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Economic policy: The decline of the West?

By Chris Lewis - posted Monday, 22 August 2011


There are complications for Western nations if we continue to accept recent economic policy trends. 

Even Australia, which rates high on the United Nation’s Human Development Index and recorded average yearly GDP growth of 3.3 per cent during the 17 years from 1992, owes much to the madness of recent decades. Like other Western nations, Australia benefited from the vast expansion of credit in low inflationary times, which helped boost the growth of the international economy.

As Richard Duncan noted in May 2011, after the Bretton Woods international monetary system folded in 1971, the ratio of total credit to U.S. GDP increased from 150 to 354 per cent between 1971 and 2010, thus boosting U.S. and world economic growth.

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With growing consumer demand, aided by China attracting much investment and producing cheaper manufacturing exports, Australian consumers and businesses could borrow, spend or invest more. At least prior to the GFC, this boosted employment, income and profits (despite rising household debt), thus causing the price of assets (stocks and property) to grow.

To be fair, Australian governments did maintain a policy mix that generally attracted majority public support. Along with necessary taxation and industry reform demanded by the competitiveness of the international economy, governments softened the impact of economic reform by increasing public social expenditure from 10 to 16.7 per cent of gross national income between 1980 and 2007.

But Australia also experienced adverse developments. First, rising housing prices have resulted in home ownership levels for Australians under 35 declining from 44 to 38 per cent between 2001 and 2008, and the proportion of Australians aged 55 to 64 with mortgages increasing from 13 to 30 per cent between 1996-97 and 2007-08.

Second, Australia’s economic diversity suffered. WTO data indicates that Australia’s export-import manufacturing deficit worsened from 389 to 472 per cent between 2000 and 2008, while Australia’s agriculture export-import surplus declined from 390 to 250 per cent. With the proportion of food exports has continued to increase in recent years, probably compounded by Australia’s appreciating currency, it is worth noting that nearly 93 per cent of food imports were substantially transformed products in 2009-10 while meat and grains accounted for 26 and 19 per cent of Australia’s food export earnings.

But matters are even worse in other Western nations less able to benefit from exporting coal and minerals to the Asian region. For instance, 15 per cent of Americans (45.8 million) were receiving food stamps in May 2011, while recent riots in Europe may also be partially explained by anger to severe budget cuts.

It is disturbing to contemplate just how competitive (and perhaps chaotic) certain Western societies may become in future years if dramatic cuts to government spending adversely affect battlers most. While Australian governments perhaps have greater room to move given its ability to cut interest rates and a relatively low gross public debt of 29 per cent of GDP, there are already 17 OECD nations with gross public debts of over 70 per cent of GDP (including the U.S., U.K., and France).

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Simple truth is that more policy problems will emerge based on current trends. There are real limitations in terms of wealth and job creation in the West as our reliance on consumer spending and easy credit wane.

We know that fairer trade must be encouraged, but should we merely accept our decline while other nations with less transparent practices prosper? According to IMF and Transparency International data, authoritarian and mercantile China increased its share of global GDP from 4 to 9.3 per cent between 2000 and 2010 yet barely improved its corruption perception score from 3.1 to 3.5 (10 being perfect). Similar findings are evident in regard to the rise of Brazil, India and Russia.

It is indeed China that causes the most concern given its size, its mercantile economic approach, and its continued crackdown on dissidents. Between 1990 and 2008, China, which also gained much wealth by investing in U.S. Treasuries and tying the value of its currency to the U.S., increased its share of global manufacturing exports from 1.85 to 12.71 per cent.

In contrast, the U.S., the world’s most important economy in terms of boosting the international economy through large trade deficits, saw its share of global manufacturing decline from 12.15 to 9.2 per cent and agriculture from 14.32 to 10.43 per cent. China, although today with 1.3 billion people, even out-performed Australia in terms of agricultural global exports, increasing its share from 2.42 to 3.15 per cent while Australia’s level declined from 2.86 to 1.95 per cent.

We now face a crucial time. After several centuries of considerable and positive influence by more liberal-minded nations, notably Britain and later the U.S., we are somehow expected to accept the rise of authoritarian China as some sort of equal with the U.S.

As Westerners, with the ideal of fairer trade and democracy remaining a guiding light for humanity, we must be careful that a changing policy mix does not merely lead to a tariff war and dangerous level of tension. Open markets are important for maximising and creating wealth, which means that Western societies too need to give ample attention to competitive realities. As McKinsey Global Institute indicated in December 2010, mature economies lost about $20 trillion of investment between 1980 and 2008 based on pre-1970s rates, and higher domestic costs were a prime reason why the proportion of offshore employment for U.S. manufacturing firms increased from 10 to 47 percent between 1957 and 2009.

But Western societies have a clear choice. They either accept their fate and further economic decline based on recent policy trends, which will inevitably mean greater suffering for their most vulnerable, or they alter their policy approach which may even force other societies (even powerful authoritarian nations) to adopt a different approach. While Western leadership must always endeavour to reasonably balance national and international considerations, such societies still have high levels of per capita resources and reasonably well-educated populations to encourage a policy mix that secures fairness and consensus.

As Richard Duncan suggests, it is not straightforward when we decide the balance between government intervention and a reliance on market forces. While the $3 trillion increase in U.S. government debt helped prevent a global depression over the last two years, but hardly delivered expected growth, it remains to be seen what sector of the economy will take on additional debt and drive the future economy. While some urge government spending to be slashed, Duncan argues that world economic growth will long depend on how much the U.S. borrows and spends.

And while the philosopher Chris Berg expressed disdain at the Coalition’s position on anti-dumping laws (in agreement with the Australian Workers’ Union), and its industry spokeswoman Sophie Mirabella for suggesting that departments should buy equipment and clothing from local companies, the sentiment for greater protection will probably increase. As Berg notes, the British-based Centre for Economic Policy Research indicates that G20 have enacted 155 trade restrictions or tariffs since November 2010.

In accordance with recent Western efforts to again modify the balance between government intervention and market forces, the opportunity for change still remains. Whether Western policy elites lead the way with ideas that promote effective change, or whether the wrath of public anger forces changes (perhaps leading to unsophisticated protectionism or even hate), remains to be seen.

 

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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