Fatal embrace
Law and politics are eternally locked in a fatal embrace (look at Robespierre, for example). A change of government usually means a hastily prepared and extravagantly garnished legislative platter for lawyers to digest. However, important global changes will result in government action turning out to be more intense and muscular than was anticipated (and promised) at the time of the election. Some legislation may even be headed in a completely different direction. These global issues are worth a glance because of their impact on trade, labour and the Australian Government’s ultimate response.
Morbid tango
Credit and real estate prices in the US continue to swirl in a morbid tango of greed and fear, but mostly fear. Employment cutbacks are becoming more frequent. Growth in US GDP fell to 2.2% for the 2007 calendar year, savings are almost at zero level and consumption is down. The Federal Reserve has dropped interest rates, almost in a panicked haste, with a view to stimulating consumer spending and forestalling a feared recession.
Is America sneezing? Will we all catch cold?
The Bank of England has swayed along behind the Federal Reserve, dropping interest rates with a little more reserve. The European Central Bank looks like it may dance next time. The Australian Reserve Bank is apparently less frightened of US recessionary contagion than inflation. The Australian economy showed a healthy growth rate of 3.5% in 2007, but inflation is nudging 3.7%. So Australian interest rates continue to move in the opposite direction from the USA - up! The justification for this policy is the view that the Australian economy is overheating and risks serious inflation.
We have to ask: “Why are these central banks heading in different directions?”
Riding tigers
The tiger Asian economies led by China might be able to ride out any US recession. China's growth rate for 2007 was in excess of 11%. Although a reduction is anticipated in 2008, the economy is still predicted to grow at 9.5%.
Karl or Groucho Marx?
While proclaiming its Communist virtue, China flaunts its capitalist promiscuities. (One is reminded of Groucho Marx's remark - "I wouldn't join a club that would accept me as a member.")
The Chinese economy is already number 3 in the world, after the USA and Japan. In fact, the net value of the Shanghai and Shenzhen stock exchanges exceeds those of the rest of Asia and Australasia combined.
Factory to the world, or last line in the assembly?
Chinese economic growth has surged largely through manufacturing. China has 109 million people in manufacturing, as against 14 million in the USA. However, this manufacturing boom draws on globally integrated supply chains. China is often the last stop on the global assembly line: components are sourced from neighbours to be processed in China then exported. As a leading producer of raw materials, Australia is a major beneficiary of this transformative Chinese manufacturing boom.
Does China hold the Kleenex?
The question to pose is: “Can China's economic expansion withstand an American recession, and if so, for how long?” This depends on how the US responds to its present predicament. If the USA takes the narrow perspective and pressures China to revalue its currency - making China's exports more expensive - or cuts back on Chinese imports and perhaps restricts Chinese investments, then a recessionary cycle could follow.
If the US does not inhibit Chinese growth, then the Chinese economy and those neighbours could ride out the US downtown. This is important for Australia. It is clear that trade has turned Australia's economy towards China. It is this trade that impacts on the Australian economy – prices for products, need and costs of labour.
Open doors
Migration has always been with us. It was virtually uninhibited and, up until the Industrial Revolution, relatively slow. Ease of transport and improved communications encouraged “the huddled masses, yearning to breathe free” to move to improve their condition. The untrammelled movement of labour that followed frightened 20th century governments into legislating to limit, to manage, or just prohibit migration.
Closed doors?
The tide of international migration is running strongly as it was before 1914 amid serious attempts to control it. Just as then, people move for gain and sometimes out of desperation. There are trends: Latin Americans tend to go the USA; South Asians to the UK; people from North Africa and the Middle East to other EU countries; and South East Asians to Australia.
The Australian population has a larger percentage of migrants than any other OECD country. While the Australian economy keeps spinning and labour shortages push up wages, this situation will not change.
Doors ajar
A cheap way of meeting the demand for skilled labour has been the development of the employer sponsored temporary visa (subclass 457). This visa allows businesses to bring in skilled workers who are tied to a particular employer for that visa. The employer retains control over the worker and the program relieves the Australian Government of social security liabilities, allowing the migrant to stay in Australia only as long as he/she is employed and therefore productive.
Work makes residence
Over the last few years, the Australian Government has seen the advantage of linking these temporary stay work visas to ultimate permanent residence through continued employment - the Employer Nomination Scheme (subclass 856 visa).
Export boom - labour shortages - inflationary wage demands - inflation
Ironically, WorkChoices - which was lauded for its neo-liberal flexibility - may compound the inflationary pressure of labour shortages, which buoyant employers can sustain. There is no role in this system for the intervention of longer term economic
arguments through conciliation and/or arbitration – immediate market forces affecting the parties, not wider economic and social needs, are the determinants.
Invisible hand
The application of the invisible hand of laissez-faire economics permitted by WorkChoices, does not take into account concerns of increased disparity in incomes, consequent damage to social cohesion, and the perils of inflation. The need to address these incipient problems seems likely to lead to a rethought and revamped industrial relations system, readied by the Government for when the Opposition loses control of the Senate in June of this year.
Watch this space!
Government intervention
Overall concern for inflation, the paucity of weapons available to the Reserve Bank – essentially interest rate increases - and the unfair burden these impose on the relatively small proportion of the 1/3 of Australian homes carrying mortgages, suggest government policy will be reaching smartly for the brakes. The budget is in May and as noted above, the Opposition-controlled Senate ceases in June 2008.
Immigration can be used as dampener on a heated labour market. Changes can be effected rapidly, and for that matter just as rapidly reversed.
Again, watch this space!
Governments make legislation …
The Government was certainly elected on a platform of change. But changes required due to unanticipated economic situations, including inflation, labour supply and consequent immigration, as we note, indicate politics of serious intervention through a more vigorous but well considered legislative program. Look for intervention in the economy in closer step with the Reserve Bank, and more direct control of costs and the supply of labour through wage determination and immigration.
When all is said and done, though, legislation makes work for lawyers. The embrace with politics continues.
Brian Hillman
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