Transcript
DR DAVID GRUEN
Questions? Paul?
PAUL BLOXHAM
Thank you. Paul Bloxham, HSBC. My question is for Dr Kent. The chart that you showed with the relative prices of non-tradables to tradables, the CPI chart, I think that's quite stunning as well and you noted that a key reason for that change in trend – the faster rise – is that tradables has been falling and that's been partly because the exchange rate has appreciated, but also is there some degree in which the non-tradables inflation has been rising ahead of productivity? Should we be worried that that's a reflection of an increasing cost base and weak productivity growth and potentially when the tradables inflation does start to rise again – partly because the exchange rate may continue to appreciate from here – that that will mean that we get some of the problems that we might face of having weaker productivity growth?
DR CHRIS KENT
Thanks, Paul. Look, I think you're right in characterising what's happened to date, broadly speaking. In terms of what might come in the future I think we've said in a number of publications that one imagines that effectively the exchange rate appreciation having weighed down on tradable prices is likely to wane from here on in and so then we turn to focus on non-traded inflation, if you like. And I think a number of times we've been making the point that our forecast of inflation staying within target over the next two years or so – partly predicated on cost pressures and that side of things remaining contained – and productivity is an important part of that. We've seen in the ABS numbers that that's picked up of late. This is the time where there are significant pressures, particularly in a number of industries where you think productivity might be growing a bit more rapidly and I think the big question and issue is will that increase be one that's really sustained over a longer period of time? So something that bears close watching, but if you think productivity's going to be increasing, one imagines it's going to be increasing at a period of significant structural change such as we're seeing now.
DR DAVID GRUEN
Do the other two speakers want to add anything to that?
I'm conscious that we have one Australian speaker and two speakers from international, and so if we get a series of questions only for the Australian speaker, then I will ask for questions for the other speakers. You have been warned. Yes?
SHANE RUDD
Sorry, David, this will go to Christopher.
DR DAVID GRUEN
I thought so.
SHANE RUDD
Shane Rudd from the West Australian. There was a presentation at yesterday's BREE Conference which showed a very close correlation between the spot price of iron ore and the exchange rate – I think the estimate was there was a 0.74 coefficient connection. In your full paper you touch on a couple of the issues that you think may explain why the exchange rate has failed to come down in line with the terms of trade, but you've only touched on them. I'm just wondering if you might go into some depth as to what the RBA is thinking as to why the exchange rate is remaining so stubbornly high given, I think, it's a 9/10% fall in the terms of trade since September?
DR CHRIS KENT
Sure. Trying to model the past behaviour of the exchange rate is a difficult business. Trying to forecast it is even more difficult and a bit of a mug's game – one that I don't have to get into thankfully. In terms of what's happened of late, it's true the terms of trade have come off quite a bit and commodity prices have fallen more recently quite sharply, at least a number of them – iron ore and coking coal, in particular – and, yes, we haven't seen the exchange rate fall significantly. I think what we said about it, including in the minutes that were released just yesterday, is that if you sit down and try run careful econometric analysis and grind out a number of different models to explain what's driven the exchange rate over a long period of time, the first thing is that the terms of trade is the one really enduring and critical element determining the fundamental level of the exchange rate and the second element is that there is a wide band of uncertainty around these estimates. I think it's true to say that it appears as if the exchange rate's somewhat overvalued, but it's hard to be too definitive and too precise about that. So I think there's been a lot of discussion about what other factors are. I think it's very difficult to pin those down with any precision. You can... anyone who runs one model and says this significant; I can find a handful of other models that say it's not, so I'd rather not speculate too much on exactly what's driving it, other than to say it hasn't... I think the most obvious thing is the exchange rate hasn't fallen in line with the fall in commodity prices we've seen at play.
SHANE RUDD
So also worth adding that there've been plenty of episodes since the Australian dollar was floated in late 1983 when there have been periods in which the exchange rate has not followed the terms of trade.
DR CHRIS KENT
Sure.
SHANE RUDD
And we know of several of those...
DR CHRIS KENT
And that's what makes it hard to pin this relationship down.
SHANE RUDD
Indeed.
DR DAVID GRUEN
Bob?
PROFESSOR BOB GREGORY
David, I'm responding to your comment about the international speakers...
DR DAVID GRUEN
Thank you.
PROFESSOR BOB GREGORY
...and I want to say something to Gordon. Gordon, I want to explain to everybody how exciting and interesting Gordon's paper is and how important previous papers that he's written or been associated with is in the United States. They show quite dramatically how the United States adjusted to increased imports. It's very much like the Australian story of 1975 to 1980 almost exactly, but I've been to a conference where that paper was delivered and the excitement about this paper being anti-Chinese and antitrade was enormous. That is a large number of people were emphasising over and over again that this looks like an antitrade paper, this looks like and anti to China paper. Anne Krueger mentioned a little bit of that in her comments, so my question is could you just tell us something about the political reaction, A, to this paper and is it being interpreted in the wide horizon in the way I'm suggesting and, B, who's pushing the other side of the story for increased trade with China and are they likely to be as effective as some of the negative aspects of your paper in terms of trade adjustment?
PROFESSOR GORDON HANSON
Thank you very much for the PR. I'd like to get a clip of that opening piece and put it on my website.
DR DAVID GRUEN
We'll do that for you.
PROFESSOR GORDON HANSON
And at the very least to send it to my mother-in-law who... So I'm a trade economist and been raised in the tradition that increased international trade is associated with gains to consumers and gains in aggregate income and nothing in our research project has belied those conclusions. What they've highlighted are the distributional consequences. I think what we've seen in the United States are the political consequences of not addressing those distributional consequences head-on because what we've seen in the US among a decent chunk of the
electorate is a loss of faith in globalisation as delivering gains for average individuals – and I think that's in part a policy failure. That is that we have not anticipated what should have been obvious to predict in the 1980s and 1990s when you saw the change in policies in Latin America, in South East Asia, in East Asia and Central and Eastern Europe that US was going to face a tremendous increase in manufacturing and we needed to be in position to help big chunks of our industrial structure adjust.
We didn't do anything and now we're facing the consequences of a hollowing out of the economic middle. If you think about it, a lot has been written about the consequences of technological change and to some extent globalisation for the wage structure in high income countries and that was that the bottom was doing poorly. That was the story of the 1980s/beginning of the 1990s. It's the middle that's been doing poorly and we haven't really come to terms how we address this other than to say we've got to do a better job with our educational system. We failed there too. Our educational system is not improving; it's declining. Just finally, the reaction to it – there's a pro-American manufacturing group that named me Person of the Month last year for telling the true story about trade with China and finally somebody in academia standing up for the American worker. That made me very nervous.
DR DAVID GRUEN
Anne, did you want to add anything to that, or Chris? No? Ross?
PROFESSOR ROSS GARNAUT
A question for our other international visitor – Anne, in the written version of the paper you mentioned the proliferation of preferential trading arrangements and described it as countries trying to...
PROFESSOR ANNE KRUEGER
Can you speak up a bit please? I can't hear you.
PROFESSOR ROSS GARNAUT
In the written version of your paper you talked about the proliferation of preferential arrangements and described it as countries trying to get open access to all of the trading countries that are most important to them. The question – does this help or get in the way of a genuine free trading multilateral system?
PROFESSOR ANNE KRUEGER
Thank you, Ross, it's a good question and one on which, of course, there is no unanimity of opinion, even among international commerce, but there's no doubt that if you had a level playing field with no tariffs for any country, you probably still would get more rapid intraregional trade than you'd get extraregional trade. That said however, the Asian countries are trying to get their network of free trade agreements so that they are not hurt by the discriminatory policies of other FTAs. I was in Korea I think last month or two ago and they were calculating that if they had everything that they got, or they got everything they want right now, they'd be up to 90% of their trading partners they have FTAs with, saying that's just about the same as free trade, isn't it? Well, yes, it is and, no, it isn't and the, no, it isn't is in part because of, A, countries get left out, but, B, there are issues where you need a multilateral system and bilateral don't do it and at least in the United States – and I can speak for the US better than other countries – what has happened at least in the past ten years is that subsequent people who have been worrying about trade policy have focused on getting a new FTA or FTAs rather than focusing on the more open multilateral system and at the same time big companies – Fortune 500 – that used before to be pushing for completion of a trade round have gotten enough of what they've wanted with preferential arrangements with Mexico or something like that.
The pressures of the international are not as great as they were, if they're there at all. Some of the ones that before were really outspoken in favour of free trade have just become silent and part of it is because they've got plants in Mexico and because of the NAFTA that cuts out exports from Japan coming in etc. So in my judgement it is not a positive, but you could make the argument the other way. Some people say that once you get NAFTA everybody in the US is not as worried about trade as they were before because they see that it didn't do so much of the kind of thing that Greg is talking about with regard to American workers. I haven't seen that effect, but you can make that case. So I don't think it's open and shut, but I wish there were much more emphasis on open multilateral and much less on the bilateral trading arrangements than there now is.
DR JIM MINIFIE
Jim Minifie from the Grattan Institute, just picking up on the points around the labour force experience of workers in lagging sectors. Bob, if I can just note some of your work looking at the challenges for the lower skilled workers who often find themselves flipping over into welfare because their market wage rate is just not sufficient to make it worth going to work? In your observations, Gordon, you noted that labour force policies have been pretty inefficient in the US. There are actually incentives for people to leave the work when they find that they're in a declining sector. What kinds of more efficient policies do you think ought to be considered specifically for those lower skilled, less attached workers in declining sectors?
PROFESSOR GORDON HANSON
It's a great question. Often the key to successful labour market adjustment requires geographic mobility and you want any policy that's in place to enable workers to move to where the jobs are. What we've seen in the US, what you've seen in various parts of Europe in response to increased import competition is losing jobs in traditional manufacturing sectors and with jobs appearing in other sectors in other parts of the country. So I think the first order of the day is to look at the set of social policies you have in place in a given country and evaluate their impact on geographic mobility. One real source of concern, if you think of the US as being the paragon of labour market dynamism, at least among high income countries, we see a remarkable lack of mobility among workers who've taken hits and there are three things going on. One, a set of social policies that to some extent are tied to where you are, so to keep those benefits you're going to do better by not moving. The second is with increased female labour force participation you have joint location decisions that complicate that mobility process and, third, when regions get hit by trade shocks it also hits the housing market and that undermines worker mobility because of high rates of home ownership in the United States. If you're underwater on your mortgage, as we say in the US, it's going to be hard to move. So the policies that would enhance adjustment are not ones that are so much about providing assistance to workers as increasing incentives for them to relocate in response to market signals.
PROFESSOR FARIBORZ MOSHIRIAN
Fariborz Moshirian from New South Wales University. I was just going to ask a question from Anne, but just as a maybe further question to Gordon from his comments just now. I think one of the arguments about high unemployment in the US has been that we've lost so-called middle skilled workers prior to GFC and during the GFC and we are not able to generate enough jobs in other sectors, if you like, as fast as we would like to see in the US. I wonder what's your comment, but let me just come back to global issues. In the earlier session we didn't have time to talk about foreign exchange regimes in Asia, particularly in China. We talk about number of aspects of structural changes in China, consumption, labour force wages, but I would like to know a little bit more about foreign exchange regime in China and its rule also on free trade and some of the challenges that you are facing within US and China.
PROFESSOR ANNE KRUEGER
In terms of the exchange rate, we all know from our undergraduate economics even that the current account balance is the difference between domestic expenditures and domestic income which is the saving in investment if you take public and private together. Having said that, there's no one exchange rate that will do for any country because you can always choose to have either, for example, domestic deflation or you can choose instead to have an exchange rate adjustment. If you choose an exchange rate adjustment you've really got any way to do something about the balance between domestic income and expenditures and if you choose deflation you've got to do something that way too. So it's not really that you must change the exchange rate, it's that you've got to get a combination of policies that brings about the adjustment.
Now, based on what we know and Chinese consumption seeming to be a historic low as a percentage of GDP relative to what we know in peacetime almost anywhere, I would have thought that the exchange rate change isn't going to do as much as it might as long as the savings in China seem to be concentrated in the state-owned enterprises in places like that that are not that sensitive to the exchange rate issue. More meaningful adjustments are coming about, I think, because of things like getting at least some social insurance even to the countryside, some kind of social safety net on health and maybe doing some other things to get those state enterprises to behave in ways where they at least have savings for others. But on the other hand I think relative to the US dollar the Chinese have appreciated in real terms when you take inflation plus the change in the nominal value – something like 12/14% over the past three years – so that there has been quite a bit of exchange rate change already. And one of the interesting questions right now is the extent to which the reduced current account surplus of the Chinese is a result of the various components there and to what extent it's the cyclical thing worldwide, including of course the fact that the European economies are down.
PROFESSOR GORDON HANSON
So on is this recession different, there's been some very nice work done by Hilary Hoynes and Ed Lazear in separate papers looking at for which type of workers has unemployment increased more, how has it fluctuated over the course of the tepid recovery we've had and what both pieces of work find is this time isn't different. It's just a worse recession. Now, the same may not apply to Europe because what we've had in the US is a financial crisis; what we've had in Europe is a financial crisis plus a sovereign debt crisis and so there I don't know how much the US experience generalises.
BEN FORD
Hi, Ben Ford, Export Finance and Insurance Corporation. My question is to Anne. It's really to pick up on some of those global governance issues that you raised towards the end of your paper. I think, like many people in the room, I would love it if countries like China became committed multilaterals. I think that's probably the ideal endpoint here, but I wonder if at least for the time being we just need to get used to dealing with different approaches to international engagements, so we just have to deal with the fact that China has a different way of looking at things. It's not so glib as to go along the path of saying that this is replacing Washington consensus with Beijing consensus, but it's just an acknowledgment of the real politicking.
PROFESSOR ANNE KRUEGER
I guess I still think that evidence counts and that among the social scientists in China and the US things like the percentage saving and consumption GDP and stuff are, despite statistical errors, perhaps more or less facts that are in evidence and the discussion and exchange of views can help with this and I think leaving anyone, and certainly any important player, out of international discussions is not going to give us an effective global system. And yet, quite clearly, you could not have resolved or prevented the global recession in 2008 had you not... well, you could not have unless you'd gotten the Chinese and the Americans and the oil exporters and a couple of others to say, look, we're both guilty and here's what we're going to do about it, instead of everybody agreed there was a problem and the other side should take care of it – which was not a satisfactory outcome. And I think there has to be more discussion, more [unclear] pieces by Asians as well and more meeting of minds. I don't think the idea that we disagree, therefore we can't have a global system, is a very happy outcome.
DR DAVID GRUEN
James, did you want to ask...?
JAMES BOND
James Bond, the Australian Services Roundtable. I wanted to ask a similar to Ross Garnaut's question, but slightly different I guess. Australia's been pushing for a services plurilateral through the Doha round. If we're not going to see any... Well, what is your view? Are we going to have any progress in Doha? If we're not going to have any progress, is it worth dividing Doha into the various sectors so we can get some progress there? And, in particular for Australia, is it worth us pushing this rather than the whole multilateral deal?
PROFESSOR ANNE KRUEGER
It's a good question and again one on which not all economists agree. In my own view that's a misguided way to go and the reason is straightforward. The genius, such as it was or is, of the WTO is that you get agreements across sectors and across industries and every time you take out a group because they get their own piece of it you're weakening the support for the multilateral system. I think the IT agreement is a perfect case in point. That once you had the IT agreement in place, which was outside the Doha round, just a separate agreement where we are not going to have any tariffs for the 90% or 92% who signed it, we're not going to have any protection on that therefore we take the IT out of it and in the future there will be no IT tariff sounds wonderful, right? Every IT company, including some very big ones, used to be supporters of an open multilateral trading system in the United States. They have been absolutely silent on Doha. They have not supported it at all.
Now the more you do that sector by sector the more you're leaving the political pressures for whatever's left to the protectionist. Whereas if, in fact, you had gains to be had for the IT sector at the same time as, yes, there would have to be some losses that we have to do something about for low income workers – textile workers or whatever – or we've got to hope for assistance and for benefits even for those textile workers if we've got the appropriate compensation mechanisms in so far as IT as a sector is out of there. They're going about their business and you have protection which doesn't help over the longer term and I think we've still got difficulties. So I'm very sceptical on sector-specific agreements. I want to see all those pressures and I want to see societal agreement where we indeed do get the support for those who are displaced, but we also get the open trade.
DR DAVID GRUEN
Hugh?
HUGH
Thank you. I'd just like to, first of all, thank Gordon for raising the issue of labour market churn and job market insecurity in the context of structural change because I think in Australia that debate, I think, is very much in its infancy, but I think it's something that hasn't been truly acknowledged. And moving on from there I think Dr Kent's chart where he had the four panels showing tremendous Australian outperformance on a number of growth and income indicators, yet we found ourselves right at the bottom of the sample in terms of the inflation rate. Now, there's something missing there, one would suspect, given that we also had the best unemployment rate. Why is it that despite better growth and an apparently stronger la
bour market in comparing ourselves to countries that – most of which have explicit or implicit inflation targets set below ours – that we're over-performing, if you like, on low inflation, but we're doing very well on the other indicators? And I think the heightened levels of job insecurity which come with the labour market churn, which is very new to Australians, explains some of that difference, but not all.
DR CHRIS KENT
I think my characterisation would be broadly just to say inflation has been fairly close to target in Australia. I don't think it's been especially low. We've had periods in fact prior to the GFC where it was rising perhaps at an uncomfortable rate. So I guess if you look through the paper we did see a pickup in the average rate of inflation since the terms of trade boom, it's just that it's not been a big pickup compared to what you might have experienced in earlier booms and part of that's been the exchange rate that's helped hold tradable prices down. Non-traded inflation has been stronger and wages did actually pick up in terms of the growth rates. So I'm not sure I agree with every premise. It's certainly true if you look at surveys of Australian consumers that one of the things they point to that they're worried about is an increase in unemployment and that's been a feature of recent times. That may be having an influence, but more generally I think the move to inflation targeting not just here, but globally, has been one that's kept inflation expectations and wage expectations reasonably well-contained to levels that are consistent with those targets. But I think, as my paper showed quite importantly, there's been big changes and big variations across sectors, so there's been sizeable increases, not surprisingly, and it's part of the adjustment mechanism – wages moving higher in mining and mining-related parts of the economy – and if you're in WA you'll notice that across not just mining, but a whole range of industries because of the pressures there in the labour market and the demand for labour is quite high. So I guess that's probably the best response I could give.
RORY ROBERTSON
Rory Robertson, Westpac Group. This is also on Dr Kent's paper where the story seems to have a hero, which is the exchange rate. So you have this giant boom in China, giant boom with the terms of trade, giant boom in the mining area. The terms of trade have gone to extraordinary levels, the Australian dollar's gone to extraordinary levels and that's all worked really well because it's basically suppressed inflation pressures, it's basically made room for the mining boom by suppressing the growth in the non-mining sectors, particularly the other non-mining tradable sectors. And all this seems to be a mirror-image of what happened in the early 2000s where you had a global recession, the terms of trade went to a very low levels, the exchange rate went to very low levels. Dr David Gruen, I think, wrote a paper a decade ago saying that the terms of trade had probably bottomed and on that basis you'd expect the exchange rate had bottomed and that's how it worked out and we've had this big move up from sub 50 against the Aussie dollar... against the US dollar, to overpowered against the US dollar and we're right up there – I think 79s the peak the [unclear] and about 77 right now. So two things – one is on the basis of the decline in the terms of trade and the very sharp falls in the past month or two in coal and iron ore prices, is it fair for us all to think that the Aussie dollar has peaked and to the extent that it doesn't come down is it fair to say that the Aussie dollar's moving from being a hero in this story to being a villain, where it's basically been too high given the global outlook, given the terms of trade?
PROFESSOR GORDON HANSON
Rory specialises in questions he doesn't expect an answer to.
DR CHRIS KENT
I'll give it a shot. I think the first one's easy – what's my expectation about the dollar? I don't make forecasts about the dollar; I don't have to. I think from a practical, but also an academic perspective, it's very hard, if not impossible to forecast it. So has it peaked? Well, who knows where it's going? I think the best forecast is where it is right at the moment and more than that is hard to say. In terms of has it turned to a villain, look, it certainly hasn't fallen since the terms of trade have declined since late last September to any substantial degree, if at all. As David said, we... and even you remarked, Rory... we had a period where we were seen as a has-been economy with nothing to offer the world other than these fairly boring commodities and, while ICT was the flavour of the few years of that period until that bubble burst and the exchange rate stayed low for quite a long time, the economy still did relatively well through that period and I don't think it's a question of the exchange rate being a villain or not. I expect if the terms of trade were to move in unexpected ways the exchange rate would adjust accordingly. Ultimately it's just a question of what the timing and magnitude of that might be, but I think it's hard to predict.
CHRIS LOCK
Hello, Chris Lock, Department of Treasury and Finance in Tasmania. Gordon, I have a question for you. You suggested that improved geographic mobility is a way of perhaps helping some of the structural adjustment and you pointed out some reasons why in practice that's not very straightforward. So I'd like to ask you and perhaps Chris to comment on what role there might be for improving occupation mobility for the low income/low wage groups who lose out on the structural change.
PROFESSOR GORDON HANSON
I think the issue of occupation mobility has been key and will continue to be key and that's because if you look at how individuals have fared in the US economy and also in Europe – I can't speak for Australia – one very important indicator of sluggish wage growth at the occupational level is the extent to which the job's being done in an occupation involving routine tasks. So beginning around 1990 we began to see a very significant impact of routinisation on occupational prospects and that has a technological change angle and with IT replacing labour that also has a globalisation angle. So proactively thinking about vulnerable groups, this routinisation measure which my company-author, David Autor, has helped pioneer is a very good indicator for the types of jobs that are better likely to be most vulnerable.
DR MASAHIKO TAKEDA
Masahiko Takeda, IMF. I would like to hear the speakers views on how autonomous Asia's growth is, which I think has some implication for Australia's future as well. Until seven/eight years ago Asia's growth was back then still remarkable, but people thought that this is because they're producing all sorts of exportable goods and selling them to advanced economies, but then there was a short period of time when the word decoupling became fashionable. Followed by that the GFC took place and there's a sharp contraction among Asian economies which were particularly exposed to a trade, but what happened after that is that these Asian countries rather quickly picked up growth and then right now, in spite of a rather stagnant European situation or actually negative growth in Europe, still Asia seems to be doing very well. So from this one could argue that Asia's growth momentum pattern has changed and has become autonomous, but it may be a little bit too soon to make a call. So I would like to know how you see Asia's autonomy in terms of growth momentum. Thank you.
PROFESSOR ANNE KRUEGER
There's obviously again debate about it. It's a good question. I guess I would a little bit worry about saying right now Asia's doing so well. The Chinese growth rate, as we heard earlier this morning, is down and there are some analysts outside China at least who are q
uestioning whether China genuinely will reach the 8% and what the pressures are for further downward rate of growth over the next few quarters unless of course the Chinese can produce more stimulus or something. So on China there are questions. India's growth has certainly fallen and again there are big issues there. Not only has India's growth fallen, but the inflation rate is up, so that the Indians have a real policy dilemma that is quite major, and South Korea's now down to 3% when they were forecasting 5% this year. So if you look at the larger Asian economies in terms of trade I would a little bit question whether they're doing so well and certainly in the case of South Korea – and I believe in the case of China, although there are people here who know more than I do – a significant part of that is the drop in Europe and the drop in exports to Europe. So the decoupling may be that the tie is a little looser than it was, but there's certainly one there, and I think Asia was more decoupled on the financial side than people realised and less decoupled on the real side – and it may still be that way – but, as I said, there's a lot of uncertainty and I think a lot of analysis to be done before we have more confidence in that.
DR DAVID GRUEN
I think we have time for one more question. John?
DR JOHN KUNKEL
John Kunkel from the Minerals Council. The Treasurer made some interesting introductory remarks this morning, I think, for shadowing the Asian Century White Paper where, if I'm accurate, he was saying to the effect that we talk a lot about Australia's comparative advantage in mineral resources and other things, but really what the White Paper will say is we have a comparative advantage in our people. Can I ask Professor Krueger to comment on that from an international economist perspective?
PROFESSOR ANNE KRUEGER
Quite clearly as economic growth progresses more and more importance attaches to human capital because people are no longer doing as much manual labour, which is a good thing, and we pretty much substituted machinery for that. Clearly human capital is important for innovation, it's important for all kinds of things within a more efficient organisation. Also certainly that's a crucial issue I think for every advanced country. As to where Australia is among the advanced countries on that, I have not looked at the statistics, and so I can't comment further.
PROFESSOR GORDON HANSON
Thank you, Anne, for a most diplomatic answer.
DR DAVID GRUEN
I think I'd just like to ask everyone to join me in thanking the speakers for a very good session.
PROFESSOR ANNE KRUEGER
Thank you.