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What does the “China boom” mean for the future

I was watching the effervescent Jeremy Clarkson on Top Gear the other day where he ran an interesting segment about the development of car production in China.

As is their way, presenters Clarkson and May took a comical look at the cars the communist state produced in the not-too-distant past and then proceeded to reel off a number of mind-boggling stats.

“In 1977, there were 1 million cars in China. By 2008, there were 51 million. Today there are 85 million. Today, China sells a shiny new car today every 2.3 seconds – 38,000 per day.”

China is producing more new cars today than the whole of Europe combined. This level of growth is not unique to China’s automobile industry – virtually every economic stat which comes out of China today seems to be a mind-boggling one.

 The gloomers love to focus on the risks but we really are living through a unique phase in Australia’s history. The population is booming, mining investment is booming and our future must surely be a wealthier one over the longer term.

As Matusik pointed out recentlythere are currently $270 billion worth of committed resource projects across Australia, which is up from $70 billion just 5 years ago.”

While developed countries tick along with growth of 2 or 3%, China could arguably grow at a staggering 8% per annum over the next 20 years and Australia is ideally placed to fuel much of that boom.

Industrial Revolution
Back in the 18th century it was the British who experienced the first major industrial revolution, a major economic shift powered by coal and oil.

 While everyone from downtrodden workers, to poets to the factory owners could clearly see the impact of the revolution on the soot-infested towns and cities, what could not have been foreseen was the impact that industrialisation would eventually have on the planet.

As someone who previously worked in the mining industry, I’m aware of the commonly held view of many in Australia that climate change is not man-made. Sceptics say that the climate has always changed and therefore we should ignore it.

However, the evidence seems to suggest overwhelmingly that climate change is real and it is being caused by human endeavours.

 Today I take the view that we should all try to do our bit and this will make the problem easier to solve – we only have one planet so we should try to look after it. I stopped eating meat and fish some years ago and I try to make greener environmental choices where I can. Some 60 billion animals are slaughtered each year for human consumption including around 10 billion in the US – imagine the environmental cost of that!

The great dilemma
While I was traveling (with Cunard) I attended a series of compelling lectures on the climate change debate and two things struck me from the statistics presented – firstly, that climate change is real and secondly that if we all pulled together as a planet it can definitely be overcome.

But the comments from the audience during the Q&A were telling.
Some Asians pointed out that it was the western nations who have benefited from the burning of fossil fuels to date, so why should China and India (and Brazil) cut down on emissions just as their boomtime is coming?

Some aggravated Aussies pointed out that while our emissions are among the worst per capita in the world, there aren’t that many of us, “so the rest of the world can p!ss off!”And herein lies the great dilemma: individually and as countries few of us seems to be prepared to accept a slightly poorer today so that future generations have a cleaner and safer planet tomorrow.

It has been estimated that making the required cutbacks in emissions today to ensure reaching safer levels would cost just 1% of the world’s GDP – whereas if we wait, it will cost 20% of GDP and many trillions of dollars. Of course, the full cost of taking no action could be inestimable.

Market failure
The pollution of our environment is an example of a market failure.Adam Smith argued that the invisible hand of capitalism should in theory dictate that markets eventually fulfil our needs and serve for the greater good. But in this case by being selfish we risk wrecking the planet.

The reason for this is that from the Industrial Revolution through until relatively recently nobody had attached a cost or ownership to the environment.Of course, if you consider the potential cost of melting our polar ice caps, flooding major cities and repeats of the New Orleans Hurricane Katrina the costs could be very high indeed. Capitalism had failed to attach a cost or responsibility to a key external factor: the planet.

The Micawber principle
While it seems amazing to me that so many today say that we should just ignore climate change and to hell with future generations, there is one school of thought which suggests that this may not be quite as dumb as it sounds.Sometimes, known as The Micawber Principle, there is an argument that “something will turn up!”.It had previously been though the world’s oil would be utilised far more quickly than we believe today but new technology arrives which means that we can extract more oil and we can get more efficient use out of the oil reserves that we do have.In fact, the Malthusian trap suggested that the world’s population would stop growing because there wouldn’t be enough food, yet the developed world found a way. Adhering to Micawber’s principle, something turned up.


Perhaps new technologies will come to the aid of climate change.

Summary
Everyone has their own views on climate change and here’s my two-penn’orth.


We should all try to be more environmentally friendly where we can, for if we all pull our weight a little the road ahead must be an easier one. Countries – including Australia and China – should stop resisting global emissions strategies so aggressively.It seems hard to imagine, though, that something which as much momentum as the boom in China’s economy will be halted by environmental considerations.

From an economic perspective we should be a little more thankful.

Most countries would give anything to be in Australia’s position, so we should take a slightly longer view than the next 6-12 months and focus on the tremendous benefits that the production phase of our mining boom will bring.

A growing population and growing wealth. That’s a very handy position to be in!

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About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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