: Super User; Region; 17 August 2011; Hits: 1136

Australia - not Just a Lucky Country

BACK in the early 1960s, when Australian author Donald Horne wrote The Lucky Country, he meant the book to be a wake-up call. Australia, he said, was “a lucky country, run by second-rate people who share its luck”. Decades later, many of Mr Horne’s illustrations – particularly those referring to the “cultural cringe” (towards Britain) – seem outdated.

But the idea that Australia has somehow been luckier rather than cleverer than other countries has not been so easy to shake off.

When the global financial crisis hit in 2008, the Labor government under then Prime Minister Kevin Rudd followed other countries by introducing a $60 billion fiscal stimulus package to offset the effect of the slowing world economy. The Reserve Bank of Australia (RBA) also cut interest rates to historic lows.

But while many developed nations struggled to shake off recession, the Australian economy rebounded after just one quarter of negative growth. In fact, it chalked up a growth rate of 1.2 per cent in 2009 – the best performance of any Organisation for Economic Cooperation and Development (OECD) member state. Australia was also the first of the developed economies to begin raising interest rates as the global economy appeared to recover.

So what made Australia different? One answer is that it was simply lucky. While the rest of the developed world struggled, Australia just happened to have huge quantities of the very raw materials (notably coal and iron ore) that the rapidly expanding Chinese economy needed. Last year, Australia exported $59 billion of goods to China, more than nine times the amount 10 years previously. In fact, at 21.8 per cent of exports, China is now Australia’s biggest market, followed by Japan (19.2 per cent), and South Korea (7.9 per cent).

As the world lurches towards yet another financial crisis, will it be good fortune or prudent policies that see the country through?

One of the reasons for the more recent plunge in global markets in the wake of debt problems in the United States and Europe is the way political obstacles have stood in the way of finding a solution.

Yet despite its squabbling politicians and shaky minority government, Australia now finds itself enjoying one of the strongest financial positions in the developed world. As in the case of Singapore, Australian government bonds enjoy an uncontroversial triple-A credit rating. And with a benchmark interest rate of 4.75 per cent, the RBA has plenty of scope to reduce rates further should this become necessary.

Unlike the United States, Japan and Britain, a weakened fiscal position will not constrain Australian policymakers when they plan their response to the latest global crisis. Australia’s fiscal deficit as a percentage of gross domestic product or (GDP) – 3.5 per cent last year – was one of the lowest in the OECD. Compare this with Britain (13.3), Ireland (12.2), the US (10.7), Greece (9.8), Japan (8.2), and even Germany (5.3), and the strength of the Australian position becomes clear.

It is true that the resources boom has gone a long way towards increasing government revenue and thus boosting the sort of macroeconomic statistics that make Australia seem like a paragon of financial virtue. But a closer look also suggests that successive Australian governments have been careful to ensure that the country lives within its means.
Australian net public debt as a percentage of GDP stands at just 7 per cent. In other words, it has one of the lowest debt burdens in the OECD. Comparable statistics for Japan (112.2), Italy (103.4), the United States (72.2), Britain (69.9) and Ireland (49) make Australian economic planners look very conservative.

All of this is just as well. A recent International Monetary Fund report echoed the opinion of many observers that real estate bubbles in Beijing and Shanghai, China’s 6.4 per cent inflation rate and weak monetary controls pose significant risks to that nation’s financial and macroeconomic stability. The risk for Australia is that, in attempting to deal with the resulting excess liquidity, Chinese economic planners will overreact, and demand for Australian raw materials will plummet.

If the Australian government does decide on another stimulus package, there are many useful things it could spend the money on. According to the World Economic Forum Global Competitiveness Report 2010-2011, Australia ranks 22nd in terms of infrastructure, well below its overall ranking of 16 against 139 other economies measured. Hong Kong, Singapore and Japan are all ranked higher.

For a country whose ageing roads, public transport systems, ports and airports are increasingly recognised as not being up to scratch, spending on these makes sense. Indeed, several major infrastructure projects, notably a $44 billion high-speed Internet system, are already in the pipeline.

A lucky country? Yes, indeed. But it has not all been luck.

Rating:

( 0 Rating )

Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.