Let’s join the Asian Century Asian-style
What do Hong Kong, West Berlin and China’s Shenzen region have in common? They have all prospered as special economic zones alongside regions dominated by government.
The federal Opposition’s leaked proposal to spur development in Australia’s sparsely populated north met with peremptory dismissal last week. But special economic zones are neither a new nor untried idea.
The spectacular transformations of Hong Kong and West Berlin are renowned testament to the power of free trade and market prices. China’s spectacular economic growth rests on creative economic zoning too. Inspired by Hong Kong’s rapid efflorescence, then-leader Deng Xiaoping designated special economic zones in Shenzen in 1980.
Shenzen’s share of trade in the greater Guandgong Province exploded from less than 1 per cent to near 20 per cent over the next five years, as migrants poured in.
So impressed were China’s leaders they designated another three zones in 1990, including Shanghai’s now-bustling Pudong district.
Inside the special zones Chinese businesses and people enjoy far greater freedoms: company taxes are half those in other provinces, wages are less heavily taxed and are set by the market rather than China’s central wage fixing regime, and bureaucratic red tape has been stripped away.
If such policies are good enough for China, surely a nominally free-market country should be able to consider them? Such solutions might be even more suitable for Australia given total tax revenues are around 34 per cent of national income here compared to 22 per cent in `communist’ China.
The proposition that fewer regulations and lower taxes foster economic growth remains true even if it applies to parts of a country only.
The Coalition’s plan to “review personal tax incentives” warrants further consideration. The Western Australian economy is growing faster than China’s, and the Northern Territory’s is growing three times that pace again.
Yet Darwin, centre of a natural gas boom and on the footsteps of an emerging economic giant with a population of over 240 million people - Indonesia - still has a population half the size of Wollongong.
How will Australia grasp the opportunities presented by the `Asian century’ when the vast bulk of its population is huddled in the south-east?
Other parts of the Coalition’s proposals were disappointing: Australia should be talking about culling public servants rather than moving them, and the $800 million in the foreign aid budget flagged to build ``world centres of excellence’’ in health an education in the north would be better used to cut income tax.
Australia has modestly compensated taxpayers for living in `remote or isolated’ places since 1945. Last year the Zone Tax Offset cost over $260 million and attracted over 580,000 claimants. That amount could be increased substantially and better targeted.
But sky-high salaries in the booming West haven’t convinced many Australians to leave Sydney and Melbourne so far. Bigger personal tax rebates might not work and in any case wouldn’t reduce marginal tax rates which are the worse barrier to effort.
Notwithstanding any challenge from states claiming discrimination, the Commonwealth should instead abolish company tax for any firm establishing operations in the Northern Territory. Darwin is the most promising place for a special zone because of its size, proximity to Asia, and the Commonwealth’s ability to freely govern it.
Because company tax is a withholding tax Australian shareholders get a tax credit for any company tax paid the change would offer relatively little (and potentially disruptive) inducement for Australian companies to relocate.
But for foreign companies pondering where expand their operations, it would be a siren call. The Henry review explained clearly that global capital is far more attracted to low taxes than workers, who are social creatures of habit.
If a new Top End low-tax zone failed to attract new business or people, then it would not cost the budget much because hardly anyone lives there. If it did work, it would boost the Commonwealth’s tax revenues as workers relocated at the same time as providing a salutary economics lesson for the rest of the country.
The Coalition document suggested Australia should “substantially increase the population” of Darwin, Cairns and Townsville. Ultimately, Australia’s north will only thrive if people move there.
Without significant changes to Australia’s strict immigration system that boosted the skilled immigration intake, any special economic zone is likely to flounder. Perhaps Australia could introduce a new class of permanent immigration that restricted work to the Northern Territory.
A populated north might even shore up Australia’s long-run security: a hundred years hence Australia with its vast and valuable energy economic resources might struggle to stay independent if it remains very underpopulated compared to its neighbours.
Comments on this post will close at 8pm AEDT.
Read all about it
Up to the minute Twitter chatter
The latest and greatest
Good morning Punchers. After four years of excellent fun and great conversation, this is the final post…
I have had some close calls, one that involved what looked to me like an AK47 pointed my way, followed…
In a world in which there are still people who subscribe to the vile notion that certain victims of sexual…