in economic and strategic weight towards the developing countries accelerated and became more obvious to everyone.
China is the biggest story in this historic shift in the centre of gravity of the world economy and will remain so for years to come. It was the largest contributor to absolute growth in the volume of world output and trade from the turn of the century to the Great Crash, and overwhelmingly so from 2008. Its role in the growth of world savings available for investment was proportionately even greater.
ECONOMIC GROWTH IN CHINA IS CHANGING
Understanding the nature of China’s economic development is essential to understanding the contemporary world. This development falls into three periods. From 1978 to 1984, reform was concentrated on agriculture and rural development. A rapid increase in rural living standards established a polit
ical base for the wider and deeper reforms that followed.
From 1984, the focus shifted to urban and industrial expansion, with a rapidly deepening interaction with the global economy. China entered a period of uninhibited expansion in investment that continued until 2011. This had three sub-plots. Until 1992, there was uncertainty about the boundaries of political and economic reform, and changes in policy were part of a search for an ideological basis to support a deepening use of markets, private ownership and integration with the international economy. From 1992 until late in the decade, there was a tighter drawing of political boundaries alongside rapid liberalisation of trade and payments, a greater use of markets to set prices, and more private ownership.
The deepening integration with the international economy was entrenched by China’s acceptance into the World Trade Organization in 2001. However, the movement towards markets and private ownership stalled with the colossal expansions of state-related expenditure following the Asian Financial Crisis of 1997–98 and the Great Crash of 2008. In response to these two external recessionary threats, large state-owned and state-connected enterprises invested massively in heavy industry, infrastructure and urban development. The Chinese economy under the Communist Party had always been associated with an exceptional intensity of metals and energy use; this was reinforced by the new pattern.
This period of rapid, investment-led growth was challenged by its own success from 2004, with a growing scarcity of labour and rapidly rising wages. The new conditions made their first appearance in coastal cities and have been present in most rural and urban areas in recent years. They have been reinforced by deliberate policy steps to counter growing inequality, increase the share of consumption and services in the economy, and deal with environmental problems. The new Chinese economic model will involve moderately lower rates of growth (averaging 7–8 rather than 10 per cent), and markedly less energy- and metals-intensive growth, together with less dependence on coal as an energy source.
While China was growing rapidly in the old model, its high savings kept the global cost of capital low, despite excessive spending in the English-speaking countries and Spain. China’s new model involves lower savings and will cause global interest rates to be substantially higher than they would otherwise have been during any return to growth in the developed countries. This will slow global recovery.
When China’s exports were concentrated in simple, labour-intensive goods, the prices of these fell on world markets. Now that its specialisation is shifting to more complex and capital-intensive products, the prices of simple manufactured goods will rise – textiles, clothing, footwear, toys and the low end of electronics.
On the import side, China accounted for more than three-quarters of the growth in world demand for steel in the early years of this century, and over 90 per cent from 2005 to 2010. In the most recent period, which straddles the global financial crisis, China contributed over 80 per cent of the increase in global demand for petroleum, just over 100 per cent of this for aluminium, nearly 150 per cent for nickel and over 200 per cent for copper.
The vastly increased demand took suppliers of these commodities by surprise. There was little investment in expanding old mines and developing new ones to meet the requirements of China. Prices for iron ore, thermal and steel-making coal and some other metallic minerals rose to unprecedented heights between 2003 and 2008, fell back briefly in the months after the Great Crash, and then rose to new record levels in 2010 and 2011. For commodities, China’s massive monetary and fiscal expansion, disproportionately focused on activities that raised demand for metals and energy, outweighed the stagnation in other major economies.
That all changed with China’s new model of economic growth. The changes were discussed and tentatively introduced before the Great Crash. They were embodied in the twelfth Five-Year Plan (2011–15), and their effects began to show up in the economic data from 2012.
China’s adjustment to this new model marks a hinge point in world history: the moment after the economic balance has shifted between the developed and developing countries. Today, developed countries are struggling with low productivity growth and growing inequality. Developing countries are mostly catching up at a historically rapid rate – although the big ones have faced new headwinds in 2013. The developing countries, by virtue of their rapid growth, are adding to pressures on the natural environment. Their entry into economic modernity raises any number of political and social challenges.
For Australia it is time to think about life after the boom, and the lessons that can be learned from the resource rushes of the past.
CHAPTER 2: THE REFORM ERA
In the second half of the nineteenth century, Australians enjoyed by far the world’s highest material standard of living for ordinary people. A rich endowment of natural resources was turned into gold, wool and other commodities for sale to industrialising Europe, supported by institutions, policies and social structures that rounded out a dynamic advanced economy.
Scarce labour and high incomes meant many features of modern liberal democracies made their first or early appearances in Australia: compulsory school education and widespread literacy; large-scale use of public libraries; a self-confident workforce; organised sport as mass entertainment; and a democratic franchise. The reasonably equitable distribution of wealth and income, and access to education, helped to preserve democratic institutions when they collapsed in times of crisis in other nations that owed their prosperity to natural resources.
Our average incomes relative to those of other developed countries fell steadily through most of the twentieth century to below the global average, although they made up some ground during the 1990s. Then, in the early twenty-first century, average Australian incomes in international currency rose rapidly until they surpassed those in all other substantial economies.
These averages hide some important details. The living standards of ordinary Australians increased more than those of the rich through most of the twentieth century. The inequality of incomes widened after 1980, although government policies offset this up to the end of the century. In the early twenty-first century, Australia has become less equal even when changes in government policy are taken into account, mirroring the rest of the developed world – but less markedly so than in the United States and the United Kingdom.
But still, ordinary Australians were earning more in 2011 than they ever had. We now face a great challenge to these conditions. We will not be able to hold on to all of the gains of the past two decades in the immediate future. However, a combination of good leadership, sound analysis and the successful assertion of the public interest in policy will allow us to preserve much and eventually return to growth after the current challenges are met. The question is: will we face up to them and make the decisions that need to be made in the public interest?
RESOURCES BOOMS RAISE INCOMES BUT LEAVE PROBLEMS
Throughout Australia’s history, strong growth in the industrial economies, and the high resource prices flowing from this, has brought prosperity and often economic boom-time. Subsequent downturns in the industrial economies were then transmitted with magnified force into Australia, leading to slumps that were usually followed by long periods of stagnation and high unemployment.
The mostly strong global growth from the 1850s to the collapse of 1891 kept wool and other commodity prices high, and the London financial markets loved lending to Australian governments and banks. By the 1880s, a resources boom ran alongside a housing boom. Australian asset prices rose to levels that could be sustained only while commodity prices remained high and the flow of London credit strong.
The boom ended when the collapse of resources prices was accompanied by the drying up of international credit. ‘The price of wool was falling,’ begins the ‘Ballad of 1891’, describing how pressures to cut wages in depression precipitated the great shearers’ strike that led to the formation of the Australian Labor Party
. The sharpest decline in activity and employment in Australia before or since followed.
After the trauma of the early 1890s, the democratic Australian colonies yearned to be free of the vagaries of the international economy. These pressures were crucial to the ‘Australian Settlement’ in the years around Federation, where protection against imports, wage arbitration and widespread government regulation of business decisions and ownership became distinctive features of our economy. Protection increased with each passing decade until well into the second half of the twentieth century. The young Australian economics profession in the 1920s obliged the country’s political preferences by developing a unique and analytically unsatisfactory ‘Australian case for protection’.
The same democratic institutions that protected Australia from an early Latin American-style ‘locking up of the land’ also prevented the large-scale immigration of low-cost labour from Asia. The first acts of the new Federal Parliament in 1901 excluded non-white migrants comprehensively. Subsequent interpretation of the White Australia Policy tightly restricted immigration from southern Europe before World War II.
Australia was tied to the fortunes of the United Kingdom by sentiment, institutions and (from the early years of the Great Depression) preferential trade agreements. We therefore shared the United Kingdom’s economic underperformance through the three decades from the outbreak of World War I in 1914 to peace after 1945.
Sluggish growth in Australia’s main market, the burdens of high protection, poorly conceived regulation and public investment, and a legacy of public debt from World War I all contributed to stagnation. From 1927, clear-minded observers could see troubles ahead. Australia’s problems were then overlaid by the Great Depression from 1929. As in 1891, the collapse of resource prices coincided with the freezing of access to international credit to produce an economic crisis.
Dog Days: Australia After the Boom (Redback) Page 3
