01/07/2010 - 00:00

Competing interests a political challenge

01/07/2010 - 00:00

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Australia’s new PM, like all Western leaders, faces a rocky road ahead.

BAND-AID fixes rarely work for longer than a few days. We all know that from jobs done around the home, and it’s something Julia Gillard is about to discover as she meets a force more powerful than her called the global economy.

Ms Gillard’s big issue, which is a problem troubling all Western world leaders, is how to fit the short-term democratic election cycle into a global economy that is becoming more undemocratic.

Last week, as Ms Gillard staged her ‘palace coup’ to replace Kevin Rudd as Australia’s prime minister, and Australia celebrated the appointment of its first female PM, there were five other events of greater significance that got lost in the domestic background noise.

• The G20 meeting in Canada of the world’s biggest economies.

• A continued slide in asset values across the world as artificial economic stimulus started to run dry.

• The truce between the mining industry and the Australian government over the proposed super-tax on mining profits.

• Confirmation of the ascent of Emirates, an airline owned by an Arab sheikh, to the title of world’s biggest long-haul carrier.

• A decision by Kerry Stokes to invest $US250 million in a Chinese bank.

Canada is a useful place to start analysing what confronts Ms Gillard, and Australia. Over there, they have a mining industry that looks much like Australia’s. In fact, we compete in many markets with Canadian coal, iron ore, nickel and copper.

The big difference between Australia and Canada is that we have a government with a tax plan which could cripple our mining industry, and if there is to truly be a variation in that plan then the man charged with negotiating a change, Treasurer Wayne Swan, will need to undergo a conversion as dramatic as once occurred on the road to Damascus – though it is unlikely that the road to Toronto can have the same effect.

It might be Bystander’s jaundiced view of the world but it seemed very odd of Ms Gillard to retain Mr Swan as the key man to negotiate a lasting solution with the miners when he was a person who seemingly delighted in bashing the industry just a few days ago.

Time will tell whether the prime minister, who grew up in the failed rust-belt manufacturing state of South Australia, represents an electorate in the steadily failing manufacturing state of Victoria, and has her fingerprints on the super-tax plan, actually understands the really big picture of how China and India are killing manufacturing throughout the Western world.

On the way down

FALLING share market prices and asset values are the first of the other big issues that threaten Ms Gillard and Australia because they signal that the Western world is entering the next phase of the ‘great recession’.

What seems to be happening is that the once economically dominant countries, such as the US, France, Germany and Britain, have failed to find a way to compete with China and its ultra low-cost workforce, and totalitarian state control of all three key economic forces – land, labour and capital.

Australia, which is centred on the manufacturing states of the south-east, is in exactly the same boat as the bankrupt parts of Europe, which require ever-greater dollops of taxpayer support to stay afloat.

Where does this money come from? Mining, of course, and that’s where the utter stupidity of the super-tax becomes frighteningly clear because its main political aim is to maintain the government in power.

Zero sum game

THE truce, item three on this week’s five-event list, will turn out to be nothing more than a phoney peace because the government and the miners are so far apart that only capitulation by one side will resolve the issue.

Politically, Ms Gillard and Mr Swan are likely to emerge as winners because they are marketing themselves as the ‘peace team’.

Economically, Australia will ultimately lose because the miners can only play along with the political games for a short time before they have to re-allocate their capital to places that produce the most profit.

That means sending overseas capital that might have been spent here if the tax environment had been more welcoming. Unlike Australia there are plenty of countries with a welcome mat for mining, including low tax rates, and even total tax holidays.

Mines, as the government already knows, are not movable. Capital is. What that means is that the next generation of Australian mines (and jobs) will be elsewhere. Who supports manufacturing as mining slows is the ultimate question?

Capital flows

THE final two items on the ‘five events’ list are more personal as they represent investment decisions made by rich people who have the freedom to do what they like with the money they control.

Both Sheikh Ahmed Al-Maktoum and Kerry Stokes also know that business success is quite different to political success, as neither needs the votes of the electorate to stay in power. There is no such thing as democracy in the business world.

Sheikh Maktoum has a supply of cheap Middle East fuel, and cheap landing rights, to build Emirates into a business that is threatening to drive European and American airlines out of the sky. His $US11.5 billion order last week for 32 additional Airbus A380 superjumbo aircraft has sent a shiver through the world’s other airlines, which simply cannot compete.

Mr Stokes’ decision to send $US250 million to China as an investment in the float of a bank is another example of a man with money voting with his chequebook and sending capital to a country that is growing, rather than keep it in one which is stumbling.

The interesting part with Mr Stokes is that he has a finger in both the Australian and Chinese economies, and their respective mining industries, via the franchise he has from the US industrial equipment maker, Caterpillar.

He knows that mining in Australia is facing a taxing time, although just how taxing remains to be seen. So rather than wait for an outcome he is voting with his capital, and China is the winner.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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