Chapter 8a : Our Economy Lacks Complexity

Our economy lacks complexity. Our politians know this and have for years. They know it's a problem because when your economy is dominated by just a few key products we export, then our economy rises and falls with the prices of those products. Our currency rises and falls based on the strength of the trade in those products. International investors wanting to invest in Australia must factor in the added risk of a fluctuating currency, so they will need a higher rate of return to compensate for investing in Australia. Clever people may wish to start their business in Australia, but why do so here when it is so much easier to attract startup capital in a country like the USA? So clever Australians leave and build their new businesses in the USA. They make the American economy stronger and more complex, whilst our economy continues to rank poorly for complexity. 

It's been like this for years, and our politicians seem to have no idea how to fix it. Let me propose a few ideas. The obvious idea is to just give more grants to people who apply for venture capital. That means Government money flowing to new startups. It's risky, and you'd probably need to throw a lot more money at new ventures and at universities for research grants, because new industries such as solar energy come from such places and people with new ideas need financial backing.

If you look at where Australians invest their money, you can see they have a love affair with real estate investing. This is because of the favourable capital gains tax treatment they receive. I'd like to propose that generous capital gains tax advantages be given to investors for new properties built in new venture capital zones, surrounded by supporting structures and suppliers. As in China, a complete industrial ecosystem evolves around these new business ventures. Anything an inventor wants, he can order from a supplier within 10km and delivered to the doorstep next day. The supplier receives the specifications, prints a working example on a 3D printer and delivers it for assessment that day or the next. 

When an investor buys a new residential property from a developer in one of these zones, he or she pays the price of the property. He or she also buys a coupon attached to the property which is equivalent to 5 years of a household's average income, indexed for inflation. The coupon becomes part of the purchase price. People who move into this property will be paid a pension from the investment property through the investors bank for 5 years. To get into the property, you must be starting up a business, and to stay in the property, you need to show progress towards building that business. At the end of 5 years, if the business proves successful, the investor has signed an option to purchase a stake in the business contained within the original lease agreement.  If the investor does this, then they will receive 5 more years of capital gains tax benefits that roll over from the property into the new business venture. Otherwise, they just sell the property as a normal piece of real estate, and reinvest elsewhere if they wish. 

I'd set up new venture capital zones where this can happen. Those zones wouldn't be in existing large cities where space is at a premium. I'd create new towns or cities from scratch. Or I'd allow struggling townships that wish to grow to apply for this favourable tax treatment. As these zones grow, the capital value of the properties will grow. As business is attracted to the area, the townships will grow. You won't have ghost cities that stay empty for years as in China. You'll have people who see this as an opportunity to start a business without having to worry about living expenses, moving in quickly, and trying their best because the clock is ticking. 

By building our venture capital industry this way, we allow real estate investment to be a foundation. Banks are familiar with the real estate industry as an investment and may only have to offer an extra 30 to 40 percent more for the property in the loan for the coupon. This provides "bricks and mortar" security for what would normally be a risky business venture loan.

Investors still need to minimize their incomes so they will invest in these hybrid loans. If the business venture proves successful, the return could be so much more than just investing in straight real estate. This vehicle helps build the country in so many ways. It doesn't just provide more real estate. 

The Government can provide grants to universities for mentoring in these zones. Existing universities can set up remote campuses in these new townships. Any success stories that need further funding may apply to the Government. But at least the Government can see the first 5 or 10 years of this project because private investors and private banks were initially involved. The Government can even ask for a stake in the business in return for the grant. Or it can be a low interest loan. This is what China does. We need to start copying them a bit. The idea that private industry is more efficient than the public sector is not correct. A good return on investment comes from a good idea well executed. Government can do this as well as private industry. 

The Assimilation Industry should be allowed to invest in these new townships. They should be allowed to apply for these hybrid loans and receive the same tax benefits. They should hunt overseas for people with new business ideas and offer them and their families a 5 year lease in one of these new townships. The immigrants won't put pressure on existing infrastructure because they are moving to a brand new township with brand new infrastructure. Of course, if the business venture fails, the Assimilation Agency loses points on it's premier league style scoreboard.