Investment guru Roger Montgomery committed economic heresy this week by using the ‘M’ word during an interview with ABC presenter Ticky Fullerton.
Several times on the ABC program The Business, Montgomery averred that Australia needed ‘manufacturing’ to maintain a healthy economy. I nearly choked on an Italian stuffed olive and splashed French merlot down my Malaysian business shirt. Thanks Roger.
Actually, when I phoned the animated investor to double check what he meant, he assured me he was using the term loosely to denote “value-adding industries”.
Montgomery complains -- and I agree -- that relying on commodity exports to pay for all the shiny things we wish to import is a way to lock in the “road to serfdom”.
Commodity producers are price-takers, and Australia’s shortish terms-of-trade boom (which is now ending) has given us the false impression that we have a sustainable competitive advantage in the things that have made us rich: predominantly iron ore and coal.
We don’t. We dug it up and sold it at inflated prices quicker than anyone else, but as competing nations ramp up supply of commodities, the companies digging up the paydirt will make money from volumes, not margins.
There is even a “prehistoric” view within the federal government, says Montgomery, that our other competitive advantage is agriculture: more commodities that, due to many price-booms in the past, we nostalgically believe will save us when the mining boom is a distant memory.
Well, not everyone in the government is that short-sighted. Treasurer Hockey has reportedly been angered this week by the RBA’s determination not to drop interest rates from record lows to, err, record-er lows.
Such anger is perhaps better described as frustration. It’s frustrating watching the Australian dollar staying too high for so long, as currency traders milk our rates, which are high by global standards. Hockey wants to see the Australian dollar fall to around 85c, but it keeps hovering around the 94c mark.
That is a mixed blessing. A lot of currency trade is to support the huge volumes mineral exports, and Hockey gets to take a small cut of every tonne exported in the form of corporate tax.
On the other hand, the rest of tradable sector of the economy struggles to export in the high-dollar environment. So less profits and less corporate tax there.
It can be a confusing picture. Australia has now had four quarters of trade surplus, thanks to all the lovely iron ore and coal. That will give those ‘prehistoric’ thinkers an even more developed false sense of security; we really can continue to prosper from nature’s gifts, just as the national anthem tells us!
Sorry to dampen that romantic nationalism, but we can’t. A trade surplus is one thing, but to pay for our imported food, wine and clothes (and everything else) sustainably we need a current account surplus, which measures all income flowing in and out of the country, not just the value of what we bought/sold.
We are selling a lot of minerals. But given that most of the capital to build the mines has come from abroad, a large part of profits must flow home as well. So we have a trade surplus and a continuing current account deficit.
That’s a problem. What Montgomery is getting agitated about is the fact that, as commodity prices fall, we need to develop the industries of tomorrow – otherwise, a ‘Made in China’ electric drill that costs $9.99 at Bunnings will soon cost multiples of that.
The $9.99 tag -- or even $19.99 -- can only be maintained if we sell value-added things back to our trading partners.
Visy executive chairman Anthony Pratt has one solution. He has been warning that time is short for Australia to become a ‘food bowl of Asia’ before we lose valuable export markets to global competitors.
What few have twigged is that Pratt isn’t really talking about an ‘agriculture boom’, but a packaging boom. Oh, look -- he runs a giant packaging firm.
There’s nothing wrong with that, of course. Pratt’s firm can take commodity agricultural products and add substantial value by helping package them for export.
Just as seen recently in the SPC Ardmona dispute, the provenance of Australian food is important. Asian middle=class consumers like the fresh, clean image of their southern neighbour – but the way to make a buck is to process and package them in innovative ways. Pureed, organic peach baby-food anyone?
Only by addressing the current account deficit in the long term -- by boosting value added industries -- can Australia maintain anything like its current prosperity.
To do that, Montgomery has a suggestion for Hockey: start offering tax holidays to foreign investors who want to start value-adding businesses in Australia, like the Singaporeans do. There, a start-up can make two years profit up to $200,000 tax-free. This, argues Montgomery, would kick-start job creation and the value-added industries of tomorrow.
Before the GFC, many economists, including at the RBA, argued that persistent current account deficits were not a problem. This is in contrast to the CADs run during the gold-rush mining boom of the 1890s, which were a massive headache because they left the economy highly exposed to international shocks.
However, the received wisdom up until 2008 was that they only became headaches because the Australian pound (as it then was) was fixed under the gold standard.
After the floating of the Australian dollar in 1983, a theory known as the ‘Pitchford thesis’ argued that persistent deficits weren’t a problem at all. On the ground, each borrower of money made rational decisions about how much debt they could carry to fund their lifestyles and, when a crisis hit, the floating dollar would absorb the impact and allow the economy to rebuild quickly.
The GFC ended all of that. The shock was bigger than the Pitchford proponents imagined, and most nations with long-running deficits (and hence a large accumulated debt) lost their shirts.
Australia did not, thanks to a commodities boom that was set in motion by Beijing, not Canberra.
So it’s easy to understand Hockey’s frustration at the high dollar. This nation’s future -- if it is not to be ‘serfdom’ -- relies on the expansion of value-adding businesses.
Yes, many of those businesses will be in services, particularly education exports, tourism and financial services.
But really, I think the Montgomery Heresy should be taken a little more literally than Roger made it sound when I phoned him. We need to make things. Valuable things. And not until that’s done can we really relax with our fine olives, wine and our favourite shirt with the stains down the front.