The Hindu Business Line : Australia's economic and strategic options

AUSTRALIA'S economy, after 14 years of sustained expansion averaging 3 per cent, slowed to 1.5 per cent in 2004-05 (July-June), but faces a surge in inflation with the product and labour markets reaching output limits — a factor behind the recent hike in the cash rate to 5.5 per cent by the central bank.

A further tightening in April was considered likely. The rate revision, the first since late 2003, may seem paradoxical in an economy which virtually ground to a halt in the last quarter of 2004, but the independent Reserve Bank of Australia (RBA) sees strong inflationary pressures emerging from raw material prices, capacity constraints, and higher wage costs from a tight labour market.

However, it also views the current downturn as temporary, given the domestic and global demand, high levels of confidence in business and housing sectors, and rising terms of trade to boost national income and spending.

Australia's resource exports, 40 per cent of the total, have benefited from the commodity boom, fuelled by China's massive appetite for raw materials, but it has not been able to take advantage of the global situation to achieve greater volumes of exports mainly because of capacity constraints.

While its energy and metal export prices have gained, it is partly offset by the significant rise in the Australian dollar. Higher volumes of imports of consumer goods and manufactures have kept trade deficits widening, taking the likely current account deficit to a record 6.5 per cent of GDP in 2004-05 or around $40 billion, the highest in 50 years.

Current deficits and high household debt remain potential risks to the Australian economy, says the International Monetary Fund (IMF). But with its vast reserves of coal and minerals, including uranium and oil/gas, Australia looks for a dominant share of the Chinese market with long-term contracts.

The Liberal-National Coalition Government has begun to realise that Australia's economic future lies more with the Asian region and is keen to sew up free trade deals with Japan and China, apart from the Association of South-East Asian Nations. China's demand to be accorded market economy status is acceptable to Australia though farmers and manufacturers want sufficient safeguards built into any deal with Beijing.

The robust economic performance of Australia, highly praised last year by the IMF and OECD, is largely attributed to its global integration facilitated by the sweeping reforms and financial deregulation of the Labour Governments of the 1980s and the early 1990s, headed by Mr Bob Hawke and Mr Paul Keating respectively, before Mr John Howard led his Liberal-National Coalition to victory in 1996.

Politically, Mr Howard, despite an edge in leadership ranking over Labour, finds himself in an embarrassing situation over several domestic and foreign policy issues. The latest interest rate revision is in direct contradiction to Mr Howard's pre-election warning to voters that a Labour government would keep interest rates high. The Prime Minister and the Treasurer, Mr Peter Costello, tipped as Mr Howard's successor, argue that the RBA has acted on "upside risks" while, viewed in perspective, there is much positive with the economy, such as unemployment at its lowest in 27 years (5.1 per cent). Australia has one of the highest levels of taxation among OECD countries, with the maximum marginal tax at 48.5 per cent. Despite OECD's call for reduction of the maximum and strong demand from industry, Mr Costello has ruled out any tax cuts in the coming May budget.

Infrastructure, especially rail and ports for an export-led growth, has been relatively under-funded. Another problem for the economy is the severe shortage of skills in various trades and manufactures and the Government is likely to raise the level of skilled immigration by 20,000 a year. But industrial firms would like a more liberal policy on immigration and a drastic overhaul of immigration procedures. Meanwhile, the Federal Government is on collision course with the States, all run by Labour, over fiscal and industrial relations reform.

The States and the trade union movement are also opposed to the Coalition Government taking advantage of the majority it would have in the Senate next July, to push through a drastic reform of industrial relations at national level which would restrict trade union rights, promote bargaining at enterprise level, and diminish the role of the Industrial Relations Commission. The Prime Minister, visibly upset over the stance of Labour-controlled States, said Australia would be "better off" if it had no State government though, he said, it was an `unrealistic' wish.

In foreign policy, Mr Howard has been an ardent supporter of pre-emptive strikes and some of the other strategic objectives underlying US foreign policy while also sharing Washington's disapproval of Kyoto protocol and debt relief. His Government's stern views on mandatory detention of hundreds of asylum-seekers indefinitely, tougher immigration procedures, and a disdainful approach toward the fading indigenous inhabitants, have drawn criticism in the country.

Australia's record in race relations, though "White Australia" policy was given up years ago, still raises concerns, and the UN Committee on elimination of racial discrimination said some of domestic laws may have an indirect discriminatory effect against certain sections.

An indication of public reaction to the Howard Government's policies is available from a sample survey conducted by the Sydney-based Lowy Institute. This comes tellingly against the US with which Australia, along with New Zealand, are partners in the 1951 ANZUS Alliance. Asked how `positively' they looked at 15 listed countries, the 1,000 Australians polled put Europe, Japan and China well ahead of the US. Apart from the Iraq war on which Australians are deeply divided, a dominant view emerged that Australian foreign policy is too much influenced by the US, not that they would want Australia to detach itself from any US-led alliance but they would like to see Canberra take a more independent line, in general.

Mr Howard recently agreed to send another 450 troops to Iraq to beef up the coalition presence, in addition to some 900 military personnel already there. He has also been an ardent supporter of pre-emptive strikes and some of the other strategic objectives underlying US foreign policy while also sharing Washington's disapproval of Kyoto protocol and debt relief.

Whatever the Howard Government's pro-US leanings, political and economic realities are pushing it into the arms of China, in particular, apart from recognising that it has to catch up with the rest of Asia in the evolving regional trade blocs.

A process to prepare for Australian uranium exports to China will also get underway through an agreement on safeguards for nuclear material. For Australia, it will be a major challenge to accommodate China's growing power while remaining steadfast to its historic strategic dependence on the US.

Initial discussions between Asean and Australia have already been held on a free trade agreement. Indonesia, which is negotiating a bilateral security treaty with Australia, has proposed Australia's inclusion in the East Asian Economic Summit to be held in Kuala Lumpur next December. Japan reportedly favours Australia, New Zealand and India to be involved in the proposed Summit.

(The author, a former Chief Editor of PTI, is a freelance journalist.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Relations with neighbours — Dialogue with discretion

Rice: Towards enhancing yield in rain-fed areas

Some tinkering

Weather forecast for the farm

Australia's economic and strategic options

Blair scare

Should markets dance to guidance?

Concept of a corporate religion

Of road blocks

Rendering good service