Tim Harcourt | The Airport Economist

The world economy is used to surprises – usually on the downside. But one on the upside over the past year has been the reforms in Burma and the lifting of economic sanctions. The surprise reforms of the new Burmese government of President Thein Sein, the election of Aung San Suu Kyi to parliament and the latter’s call for Burma to open up to trade and investment have been monumental changes given Burma’s recent past. Australian Foreign Minister Bob Carr was one of the first foreign politicians to visit Burma since the new developments and other western nations have lifted sanctions and made (tentative) moves to invest in and trade with Burma under the new regime.

But what is the economic impact of sanctions and what happens to economies after sanctions are lifted? The economic evidence is mixed when looking at trade sanctions against South Africa, Southern Rhodesia (now Zimbabwe), Cuba, Fiji and now recently Burma. According to Yale University economist Philip Levy the economic sanctions against South Africa were more ‘psychologically hurtful’ to the apartheid regime than economically damaging, although there is evidence that disinvestment by major institutions like Chase and Barclays had more of an impact than trade sanctions. As in the case of Cuba and Southern Rhodesia, trade sanctions did not have as much impact as restrictions to foreign investment and in any case the economic distortions in the domestic economy (like South Africa’s apartheid labour market distortions) were as damaging as external sanctions. Levy believes that the collapse of the Soviet Union was the key factor in enabling the white minority government to start negotiating with Nelson Mandela and the African National Congress, making South Africa a ‘special case’ in terms of effectiveness of sanctions.

But what about Burma? Will it be a special case? It is clear that Burma has some big mountains to climb economically given the long days of military rule, isolation and the fact that it is a very poor and populous country. As the world’s leading Burma expert Professor Sean Turnell says: “Burma is paradoxically a resource rich but economically poor country.” One reason has not just been the isolation due to sanctions but also the enormous economic distortion of maintaining such a large military presence with no external defence purpose. According to Turnell, Burma kept “300,000 men under arms” (i.e. almost the population of Canberra) despite there being no obvious “genuine external threat”, which is similar to the economic burden placed upon South Africa of the vast bureaucratic apartheid apparatus (not to mention the ethical burden). The defence overhang for Burma has put its fiscal policy under serious strain and created inflationary issues dissuading investment. Maintaining the military apparatus in Burma has also created bureaucratic distortions, sucking away resources from much needed infrastructure, health and education, and handicapped Burma’s human capital development (creating too many idle low skilled soldiers and not enough farmers, teachers or other skilled workers).

The military overhang is the most pressing constraint on Burma’s return to any form of economic normalcy. But now Thein Sein has made some moves in the pro-democracy direction, what can Burma do straight away economically? Turnell has identified ‘low hanging fruit’ such as providing visas on arrivals for tourists, eliminating export taxes and import licences, allowing banks to lend to farmers, and deregulating interest rate ‘caps’ and other financial regulations. But at the end of the day, economic development must come in the agricultural sector and in resources and Burma needs to develop institutions in areas like banking and finance where there is almost no viable sector to speak of. And that’s all dependent on the capacity of Burma to reduce the military presence in the economy and society and create ‘room’ for other sectors. In a country where the armed forces have had so much control for so long, that’s a big ask.

So can Australia play a key role? Bob Carr gave Aung San Suu Kyi a strong assurance that Australia was willing and able to play an important role in Burma’s return to democracy and long term economic viability. Australia has a big role to play in infrastructure given the need for roads, rail, ports and telecommunications to serve its 62 million plus population, BHP Billiton can help in the development of oil and gas, and ANZ can play a similar role to its Pan Asian banking strategy in neighbouring Vietnam, Laos and Cambodia, and Australia’s education institutions can help with human capital development. But most of all Australia’s comparative advantage in agriculture, as well as our expertise in education and tourism, means we are well placed to help with Burma’s capacity building in the same was as we’ve helped the developing economies of Burma’s neighbours in the Mekong Delta. But it will be gradual and ‘softly, softly’ as the world investment community monitors the progress of the pro-democracy reforms.

It will take years to recover from what has happened in Burma since the 1960s, economically, politically and psychologically, but the lifting of sanctions and some luke warm (but positive) responses from investors and exporters (including from Australia) may signify some small steps to recovery on the new road to Mandalay.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales (UNSW) & author of The Airport Economist:  www.theairporteconomist.com.

From the Knowledge@Wharton today blog.

Those who may chuckle at the cutting phrase “no good deed goes unpunished” might appreciate how it fits today’s banking crisis in one respect: Regulators who, post-crisis, devised so-called stress tests to uncover – and ultimately repair – bank weaknesses, could inadvertently spark a bank run by disclosing the test results. Yet, without some level of public disclosure, the stress tests might not have the intended market disciplinary effect.

But there is a path away from this dilemma, according to a recent paper by Wharton finance professor Itay Goldstein and his colleague, Haresh Sapra of the University of Chicago Booth School of Business. In the paper, titled “Should Banks’ Stress Test Results be Disclosed? An Analysis of the Costs and Benefits,” the two argue that some fixes to the stress test process could beef up weak banks by identifying problems before they blow up and also guard against damaging disclosures that could trigger a bank run.

“The disclosure of stress test results can be beneficial because they promote financial stability,” says Goldstein, and they can be “quite useful in providing market discipline for individual banks and helping with the accountability of regulators.” That all provides the right incentives.

But given banks’ deep vulnerability to the disclosure of financial deficiencies, indiscriminant disclosure can cause problems. If depositors and investors lose confidence, they will withdraw their money and possibly cause a bank to fail. And when disclosure makes bad news public, markets tend to amplify it, Goldstein points out. Even those who may believe a bank under fire is actually sound will abandon the institution because they must account for “what others may think.” A bank-run scenario can become a self-fulfilling prophecy, so regulators must carefully consider what information to release.

What is more, publicly disclosing stress test results can have an adverse effect on the behavior of bank managers, who may game the system by putting too many resources toward passing the stress test, rather than doing what is best long term. “If a manager does not know [the test criteria] there is less room for manipulation or gaming,” Goldstein says.

The authors’ recommendations? Any disclosure of problems with an individual bank should be precise – to avoid misunderstandings – and should come with a prescription for corrective action, so that markets can see that the situation is not necessarily dire. “The danger arises if we just say we found that a bank is in trouble, and don’t follow up with action,” Goldstein says. Instead, the message should be “We found a problem and now we are taking these steps to make things better.”

If regulators cannot meet that bar, then they should instead issue a system-wide evaluation offering aggregate results, and avoid singling out any one bank. While stress testing can be good for the banking system as a whole, regulators have to be “more careful with individual banks,” Goldstein points out.

System-wide disclosure can also moderate a more subtle challenge, where disclosure can adversely affect the inner workings of the market – specifically, how investors trade based on information. Market prices reflect the total information held by market participants, who trade on it. Once regulators provide more information via disclosure, some participants may feel they are losing their information advantage and thus could lose interest in trading in the area. That makes it more difficult for regulators to learn about the market from price signals, which in turn could degrade the regulatory effort. Aggregated disclosure can also help sidestep that problem.

So, could stress tests, introduced after the financial meltdown, have prevented the disaster? “They potentially could have made banks more prepared and reduced the extent” of the crash, Goldstein says. “But it’s always a challenge. We are prepared for things that happened in the past,” not in the present. “People talked about subprime and fragility for some time before the crisis, but the common thought was that it was a local problem that could affect some banks, but any damage would be contained and so it was not a big problem. They failed to understand the macro or general equilibrium implications — once one banks folds, it affects others that are connected to it and this contagion was hard to predict…. You can’t predict everything.”

Once a crisis is underway, however, full disclosure is the best course. “There is no choice but to disclose during a crisis.” There already is so little confidence that not disclosing at that point could cause more damage, though disclosure probably “will not help much.”

This post previously appeared in the Knowledge@Wharton today blog: Avoiding the Slippery Slope toward a Bank Run

Vic Edwards

Read virtually any newspaper at the moment, and you’ll be told how China could be about to witness a sharp economic contraction, which could impact on Australia’s AAA credit rating.

New figures show China’s export demand has moderated and orders in construction and real estate have contracted. That has compounded fears China is mirroring a slowdown in the global economy.

Many commentators have indicated that China will have a hard economic landing. My view is that this is wrong, and China is more likely to have a soft or cushioned landing provided that the USA does not slip into a steep recession or depression.

A sharp slowdown in China would cause problems in Australia because of its large exports in minerals, pushing Australia’s current account into deficit.

The ratings agency Standard & Poor’s has warned that Australia’s AAA credit rating could be at risk – and losing ­Australia’s top sovereign debt rating would threaten banks ability to borrow offshore. These concerns have seen the Australian dollar falling almost one US cent, and the ASX trading below 4,000.

I attended the Fitch Ratings Credit Forum, and found its assessment of China’s future outlook was much more pessimistic than my view. I am optimistic about the future for China, and while the rate of growth may slow down, any threat to Australia’s credit rating is unlikely to come from the booming Middle Kingdom.

The Chinese purchasing managers’ index fell to 55.2 in May from 56.1 in April, according to new figures from the China Federation of Logistics and Purchasing. A reading above 50 still indicates expansion.

On my visits to China over the past few weeks it has become clear that China is successfully making the transition from an export oriented nation to one that is much more based on domestic consumption. Certainly, this will cause a drop in its growth rate from 11% per annum to around 8%, but this is still a favourable outcome.

The change to a domestic economy is one that is good for Australia, with China still importing many raw materials. A factor not accounted for in most of the recent analytics of China is the fact that the enormous effort in developing infrastructure has been greatly misinterpreted. Western analysts and some of the investment banks have pointed to what seems to be excess capacity in having empty office blocks and highways leading to nowhere.

However the massive construction projects that are going on in the second tier cities such as Qingdao, Tianjin, Changsha and Chengdu are pulling people back from Beijing and Shanghai and providing a future base for decentralisation. New very fast trains are now permitting rapid and cheap transport. This is a real plus for China’s future. It will decongest the cities of Beijing and Shanghai and lead to future growth and development of the poorer western regions. Throughout my latest visit, I have seen that the investment in infrastructure is paying off.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business.

Jeffrey Knapp

The way the Australian Securities and Investments Commission has failed to disclose relevant files on its policy making activities in its 2010 and 2011 six-month file lists  is extraordinary.

Disclosure is falling off a cliff. ASIC file lists include no references to the files that should exist for the development of numerous ASIC policies including market integrity rules, over-the-counter contracts for difference, or substantial holding disclosures. I can’t help but suspect the thinning of ASIC’s file lists may be an attempt by the agency to deny the public its right to request access to documents on agency policy-making under the Freedom of Information Act.

At the ASIC summer school at the Hilton in Sydney last week, the topic of disclosure was one of many being discussed. It is certainly important for these issues to be aired in public, however the discrepancies and omissions in ASIC’s published file lists sets a poor example to the entities it regulates. Indeed ASIC needs to demonstrate leadership in disclosure practices.

This drop off in the file numbers corresponds to a Senate inquiry into liquidators and administrators in 2010. At the time I found that ASIC had removed documents that relate to administrators running collapsed public companies, from its database of those who have been granted exemption from financial reporting.

This was an extraordinary thing for ASIC to do when its governing legislation includes the object of making information publicly available. You’d have thought they would want to keep this information public. They don’t – and I can’t think of a valid reason for ASIC modifying their public database in this way. The regulator is effectively burying information about its policy making.

Mind you, it is hard to find files. If you don’t know an ASIC file exists, then you are hardly in a position of being able to request access to documents from that file.

ASIC’s failures to disclose and be transparent about its files and its accounting exemption orders sets a regrettable example for the rest of the market place.

Jeffrey Knapp is a lecturer in financial accounting at the Australian School of Business.

Professor Fariborz Moshirian

The ongoing financial turmoil in Europe has led the IMF and the World Bank to downgrade the global economic growth outlook for 2012.  The financial market expected a much faster resolution to the sovereign debt crisis in Europe.

The currency crisis of 1992 in Europe led to the breakdown of the European Monetary System. However, when the financial markets sold off weak currencies such as the Italian lire and the French Franc, European leaders decided to come up with a Monetary Union with one single currency and one interest rate as a way of protecting themselves against ongoing currency volatility. While the Euro zone agreed to fiscal discipline with the debt to GDP ratio of 60 and a deficit to GDP of 3 percent, there was no monitoring system in place to enforce the fiscal rules amongst the Euro-zone member countries.

The current sovereign debt crisis provides a unique opportunity for the Euro zone to forge ahead with the process of fiscal union. Given the political nature of the Euro zone, bad news from the market is often an impetus for national leaders to justify actions to their electorate and pursue policies that promote fiscal union.  While the Euro zone has a long way to go, one cannot underestimate the progress made so far in bringing the Euro zone and indeed the European Union closer together.  Given the rise of 800 million middle income consumers in Asia, the European Union could either become more integrated and create a formidable block to compete against the US and Asia or return to a nationally based system that could make it difficult for each of the current member countries of the European Union to compete against Asia, the US and others in the 21st century.

The current European Financial Stability Fund with a lending capacity of up to €440  does not allow them to potentially rescue Italy and Spain, should these countries’ sovereign debt crises intensify.  Therefore, the IMF has decided to increase its financial firepower by $500 billion, as the existence of a global fund with the capacity of one trillion dollars could contribute to the stability of the global banking system. 

Countries such as China and Russia may now contribute more to the IMF’s stability fund, as financial uncertainty and a possible recession in Europe will affect the economic prosperity of emerging countries.

Furthermore, European banks have to increase their capital to asset ratio in order to assure the market that they can withstand the onslaught of the market, should more funds leave the Euro zone and less business activities be undertaken by European banks in US dollars. One of the Strategies adopted by banks to increase their capital to asset ratio is to reduce their lending activities. This in turn could further slow down the economic activity of the Euro zone. In  the meantime, Japanese banks are interested in increasing their ownership of European banks. This may well assist the European banks to improve their balance sheets and address their challenges of meeting the new capital to asset ratio requirements by June 2012.

At the same time, as austerity measures in Europe slow down the economic activities of the Euro zone this will reduce demand for borrowing from European banks.

As a result of the sovereign debt crisis investors an the money market reduced the amount of funds lent to European banks. The European Central Bank ( ECB)  has responded to this major liquidity challenge by allowing banks access to a three-year refinancing operation. This has eased the liquidity challenges within the Euro zone banking system to the extent that it appears that banks are now active in purchasing new bonds issued by Euro zone member countries.

Whether decoupling of the Asian economy from Europe and the US could take place is a matter of wait and see. However, Asian countries, including China, are developing their domestic  market capacity for a large share of demand and less reliance on their export market. This policy, coupled with the massive increase in foreign capital flowing into China and other emerging countries could ensure sustained economic growth in emerging countries in 2012, despite the negative economic outlook predicted by the World Bank and the IMF.  An increase in investors’ interest in buying emerging countries’ bonds and other assets may well increase economic activities in these countries regardless of the ongoing financial turmoil in Europe.

China’s economic growth was less in 2011 compared to 2010. However, this is mainly a deliberate policy to cool off the real estate bubble and contain inflation. With China’s policy for social housing which is designed to create a large number of cheap houses for more than 80 million people in China, the demand for iron ore and other resources from Australia will continue to grow in the medium term. It appears that while the European financial turmoil could have a negative impact on the Australian economy in 2012, as long as China and India’s domestic demand keeps growing, Australia’s economy will be less vulnerable to the financial events in Europe.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.

This article first appeared in CFO Magazine, February 2012.

Peter Swan

Now that the Reserve Bank has cut interest rates, the question is – which one of the big four banks will be first to cut, and by how much – if at all?

However may I suggest this may be the wrong question. Instead the RBA may be looking at giving a boost to industry from the cut in interest rates, with any benefit to homeowners just an additional perk.

The 25 basis-point cut to the official cash rate will lower the Australian dollar and take some pressure off the entire export and import competing sectors of the economy, including areas such as education that remain weak. It may take some time to work, but this will be a noticeable effect.

None of the four major banks have moved their standard variable lending rates in response to the RBA’s quarter percentage cut from 4.5 per cent to 4.25 per cent yesterday. Now there is speculation that they are engaged in a game of chicken, each waiting on the other to move first. But I think Australian banks risk the political wrath of not passing on yesterday’s cuts in full as the banks seek to protect their profitability amid rising funding costs.

So far only two relatively minor lenders have passed on the cuts, and they are lenders that finance much of their mortgage lending from savings, rather than borrowing on the wholesale markets.

All banks have warned that, even though most are fully funded for the short term, the European sovereign debt crisis has pushed up wholesale funding costs. The banks’ profit margins are also under pressure given the flat lining credit demand in Australia.

There is a great deal of international uncertainty caused by the meltdown of the Euro and the slashing of the ratings of Euro countries including Germany and France. At the same time, the non-mining sector of the Australian economy remains weak. Indeed, reading their announcement it is clear that the Reserve Bank could be forced to cut interest rates again if the outlook for Europe and the global economy keeps on getting worse. If that happens, the major banks would almost inevitably be forced to pass on the cuts rather than hold back, or they would risk a populist backlash that would anger the government.

Peter Swan is a Professor of Finance at the Australian School of Business.

Tim Harcourt

The global economic outlook has deteriorated significantly, according to the Organisation for Economic Cooperation and Development (OECD), and that could have a significant impact on the Australian economy.

The OECD outlook shows how much of a drag Europe is putting on global growth. This is a reason for concern because the world economy needs Europe to grow or at least tread water. These forecasts are pretty dire, and it’s surprising how quickly this has gone from a drama to a crisis.

In its twice-yearly report on the global economic outlook, the OECD has lowered its growth forecasts for the world’s largest economies, and has warned that the euro-zone is headed toward a recession. It also warned that the debt crisis, now affecting countries previously seen as safe havens, could massively escalate economic disruption if not addressed, and create a new worldwide credit crunch, where countries become so worried about getting their money back, they refuse to lend to one another.

The central message is to keep calm. Australia has no reason for direct concern because our trading links are strongly tied to the Asia Pacific. The last three decades of economic reform here has enabled us to move from The Tyranny of Distance to the Power of Proximity. That is, away from the UK and Europe, and more towards our closer neighbours such as Asia and the emerging economies.

The OECD has urged the European Central Bank to act decisively to prevent the euro-zone sovereign debt crisis from deepening, which could drag the worldwide economy to the brink of recession, due to the size of the European economy, and its global reach.

China has strong trade ties to Europe, because China now exports more manufactured goods to Europe than to the USA. We in turn provide most of the raw materials for those exports, and so any impact on China could affect Australia. Even if there are no green shoots of recovery in the USA and Europe, in Australia we will still need bamboo shoots in China.

I do believe however we shouldn’t be too pessimistic. The OECD did say that Australia would maintain a healthy economic growth rate of 4 per cent in 2011 and down a bit to 3.5 per cent in 2012. So we should hopefully be immune from Eurosclerosis, but the world economy overall could do with some Eurovision.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com .

Tim Harcourt| The Airport Economist

In 1966, Geoffrey Blainey wrote his famous book “The Tyranny of Distance” on how Australia’s destiny had been shaped by its remoteness from the United Kingdom and Europe. Coincidentally, 1966 was the very same year that Japan overtook the UK as the number one naval destination for Australian shipping.

In the decades since then our integration with the Asia-Pacific region has increased exponentially. From exporting coal and iron ore – which we still do in huge quantities – Australian lawyers, architects and accounts have played a key role in the rapid development of India, western China and Indonesia.

Today, if Professor Blainey were to contemplate another book through the lens of the past four decades his title might be “The Power of Proximity” to describe Australia’s more recent good fortune in being part of the Asia-Pacific.

It is a momentum which has reached its most significant point with the announcement of the Trans-Pacific Partnership (TPP) comprising (so far) nine of the key economies of our region.

And with Greek debt and Roman ruins undermining the “old world” economy of Europe, the Asia-Pacific presents as the main hope for economic growth and Australia is indeed lucky to be an increasingly integrated part of the regional economy. But is luck we earned following the Hawke Government’s decision to open the Australian economy and the instincts of all sides of the Australian economic and political divide to continue to embrace the Asia Pacific region.

As the culmination of that momentum, the Trans-Pacific Partnership is probably the most significant economic announcement of the 21^st century so far in terms of Australia’s future.

Joining with the US and Japan along with Singapore, New Zealand, Malaysia, Brunei, Vietnam, Chile, Peru and even perhaps Canada and Mexico in a meaningful trade bloc is a major opportunity to streamline supply chains, regulations and rules of origin across the region, as well as to facilitate trade of green and digital goods.

It could also lead the way to an even larger trade grouping encompassing all of the countries of the Asia-Pacific Economic Forum, perhaps including – after the requisite diplomatic manoeuvrings – China.

It is Australia’s great fortune that we reformed our economy in the 1980s and 1990s just as the whole Asian region started to grow. That growth has gone beyond the traditional resources and manufacturing sectors and exploded into professional services and “stateless” services such as cloud computing, environmental technologies and other areas where Australia has developed competitive advantage.

Our $1.3 trillion superannuation industry is the envy of the world and our finance professionals occupy leading roles in regional financial institutions. Integrating our financial sector, in particular our funds management industry, with the Asia-Pacific is another major opportunity which can only benefit from the TPP initiative.

A key theme of the next decades will be the low carbon economy, and the APEC meeting took the step of cutting tariffs on environmental goods to five percent.

This is excellent news for the many innovative Australian cleantech companies whose prospects have already been boosted by the passage of the Government’s carbon pricing legislation. Lower tariffs can only benefit the push for Australian manufactured environmental goods to penetrate Asian markets. It will really put the green back into the green and gold.

Trade initiatives are important for workers as well as business. Exporters, on average, pay 60 percent higher wages and provide more job security than non-exporters.

APEC is often seen as little more than an annual Colourful Shirt Convention where world leaders gather and wear the national costume of the host country, but the TPP initiative is proof that APEC does matter, and is starting to deliver.

While the Doha Round of world trade talks ground to a halt and with it the whole World Trade Organisation process, the TPP announcement – and Japan’s support – give us concrete reasons for regional optimism.

In 1957, Japan helped Australia get into Asia by forging a commercial partnership with Australia, just 12 years after World War 11. With the TPP, Japan has supported what could be the most significant partnership to date in the 21^st century.

The exciting part is that it means so much more than commodities, agricultural products and old style manufactured goods. The TPP could give our transition to the low carbon, goods and services economy of the 21^st century some major momentum.

With the TPP in place Australia will really see the Power of Proximity in action and the Tyranny of Distance no longer holding fears for trade and commerce beyond our shores.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com

Vic Edwards

China could be about to witness a sharp economic contraction. Although the World Bank has played down fears of a hard landing in China, the dynamics of Australia’s relations with China are undergoing a rapid process of change, and this will reshape international and foreign policy between our two countries.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. Very poor Chinese manufacturing data shows it is at a 32 month low. Alas, contagion from Europe is impacting China, and that is causing pressure on Australia.

China’s economy faces growing risks from Europe’s sovereign debt crisis and from debt held by local Chinese governments but it could engineer a soft landing by easing monetary policy, according to a report yesterday by the World Bank. It expects Chinese growth will slow to 8.4 per cent in 2012.

I feel other events will also cause problems for our relations with China. There will be some reappraisal of where China stands with Australia, following the new Trans-Pacific trade-bloc know as the Trans-Pacific Partnership that includes nine nations including Australia and the USA, but China was not given an invitation to be a member nation. We should be concerned that there is now some doubt in China as to how much Australia can be trusted and relied upon.

For some years now, China has been able to rely on Australia as being a good trading partner and friendly nation no matter whether Labor or the Coalition were in power. However in just the past week President Barack Obama’s strong admonishment of China’s currency policy, the decision by Prime Minister Julia Gillard to reverse Labor’s long standing policy of banning the sale of uranium to India, and the agreement to locate a powerful 2,500-strong American marine task force near Darwin area all reshaping international and foreign policy between Australia and China. This is particularly so because China was not consulted on several of these, and Australia has been closely associated with all events. In China’s eyes, it doesn’t look good.

The World Bank has forecast that inflation will fall further, down from the 37 month high of 6.5 per cent in July, as its economy slows.

Will China react poorly to Australia by not buying iron ore, natural gas, bauxite from us?

I think not. However, it may cause them to re-evaluate their long term trading partnerships and future investments and they will most likely diversify their sources of supply – for example more iron ore from Brazil and Mozambique and less from Australia. They may also invest in developing the plant and equipment necessary to make high grade steel in these countries. However, the measures taken in the last week have also brought Australia closer to India and this may be seen as a good longer term play as India is tipped to overtake China as a production power engine in about the year 2030.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business

Tim Harcourt

Imagine a country that is inward looking and rarely notices the world beyond its own borders. It’s a country that has double-digit inflation and unemployment and a poor record of industrial disputation.  Industry shelters behind prohibitive tariff walls, the exchange is fixed and ‘overseas’ trade is an afterthought. There are few tourists and not many foreign students on university campuses and few ‘foreign’ restaurants. The country despite its bountiful wealth is at the bottom of the global premiership table in terms of economic performance.

You don’t have to imagine too hard because that country Australia – the Australia of the past. It’s the Australia that farmer Stan Kelly and his son and fellow free trader Bert Kelly (also known as ‘the Modest Member’) railed against because of what the old Australia was doing to farmers, exporters, workers and the whole Australian community.

But whilst Kelly and son fought hard intellectually for the free trade side of the cause (Bert as a lone voice in the Fraser Government) it took three visionaries of the labour movement to open Australia up and lock in the economic prosperity that the lucky country experiences today. Prime Minister Bob Hawke, Treasurer Paul Keating and ACTU Secretary Bill Kelty lead the reform charge and importantly managed its social and industrial impact. The float of the exchange rate, the reduction of tariffs, the introduction of inflation targeting via the prices and incomes Accord were bold, brave reforms but they were coupled with enhancements to the social wage with the introduction of Medicare, superannuation, tax cuts and reforms to the education and training system to enhance skills for affected workers. They were brave reforms and they were bold. I joined the ACTU at the start of 1991, when the March 1991 tariff cuts were implemented in the middle of a recession and with the Industrial Relations Commission still grappling with enterprise bargaining. They were bold reforms but they enabled Australia to open up to Asia and take advantage of the shift in global economic power towards the Asia Pacific region. The Tyranny of Distance has truly become the Power of Proximity and those 1991 reforms enabled Australia to be in the right place at the right time. This time the lucky country made its own luck.

As Australia faces its next challenge in terms of climate change and the possibility of another global financial shock, what are the lessons to be learnt about how Australia opened up its economy? And which lessons are important to whom as debates get ravaged in the 24 hour news cycle?

The first lesson, perhaps for the leaders of the modern labour movement is that on the whole, trade has been good for workers as well as exporters. Some research I did with UNSW shows that on average, exporters pay 60 per cent higher wages provide more job security, equal employment opportunity and better occupational health and safety (OH & S) standards than non-exporters. Exporters are more profitable and achieve higher standards of productivity and therefore can train and reward their workers better, on average, than non-exporters.

The second lesson, to those on the other side of the fence, is that it is not economically desirable to protect markets it is desirable to protect workers. An open economy does not mean we have to dispense with all notions of fairness in the labour market. An individual bargaining one on one with management will in most cases not win out. It doesn’t matter if you are a cleaner, a computer programmer or even a chief economist; you need protection when negotiating with management to produce a fair and economically efficient outcome. In fact, the UNSW research also showed that export sectors, that were highly efficient also were unionised with coverage by collective agreements. After all Australia has a unique system of industrial relations institutions and its one that produces an unemployment rate nearly half that of the US and some of our other northern hemisphere counterparts. In short, labour market deregulation is not a logical extension of trade liberalisation.

The third lesson is to avoid fads in trade and industry policy. Eleven years ago as the Australian dollar plummeted below the US50 cents mark, the head of Hewlett Packard visiting Australian for the Sydney Olympics warned that unless Australia got out of ‘old economy’ industries like mining and farming and exported software and became more ‘new economy’ like Taiwan, the Aussie dollar would be 30 cents by 2010. The chief scientist expressed similar views. This was of course before we saw one of the biggest terms of trade increases in our history as ‘old economy’ prices increased due to the surge in demand from Asia. We also developed so-called ‘new economy’ exporters selling training, software and IT services to ‘old economy’ exporters of rocks and crops. Policy makers and the RBA did well to hold their nerve.

The final lesson is that trade policy has moved well beyond tariffs. Whilst the WTO may not be as dead as a Doha yet, and Craig Emerson’s new initiative shows an innovative way to break the dead lock, most Australian exporters are concerned about behind the border issues and seek off-shore government assistance when trying to understand new business networks and cultures particularly in emerging and frontier markets.

Another Kelly, Paul wrote recently, in reference to events at Qantas, that traditional Australian industrial relations are not compatible with us engaging in the ‘Asian century.’ On the contrary, many people of Asian descent have come to Australia to experience the fairness and freedom in the labour market here that is denied to them in their countries of origin. The Australian model allows us to trade with Asia, but to work and live according to Australian traditions of fairness and flexibility. The ‘Kelly gang’ (Stan, Bert and Paul) got it right in terms of free trade, but it took Hawke, Keating and Kelty to make it work by managing the social and economic impacts in the true Australian tradition

Tim Harcourt is the J.W.Nevile Fellow in Economics at the Australian School of Business UNSW and the author of The Airport Economist: www.theairporteconomist.com. A version of this opinion piece first appeared in the Australian Financial Review 10 November 2011.