Re: Dollarisation

[Colin Danby <danbyc@xxxxxxx>]

Hello James,

> Colin,
>
> "policymakers have to be careful about any
> > increase in growth that might draw in too many imports, so you build
> in
> > recessionary bias.  Let's hope Australia doesn't end up like
> Argentina."
>
>
> I'm not quite sure of your line of argument here.
> Are you saying that "growth" always - often - sometimes - "draws in
> too many imports"?

No.  That's why the word "that" was there.

> Many countries with high rates of growth have "drawn in imports" but
> their exports have been much greater and they have had very healthy
> trade surpluses over many years. These countries have been in Europe
> and Asia especially.
> Sadly, it's a long time since that situation has existed in Australia.
>
> The emergence of large and persistent trade deficits belongs to the
> period of low growth since the 'seventies, not to the period of high
> growth between 1945 and 1969.
> The problem has been that, as soon as the Australian economy lifts its
> head above the parapet with a modest improvement in the growth rate,
> it gets hits with a surge of imports which is not matched by its
> capacity to export.

So this *is* a problem for Australia now.

> There are several elements in this of course, one of which is the
> wretched state of commodity prices for many years past. Although they
> have gone up from time to time, mostly they've remained pretty
> miserable even at the higher points.
> However, the secular pattern of the trade imbalance goes deeper and
> has been similar to that of the United States: since 1969, policies
> intended to "fight inflation" have converted domestic inflation into
> trade and payments imbalances and much of the Australian economy has
> been shifted overseas. Low levels of investment, including poor
> infrastructure investment, have kept improvements in productivity and
> production at such modest levels that "growth" which is often based
> largely on consumer demand, does not and cannot provide a sufficient
> production to correct the trade imbalance.

Sounds like 1950's Latin America -- a very CEPALino analysis

> So we get our heads above the parapet briefly but we then get shot
> down before we're halfway across no-man's-land.
> You will be aware of the extent to which the US trade deficit has
> increased even during recent years of growth - and alleged high levels
> of productivity gain. Even expansion of US exports has been
> insufficient to compensate for the massive transfer of the United
> States economy overseas. As Henry puts it, "Most of the things people
> want to buy are no longer made in America..."
> We can say with equal validity, "Most of the things Australians want
> to buy are no longer made in Australia..."

But the "most of" is not a problem *by itself*, if we all trade
vigorously.  I'm not quite sure what's meant by "massive transfer of the
United States economy overseas."

> On the other hand, of course, countries which have maintained high and
> persistent rates of real investment, improving productivity and
> expanding production have been able to maintain low inflation and
> trade surpluses over long periods.

USA seems to qualify on all but the last.

> Consider Germany (before the impact of reunification), Switzerland,
> the Netherlands, as well as of course, the Asian Tigers especially in
> their glory days.

These are the examples that people use for X-led growth.  What's the
lesson we should take from them?

> One of the things on which we do not seem to have focussed with the
> requisite robustness is that, once you get into the sort of vicious
> circle in which the United States and Australia find themselves,

I wonder how similar the situations are.  I'd tend to trace US trade
deficits of recent years much more to capital inflows.  This is not, I
hope, a knee-jerk nationalist reaction -- the USA could be heading for a
particularly nasty recesion because of the debt structure we've built up
assisted by those flows.

> it is very difficult to break out. Many years and much effort are
> required; but the fundamental requirements are a recognition of the
> nature of the problem and the adoption of imaginative policies to lift
> the economy out of its persistent malaise.
> On the other hand, if we choose to be optimistic, we can look at those
> countries that have been in a virtuous circle. Once we manage to get
> into that charmed circle, it will be much easier to stay there. But,
> to join the virtuous - and the blessed -  we'll have to look very
> critically at some of those policies - and dogmas - that we've
> cherished during the long years of decline.

I'm still not clear what is the lesson you're taking from those in the
virtuous circle. And someone has to be on the other end of those nice
trade surpluses.

Best, Colin