Review: Dragon’s Tail: The Lucky Country after the China Boom by Andrew Charlton

Andrew Charlton’s Dragon’s Tail: The Lucky Country after the China Boom is a smart essay that tackles three issues: the economic histories of Australia and China, the present changes that are happening to China’s economy and what these changes mean for the future of the Australian economy. Charton’s crash course in the past and conceivable future of the Australian and Chinese economies reveals that both economies grew rapidly in rather short periods of time (Australia in the first several decades of the 19th century, and China since 1978), through different ways of growing an economy, and that China’s incoming new phase of economic growth will wind down Australia’s mining boom and leave the country with some decisions to make. Yet while Dragon’s Tail is nearly all spot on in my judgement, it overlooks some important issues, namely how politics and diplomacy play into the story of China’s impact on the Australian economy, and this Quarterly Essay would be an even more learned piece if it wasn’t merely focused on economics from start to finish.

Dragon’s Tail states ‘Australia had a very good nineteenth century, a poor twentieth century and a stellar start to the twenty-first century’. Whilst some quibbles can be had over Charlton writing off the whole of Australia’s twentieth century as ‘poor’, the successes of the 19th and 21st centuries is well argued. Charlton explains how in the first half of the 19th century Australia became rich by ‘grafting European farming onto the southern continent’, and in particular by making money off the sheep’s back (with Charlton pointing out that ‘by 1850 more than half the wool in the clothing and blankets woven in British textile mills was being shorn from Australian sheep’). So by 1850 Australia was already pretty rich, but then in 1851, with the discovery of gold at Ophir in New South Wales, a series of gold rushes would follow that would make Australia wealthy. Australia was the richest country in the world in 1885, with Melbourne then being known as ‘marvellous Melbourne’, and the city becoming the first place in the southern hemisphere to host a World’s Fair (the Melbourne International Exhibition of 1880).

In the twentieth century, Charlton then contends, Australia was hit by falling commodities prices, and then further undermined its own economy by forming the ‘Australian Settlement’, a framework of policies that was ‘designed to prop up Australia’s industrial sector’. With fears around Australia being dependent on natural resources, the ‘Australian Settlement’ tried to diversify the Australian economy and ensure its growth came from many varied sources.  This became problematic as Australia overly backed some industries, like manufacturing with significant tariffs and subsidies, and as Charlton explains ‘our farms and mines were among the world’s most productive, but our factories and saleyards were not. As manufacturing became a larger part of the economy, its relatively low productivity dragged on our growth’.

 

China’s economic history records the country as having the largest economy in the world in the late nineteenth century 1.  However during that period the rulers of China, the Qing Dynasty, were in decline, and China’s economy declined alongside the weak political rule. This final dynasty of China then completely collapsed in 1911, which was followed by periods of experimental (and generally weak) rule with the Republic of China, and chaotic ungoverned periods up until the Chinese Communist Party (CCP) took over in 1949. The CCP then didn’t help China’s economy either, and economic growth was forestalled until Deng Xiaoping instituted new economic reforms around 1978 (and effectively turned China towards capitalism).

Since 1978, Charlton shows, ‘China has been the fastest-growing economy in the world, with annual GDP averaging, until recently, above 10 per cent for the last three decades’ (for some perspective, Australia’s economy is widely considered stellar for having averaged 3.4% GDP growth over the past 22 years) 2. He details how China’s economic growth model, the so-called ‘investment-led growth strategy’, is nothing new, and how this formula for China’s success relies upon three features, namely: 1) the country having a ‘strong government’ (commonly an authoritarian government) that can force rapid economic growth (sometimes against the interests of many citizens), 2) ‘the model requires the government to confiscate resources from its people’ (for instance, by high taxation or by holding down the growth of wages) and 3) ‘the government [using] resources confiscated from its people to fund rapid growth of investments (and often exports)’.

A very simple and clear illustration of this growth formula is provided by Charlton, and it is worth quoting at length:

To see how the model works, consider a very simple example. Imagine a poor country with a lot of unemployed people. Now imagine the following scenario: a new authoritarian government comes to power (element 1), imposes a big tax on all employed people (element 2) and uses the proceeds of the tax to pay a state-owned company to build a new road (element 3). What happens to our imaginary country? Well, each worker’s consumption [that is, spending] falls because the new tax has reduced people’s disposable income. And investment rises because the tax proceeds are used to invest in new road infrastructure. What happens to economic growth? Well, more people are employed in the construction of the road, so unemployment falls and the size of the economy increases. This example is cartoonishly simple, but it does capture the essence of the strategy used to deliver rapid growth many times throughout the twentieth century.

This frenzy of economic activity over the past 30 years has not only transformed China, but has also profoundly effected many other economies around the world, including Australia. ‘Large parts of China (and of other developing countries following the same path) have been construction sites for more than a decade’. As a tweet from Bill Gates recently illustrated, China in the 21st century has voraciously been acquiring natural resources and raw materials to undertake all of this construction:

(Source Bill Gates Twitter: https://twitter.com/BillGates/status/543410052494024704)

 

This economic activity has spiked the prices of natural resources around the world since the start of the 21st century, with observers dubbing this massive buying up of natural resources ‘the commodities super cycle’. The non-stop construction has allowed large-scale industrialisation and urbanisation across China, with the result being the many glittering skyscrapers and new skylines that adorn cities across China (which didn’t exist just a few decades ago, as these excellent photos of the Shanghai skyline in 1987 and 2013 demonstrate: http://www.theatlantic.com/infocus/2013/08/26-years-of-growth-shanghai-then-and-now/100569/).

For Australia the outcome was the mining boom. ‘Steel is the critical building material’ behind much of China’s newly built cities, and with China only using 50 million tons of steel annually in 1990, compared with approximately 700 million tons of steel annually in recent years, it’s clear that Australia was always likely to profit from China’s massive need of raw materials. With the two key ingredients required for making steel being iron ore and coking coal, of which Australia is very rich in both, Australia has indeed profited heavily in the 21th century with the mining boom, as shown by the graph below.

(Mt = million tons. Source RBA: http://www.rba.gov.au/publications/bulletin/2011/mar/1.html)

 

Yet there’s also been downsides to this economic relationship during the mining boom, as Charlton illustrates with the example of Cairns. ‘Blessed with the Great Barrier Reef and extraordinary rainforests, Cairns should be experiencing a tourism boom’, but ‘the number of international tourists arriving in Far North Queensland has dropped by 25 per cent over the past few years’. Dragon’s Tail explains that Cairns’ tourism industry is hurting because of the mining boom. A very high Australian dollar (bought about by the likes of China buying up so much Australian goods like iron ore) has made Cairns more expensive for international tourists, more Australian tourists are going overseas rather than travelling to Cairns due to the high dollar and investment in Cairns tourism industry is low due to this downturn in the industry (and a lack of investment means that it’ll be tougher for Cairns’ tourism industry to improve its fortunes in the future). Cairns is symbolic of the non-mining sectors, like manufacturing, that have ‘wither[ed]’ in Charlton’s assessment during the mining boom (which he believes we allowed through policy failure). So despite the Australian economy profiting overall during the mining boom, the gains were rather uneven as Australia was effectively a ‘two-speed economy’, with the mining sector booming and the non-mining sectors flagging.

 

However, the good times for China are not expected to simply roll on forever. There’s a consensus that the present of China’s economy is distinctly different from the investment heavy past 30 odd years. Charlton states ‘every growth “miracle” […] ends with excessive investment and the discovery that much of the new construction had been a speculative bubble turbo-charged by government distortions’. China’s economy has undoubtedly slowed down in recent years, if only by dropping a bit off the halcyon growth consistently seen over the past 30 odd years. A main source of debate now between China watchers is whether the country will experience a ‘hard landing’ or a ‘soft landing’ as the investment-led growth period draws to its inevitable close. And the Chinese government ‘recognises that its economist model is increasingly obsolete and intends to shift to a more balanced and sustainable growth path’. Indeed, since China’s 12th Five-Year Plan announced in 2011 the CCP has been openly stating that it’s a policy aim of the government to increase the amount of consumption within the economy (with the implicit point that investment should become less important, and perhaps get lowered somewhat) 3.

Charlton contends that the results of this economic change for China will be significant for Australia, as ‘whichever path China takes [to move away from an investment-led economy], the resources-intensive investment boom will slow down, with consequences for our exports’. Indeed, iron ore prices and other natural resources prices have significantly decreased towards the end of 2014, due to less demand from China, along with too many natural resources industries around the world increasing supply because they were banking on high demand to continue. This is actually what Charlton predicted mid-year when Dragon’s Tail was first published: ‘but now iron-ore prices face a double hit: Chinese demand is moderating just as supply increases’.

 

So what of the future for the Australian economy, given the coming end of the mining boom? Charlton’s verdict is harsh: ‘we have allowed temporary wealth to wash through the economy, eroding the competitiveness of industries other than mining. Governments on both sides of politics have used the temporary revenues of the boom to fund permanent tax cuts and spending increases. We have failed to prepare our economy and our people for life after the boom’. As evidence, he points out that ‘as the boom took off between 2004 and 2007, it added $334 billion in windfall gains to the budget. Australia saved only 6 per cent of this, using the remaining 94 per cent to fund tax cuts and spending increases’.

What Australia needs to do to secure its economic future post-mining boom is three things. The first thing, Charlton asserts, is ‘to increase the flexibility of the economy’, which allows for money and people to effectively move between different industries at appropriate times, which would allow workers and money to move into the mining sector during mining booms, and then allow Australia’s resources to productively end up in other sectors after mining booms. The second thing is to ‘dampen the volatility caused by a resources boom’, which generally involves limiting spending and increasing savings (for instance, through a ‘sovereign wealth fund’).

And the third thing Australia can do is to improve the productivity of the non-mining sectors of the economy. To do this, Charlton advises that we should ‘broaden our relationship with Asia. As China changes, we should not let our economic ties diminish, but rather turn its transition to our advantage’. Australia can offer the rising middle classes of Asia a range of goods and especially services, such as health and aged care, tourism, education, financial services, household goods and high-quality foods. But to guarantee this future Australia must broaden and deepen its links and partnerships with Asia, become a more Asia-literate society and make sure that the basics with regards to productivity in the Australian economy are strong (by having a top class education system, a solid health system, modern infrastructure and incentives for innovation and growth).

 

Is it too late to change? Has the moment to secure Australia’s economic future already passed the country by? Charlton optimistically argues that ‘the answer is that it is never too late’. He points out that Australia has great strengths, such as a well-educated workforce, world-leading institutions, a multicultural society and an open economy.

Charlton says a paradox lurks as the heart of Australia’s prosperity: ‘we are successful, but our wealth feels secure’. This is unsurprising, he contends, if one looks at our economic history, because ‘as a small, open, resources-abundant economy’ it is merely a reality that ‘uncertainty is an inherent feature of our circumstances’, and that ‘Australia’s success will always depend on an element of luck’. But ‘our challenge is to manage this luck over the long term’, namely by making the right decisions and by coming up with a capable policy framework that tackles the three above objectives to prepare Australia economically for life after the mining boom.

 

Dragon’s Tail is a deeply learned work, and is quite possibly the principal work relating to the Australia-China relationship produced in 2014 that students of Australia-Asia relations should learn from. As an economic study, it is probably deserving of full grades for portraying the past of the Australian and Chinese economies, as well as those economies presents and probable futures, with great accuracy and splendidly lucid writing.

However, the essay would have significantly of benefited with the inclusion of a political analysis about why such large tax cuts were given away to the Australian public during the mining boom, and why politicians failed for so many years during the 21st century to save a significant amount of the wealth generated during the mining boom. Also, some diplomatic and international relations analysis would have added to Dragon’s Tail. More Australians studied the Indonesian language in the 1970s than they do today, and that is in absolute numbers 4. So could Australia really become that much more Asia-literate, given the limited progress that the country has made over the past several decades (I sincerely hope Australia can become much more Asia-literate, but the limited progress is startling). Also, is it that feasible for Australia to become the ‘bread basket of Asia’, and a leading services provider to Asia? Perhaps the omissions are fair enough, as there’s only so much that could be packed into 70 pages, but still these additional analyses would shed a lot of valuable light on Australia’s ties with China and Asia at large.

 

So overall, Dragon’s Tail is a work packed with insights that should be carefully read by those seeking to truly understand Australia’s relationship with China, and what the future for China’s economy and Australia’s economy will depend on.

 

 

References

 

1 http://blogs.ft.com/ftdata/2014/10/08/chinas-leap-forward-overtaking-the-us-as-worlds-biggest-economy/

2 http://www.austrade.gov.au/digital-benchmark/growth.html

3 http://www.china.org.cn/china/2010-10/27/content_21214648.htm

4 http://www.lowyinterpreter.org/post/2011/11/04/Australias-Asia-literacy-wipe-out.aspx

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