The Age, The world is about to enter the final phase of the third long economic wave of the 20th century.
The first wave began in 1904 and lasted until 1929, ending with the Depression; the second ran from 1947 to 1974, ending with the OPEC oil shocks of that year. The wave we are now in, the one that began in 1982, has been overlaid by two business cycles, one from 1982 to 1990, the other from 1992 to 2000. We are about to go into the third leg, which should last until 2007 or with some luck, a bit later.
The good news is that this cycle should see synchronised global growth in 2004 with the United States, Europe and Asia all growing together for the first time since 1999. The not so good news is that this third cycle will be less wealthy than the second one, the one which lasted from 1992 until 2000 and which brought with it huge lifts in stockmarket value.
Over the next half-a-dozen years, we are going to see people of my age fall out of the labour market in their droves. This will produce a profound tightening in the labour market. And it will probably lead to strong increases in real wages.
Unless productivity is there to pay for those increases, it will be paid for from profits. And if it is paid from profits, profits will be smashed, investment will fall, and a recession will ensue.
The moment central banks around the world get a whiff of wage inflation, they will lift interest rates and the party will end as wage inflation bites into economic activity.
The only caveat I can see to this analysis is China. Before the rise of China, what happened in the industrial world was fundamentally the result of what happened in North America and western Europe.
What is happening in China today is without precedence in world history. Never before have we seen a billion-and-a-quarter people lifting themselves from poverty at such a pace.
The US will continue to be the world economic driver, but China will be a completely new factor – and there is just a chance that China will actually be a big enough influence to extend this third long economic wave. The more likely outcome, however, is that China will be the epicentre of the fourth long wave, the one after this.
While the 20th century was the century of the Americas, the chances are the 21st century will be the century of Asia and we may see, for the first time, a real eclipse of American economic power.
China's economy will have eclipsed Japan's in the next half-dozen years. It is going to demand a huge volume of resources – and our Australian resource industries will be a clear beneficiary.
The decline in commodities we have seen in the world since the middle 1960s, which cut our national income dramatically by the 1980s, may see itself reversed as China changes the commodity equation around the world.
China will also emerge as the second strategic pole in the world. The only country with the cultural confidence and the military unity to deal confidently with the US is China.
Europe will never have the political unity that China is likely to have, has had – nor does Europe have the cultural confidence. The Chinese know who they are and what they are. And they do not need the approval of the US to know what they should do or can do.
The most important thing for us to know about China is that it will be an economy built around the individual and small and medium enterprises. It will not be like Korea or Japan.
Domestic demand will be the principal driver in China. It will not primarily be an export economy, though it is a big exporting country. What the Chinese are going to do is give people a house, a refrigerator, a television set and CD player, plenty of telephones and lots of toys for the kids. That's the kind of economy they are going to have – a real one, one much more like Australia's than Japan's or Korea's.
China is a phenomenon and it is our backyard. There is a chance China will change the whole commodity equation in Australia – but are we clever enough on the productivity front to capitalise on it?
I inoculated a generation of treasurers with the surplus needle and none of them has yet found the antidote. They always want to run budgets in surplus, regardless of economic conditions or economic needs, whereas they should be providing public infrastructure to lift our productivity performance. And government debt has never been cheaper. A lot of this investment cannot be done in the private sector. Public investment has to keep up.
If we can keep our productivity up, we will keep the inflation rate down and, with it, interest rates. Productivity is not the icing on the cake. It is the cake.
Governments in Australia have got to be interested in productivity, but they are fundamentally not interested. We cannot live only by the economic changes of the 1980s and '90s. We will run out of puff unless the underlying components to productivity are understood and improved.
The Americans are now clocking up 4 per cent productivity growth numbers, phenomenal numbers.
That's the challenge for us: can China provide the lift? Will we slacken back on the oars? Will Australian productivity flag when we are most likely to be able to capitalise on new international trading conditions?
