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- ISSUE 21 DEC/JAN 11
What To Expect In 2012
A ROADMAP TO PRODUCT INNOVATION Page 76 HOW TO USE SOCIAL MEDIA TO EFFECT GROWTH Page 84 www.absmagazine.com.au
ISSUE 21 DEC/JAN 11
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THE AUSTRALIAN ECONOMY WHAT TO EXPECT IN 2012 | 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.
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During the global financial crisis (GFC), that has so badly engulfed the northern hemisphere, Australia has barely experienced a crisis at all.
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.
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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
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
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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.
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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 supplyside. However, over the past years since that golden period of the 2000 Sydney Olympics, Australia has proved its mettle in tackling some major global
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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.
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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.
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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. 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
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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,
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.