australias long boom good luck or good management? implications for argentina john edwards

Australia’s Long BoomGood Luck or Good Management?Implications for Argentina

John Edwards

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Australia is a major agricultural producer, but agriculture does not explain the long expansion






















Mining is important, but it does not explain the long upswing

Household consumption is important, but it does

not explain the long upswing











Australia has a high rate of home ownership but home building but does not

explain the long upswing


Business investment is an important part of the story in recent years












The early years of the upswing saw big expansion of exports to GDP












Coal and iron ore exports have been important recently












And exports to China have grown quickly…but even so exports to China account for only 3% of GDP












..in export volume share terms coal is little changed in 30 years, metals ores and minerals have fallen - while

manufactures have increased












Australia is not insulated from the global economy..it has a large and persistent current account deficit

Its net foreign liabilities to GDP are three times

those of the US











…and two thirds of its net capital inflow is provided by the offshore borrowing of Australian banks..











So what does explain:

• “The Miracle Economy” (Paul Krugman 1997)

•“Wonder Down Under” (BBC 2009)

??????

The politics of economic reform in Australia

•Labor’s Whitlam government was destroyed by a wages explosion in 1974 and 1975. The Liberal’s Fraser government which replaced it was then destroyed by a wages explosion in 1981 and 1982. By 1983 both sides of politics recognised things had to change.

•The Hawke Labour government elected in 1983 was determined to avoid the election catastrophes of the two preceding governments.

•At the same time new leadership in the then-powerful trade union movement recognised that wages explosions led to high unemployment and high inflation.

• These changes in attitudes made it possible begin a very difficult and wide-ranging reform

The big reforms•1983 “Accord” between the Hawke government and the trade union movement permitted a very gradual reduction in real wages, compensated by tax cuts and increased benefits targeted to lower income families

•1983 Budget marked beginning of a strategy to dramatically reduce the fiscal deficit

•1983 float of the Australian dollar bought unexpectedly big benefits, and unexpected difficulties

•1984 financial market deregulation and entry of foreign banks to the Australian market helped support development emergence of domestic financial markets

•1985 saw beginning of a national superannuation system based on pay-deductions, giving Australia growing pool of managed funds and taking some of the pressure off social security

• 1989 and 1991 saw major tariff cuts that forced out some uncompetitive industries but also saw an expansion of manufacturing exports and a continuing increase in manufacturing output.

•Privatisations and corporatizations through the nineteen eighties and into the nineties saw the Commonwealth withdraw from most business fields including banking, airlines and (eventually) telecommunications

•1993 and 1994 saw the end of arbitration of most wages as Australian moved to enterprise bargaining between employers and employees, with a safety net of minimum rates.

The Difficult 1980’s• Currency depreciation following the float kept inflation high,

despite decline in real wages

• Following financial deregulation and entry of new competitors, banks lost their heads and supported commercial property speculation boom

• The increase in profits supported a general boom in investment, which was matched by wider current account deficit

• The government and the central bank were undecided about the goal of monetary policy

• To spur economic reform, the current account deficit was portrayed as a big economic problem. This confused policy making

The Australian story – birth of the long upswing•Economic policy through the nineteen eighties was

conflicted by concern about a rising current account deficit

•The property development boom was also fostered by new competition between banks to increase their assets.

•The central bank and the Hawke government raised interest rates through 1988 and 1989, ultimately forcing a sharp recession.

•The recession was all the more difficult because the bursting of a credit bubble caused big losses at banks, at the same time as tariff cuts were forcing contraction in some areas of manufacturing

•The deep recession was however helpful in forcing inflation to zero, permitting central bank to introduce inflation targeting in favourable circumstances.•

The Australian story•Australia has enjoyed an uninterrupted 18 year expansion, despite the Asia crisis, the LTCM crisis, the Russian and Latin American crises, the global downturn of 2001, and the global financial crisis of 2008

•The upswing has permitted a sustained increase in jobs and a big fall in unemployment

•Income and wealth have both increased much more than in any comparable 18 year period in the last century

•Other developed economies have done well, but none have had as sustained an upswing as Australia

•The long upswing succeeded more than a quarter century of poor performance, including five recessions – two of them serious

•At different times the growth drivers have included home construction, household consumption, business investment, and exports - but no one category of demand accounts for the prolonged expansion

•Mining output helps. But mining output is less than 10% of GDP. Exports to China help, but account for only 3% of GDP.

•Economic reform was the precondition

The Australian story•Australia was not insulated from the global crises Australia of the last few decades. For example, nearly two thirds of its exports find markets in Asia and the Asia crisis had a big impact on those exports. Going into the recent global financial crisis Australia was running a large current account deficit. Its net foreign liabilities to GDP are three times those of the US, compared to GDP. Its finances its current account deficit largely by Australian bank borrowing abroad – and international private lending to banks was dislocated by the crisis.

•Australia learned from failure.

•For example, it recognised that the traditional Australian way of setting wages caused episodes of sharp wage inflation, to which the central bank and finance ministry responded by tightening. This was the basic cause of the recessions of 1976 and 1982. From 1983 wages began to be set in a different way. Without wage reform the long expansion would not have happened

•Another example is that banks learned by their excesses in the late 1980’s. An unrestrained credit and asset price bubble made the 1991 downturn all the more severe. Management was changed, risk practices were improved, the regulators became more vigilant. Once inflation as well down, the central bank adopted inflation targeting which helped to keep inflation down.

The Australian story•Over the eighteen years Australia has been helped by the expansion of the global economy and especially by the rapid growth of East Asia

•As a predominantly service economy it was helped by a wave of ICT technologies that improved service industry productivity at a time when labour market reforms encouraged the reorganisation of industry workforces

• Tariff cuts encouraged a new configuration in manufacturing, helping globally competitive industries and wiping out uncompetitive sectors

•Active industry policy played a quite small role. Australia did not invest government substantial resources in an industry expected to be a global winner

•Almost all of the major government economic changes took for the form of removing impediments rather than fostering particular industries

• there was never a decision on which industries would provide jobs – but the jobs were created anyway

• There was never a decision on which industries would be export successes, but the export share of GDP increased anyway

• In the Australian experience globalisation does increase external dependency, but it also vastly increases diversity

•The foundations for success included controlling inflation, changing to market based wage determination, cutting tariffs, floating the currency, deregulating finance, and controlling fiscal deficits.

Implications for ArgentinaThe gains from economic reform can be very big. Some gains are ‘one-off” as the removal of impediments and the spur of competition drives as economy towards the global technology and management best practice frontier. But exposure to global competition makes cost efficiency and innovation routine

Innovation and reform in business in driven by competition. In government policy, it is usually driven by a challenge to political survival, or the exhaustion of alternatives. Reform arises from failure, not success

The consequences of reform are unpredictable in detail and are often surprising

In Australian reform required political consensus but was driven by the moderate left with the support of the trade unions. This support was secured through advancing market reforms while at the same time taking care of families and lower incomes, and those who lost by change . The gains in jobs ultimately secured broad electoral support for the reform program.

There are limits beyond which the electorate will not go. In Australia the Howard Liberal government discovered that limit when it introduced individual contracts between workers and employees intended to replaced collective agreements and minimum standards.

Luck helps. New Zealand has “reformed” more but not done quite as well.

How come Australia’s economic expansion continued:•through the Asia crisis of 1997•the LTCM and Russian and South American crises of 1998•the global downturn in 2001•and now the Great Recession in the major developed economies?

•

The Asia Crisis• A deep Australian recession was widely predicted

in 1997• Although 60% of Australia’s exports go to Asia,

exports were only one fifth of output – and the (unresisted) sharp AUD depreciation from 1997 to 2001 offset the decline in export volumes

• The domestic economy benefited from lower interest interest rates, which fortuitously had begun to be cut a year before the Asia crisis struck

The global recession of 2001• In the US and Germany it was related to a downturn

in hitherto booming ICT investment. It then enveloped chip makers etc in Asia

• Australia was is a significant ICT producer, and the equity market boom in Australia was not as wild as in the US

• Coincidentally Australia’s home building industry was hit by a timing impact from a new tax. The central bank responded to that and to the Fed moves by cutting interest rates.

The Global Financial Crisis• Australian commercial and investment banks

had little exposure to CDOs in the US market

• The central bank responded to the crisis quickly with liquidity support and then by rapidly lower interest rates

• The Australian government responded by unprecedentedly large and rapid program of support for household consumption, home construction and small scale public works

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australias long boom good luck or good management? implications for argentina john edwards

Documents

gdp slide

increased slide

long upswing slide

argentina john edwards

big expansion of exports

iron ore exports

early years

australias long boom