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Monday, May 12, 2003

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`Liberalisation led Australia to prosperity' — Mr John Edwards, Chief Economist, HSBC Bank Australia

Rasheeda Bhagat

recently in Sydney

Taking the road to liberalisation early is responsible for the robustness of the Australian economy, which has not seen for 11 full years, two successive quarters of retraction, says Mr John Edwards, Chief Economist of the HSBC Bank Australia Ltd. In an interview to Business Line in his office in Sydney, he said that the Iraq war, which cost Australia about A$ 700 million, has no economic significance for the country.

Excerpts from the interview:

Is there any synergy between the Indian and Australian economies?

There are some similarities, but they have had very much less to do with each other than perhaps they should or perhaps they will. Both have been very much influenced in recent times by the pressures of globalisation and the kind of changes that occur when you start driving the economy out.

The story here of the last few decades has been one of extraordinary economic changes essentially brought about by liberalisation in the context of a regional economy that is itself globalising. That is, we have had now, beginning this year, 11 years — and have now begun the 12th year — of uninterrupted economic prosperity. There has not been a single period in all of the 11 years in which we have had two successive quarters of contraction...

That is amazing...

To me, this is an extraordinary phenomenon because when I was a kid and a young adult, we regularly had recession... at the end of the 1960s and the mid-1970s and then in 1981 and 1990... setting the economy back and resulting in a great deal of unemployment. And then we have had this long period of prosperity, in which we have had an extraordinary low inflation. This economy has grown from the beginning of the 1990s. The other big characteristic is high productivity growth, something not familiar to us but which has been the character of our economy. You would have heard a lot about the productivity miracle in the US. Ours has been higher that that in the US.

Economic liberalisation has been the major driver...

Through the 1980s we engaged in a sequence of very major liberalisation of the structure of our economy. In 1983 we floated the currency. One outcome of that has been that in the last 20 years we have had a much cheaper currency than before. That has been profoundly important to us and given us regional competitiveness. The other thing we did was to liberalise banking, and in the beginning of the 1990s, we virtually eliminated tariff protection in Australia. It still remains in motor vehicles, textiles, clothing and footwear, but in most Australian industry we have virtually no tariff protection at all.

That was another major change. Finally, the other great change in our economy was that for 90 years we have had a system of wages being regulated by the courts. Beginning the 1990s, we switched to a system where such judicially arbitrated increases applied only to the lowest paid jobs.

So, at the beginning of the 1990s we had a very powerful combination of circumstances. We had a sudden transition to enterprise bargaining so that it was possible to make very big productivity gains. We have had an incentive in competition by eliminating tariffs on a lot of things. Finally, we were the beneficiaries of a great variety of cheap global technology. If you brought all this together; labour flexibility, competition and those technologies, and a surge of productivity mostly based in the services industry, it is a strong combination of factors.

What has been the rate of economic growth?

On an average, 4.2 per cent; with high productivity growth, low inflation, technological advantage and a flexible labour force.

But can this rate be sustained?

There are a lot of circumstances that are not at all propitious to such growth now.

The US in recession in 2001, and Japan, our major export market — one fifth of our exports go to Japan — having big problems and a Europe in trouble too. Japan has on average grown more than 1 per cent in the last decade. So the external world is not giving us much help and domestically we have had probably the worst drought in 20 years, which is going to devastate the agricultural industry.

And, finally, in terms of a negative... the last year and the year before we were considerably helped by a big boom in the housing and construction industry... people want to renovate their houses, build another house, one on the coast along with another in the city, and so on.

So, there are some circumstances under which we have slowed but we are still growing at three per cent. At the end of the day, consumptions remain strong.

What is your forecast for this year?

About 3 per cent, but we will get better towards the end.

Why? Will other economies improve too?

The picture is a little patchy. Looks like the drought will end and we have already been getting some rain. The second half will be better, and the anxieties on Iraq have ended too.

Reverting to the property market boom, do you expect it to crash, or continue to boom? Look at <243>what happened in Honk Kong...

I think it will certainly cool down. In the last five years, the average price of a residential house in Australia has gone up by 60 per cent. In Hong Kong, in the good days, it went up by 100 per cent! Though it is not like Hong Kong, yet it causes concern. In Australia, 75 per cent of people own their houses, about 80-90 per cent of people live in independent houses rather than apartments... home ownership is very high and has increased in the last decade. So that means most people are paying their own mortgages and living in their own houses. From the bank's point of view it is a very safe lending as they always pay up.

What are the housing loan rates?

You can get an introductory loan at 6 per cent and most of it would be 6.5 per cent. Elsewhere too home ownership is becoming more accessible.

Are there tax breaks on home loans?

No, the only break we have, which is considerable, is that we are not taxed on capital gains in owner occupied property.

How does agriculture impact the Australian economy?

Our economy has changed dramatically in the last 20 years, in respect of what we do. For example, our largest exports are in coal, natural gas, aluminium, and lower down wheat and wool. But in the Australian economy if you added up all of our mines and our agriculture and put them together as a share of our GDP, it is less than 9 per cent. Agriculture is only 4 per cent.

Is agricultural income taxed?

Yes, they are advised to pay taxes but the taxman should be able to construct the level of income to tax!

How important is India to Australia in economic terms?

India is of huge interest to us. The more you open up the more interested we will be in India. We have a lot of clients who are engaged in trade with India. There are lots of opportunities for niche manufacturers to sell niche products to India, because it is such a huge economy with such a huge variety of industries.

What kind of economic partnership do you see with China, vis--vis India?

China, for all the confusion and limitations, is way down the road compared to India in terms of ease investment. In principle you should be able to provide all the advantages that China does. It is a question of... the environment that the government establishment. It is a big decision for India.

You were economic adviser to the former Prime Minister, Mr Paul Keating. Is there any huge shift in economic policy from those to the present days?

A simple point that not many people sympathise with is that economic liberalisation is not an endless process.

There are certain big things you do; you eliminate tariff, you float the currency, deregulate and that's it. You can't do it again. You cannot get another government to deregulate all over again.

Typically we were picking the biggest bits of fruit first, so by the time the current government got elected in 1996, all big things had been done... the really big things. That is not to say that there is not more to do.

What kind of a bill did the Iraq war bring to Australia?

Probably less than a billion Australian dollars... about A$700 million.

And what will that mean for your economy?

Nothing at all. We have a billion dollars in wheat to Iraq and have zero imports from there.

And now many Australian companies will have opportunities in rebuilding contracts.

Yes, but our involvement in Iraq was widely debated here.

The Australian people were really incensed...

There was a lot of controversy, but in terms of economic impact, it was very little.

Do you see the world economic order changing post Iraq?

I don't think so. The great issue is that the US is as dependent on the world economy as you are or we are. Coming out of the Second World War, the US accounted for about 30 per cent of the world's GDP.

Today it is 20 per cent and this is because the rest of the world is growing a little bit faster than the US. India, for example, is growing consistently at 5 per cent, and China a little more. Though the US is doing well, the rest of the world is doing a little better.

At the same time, just like the rest of us, the US' imports and exports are going up. Now the rest of the world has more business assets in the US than the US has elsewhere. For example, Australian businesses now have more business assets in the US than vice versa.

What I am saying is that the US has become more dependent on the world economy and it does not have the opportunity to exercise unilateralism in the world economy.

But what about its increasing political clout?

That is right but in the WTO if India says `we do not agree', or Brazil or Pakistan or China says `no', what happens?

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