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| ISBN-13: | 9781742240886 |
|---|---|
| Publisher: | UNSW Press |
| Publication date: | 07/01/2011 |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 224 |
| File size: | 2 MB |
About the Author
Michael Wesley is the executive director of the Lowy Institute for International Policy. He is a former editor of the Australian Journal of International Affairs and a former international relations professor and director of the Griffith Asia Institute at Griffith University.
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There Goes the Neighbourhood
Australia and the Rise of Asia
By Michael Wesley
University of New South Wales Press Ltd
Copyright © 2011 Michael WesleyAll rights reserved.
ISBN: 978-1-74224-088-6
CHAPTER 1
Australia rising
Friday, 26 January 1990 was a morose Australia Day. The weather in Sydney and Canberra was sullen and close, and storms threatened Brisbane. These were the only capitals which celebrated that Friday, because Victoria, South Australia, Tasmania and Western Australia refused to move the traditional Monday public holiday to a Friday. The prime minister made a half-hearted call for all Australians to celebrate on the same day, while a couple of eminent historians advocated moving it to two completely different dates. That year, more foreigners than Australians were awarded the nation's highest honour, the Companion of the Order of Australia. The flags that Sydney schoolchildren waved were prominently marked 'US Patent No. 4590883'.
Australians had little to be buoyant about. All of the signs pointed towards another recession – and a bad one at that. Interest rates stood at 17 per cent, and Australians' mortgage repayments had climbed 28 per cent in the previous year. People in economic distress had driven up calls to 24-hour crisis lines by over 400 per month. The flagship company of Alan Bond, the entrepreneur who had most embodied the 1980s spirit of Australian audacity and confidence, went into receivership, along with many others. Failed financial institutions littered the legal landscape: the State Bank of Victoria, the State Bank of South Australia, the Teacher's Credit Union of Western Australia, the Pyramid Building Society, the merchant banks Tricontinental, Rothwell's and Spedley's, the Estate Mortgage Trust, and the Order of the Sons of Temperance friendly society. Two of the big four banks had haemorrhaged money and needed to be recapitalised.
In the first week of 1990, Moody's downgraded Australia's credit rating; Standard and Poor's followed within a few days. A fortnight later market researchers Dunn and Bradstreet registered a record slump in business confidence. The Institute of Applied Economic and Social Research reported the lowest levels of consumer sentiment ever recorded. The Australian dollar fell by 6 per cent in the week leading up to Australia Day, despite the Reserve Bank's efforts to prop up its value. On the day before Australia Day, Newspoll recorded that 30 per cent of respondents believed their economic situation would worsen over the next six months, while just 18 per cent thought theirs would improve.
The pessimists were right. By the September quarter of 1990 the Australian economy had slid into a deep downturn. During the recession, the Australian economy shrank by 1.7 per cent, resulting in $30 billion in lost output. By January 1991, the share market had fallen 32 per cent. Commercial property prices collapsed by over 50 per cent. Australia's net foreign debt ballooned to $150 billion by late 1992, or nearly one-third the size of Australia's national output. Australia's payments to service the debt were almost a quarter of the size of all export revenue, the highest level of any developed economy. The economy shed 300 000 jobs, almost doubling the unemployment rate to 10.8 per cent. Between August 1989 and August 1993 the number of long-term unemployed tripled, with people out of work for twelve months or more comprising one-third of all unemployed.
The 1990s recession was even harder to take because it brought to a sudden end a period of economic exuberance and national confidence. The second half of the 1980s had seen the Australian economy growing strongly, at annual rates of over 5 per cent before the end of the decade. It was a time of national pride and sporting success, when a new nationalism infused film and popular music. The spirit of optimism and enterprise was embodied by photogenic and ostentatiously successful entrepreneurs such as Alan Bond and Christopher Sake. Ordinary Australians followed suit, buying property, cars and boats, and taking regular overseas holidays. By the end of the 1980s, domestic consumption was growing by 8 per cent, and Australians' tastes were decidedly cosmopolitan, driving up imports by 29 per cent a year.
As the bad news hit in the 1990s, it was hard not to feel helpless. Just as had happened in 1974 and 1982, when the world economy plunged it took Australia with it. It was little consolation that 10 of the world's 18 developed countries were even harder hit. All of the ebullience of the 1980s looked hollow. It seemed that Australia's was a minor economy whose fortunes were ultimately determined by the world beyond its shores, rather than by effort and enterprise at home. Almost a decade of economic reforms designed to make the Australian economy more flexible and entrepreneurial seemed to have made little difference. The architect of the restructuring, Paul Keating, had warned Australians in May 1986 that unless such reforms were made, 'we will just end up being a third rate economy ... a banana republic'.
Keating's warning had struck a raw nerve in the community at the time because it played to a deep pessimism about the country's long-term economic vitality. At the end of the nineteenth century, Australians had been the wealthiest people on earth, with a per capita income higher than any other society's. But for nearly a century, other countries had been striding confidently past Australia. Even during the long boom years of the 1950s and 1960s, when Australia's per capita growth was consistently over 3 per cent a year, it still lagged behind the average growth rate measured across all developed economies. During the downturns in the 1970s and 1980s, the Australian economy had plunged further and faster than most other wealthy economies, and by the end of the 1980s Australians' per capita wealth was lower than it had ever been when compared to the developed country average.
If Australians had been able to predict events beyond their shores in the twenty years after Australia Day in 1990, they would have been even more pessimistic. Those decades saw a serious financial meltdown somewhere in the international economy every two years. Beginning in 1991, Australia's largest trading partner, Japan, would enter a decades-long period of stagnation, registering growth rates of less than 1 per cent and stumbling through four recessions. Within eight years the other dynamic Asian economies that bought the bulk of Australia's exports, plunged into the region's greatest ever economic crisis, wiping off between one-quarter and one-half of the value of the bourses of some of Asia's fastest growing economies. The following year, 1998, American bond markets ground to a standstill. America also dragged much of the world into recession three times in the first decade of the twenty-first century, as the 'dot-com' bubble burst in 2000, in the aftermath of the September 11 attacks in 2001, and with the sub-prime crisis of 2007–08.
And the plagues were not just economic. Jihadist attacks killed more Australians in the few years after the turn of the century than had died at the hands of terrorists in the rest of the nation's history. Oil prices quadrupled in real terms, rising further than the first oil crisis of 1973 and as high as during the second oil shock in 1980. The early years of the new century ushered in a new age of pandemic viruses threatening rapid transmission and the possibility of sudden infection and death – SARS, bird flu, swine flu – with potentially disastrous effects on international travel and commerce. The same few years would bring drought of a severity not seen for generations to most of southern and eastern Australia. By 2004–05, Australia was in the grips of a terms-of-trade boom of the same scale as the last one in 1974, which had tipped the economy into nearly two decades of high inflation, low growth and high unemployment.
This collection of challenges would be enough to cause panic to anyone with even a passing knowledge of Australia's economic history. Whenever the global economy had stalled – in 1974, 1982 and 1991 – the Australian economy had contracted further and faster than most other developed countries. Of even greater concern, each of these successive downturns had been deeper than any since the end of World War II. With such previous form, it was odds-on that the succession of Asian and then global economic crises between 1990 and 2010 would cause further economic misery in Australia. Nor was there any reason to doubt that the additional threats of terrorist attacks, ballooning energy prices, pandemic scares and drought would only worsen the effects on Australia's already battered fortunes.
Beautiful numbers
But the catastrophe never came. Australia's economy began rising in September 1991, and it has never stopped. Over the next two decades, the Australian economy tripled in size. The annual growth rate of Australia's gross domestic product averaged 3.25 per cent, never slipping beneath 2.5 per cent between 1992 and 2008 and topping 5 per cent in 1998. On a per capita basis, Australia's GDP increased by 182 per cent in the two decades after 1990. All of the chronic problems that had plagued the economy since the 1970s simply vanished. Inflation, which had averaged 8.5 per cent a year during the 1980s, fell to an annual average of 2.6 per cent between 1991 and 2008. The unemployment rate more than halved between 1993 and 2008, from 10.6 per cent to 4.2 per cent. Australians had become used to their economy being talked about with furrowed brows; by the end of the 1990s, Nobel laureates were dubbing it the world's 'miracle economy'.
There was more magic behind the numbers. The economy boomed not only because more Australians were working, but because they were also working more effectively. The 15 years after 1991 saw Australia's productivity increase at an average of close to 2 per cent each year, a rate consistently higher than throughout the previous four decades. The productivity revolution was the result of the 1980s and 1990s economic reforms, which had delivered low inflation and more competition, as well as the fast uptake of new information and communications technologies. These new technologies were especially beneficial because they helped solve stocking and logistics problems, fragmented markets and limits to competition that had hitherto constrained the small, internally dispersed Australian economy. The greater efficiency of the economy delivered a range of benefits: better wages and conditions without offsetting inflation; higher profits for companies and shareholders; better quality products at reasonable cost; and greater revenues for government.
Australia's growth rates after 1991 were not just extraordinary by the country's own historical standards, they were remarkable in comparison to the performance of other developed countries. Between 1990 and 2008, the Australian economy grew at an average rate of 3.26 per cent a year, compared to an average of 2.6 per cent across all developed economies. It easily out-paced the United States, which averaged 2.8 per cent across the same period, Britain at 2.35 per cent, New Zealand at 2.71 per cent, Japan at 1.44 per cent, Germany at 1.91 per cent, and France at 1.88 per cent. Only a handful of smaller economies bettered Australia: Ireland, Korea, Israel and Luxembourg. Australia's per capita growth was consistently half a per cent higher than both that of the United States and the average of all other developed economies – which were themselves undergoing economic boom times. Australia had not experienced these sorts of leads over other comparable economies since the Korean War. From the 1950s, Australians had become used to being outperformed by other developed economies. In per capita growth terms, Australia had averaged the best part of a whole percentage point behind the rest of the developed world since the 1960s: 3.2 per cent compared to an average of 4 per cent in the 1960s; 1.7 per cent compared to 2.3 per cent in the 1970s; 1.5 per cent to 2.1 per cent in the 1980s. But in the 1990s that percentage point lag became a lead: Australia's average per capita growth sped along at 2.4 per cent a year, the developed world's at just 1.7 per cent.
Australia excelled at more than just growth. Whereas at the end of the 1960s its barriers to international trade and investment were the highest in the developed world, by the 1990s they were the lowest. As a consequence, levels of trade and investment as proportions of the national economy returned to levels not seen since the beginning of the twentieth century, after plumbing historic lows in the 1960s. During the 1990s, the productivity growth rates of Australian workers surpassed the average of workers in other developed economies for the first time ever. Partly as a result of these efficiency improvements, Australia outperformed most other developed economies in keeping inflation to historic lows. And whereas Australians in the early 1990s, with their double-digit jobless rates, had enviously watched America's 'frictional' unemployment rates of around 5 per cent, the flow of envy reversed by 2009. Australia worried about skills shortages with a jobless rate barely topping 5 per cent, while Americans struggled to bring their unemployment under 10 per cent. The spectre of labour and skills shortages drove Australian rates of immigration to their highest levels in decades, and when the Australian population passed 22 million at the end of September 2009, demographers noted that the last million people had been added to the population one year faster than the previous million, and two years faster than the million before that. Whereas between 1901 and 1994 two-thirds of Australia's population growth each year had occurred by the birth of Australian babies, by 2009 immigrants comprised two-thirds of annual growth.
Australia's rise during these transmillennial decades – the twenty years between 1990 and 2010 – was partly a matter of good management. In particular, the raft of economic reforms enacted during the 1980s and 1990s – floating the dollar, opening the capital account, deregulating the financial sector, unilaterally cutting tariffs, implementing competition policy, guaranteeing central bank independence, reforming industrial relations and restructuring the tax system – bequeathed Australia with a more flexible but resilient economic structure for the 1990s and beyond. But the transmillennial boom also benefited from a touch of luck – or more accurately a trifecta. The twenty-years boom was given three successive boosts by three major shifts in Australia's external environment. No other country was in a position to benefit from this trifecta, meaning that Australia's superior performance after 1991 came partly from being in the right place at the right time.
The lead horse in the trifecta was the structural shift in the global economy that occurred in the early 1990s. By the end of the 1980s, the importance of manufacturing to international trade was falling fast, and the importance of services to production, consumption and trade was increasing at the same rate. This long-term shift underpinned a surge of growth in the global economy by reducing the tendency for wild swings in output and consumption. This taming of volatility was also assisted by the simultaneous control of inflation across developed economies, which reduced their need to periodically slow economic growth to fight it. Global growth in the 1990s was further spurred by the arrival and integration of information and communication technologies which lifted efficiency and integration in Australia and other developed economies. And at the same time as these technologies were boosting productivity, their price was falling fast; between 1990 and 2010, the average prices of information and communications equipment fell by more than 90 per cent. Australia's strong growth and sustained low inflation during the early 1990s rode partly on the back of a horse named global growth.
The second horse was another long-term shift in the global economy: the emergence of Asia as the centre of growth and dynamism. For much of its history, Australia has been remote from the centres of global production and finance, with real consequences for the growth potential of its economy. According to the calculations of the Federal Treasury, until the 1970s only about 16 per cent of world production was located within 10 000 kilometres of Sydney. (By contrast, 94 per cent of world production was within 10 000 kilometres of London.) By the end of the 1990s, 28 per cent of world GDP lay within 10 000 kilometres of Sydney. In addition to the now much reduced transport distances, the costs of trade also started to fall. Partly this was the result of innovations in bulk shipping and containerisation, but it also related to a general fall in trade barriers across most economies. As a result, trade became much more important to the Australian economy, rising from lows of around 28 per cent as a proportion of the economy in the 1960s to 42 per cent by the end of the century.
(Continues...)
Excerpted from There Goes the Neighbourhood by Michael Wesley. Copyright © 2011 Michael Wesley. Excerpted by permission of University of New South Wales Press Ltd.
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Table of Contents
Contents
Acknowledgments,Introduction,
1 Australia rising,
2 The great convergence,
3 The geometry of power,
4 The psychology of power,
5 Insular nation,
6 Here comes the world,
Notes,