The Australian Economic Miracle

This week, the OECD -- the think-tank for rich nations -- gave Australia a glowing report.  In particular, it forecast that the Australian economy will rebound over the next year to lead the industrialised world with economic growth of around 4 per cent.

If achieved -- and the OECD forecast is consistent with most received forecasts -- this will be a truly remarkable achievement.  Our major trading partners -- indeed most economies of the world -- are facing very depressing times.  Our main trading partner -- Japan -- is mired in a deep recession.  The US economy -- the main driver of world growth -- has slowed dramatically, as has Europe.  The Asian economies have, with the exception of China, hit a wall.

In short, the OECD has forecast that the Australian economy will decouple itself from the worsening economic conditions confronting our main trading partners and the rest of the world.

How is this possible?  After all, Australia is a small, still predominantly commodity-driven economy, which in the past has caught pneumonia every time the world economy coughed.

Well, there are a number of reasons, but basically it is a result of good management, market-driven reforms and a government not succumbing to false "miracles".

Clearly, the decision to float the dollar and the subsequent low exchange rate has played a major role.  The low exchange rate is keeping viable many commodity products which face low world prices, such as gold, nickel and wool.  It is making now the best of times for producers of beef, coal, lamb and petroleum.  And it is giving a huge competitive boost to the manufacturing and service sectors.

Good, stable management of the domestic economy is another factor.  Both monetary and fiscal policy have been re-jigged over the last decade to produce stable sustainable growth and to avoid the boom and bust cycles that have haunted Australian in the past.  Of course this has been made easier by rapid productivity growth -- and Australia had the second highest rate of productivity growth in the OECD, after Ireland, during the 1990s -- resulting from microeconomic reform.  High productivity growth has allowed the economy to grow at a high, stable rate, relieving the political pressure for expansive policies.

Also there has been the good judgement of successive governments not to succumb to the many false miracles pushed at them.  In the early 1980s, the Swedish model was put forward by the unions as the way of the future, shortly before the Swedish economy went into a tailspin.  During the late 1980s, Japan Inc was said by industry planners to be the model for Australia and the world.  Shortly afterwards the Japanese economy and planning process collapsed due to fundamental flaws.  In the early 1990s, the Asian miracle was said to point the way, until it also collapsed in 1997.  The high-tech route was said to be the way of the future in the late 1990s, but the bursting of the dot com bubble and the collapse of the IT sector has shown this to be a false nirvana.

In summary, the Australian economy appears to be sailing quickly and steadily through a sea of economic gloom.  Although, in the end, the economy may succumb to this offshore gloom, good management and economic reform have given it a fighting chance to outperform all other industrial nations.

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