Natural advantages

The sharp fall in the Australian dollar — down more than 20 per cent to around US70 cents over the year to October — will probably do little to cheer up Australians, who, whatever the ominous developments in Europe or Asia, have at least been enjoying their overseas holidays. For pretty much all of the past few years, more than half of Australian households have said they are pessimistic about the future, according to Westpac’s closely-watched monthly confidence survey. Yet over the preceding decade, except for the stressful time around the Global Financial Crisis, the opposite had been true.

If only we weren’t so glum — and not only for our peace of mind. Pessimism saps economic activity, reinforcing itself, as US President Roosevelt famously observed in the early 1930s. In fact, Australia’s economic prospects are bright, and not simply because a weaker currency will boost tourism and make our manufacturers more globally competitive, as the economists continue to tell us.

A constant focus on resource prices has obscured the reality of Australia’s diverse economy: since 2005 employment in the health and education sectors has grown by more than 500,000 (a quarter of all additional jobs), compared to only 113,000 in mining.

We might even enjoy a revival in our buying power. While we have been mourning the steady collapse in the price of iron ore, our Liquid Natural Gas (LNG) exports are poised to overtake it as our biggest export by the end of next year.

According to recent ANZ forecasts, they will triple in value to $50 billion a year by 2020 (almost the value of our iron ore sales last year) as the world moves away from carbon-dioxide intensive energy sources such as coal, and Asian — and especially Chinese — households’ energy demands catch up with those in the first world. Australia will rival Qatar as the world’s biggest LNG exporter by 2018.

But even if another resources bonanza eludes us, we shouldn’t worry. Australia is increasingly well placed to capitalise on our natural advantages in agriculture, education, and tourism. Free trade, probably more than anything else, has underpinned Australians’ rising prosperity. We are on the verge of joining what will be the biggest trading zone in the world, with 800 million people and 40 per cent of global GDP — the Trans-Pacific Partnership (TPP) among 12 countries, including Japan and the United States.

While 20th century trade agreements unpicked barriers to the international trade in goods, the TPP will level the playing field in services, which make up 70 per cent of Australian GDP already and offer great scope for improved productivity and exports.

Once a tyranny, Australia’s geography has become an advantage in the 21st century. The TPP includes Indonesia, our nearest neighbour, which by 2050 will be the world’s fourth largest economy after China, the US and India, according to recent PricewaterhouseCoopers (PwC) analysis. Here, scope for mutual benefit through mutual trade and investment flows is vast.

In 2014 Australian firms had invested only $8 billion in Indonesia, compared to $100 billion in New Zealand, which has less than two per cent of Indonesia’s population. The TPP will give Australian companies, especially service firms, the chance to play a much greater role in Indonesia’s development.

It's easy to forget Australia enjoyed its quickest growth before the resource boom got underway around 2004. We powered through the 1998 Asian Financial Crisis and global recession of the early 2000s, thanks mainly to the liberalisation of labour, financial and product markets in the 1980s and 1990s — by successive Labor and Coalition governments — that made Australia’s economy more resilient, competitive, and open.

From 1991 to 2000 the economy grew by around four per cent a year on average, far quicker even than over the last decade. Australians’ living standards, measured by GDP per capita, grew more rapidly than at any time since the 1960s and more rapidly than in any other rich country over that period bar Ireland.

As The Economist famously observed, Australia has managed adversity well, but prosperity badly. As the easy money of the resource boom recedes, our failure to advance the reform agenda of earlier decades is exposing the economy’s weaknesses. Unemployment has increased steadily to above six per cent, as rates fall in the US and UK. State and federal governments have preferred showering the electorate with increased social security payments, creating a revenue shortfall that will threaten the government’s AAA credit rating if left unchecked.

There is no shortage of good ideas — sensible reform suggestions for tax, financial services, social security, child care, and even the federation governance have been piling up for years. Without the bipartisan political will to pursue them, Australia won’t be able to fulfil the significant economic opportunities the 21st century presents and our living standards may even stagnate.

ADAM CREIGHTON
Bachelor of Arts and Bachelor of Commerce (Economics & European Studies), UOW (2001)
Master of Philosophy (Economics), Oxford (2008)

Adam Creighton has been The Australian’s Economics Correspondent since 2012, having worked in London for The Economist in 2009. He covers domestic and international economic news, and writes a column on economics and public policy every Friday. This year he won the Citi Journalism Award for Excellence.

In 2001 he completed (in 3.5 years) a Bachelor of Arts and Bachelor of Commerce, in history and economics, at the University of Wollongong. He started his career at the Reserve Bank of Australia and the Australian Prudential Regulation Authority, and in 2010 was a senior adviser to the then federal Leader of the Opposition, Tony Abbott.

Follow Adam Creighton on Twitter: @adam_creighton