SPECIAL REPORT AUSTRALIA May 28Th 2011
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SPECIAL REPORT AUSTRALIA May 28th 2011 No worries? SRaustralia.indd 1 17/05/2011 16:21 S PECIAL REPORT A USTRALIA N o worries? W ith two decades of unbroken growth behind it, record prices for its minerals and an insatiable market on its doorstep, Australia can a ord to be carefree. Or can it, asks John Grimond? HP AP Y THE COUNTRY that never makes the front pages of foreign newspapers. Australia is one such. Only a dozen economies are bigger, and only six nations are richerof which Switzerland alone has even a third as many people. Australia is rich, tranquil and mostly overlooked, yet it has a story to tell. Its current prosperity was far from inevita• ble.Twenty•ve years ago Paul Keating, the country’s treasurer (nance minister), declared that if Australia failed to reform it would become a ba• nana republic. Barely ve years later, after a nasty recession, the country began a period of uninterrupted economic expansion matched by no other rich country. It continues to this day. This special report will explain how this has come about and ask whether it can last. Those with a passing acquaintance of Australia will attribute its success to its luck in having such an abundance of minerals that its C ONTENTS booming Asian neighbours want to buy. That is certainly part of the story. Yet Australia was not dragged down when a nancial 3 The case for crisis struck Asia in 1997. And commodity exports have not complacency always been fashionable. In the 1990s many thought they She’ll be right were evidence of an incorrigibly old, low•tech econ• omy doomed to decline. Australia’s terms of trade 4 Pensions the ratio of its export prices to its import prices Super•duper supers seemed stuck at unfavourably low levels. Not 6 The case for action until 2003 did minerals begin to boom again, Be prepared though by then Australia had escaped both the Asian crisis and the recession that hit 7 Wine America in 2001. Five years later came High dollar, high the GFC, Oz•speak for global nan• dolour cial crisis. Yet that, too, failed to 8 People drive Australia into recession. The evolving platypus Someone, other than Lady Luck, must have been doing some• 11 The environment thing right. A preference for green In this latest crisis Austra• 13 Foreign policy lia certainly played its cards well, Home alone but the pack had already been nicely shued. Over a period of 20 15 Politics A CKNOWLEDGMENTS years, from 1983 to 2003, governments of the left and of the right carried Politician, heal thyself Among the many people the author out the reforms that have made Australia one of the most open and ex• would like to thank for their help are ible economies in the world. That description would not have accurately Chris Cheatley, Kath Cummins, described the country at any other stage in its history. Gervase Greene, James O’Toole and The incoming government in 1983 led by Bob Hawke, a former trade Don Stammer unionist, was the rst to take serious remedial action. With the popular, politically astute Mr Hawke presiding, and the coruscating, aggressive Mr Keating doing most of the pushing, this Labor government oated the Australian dollar, deregulated the nancial system, abolished import quotas and cut tari s. The reforms were continued by Mr Keating when he took over as prime minister in 1991, and then by the Liberal•led (which in Australia means conservative•led) coalition government of John How• A list of sources is at ard and his treasurer, Peter Costello, after 1996. Economist.com/specialreports By 2003 the e ective rate of protection in manufacturing had fallen An audio interview with from about 35% in the 1970s to 5%. Foreign banks had been allowed to the author is at compete. Airlines, shipping and telecoms had been deregulated. The la• Economist.com/audiovideo/ bour market had been largely freed, with centralised wage•xing re•1 specialreports The Economist May 28th 2011 1 Issue Date: 28-05-2011 Zone: UKPB Desk: SR Output on: 20-05-2011----10:40 Page: SR2 Revision: 0 SPECIAL REPORT AUSTRALIA 2 placed by enterprise bargaining. State-owned rms had been pri- equal treatment and an apology for two centuries of injustice; vatised. A capital-gains tax and a valued-added tax had been now they want recognition in the constitution. brought in, and the double taxation of dividends ended. Cor- Demographically, by freeing the labour market and operat- porate and income taxes had both been cut. ing a colour-blind immigration policy, the reforms have created These reforms have done much more to transform the Aus- an increasingly cosmopolitan society. In the 1940s Australia was tralian economy than the recent improvement in the terms of about 98% Anglo-Celtic; by the 1980s a few other Europeans, trade. They have also transformed the country. mostly Italians and Greeks, and latterly some Vietnamese, had Constitutionally, they have destroyed the Australian set- started to leaven the mix. Today over a quarter of the population tlementa semi-tacit compact dating from the time of federa- were born abroad, and most migrants, if they are not from New tion in which the market was tamed by trade protection, central- Zealand or Britain, are from India, China or some other Asian ised wage-setting, a white Australia immigration policy and a country. Asians make up about 10% of the population. paternalist state within a benevolent British empire. Most of this Psychologically, the reforms have changed what seemed to has now gone, leaving the way open for centralising federal gov- be a dening feature of Australians’ national character: the hap- ernments in Canberra, aided by the growth of a national market py-go-lucky belief that, though their country more than others in everything from advertising to Vegemite, to erode the powers might be a victim of external events, something would always of the states and their control of public money. For their part, turn up. Micawberism has been replaced by a realisation that some states are challenging the equalising allocation of value- Australians, like everyone else, have to be resilient, competitive added tax revenues. Republicans have sought to get rid of the and ready to take charge of their own destinies. monarchy, an imperial comfort blanket in 1901 that seems irrele- It is tempting to say the reforms have gone further, bringing vant to many in 2011. Aborigines, whose very existence was le- to Australians a clarity of self-perception not always present in gally ignored by the European settlers, have fought for land, the past. Australians used to see themselves as sturdy pioneers, 1 2 The Economist May 28th 2011 Issue Date: 28-05-2011 Zone: UKPB Desk: SR Output on: 20-05-2011----10:40 Page: SR3 Revision: 0 SPECIAL REPORT AUSTRALIA 2clearing the bush, rounding up sheep and doing battle with THE CASE FOR COMPLACENCY droughts, dingos and dastardly oppressors like the policemen who hunted poor Ned Kelly (never mind that he was a hostage- She’ll be right taker and murderer). But though their heart lay in the outback, the rest of their body was, at least from the mid-19th century, rmly in the city or, more exactly, in the suburbs, which is where most live today. It would be asking a bit much to expect Australians to weave a new national myth around a suburban life involving After 20 years of success, reform is a hard sell barbecues, SSB (sémillon sauvignon blanc), heroes driving Hold- en utes (General Motors utility vehicles) and characters from SOME POLITICIANS WIN power and do not know what to Neighbours, a sunshine soap. Nonetheless, this era of prosper- do with it. Others come to oce determined to change ity and self-condence should be a good time for Australians to everything and end up doing nothing. A respectable case can be take stock and confront any problems. On the face of it, their made, in certain places at certain times, for concentrating on troubles are few: in 20 years of radical change all the obvious good management and making only a few big changes, but mak- economic issues have been dealt with. Things are good, and the ing them well. In Australia, this case rests not just on the thor- beach beckons. Certainly, the politicians seem unworried. oughness of the 1983-2003 reforms but on the fact that the econ- Though they talk of reform, they spend most of their time scrap- omy has recently passed a stress test that all other rich countries’ ping about issues like climate change. A slight whi of compla- economies to some degree failed. The global nancial crisis did cency pervades the groves of the capital, Canberra. That in itself not pass Australia by, but neither did it drive it into recession. should be a warning. 7 The rst reason for that was the strength of the four big banks. They were strong partly because Australian banking had already been through some bad times. Two had almost gone un- der in the 1990s, when several state-owned banks foundered and others were taken over. That episode, and the Asian crisis of 1997, made them tighten up. Then came the collapse of HIH In- surance in 2001, which led to a revision of regulatory oversight. As a result, Australia’s banks in 2008 had higher capital ratios than their counterparts in America and Europe and were watched over closely by an active and conservative regulator. Even so, the banks were potentially vulnerable, because they were dependent on oshore borrowing and thus exposed to British and American banks.