Can Western nations remain fair and affluent?

Can Western societies remain fair and affluent, even if developing nations continue to gain greater global GDP share in coming years? Perhaps, but achieving such goals is an increasing struggle.

Even Australia is being tested, despite being one of the few Western nations fortunate to have vast amounts of raw materials to export. While Australia has been one of the best performing OECD nations since the early 1980s in terms of maintaining similar levels of income inequality, the benefit of cheaper imported consumer goods has been somewhat offset by recent higher prices for housing, food and utility bills.

If measures cannot be introduced to address rising everyday living costs, then Australia will indeed produce a class of people whose life opportunities will increasingly perish.

So what are the chances of such measures being introduced to help the more vulnerable?

On recent trends, there is considerable uncertainty. In a climate where freer trade is still viewed as the concept most capable of upholding national and international aspirations, many urge further reform in regards to taxation, labour markets and welfare to further improve national productivity and competitiveness.

As major budgetary and debt pressures continue to emerge amongst Western nations, fiscal constraints are testing the prowess of their government to adopt an appropriate policy mix. For instance, recent budget cuts by the UK Government, introduced to address budget deficits and increasing debt, led British universities to increase fees by 300 per cent from £3000 to £9000.

As for the US, the nation which has most promoted freer trade and military security (at least from a Western perspective), it remains to be seen whether it proves capable of reform in an orderly and reasonably equitable way given the immense social cleavages that exist between Democrats and Republicans.

For now, US policy makers appear still reliant upon higher debt. Take the December 2010 decision to extend the Bush tax cuts and trim workers’ payroll tax contributions which Moody’s predicts will raise the US federal debt-to-GDP ratio at 2012 to 72-73% from around 62% in 2010, whereas previously it was predicted to be 68% in 2012. With higher US borrowing costs, Moody’s has warned the likelihood of a negative outlook on the US government’s credit rating during the next two years.

If Western democracies turn in on themselves via much greater income disparity which diminishes opportunity, then democratic politics will indeed be little more that a focused political strategy to win the most seats.

But democratic politics can work despite budgetary difficulties, at least if societies remain committed to pluralism by adopting reasonable measures to ensure reasonable equity and ample opportunity.

Both centre-left and centre-right political parties must remain committed to commonsense. If we are to accept the need for further taxation and labour market reform, it should never be accompanied by a slave labour mentality.

While Australia too may need to further support mutual obligation programs for people capable of work to enhance labour market participation, a minimum standard of living should be guaranteed by appropriate assistance to lower income people and families. Although Australia is an OECD leader in terms of its well-targeted social welfare system, any streamlining of social welfare expenditures must always ensure that assistance diminishes as income increases.

Contrary to any simplistic argument that either free trade or extensive protection is the answer, it is the balance between various considerations that always matters. After all, the rise and decline of state intervention was supported by both Labor and the Coalition since 1901 in line with the changing demands of the international economy, although both major parties have always expressed some differences in terms of the level of government intervention in regard to different issues.

This leads to the question today of whether most Western societies can compete with developing nations in terms of future GDP growth? The answer is clearly no.

As was also the case in many Western societies up to the 20^th century, political and economic rights only came about after long and often bitter societal struggles. For now, the powerful elites of China and other developing nations are in no rush to encourage reforms that would rapidly diminish their authority or dominance.

Hence, immense inequality remains more profound in many developing nations where the rich and middle classes appear to have little immediate interest to use new wealth to help their poor and vulnerable. For instance, while India’s Mukesh Ambani (worth $US27 billion) built a 27 story home costing $US1 billion with 600 full-time staff employed to look after a family of six, the vast majority of Indians live in conditions of abject poverty with many families living in a single room and sharing a single toilet with hundreds of others in the neighbourhood.

In China, while patients with good health insurance or ample savings get first-class treatment at the best medical facilities, millions of uninsured Chinese often face bankruptcy by using their meagre family savings to travel to the big cities in the hope of getting medical care. When they get there, packs of scalpers often roam China’s major hospitals, peddling appointment tickets for hundreds of dollars which allows patients with plenty of cash to avoid queues as scalpers collude with shady registration clerks to snatch up many of the slots and sell them to the highest bidder (David Pierson, ‘Want to see the doctor in China? Be rich’, Los Angeles Times, February 14, 2010).

Effective pluralist societies, aided by higher levels of wealth, have been instrumental in terms of obliterating disgusting levels of inequality and more adequately addressing the various concerns put forward by many players.

Even the poorest of China, along with its educated and middle classes, have an interest in reducing pollution levels. A 2006 study of the Pearl River Delta, a major manufacturing region of South China, estimated that 10-40 per cent of measured pollutants in the air were caused by the exports of produced goods to Western and other nations. In contrast, it was indicated in 2008 that total annual air pollution emitted by US manufacturers had declined by 58 per cent in regards to the four most common air pollutants despite the real value of US manufacturing output increasing by more than 70 percent over the past 30 years.

Democratic principles will always have greater universal appeal as most rightfully resent domination by a minority without democratic accountability. In China, a survey by the Zhejiang Academy of Social Sciences found that 96 per cent “feel resentful toward the rich” with many believing that they made their wealth by looting formerly state owned property, corruption and political connections. At the time, with about 130 US dollar billionaires in China, second only to the US with 359, it was estimated that one third of China’s 1,000 richest were members of the Communist Party of China.

But let us not kid ourselves. Despite our own struggle to maintain reasonably fair societies against tougher economic competition, we too need to remain attractive to some investment from the developing world, although how tolerant Western populations are to much higher numbers of foreign students and the foreign purchase of land and properties remains to be seen.

Western nations are attracting more foreign direct investment (FDI) from developing nations as the latter increase their wealth. In 2008, FDI inflows from just six nations (Brazil, Russia, India and China, Indonesia and South Africa) to developed nations reached $US121 billion after averaging about $US10 billion a year in the decade to 2003. The US also attracted $US5 billion from Chinese company investment in 2009 alone, although well behind Japan’s peak investment of $148 billion in 1991.

Attracting FDI often involves generous government incentives, which can diminish domestic public spending possibilities. For instance, Chinese investment into the US is aided by American government measures in terms of affordable land and reliable power (even cheaper than parts of China), and tax credits (including a state payroll tax credit of $1,500 per worker in South Carolina for any company creating more than 10 jobs). At the same time, China’s government, urging its companies to globalise, offers finance for some of up to 30% of the initial investment costs, although investments below $100 million from China do not need Beijing’s approval.

But again, domestic resistance at the Western societal level plays an important role in tempering fears about foreign investment, again providing an example to other nations.

While Western nations are unlikely to return to extensive industry protectionism, as this would contradict Western claims to global leadership, they are adopting some measures to uphold US concerns. The US Commerce Department (April 2010) imposed import duties of up to 99 per cent on a type of seamless pipe, resulting in Tianjin Pipe (the world’s largest maker of steel pipe) investing in a US facility as it could not afford to export to the US if tariffs were over 20 per cent.

China’s Jeff Chee, who owns Top-Eastern with worldwide sales of more than $120 million and 4,000 employees, notes that investment is made in the US despite prices being much higher than in China as lots of US customers have government contracts that have ‘made in USA’ requirements.

And concern about Chinese management at one Haier plant in Camden, South Carolina, also resulted in the removal of Chinese managers who had little in common with domestic cultural norms, including the need to offer health insurance.

Western governments have a difficult task to uphold social and environmental considerations, as well as remain competitive in economic terms and attractive to investment, but ongoing and smart alterations at the national level can change the game.

It could even be that streamlining welfare, along with other policies that temper any reliance upon high levels of immigration and foreign investment, may actually create extra opportunities for lower-income earners in terms of lower house prices by altering the supply and demand equation.

It is simply a furphy for policy elites to rely on more of the same to save Australia, including large numbers of immigrants, students, or even tourists.

Western societies will have to think that much harder if they want to remain affluent, equitable or even influential.

We may have to weigh up whether we force our own workers to move where work is, or rely on temporary skilled labour. We may need to look harder at how to increase per capita wealth rather than gross levels of GDP. We may need to build more public housing, even at a substantial cost. We may need further taxation reform that helps first home buyers, yet penalises others in accordance to how many homes they own. All policy options should be open to public debate.

While Western nations are unlikely to return to extensive protectionism, as this would undermine its global leadership, it would be naïve for Western governments to give full expression to liberal economic ideas, especially at a time when many rising developing nations are hardly open and transparent. For instance, the International Finance Corporation’s 2007-2008 report noted that in terms of the ease of doing business, China and India ranked 83^rd and 120^th of 181 countries. Similarly, in terms of corruption ranked by Transparency International (2010), on a scale of 1 to 10 (higher figure least corrupt), many still rated poorly: Brazil 3.7, China 3.5, India 3.3, and Vietnam 2.7.

There will also be some tension between various nations that have to be resolved. This includes resolving currency values and debt levels. Concern is expressed at China’s reluctance to float its currency, yet the German Finance Minister Wolfgang Schäuble also described US policy as “clueless” given a belief that enough money had been pumped into the market, and the US itself was itself artificially depressing “the dollar exchange rate by printing money”.

To conclude, the evidence suggests that Western nations will face tougher times ahead. In this era where a greater proportion of global GDP is being generated by developing nations, Western societies may indeed have to modify the balance between open trade and government intervention.