Australian Experiential Learning Centre

This post continues exploring the potential that the ‘China story’ is not accurate. As posted here and here, I fundamentally believe that China’s ongoing industrialisation is excellent news for Australia. It will provide a long term stimulus for our economy that will prop up our living standards for many years to come.

However, when a story (or narrative) becomes accepted wisdom it pays to challenge its central premise by considering alternatives.

A recent article in The Australian lays out some very compelling reasons why China’s rise may be a rollercoaster.

The basic premise of the article is that:

“With few financial alternatives to beat inflation, Chinese savers buy real estate, even if supply soars ahead of demand.

Between 2006 and 2010, investment in residential property jumped by half, to about 9 per cent of China’s gross domestic product, according to Mr Lardy. During that time, real-estate prices in major cities in China roughly doubled.”

This could have profound impacts on the Chinese economy. But, because of the undeveloped nature of the economy and the high level of domestic savings, it will not have the same consequence as the asset deflation that has occurred in Japan and the US (following their respective housing bubbles popping).

The other major difference between Japanese and US crashes is that the Chinese are not reliant on consumption to fuel their growth. The steady investment in infrastructure is what drives economic growth in China – not relying on house price growth to fuel future consumption.

Humans are an insanely optimistic species, how else to explain why we haven’t collectively committed suicide in a spasm of existential doubt.

Don’t believe me? Then try this trivial example.

What did you find? Interestingly, the majority of people are biased towards questions that are framed in the positive rather than the negative. It is a major bias that underpins much of our collective decision making.

As a consequence of this bias, humans are far more likely to believe they will be rich, that they will not die of various horrible diseases, and that they will not suffer a terrible accident.

When it comes to unfounded optimism, entrepreneurs are the worst of a bad lot!

Knowing that the failure rate is over fifty per cent in the first year, and that the majority of people in business just manage to eke out a living, still hoards of entrepreneurs take the plunge and start their own business.

Why? Is it the fancy perks like short work days? I doubt it.

Are they driven by a burning desire for job security? If so, they would be in the public service.

The truth is they need to be optimistic. To face and overcome adversity requires a focus on a positive outcome. Without this focus, you would be unable to achieve success.

The very worst thing an entrepreneur could be is pessimistic. A focus on failure all but ensures it.

I think the human race is better off with optimism as a bias – we are surrounded by such awful events and terrible tragedies ever day that this simple mental trick helps us keep on keeping on. It is a psychic shield to the terror of the cosmos (sorry for that slip into sloppy speaking – bad form for an economist!)

The emotional power of words has a much larger impact on public policy than you might think. (As I’ve written before, psychologists find that people have emotional reactions to words that drive their evaluation of their import. It is easy to underestimate how powerful this characteristic of human decision making is.)

Consider how the words ‘nuclear’ and ‘green’ have influenced recent events. ‘Green’ rationales have been invoked to justify all sorts of rubbish. From the Federal Government’s industry protectionism of the Green Car program (why not simply transfer $100 million to some of those email scammers – there is more chance you’d get something valuable back!)

The Grattan Institute has released a report analysing 300 programs that have been introduced by various Australian governments to ‘respond’ to climate change. Amongst the worst offenders, as reported by the Australian, were:

“The cost of some solar programs was a direct fiscal fraud with estimates of the net cost of emission reductions up to $300 per tonne.

The bipartisan Renewable Energy Target, actually backed by the Grattan report, had its subsidy cost estimated at a high $30-$70 per tonne.”

Contrast this with the focus of the media on the nuclear reactor saga that emerged in Japan after the terrible events earlier in the year.  The fact, outlined by the sometimes good, occasionally repulsive Andrew Bolt, is that the media narrative (driven by our human interests) focused on the unfolding drama of the nuclear power plants while totally ignoring the over 10,000 people whose bodies were being uncovered from the rubble of the catastrophic tsunami.

What is the fixation on nuclear meltdown? It is a high tail risk, something humans are bad at estimating, and something that we can imagine fairly easy.

So it becomes fascinating and ‘newsworthy.’

Australia has a long history of being afraid of foreigners. You can see it in our racist attitudes and hostility to all migrants (until they stop being migrants and become us - then we are excellent).

Growing up in Queensland and particularly in the Gold Coast, there was an intense period of xenophobia directed at Japanese investment. At the time, the fears were that the Japanese were buying up all the land. This got to such monumental levels it launched the One Nation party.  Stupid!

Where would Australia be without Japanese investment? The doldrums. Yet the same concerns are now focusing on Chinese investments in Australian farms. So much so that the Australian Bureau of Statistics will now be collecting data on foreign ownership of agriculture. It has been reported that National’s leader Warren Truss said:

“foreign interests – both government and privately owned – are targeting farms in Australia to shore-up their own food security… In many sectors Australia has already lost effective control over its food supply chain and decisions about our food supply are being made in foreign boardrooms.”

Rubbish! The more other nations invest in Australia the more their long-term prosperity is tied to our continued prosperity. (It’s mutually assured bankruptcy!) After all, if the Chinese government were to direct Australian owned farms to undertake inappropriate action do you really think that the Australian government would stand idly bye?

The true danger of the ‘Yellow Peril’ is that Asian countries will judge Australia as a nation of narrow minded bigots and they would prefer to take their filthy lucre elsewhere.

Would you blame them?

The Economist magazine (the tabloid of economists) ran a series of articles on Australia that heaped praise on our economy and rubbished our current political situation. Rightly pointing out that our strong national growth is a consequence of two decades of strong reform and Australia is now an open and flexible economy.

It did not happen by chance.

The reforms instigated by first Hawke, then Keating and then Howard did more to ensure our nation’s current prosperity than the incredible terms of trade we currently experience. After all, Australia has had positive boosts from terms of trade before and every time we squandered it by experiencing a mini boom followed by a major bust.

The major issue of this point in time is the level of political discourse. The money quote is:

“Its (Australia’s) current political leaders are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture…The prime minister, Labor’s Julia Gillard, admits she is unmoved by foreign policy. The leader of the opposition, Tony Abbott, takes his cue from America’s tea-party movement, by fighting a carbon tax with a “people’s revolt” in which little is heard apart from personal insults.”

We have a real opportunity to establish our nation as a world leader. The decision is between “enjoy our prosperity now” or “creating a society that continues to create prosperity in the future:”

“They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate.”