australian business solutions issue 21

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THE AUSTRALIAN ECONOMY

What To Expect In 2012

028 AUSTRALIAN Business Solutions

Cover story

| By Tim Harcourt |

Imagine a country that is inward looking and rarely notices the world beyond its

own borders. Imagine a country with double-digit inflation and unemployment

and a poor record of economic growth. While workers and their bosses are at

each other’s throats, the country leads the world in working days lost due to

industrial disputes and productivity.

Industry shelters behind prohibitive tariff walls (thinking only of the domestic

market), the exchange is fixed every morning by officials of the central bank and

the treasury and international trade is an afterthought. Shop hours are regulated,

domestic monopolies run most industries, and foreign entrants (in areas such

as banking) are prohibited. Tax is high (and therefore evaded and avoided),

expenditure untargeted and budgets in deficit.

AUSTRALIAN Business Solutions 029

THE AUSTRALIAN

ECONOMYWHAT TO EXPECT

IN 2012


hiked up tariffs. The result was a deep and

long downturn with Australia facing one of

the highest unemployment rates in the world.

This time we did the opposite. Australia had

a targeted fiscal stimulus, accommodating

monetary policy, a floating exchange rate, and

we kept wages growing and tariffs low. As a

result, we have experienced no recession and/

or lasting unemployment in comparison to

what has occurred in the northern hemisphere.

Our exporters hoarded labour in anticipation

that recovery in Asia and the emerging world

would see demand restored. The fiscal stimulus

provided by the Australian government at the

height of the GFC was particularly effective and

Nobel laureate Joseph Stiglitz described it as

“the best timed and best targeted fiscal stimulus

package in the western world’. Although

Australia is a young country, when it comes

to economics, we have proved to be very

policy-wise.

So what are the major challenges that Australia

now faces in terms of global engagement?

Tackling The Terms Of Trade: Managing

Prosperity Instead Of Surviving Adversity

There is a great contrast now to the banana

republic days in terms of our rollicking terms of

trade (the price of exports as a ratio to the price

of imports), which are at levels not seen since

the gold rush. This is boosting real income right

across the board for the Australian community.

It has also been associated with a strong

exchange rate and the so-called ‘two speed

economy’ (which in reality is a multi-speed

economy as different sectors are benefitting

from the fast growing resources sector).

It is important at times like these that we

do not confuse the issues around managing

prosperity with surviving economic adversity. It

is important not to jump at fads and prop up

There are few tourists and not many foreign

students on university campuses and there are

few restaurants around because licensing laws

are restrictive.

Well, you do not have to imagine this country

because this country was Australia only thirty

years ago.

Fortunately, since then, much has changed.

The Australian economy has progressed

from being a poorly performing (though well

endowed) economy to the highly performing

one that we have witnessed in recent years.

Global engagement with the world through

trade and investment was a key part of this

reform process. The beachhead reform was

the floating of the exchange rate because once

the dollar floated, Australians realised they

had to compete with the rest of the world and

poor productivity performance could no longer

be allowed.

Accordingly, tariffs were reduced and

trade was orientated towards the emerging

economies in East Asia. For decades Australia

had protected its industrial sectors whilst living

off export earnings in agriculture and resources.

Manufacturing was geared to domestic

consumers and had little incentive to improve

competitiveness. Manufacturing exports were a

rarity – just a way of getting rid of excess stock

when times at home were slow – but they soon

became a core part of the business.

As a result, trade is a very important part of

Australia’s economic reform. Openness to trade

is associated with higher living standards and

Australia’s improved position in the economic

growth stakes.

In short, almost three decades ago Australia

was another country. And most importantly, it

was trade reform and Australia’s new found

ability to confidently engage in the world around

us that has made all the difference.

Crisis, What Crisis?

In 2011, it is a very different picture. Australia has

experienced 21 years of strong stable economic

growth, unemployment is low, our trade and

investment ties with China, India, ASEAN and

the rest of the Asia Pacific are strong, and global

commentators are calling us ‘down wonder’ on the

back of this extraordinary long-running economic

record. In fact, during the global financial crisis

(GFC), that has so badly engulfed the northern

hemisphere, Australia has barely experienced a

crisis at all. There was no rise in unemployment, no

recession, and in the mining-rich state of Western

Australia economic growth was flat for about a two

week period.

There are three key reasons why Australia made

it through the GFC that hurt other economies

so badly. Firstly, the long-term reforms started

in the 1980s. The float and tariff reforms forced

structural adjustment upon Australia and made

us more flexible and competitive, and therefore

able to cope with other downturns like the Asian

Financial Crisis of 1997-1999, the dot.com

boom and bust and the recent GFC. Australia,

as an open economy, has become a leading

economy in terms of per capita income growth

and employment generation, compared to its

laggard status in the 1960s and 1970s.

Secondly, the world around us has changed

due to the rise of the Asian economy. Australia

opened up right when East Asia became more

economically powerful globally and it almost

seems as though the country found itself in

the right place at the right time. It seems that

‘the tyranny of distance’, made so famous by

Geoffrey Blainey in the 1960s, has become ‘the

power of proximity’.

Thirdly, Australia responded well policy

wise. In the great depression of the 1930s,

the country cut its spending, restricted credit,

kept a fixed exchange rate, cut wages and

Cover story

During the global financial crisis (GFC), that has so badly engulfed the northern hemisphere, Australia has barely experienced a crisis at all.

Cover story


areas of the economy whose best interests are

in making a transition.

Ten years ago, in 2000, just after Sydney

had hosted the Olympic Games, the Australian

dollar was worth about 50 US cents and many

commentators were pondering why the global

financial market’s view of Australia’s prospects

seemed so different to those who had witnessed

Australia’s fine performance as a nation that

hosted, according to the International Olympic

Committee, “the greatest games ever.”

Many commentators aired their views from

near and afar. In fact, one visiting US business

executive, who took advantage of the Olympics

to visit Australia for the first time, warned that

Australia was too “old economy” and if it did

not create “new economy” industries instead

of relying on mines and farms, “the Australian

dollar would be worth 30 US cents by the end

of the decade.” This was reflective of by several

local views along the same lines.

However, ten years on, we have seen a major

global commodity boom, with Australia’s terms

of trade at record highs in our recent economic

history. The exchange rate, of course, is not

30 cents US, but recently hit parity and those

mines and farms we kept did not do too badly

at all, particularly given the growth of emerging

markets in the Asia Pacific region.

Like all trends that come and go, the new

economy/old economy debate seemed to

have misunderstood what was occurring in

Australia’s economy as it opened up to Asia

and the rest of the world after many decades of

protectionism and isolation.

Firstly, the mining and agricultural sectors

spawned a whole group of new innovative

companies, that are in effect, services exporters

(or “new economy in old economy” clothes, if you

like). We now have some merging export sectors

selling mining equipment, technology, training and

other professional services to the mining industry,

and these small and medium sized exporters are

located all over the world from Sao Paulo to Siberia.

Secondly, our education sector blossomed as

it found its international footing and this enabled

Australia to develop a professional services sector

that is internationally focussed and competitive,

in areas as diverse as architecture, engineering,

accounting, design, business logistics and

management. This has created international

opportunities for Australian professionals working

in Asia and has attracted many overseas

professionals to Australia for the quality of its

institutions and the strength of its economy and

labour market. Education forms an important part

of Australia’s services sector which accounts for

85 per cent of Australia’s employment and 40 per

cent of Australian businesses’ overseas sales.

Thirdly, even in areas you would least expect,

the end of tariff walls and an inward-looking culture

unleashed Australian innovation. Even in sleepy

surf towns like Torquay in Victoria, Rip Curl became

an international player and joined competitors like

Billabong and Quiksilver on the world stage. Small

and medium sized enterprises found they could

be global players too (90 per cent of the exporter

community is comprised of small to medium

enterprises), with some of them going on to be big

exporters, and employers, as a result.

Fourthly, as Australia’s fortunes have accelerated

so has the need for a sophisticated, world-class

financial sector to fund our global expansion and

engagement. Australia’s success as a provider

of financial services is apparent in Kuala Lumpur

and Singapore as Australia showcases its financial

strength in the aftermath of the GFC. Australia now

has the second largest stock market in Asia, the

second largest securities market in Asia and the

second largest hedge fund sector in the region.

Our superannuation system is one of the world’s

major financial innovations of recent years and we

have one of the largest infrastructure fund industries

found in the world. Australia’s openness to trade and

investment, and the resulting economic success,

now makes us a major player in financial services

in the region and the world, particularly after the

GFC. Furthermore, the world has taken notice of

Australia’s success and this means more global

activity for its financial services sector.

Looking Forward

Australia is a totally different place than it was 30

years ago and trade has played an important role

in its structural adjustment. We can mark the float

and the reduction of tariffs as landmark reforms in a

time when we developed a strong export culture in

industries we had not yet considered to be ready for

the world stage.

No doubt the next 10 to 20 years and beyond will

throw up its unique set of economic challenges both

globally and locally, on both the demand and supply-

side. However, over the past years since that golden

period of the 2000 Sydney Olympics, Australia has

proved its mettle in tackling some major global


Cover story

economic crises while still managing to maintain

its traditional areas of comparative advantage

and developing some new sectors that are now

global players to an extent that no one would have

expected in 2000 or in 1980. The so-called ‘lucky

country’ did make its own luck with careful reform

and management, in resisting fads and looking

at the true economic fundamentals that drive

innovation, productivity growth and improved

living standards. Australians are practical people

and if we stick to these traits, the next ten to

twenty years and beyond could see us earn some

more luck, once again.

The Bottom Line

While Europe and the US hold their collective

breath as we move toward 2012, Australian’s

and Australian business needs to take heart from

a number of simple truths. The economy is an

emotional beast that thrives on sentiment. Much

of the doom and gloom that is currently being

portrayed by the wider media only serves to suck

the life out of our economy and fails to take into

account many of the positives about our position

which have served us so well to date. It must be

acknowledged that we can never be completely

protected from what happens in the rest of the

world, but the impact can certainly be minimised

and managed.

Many commentators have expressed concern

over the possible slow down in mining and

mineral exports to countries like China if the

American economy continues to slow, as they

believe this will affect demand. Australian mineral

and mining exports are currently at record

highs so it would not be unusual to see a slight

slowdown. However, China currently has a huge

number of infrastructure projects on the go due

to, amongst other things, their rapidly expanding

population. Most of these projects are estimated

to run for another 20 to 30 years, which means

the likelihood of Australia experiencing a dip in

demand for mining and mineral exports anytime

soon is unlikely.

It should also be noted that we are not reliant

on China alone. There are a number of other

emerging economies around the world such as

Brazil, Africa, India, ASEAN, Latin America and the

Middle East that are, in reality, performing beyond

the expectations of previous estimates. This

means new and expanding markets for Australian

export product.

Even if the rest of the world were to experience

the type of financial crisis being predicted for

next year, there is no reason that Australia will

follow suit. We have everything the world needs

right now, so we are in a much better position to

weather any storm.

high immigration, high export revenues and the

strength of the Australian dollar means that, for

Australians, 2012 will not be the scary year that

a lot of the world has envisioned.

Tim Harcourt is the Chief Economist of

the Australian Trade Commission and a

Visiting Fellow at the Australian School

of Business atthe University of

New South Wales, Sydney.

The Australian Labour market has been strong

over the recent past and continues to be strong.

There is no reason to believe that unemployment

numbers would grow significantly over the next

twelve months.

By international standards, we currently have

a very low level of debt. Furthermore, we also

have good long-term trends that ensure our low

debt levels are likely to stay low over the coming

12 to 24 months. Things like our strong export

revenues, the large number of people in work

who are all paying taxes, and strong immigration

contributes to our strong economic position.

Our immigration numbers are another area of

the Australian economy that is often overlooked

in the wider media. Australia’s immigration

numbers mean that we do not suffer the

effects that come from the demographic issues

experienced in places like Japan and Europe

where the aging population is outstripping

the younger money-earning sections of

the economy.

It is important to remember that one in two

exporters (in Australia) are born overseas. In

fact, currently, one in four Australian’s are born

overseas and two thirds of our entrepreneurial

class are born overseas – in short, Australia

imports a lot of human capital. If one is to look


Even if the rest of the world were to experience the type of financial crisis being predicted for next year, there is no reason that Australia will follow suit.

Cover story

back over the last few years at people who

have made significant contributions to the

Australian economy, names like Crazy John

(mobile phones), Frank Lowe (of Westfield) and

Bing Lee (owner of the largest privately held

electrical retail business in NSW comprising

41 superstores) come quickly to mind and

demonstrate the significant, positive impact

that our migrant population has had on the

Australian economy. There is no reason to

believe this should change over the next year

or two. In fact, if the rest of the world is doing

it tough, it is not inconceivable that the best

and the brightest might look to countries like

Australia to make a new home, which can only

be positive for us.

We used to talk about the

tyranny of distance in Australia

and the fact that we were the

lucky country in the 1960s. For

Australia, our financial reality is

now about the power of proximity

and the fact that we are a country

that has made its own luck. The

reforms of figures like Paul Keating and

Bob Hawke in the 1980s, carried on by

successive governments, combined with

factors like our low debt, low unemployment,

australian business solutions issue 21

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