Stagflation and economic reform: Australia in the global economy, 1970s - 1990s Flashcards
(36 cards)
1
Q
What were the two main features of the period between the 70s and 90s for Australia?
A
- Economic struggles in the 70s
- Restructuring during the 80s
2
Q
Describe the End of the Long Boom in Australia in regard to inflation
A
- As elsewhere
- International conditions were transmitted to Australia once again
- Inflation rates had been increasing in the early 70s
- Inflation was often the sign of a buoyant economy with strong consumer demand
- The Whitlam government misread this inflation and considered this an ideal opportunity for social reform
- Government spending increased constituting further to inflation(16.7% by June 1975)
- High wage increases contributed to inflation
- Tight labour market
- High wage award in motor vehicle industry
- Less immigration
3
Q
Why was the End of the Long Boom not immediately detrimental to Australia?
A
- Although the boom in energy prices affected many countries negatively, high energy prices initially benefits Australia
- And the ToT improved in the early 1970s
- but international inflation transmitted to domestic inflaiton
4
Q
In the early 70s, what happened with the Australian exchange rate and what effect did this have?
A
- The government revalued the currency in December 1971 and December 1972
- The revaluation lowered capital inflow into Australia
- In addition, the Whitlam government raised interest rates and cut tariffs to reduce inflation
- The measures failed to reduce inflation
- But they did reduce investment
5
Q
What happened following the transmission of the international recession to Australia in 1974?
A
- The ToT declined and the current account was in deficit
- The government initiated a credit squeeze to combat the BoP problem
- The dollar was devalued in August 1974 and in December tariffs were raised
- Economic growth slowed and unemployment rose
- But inflation continued to rise, exacerbated by the devalued dollar and import tariffs
- Growth declined to 1.3%, inflation was at 16% and unemployment at 4.6%
6
Q
Describe Australia’s initial experience with Stagflation
A
- Between 74/75 and 82/83 economic growth averaged 2% a year but inflation averaged 12%
- Growth improved during the 1980s and inflation came down but unemployment did not return to the low levels of the Long Boom
- The crisis was less immediate than that in 1929 and it took a while for people to realise that is was happening
- It also took a while for governments to understand how to solve the problem of growing (cost push) inflation and unemployment
- Policy responses such as a devaluation in 1976 put further pressure on the influent rate as well as a worsening of the balance of payments
- The recovery in the late 1970s was short lived as the oil price rose again in 1979
7
Q
Describe the volatility in the Australian economy in the 80s
A
- Recovery from drought and new government in 1983
- Boom lasted until 86/87
- Although inflation had come down to 7%, this was still considered high
- The government tried to exert control over inflation and the rapid rate of growth
- Unfortunately all OECD countries used this policy at the same time and all economies began to slow in 1989
8
Q
What inflation and growth controls did the Australian government use in the 80s?
A
- Wage restraint
- Accord led to a decline in real earnings in the 80s
- Fiscal consolidation
- Series of declining government budget deficits from 83/84 to 86/86 followed by surpluses
- Interest rate policy to restrict money supply
- High interest rate
9
Q
What balance of payment and foreign debt problems were faced by Australia in the 70s - 90s?
A
- Australia was competitive in primary products
- Slow growth of world trade affected Australian exports adversely
- Stagflation resulted in a decline in the ToT
- The Australian exchange rate declined steadily after 1973
- During the early 1980s Australia experienced a series of balance of trade deficits
- The deficits made it harder and harder to service growing foreign debt
- By the late 1980s Australia was in a foreign debt crisis
- Debt consisted of private, public and government debt
- By 1991 interest and repayments on the debt equalled almost 28% of foreign exchange earnings
10
Q
What was the state of Australian International Trade in the 70s-90s?
A
- Australian exports faced volatile markets, very dependent on economic conditions in industrialised nations
- The share of manufacturers in exports was declining
- Trade was also subject to volatility from exchange rates
- Australian manufacturing remained uncompetitive and subject to high wage rates, only performing well in periods of exchange rate depreciation
- Effects of depreciation often undone by the high local inflation rate (despite the Accord)
- Furthermore, Australia’s export markets became more protectionist during the 1980s
11
Q
What changes occurred in Australias export markets between the 70s and 90s?
A
- Export markets consisted of Asian countries, with an expansion into China, Korea and South East Asia, European and north America. Exports to Britain declined
- Import sources continued to shift away from Britain and move into Asia and the Pacific
12
Q
What happened to Australia’s international capital flows from the 70s to the 90s?
A
- Restricted in 72/73
- Variable deposit requirement
- Embargo on overseas borrowing
- Dollar revalued
- Encourage in 74/75/76
- Variable deposit requirement suspended
- Borrowing embargo lifted
- Dollar devalued
- Restricted in 1977
- Encouraged in 1978
- Direct foreign investment grew until 1980
- Slowed in 81/82 and 82/83 as the energy resources boom slowed and growth slowed
- Late 1980s fiscal and monetary policy used to slow flows
13
Q
What was the nature of international capital flows for Australai in the 70s through 90s?
A
- In ‘77 as world energy prices increased Australia began to invest in energy production. This investment required capital
- Firms were able to borrow overseas and foreign ownership restrictions were relaxed for a time
- Foreign capital flows increased nearly 7 fold
- Recession then caused FDI to slow in the early 1980s
- The services sector benefitted most form foreign investment
- Deregulation of financial sector and removal of the restrictions on foreign investment in property and non-bank finance stimulated foreign investment in finance, property and business services
14
Q
Broadly, what happened to immigration in Australia between the 70s and 90s?
A
- End of ‘White Australia Policy’
- Economic and defence motives for immigration no longer relevant
- The level of immigration declined in the early 1970s
- Immigrants had to be skilled, family or refugees
- A points system was introduced
- Net immigration rose again form the mid-1970s
- Declined in the early 1990s amidst concern about the level of immigration
15
Q
Describe the politics of economic reforms in Australia between the 70s and 90s
A
- Labour party under Whitlam tried to initiate reforms in early 1970s
- Unsuccessful attempts to lower tariffs
- Liberals under Fraser unable to initiate reforms between 1975-1983
- ALP under Hawke (Keating as treasurer) succeeded in initiating free market reforms
- Approved by economists
- Distrusted by other social scientists
- Overall good for the Australian economy
16
Q
What Financial deregulation occurred in Australia between the 70s and 90s?
A
- Reduced control over international capital flows
- Foreign exchange controls abolished in 1983
- RBA had control over monetary policy
- Can still set the interest rate
- Loss of currency volume information
- No restrictions on foreign ownership of merchant banks
- General removal of restrictions on financial activities
- International financial markets were becoming more integrated and Australia was part of that
- Significant changes to the corporate tax system
17
Q
What effects did foreign exchange control abolition in Australia have and when did this happen??
A
- 1983
- Dollar floats
- Allows foreign borrowing and lending for private individuals
- Firms could go offshore
- BoP crises became irrelevant
18
Q
What effects did financial deregulation have in Australia through the 70s and 90s?
A
- International financial and economic swings would be more readily transmitted to Australia
- Australian firms utilised opportunities to acquire cheap loans as did other international firms, some investment decisions were reckless in this era of cheap finance
- Resulted in debt crises for some firms
19
Q
Describe the first round of Tariff cuts in Australia post-Long Boom
A
- First reduction in 1973
- Little public support (despite low U)
- 25%
- Period of high inflation and strong surplus
- World recession in 1974/75 changes this policy
- In general over next 10 years tariff protection declined from 27% to 22%
- Fraser government does not lower tariffs
- Hawke government lowers tariffs form 1985 onwards
- Implements protection for car and TCF industries
20
Q
What industries were not affected by the first round of tariff reductions in Australia?
A
TCF (textile, clothing, footwear) and motor vehicles and parts
21
Q
Describe the second round of tariff cuts in Australia post-Long Boom
A
- Second round of tariff cuts in 1988
- To 15% and 10%
- By 1989/1990 average tariff rates in manufacturing were around 10%
- 1988 cuts inspired by current account deficit, desire to improve import substitution and raise level of manufactures exports
- In 1988 public opinion was supportive despite higher unemployment
- By the mid-1990s most sectors had only negligible protection
- Motor vehicles and parts and TCF were still protected
22
Q
What was the impact of Tariff reduction in Australia?
A
- Manufacturing share of output, employment, exports and domestic consumption declined
- Share of output fell from 26% in 65/66 to 21% in 75/76 and 17% by the end of the 80s
- Share of employment fell from 26% in ’66 to 22% in ’75 and 15% in ‘90
- Share of exports declined from 25% in 73 to less than 20% by early ‘80s but increased again from 86 to early 90s
- Australian manufacturing did respond to the challenge to improve competitiveness
23
Q
In regards to economic policies, what did the Long Boom mainly consist of?
A
1950s and 1960s characterised by macroeconomic policies
24
Q
What were the 80s characterised by in regards to economic policy in Australia?
A
- 1980s characterised by ‘economic rationalism’
- Popular in many developed countries
- Reduction in state involvement in the economy
25
What form did microeconomic restricting and economic rationalism take in Australia?
- Less protection for imports, easier access to foreign capital and less direct control over the Australian financial and monetary systems
- Size of the public sector declined
- Government became more involved in export promotion
- Australian Trade Commission
- Targeted foreign markets
- Search for export potential markets
26
What was the general impact of economic reform in Australia post-long boom?
- Clearly integration in the international economy had already happened by the late 1980s
- The 1980s increased our level of integration by
- Floating the dollar in 1983
- Deregulation of financial markets in 1984
- Reducing import protection in 1988
- Reforms had knock-on effects resulting in further reforms so that institutions could keep pace with the reformed economy
- General Equilibrium
- Changes in international technology gave further impetus to reforms
27
In what categorical ways has globalisation affected Australia?
* Domestic prices
* Balance of payments
* Openness, structural changes and investment flows
* Labour Market
* Productivity
- Inequality
28
Overall what effects did globalisation have on domestic prices in Australia?
- Tariff cuts reduced the prices of imports, reducing the cost of inputs in some production processes
- Firms wanting to remain competitive had to lower costs, improve productivity and resist wage increases
- ToT were falling during the 80s and 90s but didn’t slow the economy
- International financial markets punished countries pursuing inflationary policies providing an incentive to follow disinflationary fiscal and monetary policy
29
What is the result of falling demand for exports (ToT down) in a floating rate system?
Depreciation, which is inflationary
30
What is the result of falling demand for exports (ToT down) in a fixed rate system?
Exporters earn less, growth rate falls
31
Overall what effects did globalisation have on the balance of payments in Australia?
- The floating dollar changed how we viewed current account deficits
- Australia was able to maintain a current account deficit and to borrow to achieve external balance without lenders losing confidence as before
- Interest rates would rise and the exchange rate would depreciate but lenders could still be found
- Unless there was a chance that the depreciating currency meant that loans could not be repaid
- The 1980s foreign liabilities were driven by debt, in the 1990s this had switched to equity
32
What Overall what effects did tariff reduction have on Australia?
- Immediate Job losses, bankruptcies, disinvestment and regional crises
- Was expected to raise productivity, improve management and lead to higher quality and innovative production
- Tariff reduction did result in an increase in the trade ratio to GDP
- Manufacturing and services because more export orientated and at the same time subject to pressure form imports
- To survive firms would have to raise productivity - increase output per worker and per unit of capital
- Manufactures did increase their share of imports and exports with manufacturers exports growing faster than GDP
33
Overall what effects did globalisation have on the export mix of Australia?
- Unprocessed exports declined from half of exports in 1983 to less than 30% in 1997 reducing the volatility of Australia’s ToT
- Australia also became more open to trade in services as a result of deregulation of the services sectors in many countries
- At the Uruguay round of GATT the first multilateral agreement on trade in services came into effect
- Tourism played a major role in the increase in the export of services
- Financial services, health and education also played a role, sectors that were subject to deregulation in the 80s and 90s
- in 2011 education is one of Aus’s largest export sectors
34
Overall what effects did globalisation have on Australian capital flows?
- Capital flows responded to deregulation
- Direct foreign investment was directed to North America and Western Europe, with not much going to Asia
- CTF, paper and machinery and equipment sectors moved off short in search of cheaper labour
- Inward foreign direct investment also increased
- Investment occurred in financial services as well as the
struggling manufacturing sector - FDI played a major role in manufacturing after restructuring
- FDI influenced government policies with respect to taxation, infrastructure, the competitive environment, the quality of human capital and industrial relation
35
Overall what effects did globalisation have on the labour market in Australia?
- Labour had been a major beneficiary of tariff policy
- The labour market bore the brunt of restructuring and deregulaiton
- Nearly all manufacturing sectors lost jobs, employment in manufacturing declined by 25%
- The sectors with the greatest job losses were those with the highest productivity gains, not necessarily those competing with low-wage countries
- Many less skilled workers faced the prospect of lower real wages or permanent job losses
- Wage rises were increasingly tied to productivity gains and from the late 80s enterprise bargaining began
- Economic growth was required to reduce unemployment
36
What had been happening with Australian productivity over the 70s through 90s?
- Productivity growth improved in the last quarter of the 20th century but was still behind other developed countries
- The Accord drove down real wages and firms had little incentive to replace cheap labour with capital that might make labour more productive
- While stagnant during the period of stagnation, productivity increased in the 1990s
