By many counts, Australia’s economic position is to be envied by the world. Assuming the Gillard government can deliver on its promise, there will be a surplus for the 2012-13 budget. We are experiencing historically high terms of trade: importing on the cheap while exports sell high.
Unemployment is only a touch over 5%. Our dollar has overtaken the US Greenback. We have the second lowest public debt (proportional to our GDP) in the industrialised world. And If you’ve listened to Treasurer Wayne Swan open his mouth in the last 6 months, you’ll know that our economy’s “fundamentals are strong”.
It may surprise some therefore, that I would suggest that this is no time for complacency about our future. Indeed, our position is more precarious that one might initially think. For there’s another side to the Australian story: lopsided growth, struggling non-resource exporters, depleting natural resources, coming challenges of an ageing population and climate change, and a vulnerability to oscillating commodity prices. Considering these factors, it is best that the orthodox optimism surrounding our economic future be taken with a grain of salt.
It has become a trite truism to point out that mineral resources and the growth fuelled by them are, by nature, finite. This doesn’t make the implications any less escapable however.
In times of prosperity, doesn’t it make sense to set aside some wealth for the benefit of posterity; for the point when the mining boom comes to an end and we reach the bottom of the bottomless pit? It is with this aim in view that I support a sovereign wealth fund (SWF) to manage Australia’s long-term prosperity.
A SWF is a state-owned but independently managed fund into which surplus revenue is pooled and then invested, typically abroad. The interest that accrues on these investments ensures that the fund’s wealth grows over time – provided the investments don’t turn bad.
Many countries have SWFs, particularly those that are large exporters of natural resources (e.g. Brazil, Norway, Abu Dhabi), or who simply have massive surpluses (China). The oft-suggested model for responsible resource management has been Norway’s SWF, established in 1990 to preserve some income from the country’s petroleum reserves.
The success of the Norwegian SWF offers a compelling argument for Australia to set up its own version. It is the second largest of its kind in the world (behind Abu Dhabi), estimated to be worth US$ 571.5 billion and owning more than 1% of the entire world’s shares. Moreover, it has a diverse portfolio, thus minimising the risks associated with market volatility (incidentally, the Norwegian Fund divested its holdings in Rio Tinto because of the latter’s poor environmental record).
The Greens have come out in support of such a fund. But just in case anyone thinks the debate need be divided over political lines (after all, Norwegians are bloody socialists aren’t they?), support for the idea has also been expressed by Malcolm Turnbull, numerous business leaders, economists, WA Premier Colin Barnett, and has even been hinted at by the Reserve Bank. Unfortunately, both the Coalition and Labor have rejected any plans for an Australian SWF.
Shadow Treasurer Joe Hockey even dismissed the proposition with the contemptible comment that we already have one. We don’t. We have the Future Fund, established under Howard in 2006, designed to pay for the pensions of public employees.
The Future Fund does not prepare our country for future economic pressures, save perhaps that of an ageing population. As Malcolm Turnbull rightly points out though, the well-managed Future Fund demonstrates that “...with clear rules, transparency and a well-understood mission it is possible for public investment vehicles to operate effectively and with bipartisan support in Australia.”
Just as Australia is failing to utilise its assets to maximise prosperity, it appears the Coalition continues to neglect the asset they have in Turnbull. Oh the iron(ore)y.
Why have one?
There are a host of arguments for the implementation of a SWF in Australia. Chief among them is obviously that a Fund would offer more fiscal resources to future generations to combat the effects of climate change, an ageing population, the dislocation likely to be experienced after the mining boom, a crash in commodity prices, a sudden decline in Asian demand for our resources (perhaps unlikely), or a GFC 2.0 (much more likely).
In fact, in its latest report on the Asia-Pacific region, the International Monetary Fund (IMF) urged Australia to adopt a SWF to guard against fluctuations in commodity prices. One quarter of our annual exports go to China – that’s a lot of eggs in one basket.
We’ve received the same warning from the World Trade Organisation, which also rebuked us for being dangerously exposed to fluctuating commodity prices. Importantly, it added that our reliance on mineral exports and incredibly high dollar were having a devastating effect on our non-resource exports.
You see, while a high dollar might yield certain benefits, it means that our other countries have less purchasing power when buying our goods, and will therefore make our exporters less competitive because their prices are higher for overseas buyers.
In economics this phenomena is known as the “Dutch Disease” – when higher prices for the resources of resource-rich countries result in a strengthening currency, which, in turn, adversely impacts non-resource exporters.
When the Netherlands found large oil reserves in the North Sea in 1959, the subsequent oil boom weakened its manufacturing industry enormously via an appreciating currency. The same is occurring in Australia. Mining might be experiencing a boom, but other export industries like tourism, agriculture, and manufacturing are suffering as a result.
The most salient recent example of this is the 1000 employees laid off at BlueScope Steel, which Trade Minister Craig Emerson acknowledged was the result of a high currency and the mining boom.
One of the added benefits of a SWF is that by investing offshore, some of the upward pressure on the currency is relieved, which would go some way towards giving our other exporters a bit of a break.
Where should the money go?
Well, as I mentioned above, the funds might be used to help guard against unexpected economic troubles – such as commodity prices plunging, or another financial crisis. But more important than these reactive uses is the possibility of using the funds proactively.
A SWF could lay the groundwork for an economically and environmentally sustainable Australia if we invest in the right places. These places, I would contend, include renewable energy and research and development (R&D).
Since renewable energy is an industry still very much in its technological infancy, there is obviously considerable overlap between the two.
Out of the Organisation for Economic Cooperation and Development (OECD), which comprises the rich industrialised states, Australia spends below average on R&D. Labor, which has succumbed to the Coalition’s narrative of a budget surplus being the only sign of economic competence, is set to cut $400 million from research.
Here’s what the President of the Association of Australian Medical Research Institutes, Julie Campbell, had to say about it in the Sydney Morning Herald:
‘‘They are cutting Australian science off at the knees … and it is just for peanuts, absolute peanuts…So much for the clever country. It is a disgrace and, frankly, I am disgusted.’’
If it really wants to stifle Australia’s innovative talent rather than help it flourish, Labor is on the right track. There’s really no rush for a surplus, other than politics.
In the 1970s, Australia’s political elites made the conscious decision to liberalise trade; believing that the benefits from increased coal exports would outweigh the losses to our manufacturing sector. Thus we became the greenhouse ghetto of the world, as Guy Pearse quips. So when the mining boom ends and we don’t have a vibrant and competitive manufacturing sector to prop us up, what then?
Well firstly, although reviving manufacturing should be a priority, there are alternative sectors in which we can be internationally competitive, and which may also prove to be more lucrative.
To illustrate this point, I want you to think of a mobile phone. Chances are it’s “made in China”. That’s where a good deal of the world’s manufacturing is gravitating to these days. But the most profitable aspects of that phone aren’t found in its construction, but in the technology behind it – technology that usually comes from Western nations.
Australia has been propitiously endowed not only with an abundance of natural resources, but with world-class scientists and researchers. If we can harness this intellectual capital, then we have the opportunity to create a robust “knowledge economy”.
In realising such a vision, not only is greater funding into R&D required, but greater collaboration between sectors. In this way we can build an innovative synergy. For example, while The CSIRO, Australia’s largest R&D agency, is a respected institution, it rarely collaborates with the manufacturing sector to spur innovation in that industry.
As for renewable energy, admittedly, Labor comes out looking a lot better. Under the supplementary measures of the government’s proposed Carbon Tax scheme, investment into renewable energy gets a big boost, particularly with the creation of an independent $10b Clean Energy Finance Corporation, which will invest in those businesses attempting to get clean energy technologies off the ground. But we can still do better.
Independent MP Tony Windsor recently went on a fact-finding tour of Europe. There, he was impressed to find that Spain, despite its considerable economic woes, was surging ahead with investment in renewables. “I take my hat off to the Spanish government and their economy is a shambles compared to ours but they have been prepared in recent years to really engage with the corporate world to find the technologies that will drive this sort of technology forward,” he said on ABC’s AM radio.
Germany is also taking the lead in this path, announcing its intention to have 80% of its energy needs supplied by renewables by 2050 and to fund environmental R&D initiatives such as electric car technology.
If European economies, ailed as they are by financial crisis, can still maintain a forward-looking mentality with regard to clean energy futures, what is stopping a comparatively well-placed Australia from also making bold moves toward a sustainable future?
Two weeks ago in the Weekend Australian, Paul Cleary comments that there is a clear failure of the government to strategically manage our collective resources for long-term prosperity. Establishing a SWF would be a move toward more effectively allocating the proceeds of these finite resources into a sustainable future for Australia.
It is imperative that we manage what are, ultimately, our national resources, for the benefit of all Australians – and their children. The benefits should not just be distributed more fairly across space, but time. Otherwise, as Cleary notes elsewhere, we are guilty of engaging in generational theft.
The lack of foresight displayed by the two main Australian parties at the moment is disheartening, to say the least. Principles and vision have gone out of fashion in Canberra, in favour of short-term political pandering. A pox on both their houses.
An injection of some long-term thinking into our national political dialogue is long overdue. The time has come to prepare for future challenges. So let’s have a SWF.
After all, who is better positioned than this sunburned country to experiment with solar energy? With our great distances and sparse settlements, who is better positioned to experiment with high-speed rail? These kinds of projects would not only prepare us for future challenges, but provide the nation with needed jobs and infrastructure. What’s more, they could all be financed by a SWF.
The resources, conditions, and ability are all there. All that’s missing is the will.
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