StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Australian Macro-Economy - Essay Example

Cite this document
Summary
This analysis highlights the critical importance of macro-economic management in a reform program designed to make the Australian economy more internationally oriented. Macro-management is not the key ingredient in the process; rather, the essential building blocks have been trade liberalization…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91.5% of users find it useful
Australian Macro-Economy
Read Text Preview

Extract of sample "Australian Macro-Economy"

Australian Macro-Economy Introduction The macro-economic environment supporting the Australian micro-economic reforms have been satisfactory is some respects, but notably deficient in other areas. It is imperative to examine these developments briefly, since, if the major problem areas are not resolved, they have the potential to disrupt the genuinely significant achievements and frustrate the path towards an internationally oriented and efficient economy. The purpose of this section is to examine briefly the salient features of the macro-environment. This article also alludes to some of the effects of the reforms. It does not attempt to provide a comprehensive assessment, which would be beyond the scope of this chapter, and arguably premature. Fiscal Policy Throughout most of the reform period, fiscal policy was reasonably conservative. The Australian Labor administration inherited a large fiscal deficit in 1982/3, in consequence partly of a severe recession. The government proceeded to reduce this deficit progressively through the decade. By 1987/8 a modest surplus had been achieved, and was maintained for the next three years, before another serious recession forced a change in policy. For a short period, also, the administration reversed the post-war trend towards an ever-larger government presence in the economy. Economic growth remained quite buoyant during this period, although inflation continued to exceed that of major trading partners, while remaining below 10 per cent after 1983. The recession of the early 1990s was the major mistake in macro-economic management over this period. Extremely tight monetary policy resulted in a hard landing, with reductions in per capita income for two years and unemployment rates in excess of 10 per cent. Inflation did, however, fall sharply. After several years of low inflation, there is now some prospect that inflationary expectations have been eradicated and that low inflation may be a durable policy achievement (Dunning 1999). In the newly liberal commercial environment the government has, however, been far less successful in promoting domestic savings, managing external debt and the exchange rate, and responding to exogenous trade shocks. One key element of the process of globalization, the opening of the international capital account, altered the commercial and economic management rules of the game rapidly, and for both governments and financial institutions the new environment has posed great challenges. Firms commercial horizons broadened immeasurably, as we shall see shortly, and there was a flurry of aggressive highly leveraged international expansion. But financial institutions were rather slow to adjust to the changes. Less than a decade after the liberalization, many of the countrys most prominent business conglomerates had collapsed, and several major banks were in great financial difficulty (Sykes 1994). Liberalization In some respects, macro-economic management was also one of the casualties of the liberalization. A case in point is the exchange rate. The floating of the Australian dollar initially had the desired effect of delivering a competitive exchange rate. When commodity prices fell sharply in the mid-1980s and with it Australias terms of trade, the nominal exchange rate also declined. Even though inflation continued to exceed that of major trading partners, the decline was substantial enough for the real effective rate also to fall significantly. The economy recovered strongly from the terms of trade decline, but again began to experience unsustainably large current-account deficits. To cool an overheated economy, the government adopted a moderately conservative fiscal policy, as noted. But the fiscal restraint proved insufficient, and so the government resorted to ever-tighter monetary policy. By the end of the 1980s interest rates were at record levels, in excess of 10 per cent in real terms. The consequent mismatch between fiscal and monetary policy proved disastrous. Capital inflow led to a substantial appreciation of the Australian dollar, eroding the competitive benefits achieved a few years earlier. Ultimately the current account deficit was brought under control through the extremely crude and costly mechanism of the countrys worst recession since the 1930s--two years of negative per capita growth and unemployment peaking in excess of 11 per cent of the workforce. The high and rising current-account deficit of course reflects a shortage of domestic savings. No economic issue has attracted more attention in Australia over the past decade than the level of savings and external debt (Pitchford 1990; Nguyen 1992; Collins 1994). Current-account deficits per se need not be a cause for concern, provided the marginal rate of return on borrowed funds exceeds the interest rate and, by extension, domestic savings remain buoyant. However, Australias high current-account deficits have been accompanied by a secular deterioration in the savings rate. It has not been uncommon for up to one-quarter of the countrys investment to be financed by foreign savings. Unfortunately, there is no evidence that this trend is about to be reversed. The origins of this poor saving rate are complex, and beyond the scope of this chapter. But two general observations are pertinent on each of the major components, public and private savings. First, the governments apparent achievement of moderately conservative fiscal policy is somewhat illusory. As a major national report on the subject demonstrated (Fitzgerald 1993), the usual practice of reporting financial statements significantly understates public debt, mainly because it excludes a variety of formal obligations by Australian governments to its employees such as unfunded superannuation entitlements. A revised set of estimates prepared by Fitzgerald (1993) suggests that net public-sector debt is some $A300 billion, about double the official estimate, and almost double the nations net external indebtedness. There was a good deal of discussion in Australia during the late 1980s of the fact that the country recorded ever-larger current-account deficits despite having a fiscal surplus. That is, its experience seemed to be at odds with the popular twin-deficits explanation for the 1980s US current-account deficits. Of course, the national accounts identity can explain why a deficit on one account and a surplus on another may coexist. But, in addition, the Fitzgerald report drew attention to the frequently neglected point that, depending on how they are measured, fiscal surpluses may be illusory, because, in Australias case, of a failure to report properly all financial obligations. Secondly, while it is more difficult to explain the apparently poor rate of private-sector saving, the tax system is likely to be a significant variable. For example, a recent comparison of real effective tax rates for individual investors on average marginal personal tax rates found that Australia had one of the highest rates. At over 50 per cent, it exceeded the OECD average of 40 per cent, and was far higher than in the high saving East Asian economies, five of which had a rate of less than 10 per cent (Pender and Ross 1995). The savings shortfall has resulted in extremely rapid external debt accumulation. Australia now has one of the largest external debts, relative to the size of its economy, within the OECD bloc. Exceeding $A200 billion, gross external debt is now equivalent to over half of GDP; the present ratio is seven times that of the mid-1970s. Net external debt has risen more slowly, owing to the increase in foreign assets following the capital market liberalization of 1983. The increase in the debt to GDP ratio is partly explained by measurement effects resulting from the depreciation of the Australian dollar. Nevertheless there can be little doubt that the debt is increasing at an unsustainable rate (a point highlighted by some recent international financial press reporting that the Australian economy is more exposed internationally than any other OECD economy apart from Mexico). A reversal of the trend requires, at the broadest level, higher public- and private-sector savings, while at the micro-level a continuation of the reforms commenced in the mid-1980s as a high priority. Trade Patterns and Exports To complete this review of broad trends, this article turns to trade patterns and in particular the composition of exports over the reform period. The picture here is moderately encouraging in at least two respects. First, the Australian economy has become unambiguously more international in the sense that the trade share in the economy has risen, from about 31-3 per cent in the early 1980s to 358 per cent a decade later. Secondly, the composition of exports has moved in the desired direction. Minerals still dominate exports, accounting consistently for almost 40 per cent of exports over the last decade. But the reliance on unprocessed rural products has fallen significantly, and in their place more income-elastic manufactures and services have assumed a greater role. In the case of the so-called elaborately transformed manufactures (ETMs), annual export growth in real terms over the period 1985-93 was 14.5 per cent, as compared with just 1.8 per cent for the period 1979-85. By contrast, import growth of these items over the whole period was in the range of 5-6 per cent, with little sub-period variation (Sheehan 1994: 6). This is presumptive evidence of efficient, export-oriented industrial growth during the reform period. Australian service exports grew over the period 1985-91 at an annual average rate (in $US terms) of 17 per cent, exceeding both the average international and Asian rates, of 13.6 and 14.6 per cent respectively, over the same period (AUSTRADE 1994: 37). The services sector is also expected to generate most of the employment growth over the 1990s. It is then important to return to the growth of these non-traditional" exports, but it is worth noting here that high value-added industries such as resource-based processing, international education, and tourism have been prominent in the new export growth industries. These conclusions are necessarily tentative: the time period is too short to draw definitive conclusions; economic cycles and commodity-price fluctuations obscure the picture; and the mechanics of the link between reform and supply response have not been adequately investigated. Nevertheless, is seems that exposure of Australian industry to the winds of international competition, coupled with liberalization of economic management and diminution in the role of state enterprises, has shifted the economy substantially towards international integration. Conclusion This analysis highlights the critical importance of macro-economic management in a reform program designed to make the Australian economy more internationally oriented. Macro-management, of itself, is not the key ingredient in the process; rather, the essential building blocks have been trade liberalization, the opening of the capital account, the floating of the dollar, and the attempts at broad-ranging micro-economic reform, as yet incomplete. But the macro-element is essential, in that poor management can jeopardize the micro-reforms. Growth could be retarded, as occurred in the early 1990s. A low savings rate could frustrate the necessary retooling which is required for rapid structural change. More generally, macro-economic mismanagement renders more difficult the prospect of achieving durable reforms. Reform is an inherently destabilizing process that inevitably produces both winners and losers. The conservative social-welfare function, in Australia as elsewhere, generally weights these losses more highly than the gains. If in addition economic mismanagement and cyclical factors generate a downturn in economic activity, the political consensus in favor of reform tends to evaporate. This has been the Australian experience of the early 1990s. While there has been no significant backtracking on reform, the forward momentum has slowed appreciably, most notably in the area of micro-economic reform of non-tradable activities. References AUSTRADE, (1994), Intelligent Exports and the Silent Revolution in Services (Canberra: Australian Government Publishing Service). Collins, S. (1994), "Experiences with Current Account Deficits among East Asian Economies: Lessons for Australia?", in Lowe and Dwyer, pp. 274-303. Dunning, J. ed. (1999), Governments, Globalization and International Business, Oxford University Press, Oxford. Fitzgerald, V. W. (1993), National Saving: A Report to the Treasurer (Canberra: Australian Government Publishing Service). Nguyen, D. T. (1992), "The Role of Policy Reform in Managing Australias External Debt", in A. J. MacIntyre and K. Jayasuriya (eds.), The Dynamics of Economic Policy Reform in South-East Asia and the South-West Pacific (Singapore: Oxford University Press), pp. 178-97. Pender, H., and Ross S. (1995), Business Taxation in Australia and Asia (Commission Paper No. 4; Canberra: Economic Planning Advisory Commission, Australian Government Publishing Service). Pitchford, J. D. (1990), Australias Foreign Debt--Myths and Realities, (Sydney: Allen & Unwin). Sheehan, P., Pappas N., and Cheng E. (1994), The Rebirth of Australian Industry (Melbourne: Centre for Strategic Economic Studies, Victoria University). Sykes, T. (1994), The Bold Riders: Behind Australias Corporate Collapses (Sydney: Allen & Unwin). Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Australian Macro-Economy Essay Example | Topics and Well Written Essays - 1750 words”, n.d.)
Retrieved from https://studentshare.org/miscellaneous/1537807-australian-macro-economy
(Australian Macro-Economy Essay Example | Topics and Well Written Essays - 1750 Words)
https://studentshare.org/miscellaneous/1537807-australian-macro-economy.
“Australian Macro-Economy Essay Example | Topics and Well Written Essays - 1750 Words”, n.d. https://studentshare.org/miscellaneous/1537807-australian-macro-economy.
  • Cited: 0 times

CHECK THESE SAMPLES OF Australian Macro-Economy

EconomicThe Banana Industry

Industry group such as Growcom and the banana growers like Naomi King (australian Broadcasting Corporation 2006, 1) will be willing to produce and sell more bananas when price in the market is high.... Executive Summary Agriculture is an industry which can be understood by applying the demand and supply tools of competitive markets....
6 Pages (1500 words) Essay

Alcoholism in Australia

The author of the following text entitled "Alcoholism in Australia" presents an analysis of the threat of alcoholism.... According to the text, alcoholism is a health problem that affects a relatively high percentage of individuals within most populations.... hellip; Problem drinking is somewhat hard to define, and it is generally measured not in terms of how much alcohol is consumed or how often, but rather, what kind of consequences result....
13 Pages (3250 words) Essay

Macro Forecasting of the Australian Economy

Business Cycle Properties and Macro Forecasting Of the australian Economy Word Count: 1885 Executive Summary The analysis of macroeconomic variables is employed in determining the likely outcomes of a country's economic, monetary and fiscal policies, in the light of changing local and global realities.... The country's economy has sustained one of the longest, most progressive runs in the world as cited by the IMF, and despite the recent slump in housing prices, a slight rise in exports and relative weakness in the australian dollar, the prospects appear encouraging for the country as its macroeconomic variables show stability even through the global economic crisis....
8 Pages (2000 words) Essay

Australia: Terms of Trade

What could be the likely impact of a decline in the terms of trade on the australian Economy?... Discuss the reasons for the main movements in Australia's terms of trade over the last decade The terms of trade mean the quantity of imports, which are buyable via sale of a quantity of exports that is fixed....
8 Pages (2000 words) Essay

Australian Economy and Price Stability

australian Economy Name: Course: Professor: Institution: City and State: Date: australian Economy Introduction The government of Australia works with the Reserve bank in managing fiscal and monetary policies in the country.... Performance of the australian Government and the Reserve Bank in running the economy from November 2011 to November 2013 Price Stability Price stability is achieved when the annual rate of inflation in a country is zero....
8 Pages (2000 words) Assignment

Changing Trends of International Business

australian newspapers have similarly been blazing on about the changes in the economic policy and big business.... The Age reported on February 25th about the australian clothing company Pacific Brands moving its manufacturing facilities to China (Draper 2009).... Brands espoused by the company have been seen to be quintessentially australian with a large following.... However, The Age reports that Pacific Brands, which retains australian ownership, stresses that it remains very much australian....
11 Pages (2750 words) Essay

Find a newpaper article on wine industry and draw a link to a macroecnomic concept

The concept that shall be used in this essay is the Aggregate Demand and… The news article refers to the global economic slowdown (Economic cycle), extra harvest (Supply), change in consumers' drinking habits (Demand) and the strength of australian dollar (Currency).... The article focuses on the macro-economic and micro-economic factors that are troubling the australian wine industry.... The article explores the reason for australian company Foster's parting away with its wine business....
5 Pages (1250 words) Assignment

Ecological and Economical Urban Planning Initiatives in Australia

… The paper “Ecological and Economical Urban Planning Initiatives in Australia” is a meaty variant of term paper on social science.... Australia is a country that has a great proportion of urban societies.... Its economic development which is impacted by rapid population increase and the immense urbanization growth led to the introduction of advanced urban planning in the Country....
10 Pages (2500 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us