Our China-based recovery is a naïve delusion

In the land of babies, booze and betting, leisure, pleasure and home improvements the Government is optimistic that it can return a projected $300 billion public debt to surplus by 2013-14.

The fundamental anchor for that optimism, according to official statements reported in the media, is China's continued economic growth.

Governor of the Reserve Bank, Glenn Stevens is reported as saying:

China's economy has been hit by the downturn, but there are signs now of recovery. China is Australia's biggest trade partner ... Australia's economy has remained comparatively strong due to a strong linkage of key commodity exports to China, which appears to have seen a pick up in growth this year ... Green shoots of recovery seen in China were real ... The durability is the open question and that is a question we don't really know the answer to at this point ... It has certainly been generated by domestic factors in China, not in a pick-up in China's exports.

Given China's export dependence and the falling worldwide demand for its products in the global recession, it's no wonder Mr Stevens is far more hesitant and noncommittal than the government when speaking about the anticipated China led recovery.

In fact, one must wonder whether the "domestic factors" Mr Stevens refers to as nurturing the "green shoots of recovery" are signs of a "real" recovery or just the result of the Chinese Government's two-year 4 trillion yuan (US$586 billion) stimulus plan.

Even assuming Chinese production continues to create demand for our raw materials, to what extent has our government taken into account non-linear events such as problems with water, desertification and other environmental realities in China? Has our government studied how critical water is for China's (or for all countries', including our own) economic growth and well being?

Certainly the former government would have been aware of China's water issues when it signed the The Declaration of Intent for a bilateral relationship regarding water scarcity to complement the Memorandum of Understanding with the Chinese Ministry of Water resources on water management.

And quite apart from the question whether our China-based recovery is a naïve delusion, what exactly are we encouraging or condoning or wishing upon another country and its people - in this case China - in order to avoid any personal economic discomfort?

According to the Pacific Institute's World Water 2008-2009 report (PDF 920KB):

• China's water resources are over allocated, inefficiently used, and grossly polluted by human and industrial wastes, to the point that vast stretches of rivers are dead and dying, lakes are cesspools of wastes, groundwater aquifers are over-pumped and unsustainably consumed, uncounted species of aquatic life have been driven to extinction, and direct adverse impacts on both human and ecosystem health are widespread and growing; and
• in 2005, the Chinese Government acknowledged that 50,000 environmentally related protests occurred that year, many of which were related to water degradation.

More recently, the report by the Leadership Group on Water Security in Asia, Asia's Next Challenge: Securing the Region's Water Future was released in April 2009. It confirms that:

Water problems in Asia today are severe - one out of five people (700 million) do not have access to safe drinking water and half of the region's population (1.8 billion people) lacks access to basic sanitation.

As population growth and urbanisation rates in Asia rise rapidly, stress on the region's water resources is intensifying. Climate change is expected to worsen the situation significantly. Experts agree that reduced access to freshwater will lead to a cascading set of consequences, including impaired food production, the loss of livelihood security, large scale migration within and across borders, and increased economic and geopolitical tensions and instabilities.

China's double-digit economic growth has greatly increased water demand for industry while decreasing the quality of supply because of rampant waste dumping and pollution by the industrial sector.

Desertification concerns have also been echoed by Guardian reporter Jonathan Watts last week:

The government says more than 150 million people will have to be moved. Water shortages exacerbated by over-irrigation and climate change are the main cause. The problem is most severe in the north-west, where desert sands are swallowing up farmland, homes and towns ...

Then there are factors like China's real unemployment figures; the potential social unrest highlighted by Vincent Kolo; the security concerns raised (PDF 114KB) by the Oxford Research Group in its report Tigers & Dragons: Sustainable Security in Asia and Australasia; and the environmental fallout from and military risks associated with the Three Gorges Dam Project (PDF 85KB), to name a few.

Back in Australia Treasurer Wayne Swan said recently:

But there are also good reasons to be confident that growth in China and other developing economies will provide an ongoing source of demand for mineral and agricultural commodities over the next few decades.

Give the man a cape. We're saved. It appears that Treasurer Swan has a plan up his sleeve to save Australia's largest food bowl from imminent death so we can export food to the Chinese! Happy days!

And if the government is coy about confessing it will be taking us into debt to the extent of $300 billion, what about Australia's private foreign liabilities?

You can't ignore them if you're looking at our country's indebtedness. What does the government have to say about our total foreign debt (deducting our total gross foreign assets - assuming, of course, that they are realistically valued - from our total gross foreign liabilities) already standing at about $714 billion at the end of December 2008?

In her book The Coming First World Debt Crisis, Anne Pettifor warned:

Even though these are private foreign liabilities they represent a risk to the government. This is because they have to be repaid in hard currency (dollars, sterling or yen) stored by the central bank reserves. If there are insufficient reserves to finance these debt payments, there will be a run on the Australian dollar, which will cause wider economic dislocation ...

Hard currency? At a time when the value of the US dollar is artificially propped up by its reserve currency status, what about something even "harder": what about gold?

Well, the Reserve Bank sold off two thirds of Australia's gold reserves (or 167 tonnes) in 1997. It now holds 79.8 tonnes. Who can forget Treasurer Costello saying "Gold no longer played a significant role in the international financial system ..."

What's gold up to nowadays?

A similar decision made by the now Prime Minister Gordon Brown continues to haunt him.

Returning any budget to surplus on a sustainable basis requires a lot of rethinking, planning and hard work; it requires much more than keeping the economy on a respirator and doing nothing but hope that its heart will begin beating again.

On the level of human economic activity it requires a re-examination of our entire financial and regulatory systems, but more fundamentally it requires a revaluation of the importance of the endowments of mother nature - like water, clean air and climate - and it requires political stability in our trading partners, if not globally. These are things that we mere mortals are prone to forget.

By anyone's measure, artificially replacing investment demand with consumer demand in China in order to maintain global economic growth with the objective in turn of maintaining our current lifestyles is neither "durable" nor sustainable.

When that fails we will all need a back-up plan. What's ours?