Why has Australia remained one of the best-performing economies in the face of the global financial crises of the past five years?
The Australian economy since 1997 has shrugged off the Asian financial crisis, the pricking of the equity-market bubble in the United States – which wiped out more than $US6000 billion of that nation’s wealth – severe deflation in Japan, faltering export markets, and deflation that has imperilled the economies of North America and Europe.
According to the consultancy McKinsey & Company, systemic crises more than doubled in the 1990s (to 93), a rise that has continued in the 21st century. In the past year Argentina and Uruguay have endured financial crises, Germany is on the brink of deflation, Brazil is still at risk and Turkey is struggling to recover from a currency crisis.
But not Australia. It has been one of the best-performing economies in the developed world over the past five years, inflation has not been too high or too low, interest rates are not at the dangerously low levels evident in North America and Europe, and unemployment is low. The currency has been volatile, suffering more than 30% in the past three years, but much of this has been due to international factors. The lows in the currency helped exporters at a time when the domestic economy was not as strong.
A disturbing bubble has developed in the housing market, but there seems little likelihood that a decline will greatly threaten the banking system.
Australia’s monetary authorities, unlike those elsewhere in the developed world, have some room to move (Europe’s interest rates are below 3%, in the US they are 1% and Japan’s are close to zero).
Many commentators have suggested that Australia’s “old economy” – seen as a handicap a few years ago – has saved the country from the worst of the recent financial mood swings and their economic consequences.
Certainly some of Australia’s stellar industries – for example, wine and resources – are in the old sectors of agriculture and mining. And strength in telecommunications comes at least partly from having a government-owned carrier operating in a country the size of Australia. Because Australia is the only nation in the world with sovereignty over an entire continent, the argument goes, it had a natural monopoly not seen in other parts of the world.
Wine is the big success story, built on competitive advantages that include a high degree of collaboration in the industry – regions like the Barossa Valley in South Australia, the Yarra Valley in Victoria, Margaret River in Western Australia and the Hunter in New South Wales – substantial infrastructure, research and development and relatively cheap land.
Australian and other New World wine producers have made the most of buoyant economic growth, growing demand in previously non-consuming nations and greater exports. They have been riding the crest of a wave for about a decade.
For Australia, the effect has been extraordinary. Wine ranks fourth by value in Australia’s top five farm exports. Worth an estimated $2.1 billion, it is well behind wool ($3.7 billion), wheat ($4.6 billion) and beef and veal ($4.3 billion). And, wine is the fastest growing. From 1999 to 2004 it will have had estimated compound annual growth of 24%. The rate for beef and veal is 4%, wool 5% and wheat minus 1%.
Globally, the industry is fragmented. But Chris Day, chief executive of Berren Asset Management (which runs the International Wine Investment Fund), has predicted that five to 10 “mega” wine groups will dominate the industry within five years.
Australia’s telecommunications sector is another case in point. This is particularly because there is one company that seems to have deep pockets and, despite some questionable overseas ventures, has shown a more measured approach to investment. The entity is Telstra, which is still 50.1% owned by the Australian Government.
Telstra’s stranglehold on the domestic market has resulted in record revenue and profit figures. Telstra’s significance to the industry cannot be overestimated, and questions about its being a natural monopoly in a country the size of Australia underscore the debate on the proposed sale of the Government’s stake.
Certainly, Telstra has obligations in the national interest. Its smaller and privately owned competitors provide mobile phones. But apart from that, they can only arbitrage, using Telstra’s physical infrastructure to varying degrees.
Despite a market that is clearly underwhelmed, Telstra has fared better than its overseas counterparts. In the past two years, France Telecom shares have crashed 52%, Deutsche Telekom 43%. Telstra shares have slipped about 8%. British mobile phone carrier Vodafone last year recorded the biggest-ever loss for a European company after writing off acquisition costs.
Comparing Telstra with its European counterparts is difficult because of Europe’s disastrous spending spree on 3G (third-generation technology) spectrum. European operators had to buy 3G because their existing networks had run out of capacity. Telstra did not have that problem, as there was plenty of capacity in the 2G networks here.
The British consultancy IR Group surveyed the world’s top telcos and the return to investors for the 2001-02 financial year. Telecom New Zealand took the top spot, followed by Telstra. The Australasian telcos easily beat their global peers.
One of the things that set Telstra apart was that it did not take such big risks as the European telcos. Whether this was due to its 50.1% public ownership or the market itself is a matter of debate. But risk aversion is the flipside. Telstra has been criticised for its late entry into the broadband market, and its joint venture with Richard Li’s Pacific Century Cyberworks was a disaster. Analysts say the challenge ahead for Telstra is to increase its data communications revenue and derive more of its total revenue overseas.
The $60 billion resources sector has also been identified as a growth machine that sets Australia’s economy apart from the rest of the world. So much so that it is now almost entirely in the hands of foreign companies. The need to become bigger has driven the merger juggernaut.
The London-based Rio Tinto bought North, Ashton Mining and Comalco for $5.7 billion, and London’s Billiton merged with BHP in a $58 billion deal. Normandy Mining was acquired by Newmont Mining of North America in a $4.5 billion deal. AurionGold – created by the merger of Goldfields and Delta Gold – was acquired by Placer of Canada for $1.6 billion.
The Australian-based companies still have billions of dollars in revenue and employ thousands of people. And the reality is that takeovers are not locked in by foreign companies in perpetuity, as the acquiring company will always cut loose the assets it no longer wants.
Merrill Lynch’s head of assets allocation in Australia, David Hudson, says: “The lucky part is that we have had a low exposure to the so-called ‘new economy’ sectors of technology, media and telecoms. The bubble in asset prices in these sectors has made economic management very difficult, as many business decisions were distorted by the ‘free’ money thrown at these sectors.
“The adjustment after the bubble burst has been bruising, particularly as these factors have been compounded by dramatically increased geo-political risk,” he said.
Alex Erskine, a private-sector economist who consults to such international organisations as the World Bank, says the fact that Australia has avoided financial bubbles and maintained a healthy level of economic growth has been important for global investor confidence. That, he says, brings with it luxuries that other countries don’t have, like having enough inflow of foreign capital to almost continually finance a current account deficit.
“The conventional wisdom is that Australia is one of the few countries that has been able to borrow from the rest of the world in our own currency. That has allowed us to run current account deficits and consume money that we did not earn, for longer than almost anyone else.
“We have retained the ability to let our currency float and depreciate and still have tolerably low interest rates. How did we achieve this? First by floating the Australian dollar in 1983. Then by some radical improvements in economic policy, particularly the Hawke-Keating budget surpluses, and then the adoption [and successful pursuit thereafter] of sensible 2-3% inflation targeting from 1993.”
Erskine says an important difference is that other countries have been “required” by global financial markets to run current account surpluses to try to balance the deficits. “Australia had only four years of current account surplus in the 20th century.”
Although that analysis might sound as though Australia is living on borrowed time, many commentators point to how the nation’s productivity improved after many of the economic reforms implemented in the 1980s to radically change the performance of the economy.
Even opponents of the trade union Accord system that was implemented during the Hawke- Keating governments acknowledge it reduced wages growth and improved productivity as trade-offs were agreed to.
JP Morgan senior economist Stephen Walters says some credit should go to the Reserve Bank of Australia for managing policy through several droughts, war and the Asian crisis.
Little wonder then that Reserve Bank governor Ian Macfarlane, was named central banker of the year last year by Euromoney magazine.
Investment in innovation
A report by Melbourne Business School academic Joshua Gans and Kellogg School of Management academic Scott Stern says Australia’s investment in innovative capacity between 1980 and 1991 began to have an effect in the next decade. “The growth in Australian innovative capacity accelerated between 1991 and 1996 … a record of sound macro-economic policy, micro-economic reform and openness, and an enhanced R&D workforce all contributed to Australia’s ability to achieve second-tier status by the mid-1990s.”
However, Gans and Stern say that Australia’s investment in innovation since then has stagnated, the result of a drop in investment in higher education and high-level research at universities.
Other things have set Australia apart, things that in recent years have helped its economic performance.
Australians have a stronger desire for home ownership than people in most Western countries, and in the past two years the growth in housing construction has pulled domestic spending along with it, at a time when exports have been weak.
The appetite for housing in the past two years was also helped by the introduction of the goods and services tax in July 2000, which caused weakness in the economy in the second half of 2000, thereby creating pent-up demand for housing in 2001. That housing boom coincided with the global recession, allowing Australia’s economic performance to once again run counter-cyclically to the rest of the world.
Lower government debt
Another critical factor in Australia’s resilience has been the character of the country’s debt. In the past decade, debt has been shifted from government to companies and households. Household debt, expressed as a percentage of annual disposable income, is about 130%, up from 53% in 1992.
By contrast, the Commonwealth has not borrowed in net terms since 1996, according to Axiss Australia, and the net Commonwealth debt has fallen from 19% of gross domestic product in 1995-1996 to less than 7%.
The suggestion made earlier in the year that the government bond market would cease is further evidence of how little sovereign debt there is. This has meant that Australia has incurred a low level of sovereign risk – possibly a further reason why the economy has been uncommonly resilient. With only a negligible government bond market, the possibility of a debt crisis of the type that hit Latin America and parts of South East Asia has been virtually eliminated.
Almost all the Australian debt is private, and private debt can fail (and is more truly “global” than government debt). Government debt is only 16% of GDP, whereas company debt is more than 55% of GDP (more than 65% if government corporations are included) and household debt is more than 75% of GDP. In the US, where debt is more than 200% of GDP, government, company and household debt are at similar levels.
Australia’s high level of household debt is becoming a common feature of developed economies, and although it poses a danger for the Australian economy should asset prices fall sharply, it has not led to any penalising of the economy in the international environment. For the first time since World War II, the US, Canada, Britain, Australia and New Zealand have net savings at, or near, zero (partly as a result of savings being directed away from bank accounts and into less accessible vehicles such as equities and property). Australia, consequently, does not stand out.
There are many less favourable signs about Australia’s performance. The performance of the stockmarket has been desultory over the past 15 years. The All Ordinaries has risen by only about half from its pre-1987 highs compared with a trebling of the Dow Jones index, even in the current bear market.
In the Asian region, the Australian stockmarket is seen as a largely defensive option, somewhere to go when the growth prospects elsewhere look poor. This does not augur well for the country’s future.
Neither is the strength of the economy readily attributable to Australia’s management culture. Andrew Liveris, president of Dow Performance Chemicals and an expatriate manager, says Australia’s lack of scale means that a critical mass is hard to generate.
“There is definitely a bell curve in management,” Liveris says. “Five per cent of the bell curve constitutes great success. You look at the numbers of managers in Australia and say it is 5% of a pretty small number therefore you are not going to see many.
“But that is not true of Australians that work in American and European companies and do very well. There are a lot of Australians in global enterprises who have adapted and have become very impressive. Australians are straight talkers and we get things done. I think that is highly valued.”
It is difficult to calculate with any plausibility how much Australia’s resilience in a global economy that is suffering from large imbalances has been a matter of luck, and how much of it has been due to internal strengths. Certainly Australia’s financial institutions are more effective than many in Asia or the developing world.
The prospect of a free-trade agreement with the US may mean that, in economic terms, Australia is about to “get lucky” again. The global economy is becoming increasingly “US-centric” – relying heavily on the US consumer. Two-thirds of world growth in the past five years has come from the US, whose GDP is only about one-third of world GDP.
There is little reason for complacency. Australia may just have been lucky after all, and that luck may turn. The economist Erskine warns that Australia’s unique combination of rich resources and relatively good economic management – on their own – will not be enough forever.
“Our resource endowment is a handicap that we have managed to accommodate, and has not been a blessing. Skills and enterprise are what make successful economies, not great mining or agricultural endowments. We have thrived in large part because of our high immigration, which has kept Australia young.”
Gans, J., and Stern, S.,Assessing Australia’s Innovative Capacity in the 21st Century , Melbourne, June 2003.
Porter, M.,Clusters and the New Economics of Competition , Harvard Business School Press, 1998.
Schwab, K., Porter, M. and Sachs, J.,Global Competitiveness Report ,World Economic Forum.
Sauer-Thompson, G. and Wayne Smith, J.,Beyond Economics: Postmodernity, Globalisation and National Sustainability , Avebury, 1996.