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Treasury's China star

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This post is part of the Australian budget debate thread. To read other posts in this debate, click here.

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12 May 2010 09:24


This post is part of the Australian budget debate thread. To read other posts in this debate, click here.

The annual budget always offers a world view beyond the tax and spend hoopla. In previous decades, the US and Japan were the north and south stars to guide fiscal navigation. Over the past ten years, the China constellation has shone ever brighter. Kevin Rudd's recent China speech outlined various dark scenarios: China as a threat, China as a direct competitor with the US for control of the international system, or China as self-absorbed mercantilist bully.

There's not much evidence of those outlooks lurking in the budget crystal ball. No one needs to teach Treasury about one of the iron laws of politics: follow the money. Treasury can ignore Rudd's geo-political worries and glory in the geo-economics: the best terms of trade since the middle of the last century and Australia back to four percent growth by 2011-12. Here's the terms of trade golden glow, rendered in Treasury speak: 

The terms of trade are forecast to rise by 14¼ per cent in 2010-11 to their highest level in 60 years, largely due to strong price rises for Australia’s iron ore and coal exports, driven by a recovery in global demand.

In analysing the elements in the glow, China keeps popping up — the size and impact of Beijing's economic stimulus package gets several mentions along these lines:

While demand for non-rural commodities from many of our markets diminished, in line with decreased industrial production, this was offset by an unexpectedly large increase in Chinese demand. China’s demand for coal and iron ore increased substantially in 2009 on the back of the Chinese Government’s stimulus package.

Treasury is duly grateful for the China boom: the 10 per cent growth performance is again noted, but has long ceased to be cause for any particular comment. The China effect is given its due, though, as Australia skips away from the global financial wreckage:

Australia has largely avoided the business failures and large-scale employment losses that have occurred in many other countries, providing a solid foundation for the recovery. The positive outlook is being increasingly underpinned by an improved global outlook and by our close trade links to the rapidly growing Asian region, and in particular China.

China has lifted Treasury over the international rocks so regularly in the past decade, it no longer gets much of a gee whiz treatment in the international economic assessment. What is different this year is a special chapter: STATEMENT 4: BENEFITING FROM OUR MINERAL RESOURCES: OPPORTUNITIES, CHALLENGES AND POLICY SETTINGS. This chapter is partly another shot from Treasury about the new tax on the miners. Yet another way of rendering the Statement 4 headline would be: China and India — How fast can these rockets go? And can Australia hang on?

Economists are born to misery.  So, in the way of Treasury, the fact of the strongest terms of trade in a lifetime has to be dealt with as a bane as well as a blessing. Statement 4 is a discussion of the natural resources curse, de-industrialisation and how the economy will have to change its structure because of mineral prices that will stay high for quite a while.

Read Statement 4 as a 30 page meditation on what the emerging Asian giants will do to the internals of Australia's economy and society. This is more than the terms of trade: it's about the terms for Australia’s future economic settlement.

Photo by Flickr user thepismire, used under a Creative Commons licence.

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