The currency wars: how the mighty A$ is quietly shaping politics
While the media obsesses about the Labor leadership and the election, the strength of the Australian dollar is a key unacknowledged factor currently shaping politics.
The dollar’s strength, and its stubborn refusal to respond to the factors that have traditionally seen it weaken, have been a persistent handbrake on corporate profits both in the mining and non-mining sectors, and as a result on tax revenue. That’s in turn led to Wayne Swan having to abandon the government’s commitment to surplus, even if it might come closer than many currently predict.
But it has also helped keep inflation low, which along with the government’s tight fiscal policy has given the Reserve Bank room to keep reducing interest rates in an effort to kickstart residential construction, an agenda that, if successful, should make economic management much easier for whoever wins on September 14.
And, more subtly, it’s sent a shock through the trade-exposed sector, particularly in manufacturing, that has forced lazy managers and unions to focus on cost-cutting and productivity. As a result, while every resident galah in the national newspapers has been talking about productivity as though it could be conjured up with a dash of WorkChoices, workers and bosses in the real world have been getting on with the challenge.
“The productivity challenge posed by the high dollar is one to which the government has come a little belatedly … but it is now front and centre.”
Perhaps that’s why manufacturing actually halted its decline in employment last year and put on 14,000 jobs after decades of decline.
The productivity challenge posed by the high dollar is one to which the government has come a little belatedly, at least in rhetorical terms, but it is now front and centre in Labor’s economic policy and the narrative for the remainder of its term. It provides a handy public spur for reform in an economy otherwise dominated by good news, in the same way Keating used the current account deficit and talk of a “banana republic” to focus Australians’ minds on the need for reform in the ’80s.
In dealing with the problem, this much-maligned government has declined to take advantage of the advice offered by various parties. It has rejected the suggestion from both unions and conservative commentators like Warwick McKibbin that direct currency intervention should be undertaken to lower the dollar, wisely understanding that such efforts would be extraordinarily costly and futile.
It has rejected the protectionist arguments of unions and the Greens that it should simply order large companies to use more Australian content. And it has rejected the galahs in the national papers and in business who think just cutting wages — sorry, “workplace flexibility” — can make up for a high dollar. Julia Gillard correctly nailed this furphy on Sunday when she noted that average wages would have to fall to $50,000 pa to offset the recent strength of the dollar.
The government’s new manufacturing policy is instead a mixture of red tape and some shuffling of incentives to encourage greater use of Australian content, without mandating it, and encourage genuine on-the-ground innovation. It’s a package that, unlike the other options urged on the government, is unlikely to cost much or do much harm while manufacturers get on with the challenge of improving productivity themselves.
This isn’t the only government to turn its thoughts to the impact of its currency. It was a major issue of consideration at the weekend’s G20 meeting, with the possibility of “currency wars” on the mind of major economies. The G20 declared in its communique that it “will refrain from competitive devaluation … [and] will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open”.
Page 1 of 2 | Next page