The Role of the Economist in Securing the Nation's Future

Conventional neoclassical trade theory predicts that China's emergence from autarky would lift the relative price of labour‐intensive products in that country and lower their relative price in most trade‐exposed countries in the developed world, inducing a shift in those countries towards less capital‐intensive modes of production, lowering rates of growth in both labour productivity and real wages. These impacts appear to have had political resonance in the United States. In that country, sharp adjustments in the prices of traded goods and services have delivered a lower terms‐of‐trade, a persistent current account deficit and a trade deficit with China. In Australia, the same adjustments in international prices have delivered a much higher terms‐of‐trade, a narrowing in the current account deficit, even a trade surplus in some years, and a trade surplus with China. Impacts on a country's terms‐of‐trade, current account balance and bilateral trade balances are irrelevant to an understanding of the implications for productivity and real wages of China's embrace of globalisation. But political leaders in both the United States and Australia evidently do not get it. Captured by a mercantilist mindset, Australia's leaders celebrate higher export prices, choosing to believe a dangerous myth, that the “mining boom” has been critical to Australian prosperity in the 21st century, even though workers have done poorly. Consistent with neoclassical trade theory, the Australian mining boom provides a plausible explanation for a couple of decades of very weak productivity growth and a fall in real wages. Standard international macroeconomic analysis tells the same story. In response to China's industrial expansion, Australian policy makers should have embarked on an ambitious programme of productivity‐enhancing economic reforms, as they did in implementing the tariff reforms of the late 20th century. Instead, this century's celebration of the mining boom myth has delivered a torpor of policy complacency that has sold Australian workers down the drain. Australia's economists have been far too tolerant of this complacency. We should have been using our insights to assist in the construction of narratives for the nation's future that are based on reason, not mythology.