The West's time in the economic sun may be over

Australia’s relatively prosperous banks are reluctant to unleash a new credit boom through lending, although consumers too may choose to save more in response to any gloomy news.

It has also been reported that corporate Australia has $200 billion of debt which will need to be financed in the next three years, and that this figure (derived from publicly accessible databases) does not include private deals companies do with banks.

It appears that the days of endless credit are over for now after increasing by $US22 trillion in the US alone during the 2001-2007 period while its GDP increased by just $US4 trillion.

And can we rely on governments raising taxes to boost public spending. When one takes account the further effects of policy, Barro and Perotti suggest that each $1 increase in government spending reduces private spending by about $1, while Romer and Romer (including Christina Romer who now chairs the US president’s Council of Economic Advisors) note that each $1 increase will reduce private spending by $3.

Yet, the US Center for Budget and Policy Priorities indicates that 23 states have imposed tax increases in 2009, with another 13 considering them, after ten states imposed higher taxes or other revenue boosters in late 2007 or 2008.

Finally, is the answer to rely on China which is predicted to generate 74 per cent of the worldwide GDP growth in the 2007-2010 period and is the prime reason why commodity prices have not collapsed?

With China’s communist government unhappy about recent steel price negotiations, as illustrated by China detaining 16 executives from Chinese steel mills and four Rio Tinto officials on the basis that bribes were made; and by it asking Melbourne’s Film Festival to remove a film about a millionaire Chinese dissident (a member of the Uighur minority now living in exile in the US), do we just accept China’s rise and make the most of the relationship?

On July 23, Western Australian Premier Colin Barnett pledged to give Chinese investors “special attention” to overcome investment hurdles (Sydney Morning Herald July 24, 2009). Similarly, Paul Kelly argues that “the naive one-dimensional views on Asia loved by Australian public opinion and fed by much of its media are untenable in handling the future China challenge” (The Australian, July 18, 2009).

China also expresses a mercantile economic approach with state-controlled Chinese companies acquiring resources from around the world: although it does finance vital infrastructure in developing nations - opportunities created by many corrupt or poor nations crying out for assistance. This is despite considerable resentment towards Chinese migrants in Papua New Guinea (PNG), Tonga and the Solomon Islands, Zambia and South Africa where there have been violent incidents. The tension in PNG has hardly been helped by about 300 Chinese workers entering PNG illegally each week without proper immigration checks: an occurrence which led to the arrest of 213 Chinese employees in November 2008 for having improper permits (Geoffrey York, Globe and Mail, March 31, 2009).

And if you thought working conditions and the environment were worsening under US hegemony, spare a thought for PNG workers who were once paid cans of tuna for overtime and had their pay docked for going to church on Sunday (sparking a riot).

In regards to the environment, a Chinese company in PNG plans an underwater disposal of the mine tailings in Astrolabe Bay 150 metres below the surface of the sea, although this method is essentially banned in Canada and the US. And PNG’s forests are being plundered with 80 per cent of the logs (almost two million cubic metres) shipped annually to China, often in breach of the country’s rules (York 2009).

International economics and politics are indeed a competitive game between nations, so we can expect more tension between the West and China to emerge. China wanted to address the dominance of steel suppliers (two companies in Australia and one in Brazil) by seeking an 18 per cent stake and two of Rio Tinto’s board seats, The Australian Government openly preferred a BHP-Rio deal rather than a Chinalco-Rio possibility, although such a concentration of power in the global market would not normally be accepted.