Is 21 years of uninterrupted growth by Australia due to good economics

Is 21 years of uninterrupted growth by Australia due to good economics and can we continue that growth for the next decade?

Economics gets a bad press as it is known as the dismal science, prone to highlight the risks and dire consequences of alternate courses of action.  What may raise a customary laugh in introducing an expert in this field might well take the form of: please welcome .......... who has successfully predicted 14 of the last two recessions. But economics is a social science whose theories are routinely hijacked by non-rational markets and the vagaries of human behaviour. Economist’s reputations suffered a further blow since most failed to predict the global financial crisis.  There were some notable exceptions but invariably even from this elite group you will find that this correct prediction was just one from a long list of prior failures.

When I first studied economics in the mid-sixties Keynes and Samuelson dominated our textbooks, and there was a sense sound economics would guard against recessions. Keynes was one of the first philosophical economists who insisted economic theories must lead to fairer more ethical outcome for everyone. Keynes’ views were no doubt forged from his desire to avoid a repeat of the great depression where he held onto his shares and subsequently lost his fortune along with many others. His theories suggested the need for a strong regulatory regime to prudently effectively use both monetary (supply of money and interest rates) and fiscal policy (government spending and taxation) to help iron out the inevitable economic imbalances and his theories were largely adopted in Australia.

But the USA was to turn away from the Keynesian route in lieu of the monetarists who suggested you only need to vary the volume of money in circulation (money, bank deposits in demand and related interbank deposits with overnight liquidity) and vary interest rates to effectively control imbalances between supply and demand. This very much suited successive governments and business since it involved less regulatory resources. Consequently regulatory regimes were wound back with deregulation. These ideas inevitably filtered through to other countries so that we entered a prolonged period of global easy money and falling interest rates.  A number of warning bells were ignored such as was evident in the USA with the Savings and Loan fiasco and the Dotcom bubble.

In Europe the EU was formed without regulatory teeth or an effective central bank to coordinate monetary policy. Furthermore little thought was given to the risks of a single currency which prevents the stabilization afforded from currency devaluation by individual member countries whose trade cycles become weakened.

However fortuitously Australia was to benefit enormously from increased taxation revenue derived from a mining boom wisely squirreled away in reserves for a rainy day. These reserves were quickly absorbed in the subsequent stimulus packages embarked upon by the then Labour government in response to weaker business conditions emanating from the GFC. Australia has also benefited from her close ties to the expanding Asian region and from investing in a more effective regulatory regime.

The rather obvious conclusion is the application of Keynesian principles played a pivotal role in ensuring we have continued to enjoy uninterrupted growth for more two decades and even during the global financial crisis.
But now that the mining investment boom is coming to an end as we move into the production cycle we need to encourage reforms to reinvigorate the nation’s economy as the price of exports falls.

But any reform can gain momentum by encouraging more investment from the expanding opportunities within our Asian region, with resultant strong spin offs in improved productivity from joint ventures. Such an approach will ensure enhanced outcomes from a sharing of knowledge and business practices. But this will require a rethink on our trade policy to ensure our market is made foreign investment friendlier, to reduce the tax payable and to provide incentives for foreign investors.  Furthermore government thinking needs to change to a focus which encourages investment into industries that are not market price takers such as currently applies. It is now in the nation’s best interest to support moves into sectors that are market makers, to secure future growth, rather than spending money in propping up non-competitive traditional industries.

We need to encourage business to invest more in much needed innovation with resultant productivity improvements. There needs to be a particular emphasis to encourage business start-ups, with the provision of added incentive such as providing a tax holiday for their first year of profitability or for the period following the initial investment.