Be careful what we wish for …

The global recession is presenting a new dilemma for the first world which will have significant impacts long after growth has returned. We saw in recent years that the price of oil rose sharply as the demand of energy from emerging nations skyrocketed. While we clearly have a short-term incentive at least for China to redirect its economic energies into domestic growth to give our export sectors a boost there will be implications of this that we might not have bargained for. Do we really want an extra 1 billion or more people to be as rich as us? It is a case of being careful what you wish for …

The rapid growth in China and India over the last decade was driven by their export-oriented growth strategy. While the rest of the world was growing strongly, China was selling us cheap textiles and other manufactured goods. Their cheap (anti-union) labour guaranteed they could almost always undercut manufacturing costs in countries which pursued more sophisticated attitudes to the workforce (that is, higher wages, better conditions). While some of this growth clearly created spillovers whereby living standards in China were increasing more generally, the benefits of the growth did not solve the poverty problem in rural China. A new “coastal” middle-class elite emerged to share the spoils and that elite began to demand energy and other finite global resources in the same way that richer economies behave.

Australia enjoyed strong demand for our primary commodities as part of this energy binge in China. But the problem is, and this generalises to all first world countries, the richer that China becomes the greater will be the fall in our living standards unless we change our own behaviour significantly. And given the huge wealth and income inequalities that persist in the advanced industrial countries such as the US and Australia, the negative impact will be disproportionately borne by the poor but will also impoverish demographic groups that have up until now been considered more fortunate.

Until recently only wealthy nations such as Australia could afford having high levels of car use. Even the lower incomes workers in Australia could typically afford to run a car because energy has been so cheap. However, the rapid industrialisation of China and India has allowed them to generate enough wealth now to effectively compete with the wealthier nations for scarce energy resources such as oil.

Global oil prices are set by a small number of nations who enjoy a near monopoly (for example, Saudi Arabia). With demand from China and India so strong, these so-called “swing producers” are able to increase output while pushing the prices ever higher.

The competition for oil has significant distributional impacts. The emerging wealthy classes in China have, in effect, been squeezing the poor in the US and Australia and elsewhere who are increasingly unable to afford to drive cars and consume energy while maintaining other financial commitments.

But the problem is worse and goes to the basis of our humanity. Driven by the higher oil prices, Western investors started pouring cash into biofuels to extract energy from wheat, soy, corn and other food products to keep their cars running. In a misplaced effort to be green (and aided and abetted by environmental lobbies) and also to provide some energy security, governments have given huge subsidies to the biofuels industry.

The results of this strategy are clear – the diversion of food into fuel has dramatically increased food prices and global starvation is rising. So the desire of of wealthy to run their cars and enjoy profit is causing starvation elsewhere.

The last decade or so has marked this fundamental shift in world economic power towards China and India and away from Europe and the US. It has been a mixed bag for Australia. As a primary commodity exporter we enjoyed good times. But consumers suffered from the rising fuel costs and the sceptre of world recession is threatening to stop us all.

With the global crisis now killing China’s export markets, its GDP growth rate has stalled. The data coming out of China suggests that there are now steel stockpiles at Shanghai’s main export port. China is the world’s biggest steel producer. Large companies are reporting job losses and one estimate is that 20 million migrant workers have already lost their jobs and are heading back into the hinterland because they can no longer afford to live in the industrial cities along the coast.

The reaction of the Chinese government has been to announce a huge fiscal stimulus (around $USD590 billion) which is oriented towards shifting demand towards local production and consumption away from the export sector. Reports are coming in which suggest that China’s manufacturing index is now improving again and domestic retail sales are rising. Electricity output, which is one indicator of economic activity, has increased over the last month. Further fiscal measures are expected to be announced in the coming weeks. It is rumoured that a huge “government-based investment” strategy is about to be announced aimed at building local capacity. The commentators are predicting that the Chinese economy will recover in the first half of this year.

So now … here is the dilemna. The only way the domestic growth strategy of the Chinese government will be successful in the absence of a major (unlikely) pickup in world export markets is if increased purchasing power is placed in the hands of a broader cohort of Chinese society, who previously have not participated in the “growth miracle”. That is, China will have to create more wealth spread across its rural landscape. The workers displaced in the recession have to have jobs and have become used to city life with its consumption styles.

On the one hand, we are keen for China to resume its high growth path so it buys primary commodities from us. So in the short-run anything that gets the Chinese economy back on track would seem to be a good thing. But there are quite significant differences between the consequences for us of an export-led growth strategy and a domestic-led growth strategy. Hence we should be careful what we wish for …

The upshot of the current domestic-led recovery in China is that there will be that many more energy-hungry persons wanting cars and access to international travel and plastics and the rest of it. All of which will add to the intensifying competition for the finite supply of oil. This competition will further impoverish significant portions of the working class and lower-middle classes in Australia and other advanced nations not too mention increase world poverty overall. It will also worsen the scandal that the bio-fuels industry has created – some drive cars while others starve! So the trends that have already emerged with the growth of China and India over the last decade will accelerate quickly.

The advanced world could reduce the momemtum of the trend and buy themselves some time to make structural adjustments by more quickly getting our economies back towards full employment with huge fiscal injections into our own economies. This would strengthen the demand for Chinese exports and perhaps curtail the current strategy of the Chinese government of injecting billions into their domestic economy to reduce their reliance on exports.

The problem is that the neo-liberals are still shouting loudly about budgets deficits and making totally erroneous statements about the government “running out of money soon” and “loading us all up with debt that has to be paid back”. These nonsensical statements have reduced the incentive of governments to massively stimulate their domestic economies and introduce, for example, sound strategies like a Job Guarantee. Statements like those coming out of the Euro zone are positively frightening. The Euro leaders still haven’t grasped the stupidity of their economic system (centralised monetary authority and currency but decentralised fiscal responsibilities tied in a straitjacket by the ridiculous Growth and Stability Pact) which effectively prevents huge fiscal expansions from occurring.

But if we don’t do something very large then China will redirect its economic effort to build more domestic demand which will require raising incomes more generally across their communities and then we will see whether we like the results – much higher petrol prices, will be the start of it.

While we should clearly be using fiscal policy to generate full employment there are other strategies that we could be pursuing now which we are not. It would be a much better strategy for us to use the stimulus, in part, to promote new industries and behaviours that are not dependent on fossil fuels so that as China and India becomes wealthier, their increased demand for energy doesn’t impoverish major sections of our communities. Now is the time to introduce foresighted strategies to wean us all off cars; promote better urban structures to suit bicycles and walking; improve our house designs; increase our reliance on urban gardens for food; dramatically improve public transport and the rest of it.

Playing around with flawed Emission Trading Systems will never achieve the structural shift in behaviour that will be required as the large population zones get wealthier. The days when we can rely on the Chinese to keep their populace impoverished so we can get better access to cheap (but finite) energy are well and truly over.