The Rudd strategy Part I: political expertise or political expediency

As the economic crisis began impacting on the global financial system, a grim faced Prime Minister Rudd announced to the nation that although tough times lay ahead, Australia was well protected by its strong and well regulated banking system.

Short on detail, it was a stoic Churchillian performance, designed to demonstrate the Rudd Government's will and determination to fight the adversity of the global economic crisis with economic skill, but careful to warn that some pain lay ahead and unemployment could rise.

Following the lead of other nations, Rudd announced similar government backed guarantees. Determined to be seen as visionary and proactive, Rudd went further than his counterparts by announcing he would extend guarantees to cover all deposits, but again failed to provide the detail only to find soon after that the devil lay in that detail.

Rudd went further once again, responding to the plight of Australia's aged and carers with a massive pre Christmas cash windfall. Australia's massive surplus and its well performing "future fund" made such a generous gesture possible.

This was followed by further additional mega bucks expenditure on infrastructure projects, crucial to keep Australia competitive and remove the bottlenecks restricting the steady flow of our minerals, grains and product exports.

Rudd confidently explained that "his government had kept the huge surplus in reserve for times of need, and those times are now here".

So! Do these guarantees and acts of generosity reflect skilful economic management by our elected government?

In such serious times, surely it could not be just an act of political expediency or even inexperience!

Faced with such a crisis, and before making an address to the nation, it would be logical for any government to seek advice on key trade, financial and domestic issues as a priority. This would be especially so before committing to any major draw downs on the nation's strategic cash reserves.

Apparently not!

It was not until after making these "bold initiatives" however, that Rudd sought a briefing with the captains of industry to seek their input. Details were kept secret, but there were a lot of grim faces leaving that room after that meeting. It was only later when the implications of the "deposit guarantee commitment" became evident, that Rudd eventually sought further advice from the financial sector and modifications were made.

All governments actively seek to dispel fears of a recession, and that can be reflected in a slowdown in the retail, housing and small business sectors. With that in mind, could it be argued that Mr Rudd's generous pre Christmas handouts may be construed as a cynical short term, or even panic strategy, to defer indications of any such slowdown until the end of the first quarter of 2009 when the impact of consumer spending on the economy over the Christmas holiday period, is revealed.

Without increasing evidence of a hard landing, a cynic could in fact interpret the Rudd Government strategy as a cruel and heartless invitation for the vulnerable, and those who could ill afford it, to pump up the economy by splurging their "windfall cash bonus" on a Christmas spending binge, rather than saving or extending it for future spending on necessities in the tough times ahead.

So! What are the hard times ahead referred to by Rudd?

Is the problem really under control?

Is the spending splurge really the answer?

Rudd is confident that China's economy will remain on track and that demand for Australia's iron ore, coal and gas is crucial in contributing to China's continuing growth.

He is confident that China's ongoing economic growth is somehow immune to the global economic crisis. Revenues and royalties, therefore, will continue to flow from China's ongoing demand for Australia's coal, and iron ore. The resources industry continues to gear up for another two decades of continued growth in China fuelling ongoing demand for Australia's iron ore, coal and grain.

It has to be so. His friends Hu Jintao and Wen Jiabao have told him so in many phone calls. Besides, his own team of advisors must also have considerable first-hand knowledge of China's strengths.

Australia is not totally reliant on China. The Northern Territory is slavering over huge revenues and spin offs from the Japanese gas project that it won from Western Australia and therefore is not China reliant. The royalties will be a major contributor to Federal and State coffers, but that is in the future.

Queensland's coal exports continue to produce a flow of royalties and revenues into Federal and State coffers driven by Japan and South Korea. China's contribution is relatively small and any decline will have a relatively minor impact on royalties and state revenues.

In Western Australia, royalties from iron ore and gas continue to feed a state surplus. New mines are coming on line and potential miners are negotiating with Chinese steel companies for orders and investment. A new major gas project is also in the planning stages.

Coal

China ranks number six in Australia's coal export markets buying nearly six million tonnes a year. Japan buys 18 times that with 108.2 million tonnes. South Korea buys 28.1 million tonnes, Taiwan buys 24.1 million tonnes. India and Holland even buy more Australian coal than China.

In comparison, Indonesia exported 193 million tonnes of coal in 2006 with a target of 370 million tonnes targeted for 2009. US$1 billion is being spent developing two new Indonesian mines with initial production of four million tonnes per year.

Queensland's coal exports to China will become irrelevant as China and foreign mining giants develop vast reserves of high quality coking and steaming coal in central and southern Mongolia close to China's border. Some dedicated coal railways are already operating while others are under construction. These connect the huge open cut mines with major steel and power generating centres in China and its huge rail network.

Similar large open cuts are operating and expanding in Inner Mongolia with similar infrastructure.

Queensland's coal exports could be influenced by the China factor as Japan and North Korea consider the benefits of major steaming and coking coal operations on their doorstep.

Iron ore

Mining expansion and infrastructure development programs are in progress to meet the insatiable appetite of China's restructured steel industry in Western Australia.

Unlike a decline in coal exports for Queensland, a decline in iron ore exports would impact severely on both the Western Australian and Australian treasuries.

So it comes down to China and steel.

The importance of steel

China's steel production now represents 40 per cent of global capacity and is committed to huge restructuring and ongoing expansion programs to meet planned domestic demand.

The 10th and 11th 5-Year Plans outlined Beijing's ambitious plans for 2030. The 67 per cent urbanisation plan is intended to urbanise 400 million of China's rural population to be incorporated into its massive planned labour force to power its expanding industrial capacity.

That urban population will jump to 450 million when coupled with natural urban population growth.

Such urbanisation demands a massive construction program to expand existing cities, and to construct completely new cities, infrastructure, associated industrial facilities and services.

That is the equivalent of building nearly two cities the size of Beijing every year.

The construction industry will be a major beneficiary and in turn will create new employment opportunities across China. When completed, the new cities will generate massive domestic consumer demand fueled by an enhanced lifestyle and disposable income of the new urbanites and their families.

Other grand plans that will consume China's steel and labour include a string of massive dam projects, new major ports and shipbuilding facilities, water diversion schemes, the world's biggest coal fired and nuclear power generation expansion program, the Shanghai 2010 World Expo, new railways and highways, expansion of the Qinghai Tibet rail network across Tibet, industrialisation of Tibet, massive oil and gas pipelines and post Sichuan quake reconstruction.

China is constructing the world's biggest shipyard near Shanghai at a cost of US$3.62 billion for completion in 2015 when China will overtake South Korea as the world's biggest shipbuilder.

China is confident that revenues from new vessels and breaking and repair work will continue to grow and with it, domestic demand for China's steel and more employment.

China is confident of its ability to increase domestic demand, not only to survive the economic crisis, but to continue its record economic growth. It also claims a massive war chest of US$1.9 trillion in foreign exchange reserves.

So! Is Mr Rudd correct in his assumptions on China?

Closer scrutiny of what is happening in the US, Europe, Asia and especially China, reveals the answers and Mr Rudd would have been fully informed of the situation during his closed meeting with the captains of industry.

Like Australia, China's economy is reliant on increasing export growth.

To maintain export growth China imports raw materials, energy and components that combine with extensive government subsidies, low cost services and ongoing cheap labour. To remain competitive, China's export growth also relies on high volumes and low margins. Goods are mostly produced in factories manned by huge labour forces and not highly automated facilities.

China is committed to its growth plans for 2020 to provide for 2030 when its population is expected to reach 1.6 billion.

Where does this leave Kyoto?

Rudd loudly proclaimed Australia as a driving global innovator in greenhouse gas emission reduction, confident in his ability to use his personal relationship and diplomacy to motivate China to meaningful emission cuts.

As a direct result of its record growth, China is now the world biggest polluting nation and greenhouse gas emitter, and without meaningful emission caps within a global framework, will undermine any commitment by the developed nations to reduce global warming.

China is also inflexible in its "growth at all costs" policy, blaming the developed nations for global warming, while conveniently forgetting that the emissions it has produced over the last 25 years exceeds that produced by the developed nations over the last 100 years.

Blatantly ignoring the living and working conditions throughout China, Beijing spent billions of dollars and hundred of millions of human resources on the Beijing Olympics to flaunt China's wealth and “can do” capability. Yet with this extravagant splurge, China expects the world to classify it as a developing nation for the cash benefits. Consider just what that misuse of cash and human resources could have achieved if Beijing had acted responsibly in addressing the key issues of environmental degradation, desertification, water pollution, water shortages and improving the lifestyle of the low paid and rural poor.

Given China's inflexibility on its future development and the serious impact that China's development is having on global warming, what are the Rudd strategies to convince China to co-operate?

Just what are the Rudd strategies acceptable to China that will not include carbon related taxes or tariffs on energy or iron ore, that will not reduce China's competitiveness?

In respect to meaningful caps one cannot ignore the increasing impact on global warming that will come from China's massive steel expansion, coal fired power generation and urbanisation programs. These will continue beyond 2020 and make any base for emission caps prior to 2006 totally irrelevant.

What if?

What happens if China's demand for Australian raw materials does in fact fall?

If China demand weakens, it is reasonable to assume that the same cause will weaken demand from Japan and South Korea?

How much of the current surplus and "Future Fund" will be left by mid 2009?

Who's responsibility is it?

Responsible fiscal management is the responsibility of the Australian Government, so what are the Rudd strategies for the strategic surplus and the Future Fund if the economic crisis worsens and exports drop?

Since it is a Rudd strategy, then it must rely on Rudd's own claims of evidence using hard fact in order to comply with his regularly quoted “evidence based policy”.

It would be enlightening if he could disclose the hard evidence upon which this current strategy is based.

Surely it is not possible that it may be too randomised?