Stop chasing dragons and tigers: Saul Eslake

“A point that’s not often appreciated by Australians is that after China or India,” independent economist Saul Eslake said “there are no more Chinas or Indias to come.”

Speaking at the International Mining and Resources Conference in Melbourne this morning, Eslake outlined the transition China was going through in its economy, calling the days of double-digit growth over as it transitions to a more services-based economy rather than a manufacturing one, saying a growth rate of about 7% would invariably slow in the medium term.

“Inevitably, as human history demonstrates, when countries enter middle income status, when their incomes begin to exceed about 10,000 US dollars we observe the proportion of spending and economic activity which comes from the services sector tends to rise,” Eslake said.

“The tendency for the share of the services sector to increase as the GDP increases is one which transcends geographies, cultures, and histories.”

While The China growth story has been playing out for the last 35 years as it transitioned from an economic laggard to a powerhouse, Eslake said this period has produced most of the economic growth expected for China with only incremental growth to come.

“If China’s economy continued to grow at around seven per cent per annum while the rest of the world is doing something like three, then the result would be that by the mid-2030s China would represent a third of global GDP well in excess of its share of global population – and that simply doesn’t make sense,” Eslake said.

“So there’s a sense of inevitability about the slowdown of China’s growth rate.”

He said, rather gloomily, that we could not see another mining boom on the scale of the China story ever again.

“It could very well be, in my view, that the commodities boom Australia has just experienced in the last 12 or so years is the last of its kind in human history,” Eslake said.

However, there is a growing school of thought that India could pick up some of the slack of economic growth left on the table by China’s transition.

“Many people think it is possible that India would provide a new source of economic impetus to the Australian economy the way China has done over the last 15 years,” Eslake said.

“India has a more favourable demographic profile for economic growth than China has with a more rapidly growing working age population and a younger average age than China.”

However, in many more respects India does not resemble the China of 20 years ago, Eslake said.

“India has done far less than China to promote widespread literacy and numeracy amongst its population. India has done less to ensure basic health standards for much of its population. India discriminates against women and on the basis of caste to a greater extent than China ever has done,” he said.

“India has put far less into infrastructure, transport, and communications and electricity generation than China has done.

“India saves a lot less than China, which means India is more exposed to the vicissitudes of the international financial cycle and markets than China is.”

This invariably means that India has less money to invest in the rapid economic growth felt by China over the past 20-odd years.

“India will not be the answer to any difficulties posed by Australia by the kind of developments I think are more or less inevitable in China over the next five to 15 years,” Eslake said.

So what does this mean for Australia?

Invariably, Eslake said, Australia cannot peg its hopes on India being China 2.0 despite promising signs, and has to fundamentally restructure its economy to not hitch its wagon to economies such as China or India.

“Australia has derived more benefit from the growth and industrialisation of China over the last 20 year than any other economy in the world, of course with the exception of the Chinese themselves,” Eslake said.

“The gains in Australia’s terms of trade far outweighed those experienced by other western economies and even commodity exporting countries.

“Of course that means the unwinding of the Chinese economy poses more of a challenge to Australia’s economy than others.”

There were two key things the Australian economy needs to do in order to manage the transition away from rapid growth: diversification of exports and ensuring cost competitiveness.

Eslake said more than 75% of Australia’s exports to China were made up of just four commodities, while there was a similar ratio for India.

This becomes especially important where the price of commodities is expected to stay broadly flat or even retract over the next 12 to 24 months, he said.

In this environment, it also becomes vitally important for Australia to maintain its position on the international cost profile.

“For Australia the key challenge will be maintaining or improving our position on the international cost curves so our companies can remain profitable in a flat environment or much lower prices,” he said.

“In the case of iron ore our position on the international cost curve means they should continue to be profitable.

“In the case of coal by contrast, Australia is not necessarily in the most favourable position in international cost curves and maintaining Australia’s competitiveness...will be a major challenge.”

No more Chinas or Indias

Most importantly, Eslake said, Australia cannot expect a growth story like China or India to play out again in the future.

The type of growth those economies have experienced or are tipped to experience will not happen on the scale of China or India ever again.

“Those countries that are still to go through the development experience that China has undergone and India is to some extent expected to are both significantly smaller in terms of their population than China and India are,” Eslake said.

“The next largest developing economy in terms of population is Indonesia, with about 250 million people.

“Then you go back further to countries like Pakistan, Nigeria, and Ethiopia and Vietnam and the Philippines.”