Over the past couple of decades, the performance of the Australian economy has changed. And it needed to. During the 1970s and 1980s, Australia experienced a worse dose of stagflation (high inflation and high unemployment) than most nations. We were often advised to remodel ourselves on the lines of Germany and Japan. Thank goodness we didn’t: their economies have stumbled under the challenges from globalisation and change. In the 1980s and much of the 1990s, we were said to be slipping behind the ‘Asian Tigers’ in growth, job creation and wealth. Those concerns ceased in the late 1990s when the Asian economic crisis hit.
No only did our economy experience stagflation in the twenty years to 1990: but also wide swings in the economic cycle. Our recessions of 1974, 1981 and 1989/90 were worse than those in most comparable countries, while the intervening growth surges were generally more marked than those in other western countries.
How things have changed. Around the world, the English-speaking economies have upped their performance. And, among the English-speaking economies, Australia has made relative gains. The influential Financial Times journalist, Martin Wolf, made use of the following graph in an important article last January; the rankings would not have been thought possible a decade or so ago.
Sources: A Maddison, ‘The World Economy: Historical Statistics (OECD 2003), IMF, OECD, Thomson Datastream
The good news on the economy
It’s now fifteen years – and still counting – since Australia experienced a recession. For my generation of people in business, this is a new experience: we had grown to expect a recession, on average, every eight years or so. (I should add that, as a result, managers were usually on the look out for early signs of recession, in order to batten down early enough the business hatches – and thus to ensure that the business survived. Just think: if Australia’s next recession is in 2010, a manager aged thirty at that time would only have been ten years old when we were last in a serious downturn.)
Also over the past fifteen years, inflation has been contained, productivity growth has been strong (though productivity has fallen very recently), average real incomes have increased well above rates of other comparable countries, and average wealth has risen markedly
To my thinking, four influences account for the better performance of the Australian economy over the past fifteen years.
First, Australia was a late starter in the processes of economic reform. But both sides of politics – the Hawke/Keating and the Howard/Costello governments – then oversaw a series of important changes (floating exchange rate, financial deregulation, broadening of tax, workplace reforms) that made this economy more efficient and more flexible.
Second, sharp declines in the Australian dollar in 1998 and 2001 insulated the Australian economy from, respectively, the Asian recession and the US recession. And the sharp rise in the currency over 2004 muted the effects of the surge in commodity prices. Under the clean float of the Australian dollar, shocks in the global economy now have a big effect on the exchange rate and less impact on the economy, interest rates and the share market.
Third, China’s emergence as a powerful economy has been a major plus for this country. No other western country is as advantaged as we are by China’s transformation: we gain from China’s demands for energy, minerals and services; and with our small manufacturing sector, we are less threatened by China as competitor.
Fourth, Australia was less carried away than most other countries by the earlier dot.com boom: there was less of a boom-bust cycle in technology. Recall the late 1990s when we were disparaged as an ‘old economy’? These days, of course, everyone would like to have ‘old economy’ iron ore and coal mines exporting to China.
The challenges facing the economy
Now to the challenges that face the Australian economy.
First, in this tough and competitive world, we cannot bask in the glory of the reforms of recent years. That would risk the problems that France and Germany now face – rigid and stagnant economies and high unemployment. My worry is that the two major political parties are experiencing reform fatigue: the Coalition because the next round of key reforms – water pricing, pharmacies, aged care, single desk marketing of farm products and so on – will offend key support groups; and Labor because many grass root supporters are intensely critical of the ‘economic rationalist’ policies of Bob Hawke and Paul Keating.
Second, Australia is being disadvantaged by the slow progress towards multilateral liberalisation of trade in agriculture and services. To be fair, there is not a lot we can do: if the WTO meeting in Hong Kong in December is to kick start the Doha Round, the lead will need to come from Europe and the United States; it will not come from our Asian trading partners; and we’ve already said our piece. (We might, though, strengthen our moral claim for liberalization of agricultural trade by offering better access to New Zealand apples and Philippine pineapples).
If multilateral reform of trade turns out not to be achieved in the Doha Round, Plan B should be an ‘open regionalism’ approach similar to that considered by APEC some years ago. Australia would need to put in a strong effort for APEC-initiated reform to regain momentum; the stumbling block could again be reluctance in China, the United States, Japan and Korea to relax barriers to agricultural imports.
Some people see free-trade agreements (FTAs) as Plan C. The world is now awash with proposals for FTAs. But they are a poor substitute for either multilateral liberalisation of trade or open regionalism. This is because FTAs divert trade as well as create it. And, in highly legalistic FTAs, particular clauses can even institutionalise long-term barriers to trade. (I fear this could happen with the restriction on Australian exports of sugar to the United States included in our FTA with that country). I recognize however that FTAs can provide insurance for small and isolated country such as Australia should there be risk of the world splitting into trade blocs.
Third, there’s our current account deficit. It’s large. Point one: if Australia is attracting net capital from other countries, we must run a deficit on current account; that’s the way the real transfer of goods and services to Australia is effected. Point two: all of the capital inflow is being used in the private sector; if investments are unwise, the taxpayer would have no direct liability or responsibility. The risk of our heavy dependence on capital inflow is that, if for some reason or other, capital inflow tightens suddenly, a sharp adjustment then has to be made within the economy and financial markets. To reduce the impact of this Australia needs to boost domestic savings.
Fourth, we need to take fuller cognizance and advantage of emerging changes in the world economy. Australia is doing well from China’s transition to an economic super-power (though we need to allow that, over the next half dozen years, China could experience a nasty if short-lived slump as various speculative excesses are unwound). But there’s too little effort to seize opportunities in the growth spots of: India, which is pursuing a very different growth strategy from China (technology rather than manufacturing; and population growth rather than one-child policy), Eastern Europe, parts of the Middle East and Brazil.
In the mid-1980s, The Economist magazine offered a great one-line comment on the Australian economy: if you look at history, Australia is one of the best managers of adversity the world has seen – and the worst manager of prosperity. The last couple of decades demonstrate that Australians could shed this reputation. For a time, at least.