Asian Malaise Calls for Australia to Take Cure

To reform or not to reform, that is the question confronting governments.

Over the last 15 years, the Australian economy has been transformed by forces of "economic rationalism" -- less regulation, smaller government and great use of market forces.

This process has never been popular, but until recently voters and pollies, aside from the greens and the Democrats, were convinced of its necessity.  This consensus is now crumbling.  One Nation is pushing the Nationals towards supporting the Democrats belief in government control.

Ironically this retreat comes at time when the evidence in support of economic rationalism has never been clearer.  It also comes at a time when a populist retreat to the policies of the past would be most disastrous.

Clearly the economic malaise engulfing our region is having a deleterious impact on our economy and may well push us into recession.  However, the undeniable fact is that we are weathering this cyclone far better than we would have because of the many reforms undertaken over the last decade and a half.

Just imagine if we had not floated the dollar.  Given our large current account deficit, low savings rate and small domestic economy, the Australian currency would have been exposed to the same speculative forces as has, for example, the Malaysian ringgit.  The result would be double digit interest rates, plummeting investment and higher risk-premiums.

Imagine if we had not reformed the banking system by opening it up to competition, deregulating interest rates, and imposing rigorous fiduciary and accounting requirements.  Instead of Australia financial institutions being currently in the market to buy assets in Asia, the government or the IMF would now be involved in a costly bank bail-out.

Imagine if we still had a public sector deficit of 7% of GDP and an inflation rate of over 10%, as we did at the time of Mr Keating's now famous Banana Republic warning.  Instead of confronting a current account of less than 6% of GDP -- which is high, but manageable -- we would be looking at a double digit current account, rapid growth in foreign liabilities, and the currency crashing below the 50 US cent mark.

Imagine if Telecom had remained an unreconstructed government behemoth -- consuming three times the resources and producing half the output, at twice the price as it currently does.  We would be locked out of the global telecommunications system.

Imagine if we had not made efficiencies in government trading enterprises or staffing levels or service delivery.  Not only would government services be poorer and taxes even more crippling, but we would be unable to compensate the losers of reform.

Clearly not everything is going well down under.  Unemployment is far too high and the regions are being disproportionately effected.  However, these sins arise because of the lack of reform and the anti-development ethos pushed by many urban anti-rationalists, than from reform.

Importantly, now is not the time to get cold feet or retreat to the past.  The threats and opportunities thrown-up by the Asian contagion demand that we reform the remaining holdouts -- starting with the labour market and tax.

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