A great op-ed from economics professor Andrew Leigh on why Australia is truly the lucky economic country. We should not, therefore, drop the ball on prudent--and appropriately diligenced (which is a vital rider)--economic reform.
Time to Make Our Luck, Australian Financial Review, 31 August 2010
In 1964, Donald Horne argued ‘Australia is a lucky country run by second-rate people who share its luck’. Forty years later, he wrote that: ‘Things have changed for the better. But the jury is still out.’
With next week marking the fifth anniversary of Donald Horne’s death, many commentators seem to be stuck in a rut of bemoaning Australia’s misfortune. But while politics has gotten a tad more complicated, it’s also important not to forget our nation’s extraordinary good economic fortune.
On the unemployment front, Australia stands apart from most of the developed world in not having experienced a major economic downturn. (Visiting Australia earlier this month, Nobel prize winning economist Joseph Stiglitz quipped that our only contribution to the worldwide slump was to have coined the acronym ‘GFC’.) For decades, it was a truism of labour economics that Australia had a higher unemployment rate than the United States. Today, the US jobless rate (9.5 percent) is nearly twice as high as Australia’s (5.3 percent). Worryingly for the US, economist Paul Krugman recently argued that his country’s growth rate is still too sluggish to reduce unemployment anytime soon. In human terms, Australia’s lower unemployment rate means hundreds of thousands of people who have not experienced a bout of joblessness, with the loss of skills and self-esteem that typically come with it.
As international economic experts have pointed out, Australia’s economic strength is due in large part to our rapid fiscal response. Yet while the combination of lower tax revenues and higher spending has left some nations with government debt larger than 100 percent of GDP, Australia’s debt-to-GDP ratio will peak at just 6 percent of GDP in 2011-12. Where other countries are heavily constrained in their policy choices by the absolute priority of paying off debt, Australia has the ability to both satisfy our creditors and make long-term investments.
Globally, Australia’s geographic position could hardly be better. At the start of the Asian Century, our proximity to fast-growing nations such as China, Malaysia, Vietnam and Korea will prove vital not only for goods trade, but also because it will allow us to plug in to global growth in other ways as well. Thousands of foreign-born students now study in our universities, while many Australian-born students take the chance to complete all or part of their education in an Asian university. And the chance for our skilled workers to spend part of their career working in Asia (and vice-versa) brings new ideas and approaches to businesses in both nations.
Another reason to be optimistic about Australia’s economic future is the bipartisan consensus that has underpinned major economic reforms. For most goods, tariff barriers are now close to zero. While the US squabbles over private social security accounts, Australia’s superannuation system ensures that individuals get the benefits of a sharemarket that has historically outperformed all other asset classes, but with a safety net that keeps pace with wage growth. HELP (formerly HECS) makes sure that our universities are partially funded by students, but with repayments deferred until after graduation, and paid only by those whose incomes exceed the average. Crucial to spearheading many of these reforms (and preventing backsliding) has been the Productivity Commission, which provides a strong and independent voice in favour of good economic policy.
Great fundamentals place the onus on us to do something special. With the right policies and effective leadership, we can lay the foundations for continued productivity growth, ensuring that future generations enjoy steady improvements in living standards. We can make schools and hospitals work even better, providing the building blocks of a happy and healthy life. We can improve trust in politics, engaging with voters about the tradeoffs that are at the heart of decision-making. We can continue to close the gaps between Indigenous and non-Indigenous Australians, applying hard-headed analysis to find out what works, and what does not. Through trade, aid and diplomacy, we can help improve the lives of many in our region. And with the guidance of scientists and the goodwill of taxpayers, we can use market mechanisms to help address dangerous climate change.
Squib this chance, and future generations will shake their heads in wonder. But if we grab our opportunities with both hands, we will truly be the nation that makes its own luck.
