The Globalisation of Australia in 1990s and 2000s

Question 1

What did the PM of the time say of the early 90s recession in Australia?

Answer 1

Recession we had to have - Keating

Question 2

What were the policies of Australia during the early 90s recession?

Answer 2

• Government decided to “break the back of inflation” - credit squeeze
• Inflaiton fell to 2% points lower than the OECD average
• Unemployment rose
• Caused by high interest rates (contraction), the investment cycle and the terms of trade
• Attempts to slow the economy were initially weak partly because of a lack of understanding of the importance of signals - early days of rational expectations

Question 3

What effect did the early 90s recession have on employment in Australia?

Answer 3

• From 83-90 job growth had been strong (Accord era)
• By 1991/92 unemployment was over 10%
• Full time male blue collar workers hit hardest
  
  • Structural changes from globalisation
• Shift to part-time work
• Leads to underestimation of unemployment
  
  • Decline in labour force participation

Question 4

What happened regarding the balance of payments and foreign debt as a result of the early 90s recession?

Answer 4

• Balance of payments improved in the recession
  
  • Exports of energy and manufactures increased
  • Asia was booming - recession was OECD
• Foreign debt servicing costs fell as world interest rates declined
• Tourism continued to supplement net services income
• The external debt problem was eased signalling a return to the conditions of the 1970s after the heavy debt burden of the 1980s

Question 5

What were the policy responses as the early 90s recession was nearing an end in Australia?

Answer 5

• Monetary policy was eased in response to falling inflation
• Inflationary expectation were also reduced
• Exchange rate remained stable
• Budget moved into deficit in response to weaker tax revenues and increased expenditure

Question 6

Describe the mid-90s recovery in Australia

Answer 6

• Recovery was weak and slow
• Jobless growth
• Private business investment remained low
  
  • Firms were still dealing with the 80s debt (OECD wide)
• Recovery was consumer led but with an increase in household debt
  
  • Financial deregulation made consumer access to credit easier

Question 7

Why was the mid 90’s growth Jobless in AUstralia?

Answer 7

• Excess capacity kept business investment low
• While services use labor, they aren’t as labour intensive as manufacturing was
• Unemployment seemed to be structural
  
  • Expanding industries replaced labour with capital
• Domestic expansion couldn’t lower unemployment to pre recession levels
• Part time employment continued to grow faster than full time
• Wages growth remained subdued, still subject to the Accord
• Deregulation meant firms were subject to market forces, capital and labour would move to where the reward was highest
• Some successful industries shed labour

Question 8

What advancements in regards to human capital occurred in the 90s?

Answer 8

• Medicare established
• Equal pay
• Free tertiary education (replaced by HECS)

Question 9

When was the Australian BoP in surplus in the 90s and what caused this?

Answer 9

BoP surplus in 1991, 92, 93, driven by export growth resulting from growth in E Asia despite global economic downturn

Question 10

What was the situation regarding Australias exports following the recovery from the early 90s recession?

Answer 10

• Japan was Australia’a largest market until 2009/10 but wheat and wool shifted to minerals, coal and iron ore
• Trade with S Korea also rose substantially in 90s
• Minerals trade with China grew only after the Asian Crisis but wool trade grew form the early 1990s
• Manufactures exports were doing well at this stage, especially to E and SE Asia
• Growth in export of ETM (3/4 of all manuf. exports in ‘97)
• Services exports also boomed
• Inbound tourism and education
• Net services were in surplus for the firm time in 20th century

Question 11

What factors caused the growth in the exports of ETM in the 90s?

Answer 11

• Driven by four factors
  - Wage restraint
  - Tariff cuts and microeconomic reforms
  - Emerging export culture
  - Growing demand in rapidly growing E and SE Asia

Question 12

What was the situation regarding Australian savings in the mid 90s?

Answer 12

Financial restructuring led to the lowest savings rate to GDP since WWII

Question 13

Why was Australian public savings so low in the mid 90s?

Answer 13

• Uncoupling of budget deficit and current account deficit
  
  • No need to have budget surplus in order to support current a/c
• State governments that had been responsible for infrastructure privatised public assets in line with economic reform principles
  
  • Sold banks, insurance companies, railway systems and electricity networks

Question 14

Why was Australian private savings so low in the mid 90s?

Answer 14

• Usually saves through retained earnings
• But earnings had been lost through debt crisis
• Decline in investment while businesses dealt with debt from deregulation era
• Investment increased after the recovery

Question 15

What are the types of savings?

Answer 15

• Public
• Private
• Household

Question 16

Why was Australian household savings so low in the mid 90s?

Answer 16

• Home ownership drove household savings
• But rising house prices that don’t involve additions to the housing stock mean less liquidity for other activities
• 55% of Australian hh wealth in home ownership, opportunities for other forms of savings are low
• Very dependent on housing prices

Question 17

Describe superannuations

Answer 17

• Superannuation Guarantee Act 1992
• Employers deposit 9% of gross income into a fund
• Employees can add to that
• Contributions go into funds specifically designed to manage super, overseen by Australian Prudential Regulatory Authoirty
• Each person responsible for his/her own retirement rather than relying on current workers to fund current retirees

Question 18

What happened to Australia during the East Asian Finical Crisis?

Answer 18

• Australia was relatively untroubled by all the financial scares of the ‘90s
• Although the demand for Australian export in E and SE Asia declined Australia was able to use the depreciating dollar to export elsewhere
• Now Australia’s export of resource based commodities helped it find new markets
• Exports of raw materials to E and SE Asia also helped Australia as these countries attempted to trade themselves out of their recessions
• The value of exports to the US and to Eurpoe rose and new markets were found
• The crisis was driven more by fickle investors rather than structural problems in the E Asian economies and they were able to recover fast reducing the severity of the impact on Australia
• The countries agreed to trade themselves to recovery and to do that they needed minerals from Australia
• Domestic demand remained strong and continued to support growth
• The strong economy coupled with a decline in export earningg led to a current account deficit once again

Question 19

What happened to Australia’s exchange rate during the East Asian Financial Crisis and what effect did this have?

Answer 19

• The world’s perception of the E Asian crisis meant demand for primary products worldwide did decline somewhat and the Australian dollar depreciated in reponse
• Goods prices in AUD became cheaper e.g. educaiton
• Goods priced in USD brought more income to Australia
• The depreciation of the dollar was crucial in allowing Australia to weather the crisis

Question 20

What happened regarding trade in Australia between the early 2000s and 2007?

Answer 20

• Japan remains biggest market followed by S Korea
• Trade with SE Asia continued to grow
• Chinese purchases of Australian raw materials increased substantially by 2000
• China overtook Japan and the USA to become Australia’s main supplier of merchandise
• Australia’s hard won advances in manufacturing began to be eroded by synergies in E Asian production
• From around 2001 the AUD began to appreciate making matters worse for trade
  
  • Resulting in large current account deficit
• Exports of manufactured appliances to north American and Europe began to decline
• Tourism from India and China began to increase
• A number of successful bilateral trade treaties were signed

Question 21

What further microeconomic reforms occurred in the 90s and 2000s?

Answer 21

• States continued to sell government bans and insurance offices as well as electricity infrastructure, some transport and some water systems
• The Commonwealth Bank, Telstra and Qantas were sold
• Enterprise bargaining began to replace industry wide wage setting arrangements
• The government provided less and less finance for restraining and for tertiary eduction
• Restraint in government spending became very important
• RBA became independent in 1996
• GST implemented in 2000

Question 22

How did Australia deal with the lead up to the GFC?

Answer 22

• Fears of a housing bubble and that it would burst
• But the RBA raised the cash rate to try to slow the bubble (worked, or was there no bubble at all?)
• By 2006 asset price rises and debt accumulation had slowed

Question 23

What was the state of savings in the 90s through 2000s?

Answer 23

• Public sector surpluses were used to retire public debt, and not as investment
• Private investment was dominated by mineral exploration and expansion driven by growing demand form China and India

Question 24

What happened regarding productivity from the 90s to 2000s?

Answer 24

• Productity declined partly as money was spent on exploration rather than on production
• Declines occurred in mining, manufacturing, agriculture and utilities
• Manufacturing struggled with an increasing exchange rate
• It was unclear why productivity in utilities decreased