Australia's Economic Record
by Jennifer Buckingham and Helen Hughes
Click here for PDF version

Economic performance, measured by national productivity and output, underpins the possibilities of social and cultural life and profoundly influences the opportunities for individual well-being. The 20th century showed that the economies that best meet the needs of their citizens are those in which productive capacity is overwhelmingly privately owned and operates within a competitive environment and a system of government based upon the integrity of institutions, the rule of law and equality before the law. Although the Australian economy remains quite regulated, notably in industrial relations, in comparison with many other industrial countries, economic reforms since the 1980s have opened up the economy to international competition and policymakers began to privatise enterprises and utilities that were formerly government operated.

In the 1990s, the re-establishment of monetary stability and low inflation became priorities. From the middle of the decade government budgets were balanced. Some attempt has been made to make labour markets more flexible and the tax system more equitable and efficient. The results of these changes are becoming evident in a challenging but more stable and predictable environment for enterprise, and in increasing productivity and national wealth.

Welfare has not been neglected, albeit at very high cost to taxpayers and, paradoxically, to those who become dependent on it. Unemployment, which is closely correlated with poverty, is still unnecessarily and unacceptably high. It remains the principal cause of low living standards and thus Australia's key social and economic problem. Australia has very considerable natural advantages and an able population, but its pace of reform is still lagging behind industrial country leaders. To keep abreast of international developments, Australia has to reform its economy faster. Much remains to be done.
The international comparisons that follow show Australia's place in the world. Wherever available, international data have been expressed in purchasing power parity terms (in US dollars) to lessen distortions created when official exchange rates, which may overvalue or undervalue currencies, are used.

Economic freedom in Australia

The Fraser Institute in Canada (and the Hoover Institution in the United States) have calculated indexes of economic freedom to measure worldwide liberalisation of laws and regulations. Although carefully assessed by leading scholars and using objective measures (such as the level of tariffs and the share of government in GDP), the freedom indexes are necessarily to some degree subjective. But they are compiled by experienced analysts and give a good idea of Australia's ranking in the freedom stakes.

Figure 1 shows that Australia became more regulated in the 1970s, so that its rank dropped from 7th in the world to 17th. With the reforms of the 1980s and 1990s, as the economy became less regulated, it improved its standing to 6th in the world in 1999 (and 7th in the Hoover ranking). Countries as divergent as the United States and Singapore and Hong Kong lead in the economic freedom rankings.

The higher the column, the better attainment of economic freedom-that is, the more pervasive the sphere of private decisions, the better the security of property, the more stable money, the better the access to international markets, the greater the freedom to work, buy, save and invest, and the simpler and more reliable the government regulation of economic activity and its enforcement of the necessary rules.

Figure 2 shows the index numbers for Australia by economic sector. Australia stands out in the legal structure and security of property rights. Not unexpectedly, it is by far the worst in the inflexibility of labour markets.

Economic freedom and per capita income

The advocates of liberalisation argue that the reason for a more liberal environment is the achievement of rapid growth and high per capita incomes so as to put more money into people's pockets. Reforms do have costs in the short run, but these can be minimised by the careful formulation of reform policies. In the medium and long term reforms produce new jobs and higher incomes.

Figure 3 shows the unambiguous relationship between high economic freedom and high per capita income. The least free countries have the lowest per capita income.

Australian aid

Figure 4 shows that the level of Australian aid has been fairly stable in the 1980s, with a new peak in 1999/2000.

Because it is aware of its necessarily small influence in world affairs, Australia has focused its aid both by countries and in sectors to which it gives assistance. Most of the bilateral aid, (which accounts for about 60% of total aid), goes to the Pacific Islands, including Papua New Guinea, where Australia has the greatest responsibility in international terms. The East Asian neighbourhood is the other principal destination for bilateral aid.

Australia makes a substantial contribution to multilateral development institutions, notably the World Bank and the Asian Development Bank, to be able to join with other countries in giving aid effectively to large countries such as India and China where direct Australian aid can only be a drop in the bucket. By working through the development banks Australia also contributes to other areas where poor people are concentrated, notably Sub Saharan Africa.

Social infrastructure and services have received an increasing share of Australian aid through the bilateral programme and as the development banks have moved into these areas. Emergency assistance and support for productive capacity, notably in agriculture, has also grown.

Global growth trends

Global growth rates vary considerably by region, and by countries within regions, although there are some clear regional patterns. Within regions, and within large developing countries such as China and India, averages of per capita income are not very informative because of the extremes of poverty and wealth that continue to exist side by side (see figures 5 and 6).

East Asia and the Pacific have led global growth since the 1980s. The East Asian countries' per capita income has risen markedly compared to industrial countries. The relatively poor performance of Indonesia, the Philippines and Vietnam, however, is offsetting the rapid growth of Hong Kong, Singapore, the Republic of Korea, Thailand and Malaysia. After setting its door to the world ajar, China grew even more rapidly than the rest of the region, although it is widely believed that its real average annual per capita growth was closer to 6% or 7% than the official claims of 10% reported here. The economic performance of the Pacific Islands was disappointing, with minimal increases in per capita income.
Although decolonisation dates back to the 19th century in Latin America, the region had persistently poor growth records for countries with 'catching up' opportunities. Its percentage of industrial countries' income has remained static since 1980.

The Middle East and North African countries have also had mediocre growth performance despite 'catching up' opportunities, so that their percentage of industrial countries' per capita income also remained static. There were wide disparities in this region in per capita income and growth between countries such as Algeria, Egypt and Morocco, and the petroleum rich countries.

South Asia has improved its growth performance since the 1980s, so that despite its still rapid population growth (resulting from past demographic profiles), per capita incomes are rising slightly in comparison to those of industrial countries.

Civil unrest, wars and political disarray accompanied by poor economic management affected the Sub Saharan African countries so badly that they grew very slowly. The apparent AIDS epidemic has added substantially to these countries' problems. The percentage of their per capita incomes to the industrial countries' has declined slightly.

The stagnation of the Central European countries (the Czech republic, Hungary, Poland, the Slovak Republic, Estonia, Latvia and Lithuania) in the 1980s was followed by an acceleration of growth in the 1990s. Per capita income reached about 33% of that of industrial countries.

The GDP of the East European and Central Asian countries (principally the former USSR and the war-torn Balkans) fell during the 1990s. In 1999 their per capita income was only 20% of that of industrial countries.

Steady growth in the mature industrial economies, only slightly interrupted by a mild recession in the early 1990s, stimulated global growth by providing market access and investment for developing countries. Markets and investment were particularly important for the rapidly growing East Asian economies and China.

Policy is the quarterly review of The Centre for Independent Studies. For more information on subscribing to Policy, click HERE

If you are interested in the Centre's activities and publications, why not subscribe to e-PreCIS, our regular email update on the latest news and events.

(e-PreCIS requires html capable email facilities, such as Microsoft Outlook Express or Netscape Messenger)