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University of Wollongong Graduate School of Business TBS 905 Economic Analysis for Business

Major Assignment

Describe, Compare and Contrast the

Economies of Australia and The Netherlands

Prepared by Student Number Word Count 2718

10 October 2006

TBS 905 Major Assignment 10 October 2006

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Introduction This report has been prepared to Describe, Compare and Contrast the Economies of Australia

and The Netherlands. The report looks at a number of economic indicators over a 5 year period

and uses this data to analyse and interpret the underlying information to compare the two

economies. Ultimately this comparison is aimed at cutting through the statistical data to

determine which country has made the most of its scarce resources, improve its productivity and

hence it citizens potential to enjoy a better quality of life.

Australia has an economy that is heavily influenced by the agriculture and resources sector, with

a large land mass and abundance of natural resources. Recent strong demand for resources

driven primarily by the rapid expansion of China’s and other Asian economies has been the

engine in Australia’s economic growth during the period under scrutiny. During this period the

country has suffered from widespread drought which has had some negative impact on the

agricultural sector. The general increase in economic activity has also underpinned domestic

demand for retail goods and services which have inturn further boosted the economy. Despite

the large export of natural resources Australia remains a net importer, raw materials are exported

and returned as value added finished goods, trending the trade deficit incessantly upward. The

Australian Dollar (AUD) is currently trading at high levels and this is exacerbating the trade deficit

as imports become less expensive thereby increasing demand and export returns decrease.

Australia is experiencing inflationary pressure and the Central Bank the Reserve Bank of

Australia (RBA) which is charged with keeping inflation in check is currently exercising its open

market policy to reduce the money supply by increasing interest rates in order to put a brake on

inflation.

The Netherlands is part of the European Union (EU) and shares its currency (Euro) and much of

its fiscal policies with its EU member countries. The Central Bank De Nederlandsche Bank

(DNB) has dual responsibilities; as a member of the European System of Central Banks it

contributes to the development and implementation of monetary policy of the EU member

countries, and unlike the RBA it also provides the function of prudential supervisor over other

financial institutions. The economy is based heavily on foreign trade which is due partly to its

strategic location, but also because of its well regarded stable workforce and efficient seaport; it

has a highly efficient agriculture industry and despite employing just 2% of the population in

agricultural activity, exports approximately 60% of its agricultural produce {Federation of

International Trade Associations} both as raw produce and processed foods.

Throughout this report the where dollar values are used the economies will be compared in

Purchasing Power Parity (PPP) represented by United States Dollars (USD) for simplicity,

commonality and clarity.

TBS 905 Major Assignment 10 October 2006

Gross Domestic Product Gross Domestic Product (GDP) is a comprehensive measure of the market value of all

the final goods and services produced by a country in a given period {Stonecash et al

2005, p129}. This is the primary value economists use to measure the economic activity

within a country, GDP is used as a tool to gauge productivity and how effectively the

Country has used its resources to produces goods and services.

The Chart below contrasts Real GDP which is a measure of the economy’s change in production between monitoring periods, it is based on the “real” change in output against

a base year after accounting for any change in prices and therefore provides a more

representative view of the actual changes in production within an economy.

$0

$200

$400

$600

$800

Billion US$

2000 2001 2002 2003 2004

Real GDP

Netherlands Australia

Table 1 Real GDP - Source OECD Factbook 2006

The GDP of Australia is higher than that of the Netherlands however this statistic on its

own does not tell us much about the quality of life or the standards of living that the

citizens of each country enjoy, how the wealth that a nation produces is shared amongst

its population, what environmental damage might have been caused to achieve the GDP

and many other non tangible components. It can however provide an indication of the

overall well being of individuals premised on the fact that the majority of people would

prefer to have a higher income and therefore expenditure.

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TBS 905 Major Assignment 10 October 2006

To understand the differences within an economy and how it is really performing against

its peers we need to look deeper into the data behind the GDP. The charts below show,

the components that go into producing the GDP of each Country.

Netherlands Components of GDP

Agriculture 2% Industry

24%

Services 74%

Australia Components of GDP

Agriculture 4% Industry

26%

Services 70%

Table 2 Components of GDP -Source CIA World Factbook -2006

Like most western economies the services sector contributes a large portion of GDP to

both economies. This is representative of a developed economy that has moved from

the basic subsistence agricultural type industries towards a higher fulfilment of consumer

desires that the services sector provides. Services in Australia are chiefly driven by

domestic consumption this may be largely due to geography since Australia is quite

remote compared with European nations and therefore trade becomes more expensive.

In contrast the Netherlands relies heavily on foreign trade especially amongst its EU

associates to increase its services production. Geographically it is ideally placed to

trade with other European nations and has developed a reputation for providing stable

port facilities without industrial relations turmoil. This is evidenced by the fact that the

main seaport (Rotterdam) is the largest port in Europe handling more than twice as

much cargo as its nearest rival {The Economist Intelligence Unit}.

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TBS 905 Major Assignment 10 October 2006

Of importance when examining GPD is the real growth in GDP, real growth is an

indicator of how well a country is performing against its peers, as well as how the

economy is changing over time, it is also used to identify trends and how a Nations

economy is reacting to external factors.

Real GDP Compound Growth

98 100 102 104 106 108 110 112 114 116 118

1999 2000 2001 2002 2003 2004 2005 2006

%

Australia Netherlands

Table 3

The chart above contrasts the compounded growth in real terms between Australia and

The Netherlands. Australia’s growth has been steady over the period and this is

explained by the continuing high level of demand for resources that has been a major

factor in the countries economic performance. The resources sector has provided the

catalyst to stimulate domestic demand and hence overall GDP which has insulated

Australia form the economic downturn experienced throughout many western

economies. The Netherlands has had a very flat GDP growth between 2000 and 2003

this could be attributed to a general economic slowdown in Europe during this period;

since then the trend is now more in line with that of Australia. As The Netherlands relies

on Trade as a significant component of GDP it is therefore very much reliant on the

economic activity of its trading partners hence any external slowdown would have a

large impact on The Netherlands economy.

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TBS 905 Major Assignment 10 October 2006

To take GDP data and determine what this means to individuals we can divide the GDP

by the population of a country and determine GDP per Capita.

GDP Per Capita

$23,000 $24,000 $25,000 $26,000 $27,000 $28,000 $29,000 $30,000 $31,000 $32,000

2000 2001 2002 2003 2004

U S

$ Australia Netherlands

Table 4 - Source OECD Factbook 2006

The GDP per capita of Australia and The Netherlands are very similar and both nations

enjoy a higher rate than the OECD average. As this figure is an average it does not

provide us with sufficient detail as to the distribution of the wealth amongst the

population. A further tool for measuring this distribution is the Gini Coefficient comparing

this ratio yields quite a difference indicating that there is a greater disproportionate

distribution of wealth in Australia which has a coefficient of 35.21 whilst The Netherlands

is 30.9 {OECD Factbook 2006}.

An interesting feature of the graph above is that the GDP / Capita in The Netherlands in

the early part of the data series starts off higher and is growing at a faster rate than that

of Australia and then tapers off to the point where they are almost the same in 2004. An

explanation for this might be a change in the population demographic due to migration of

skilled workers. During the period, the Netherlands population remained fairly static

however there was a net migration of Tertiary Educated persons from the Netherlands

{OECD Factbook 2006}. Since the economy is based upon value added services the

flow on effect of workers with lower skill levels may have caused this slowing in per

1Gini Coefficients reported by the Australian Bureau of Statistic differ considerably from those stated above. However since the report is primarily concerned with a comparative assessment, the coefficients from the same source are used as a basis of comparison as this is more useful than quoting absolute values that may have been determined using different methodologies.

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TBS 905 Major Assignment 10 October 2006

Capita GDP growth toward the end of the period. This could be a short term trend as the

economy absorbs and educates more of the migrant population.

Household Savings Another metric of comparison is Household Savings this is a measure of the amount of

income that is not consumed and is saved for future use. These savings are the main

source of domestic capital and are central to increasing productivity and hence long term

economic growth. The savings rates can be used to compare how much a population is

investing for future production of goods and services.

Household Savings % of GDP

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2000 2001 2002 2003 2004

Australia Netherlands

Table 5 - Source OECD Factbook 2006

As can be clearly seen by the chart above starting out from almost the same rate in 2000

the two economies savings rates have taken decidedly different directions. Australians

are consuming more than they earn and this is facilitated by an ever increasing reliance

on the rapid growth of credit facilities. The increase in availability of credit has been

principally driven by the sharp increase in property prices; Australians have unlocked the

accumulated equity in their homes and are often using this for consumption rather than

investment. This is quite a dangerous situation for Australia as although consumption

stimulates the economy it is at the expense of future investment and thus highlights a

weakness in the make-up of the Australian economy. Governments would be well

advised to address the national savings issues by providing incentives to encourage a

greater savings ratio.

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TBS 905 Major Assignment 10 October 2006

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In contrast the savings rates in the Netherlands have taken an almost diametrically

opposed direction (refer to the Trend line overlayed in the above graph); although

coming off a historically relatively low base in 2000 The Netherlands has fostered an

economy which provides incentives to saving which can be used for increased

investment in production. Unlike Australia income from investments and savings in the

Netherlands is separated from an individuals other income (the 3 box system). This

system provides the first €19.698,00 of income earned from investment is tax free {Dutch

Tax Administration} providing significant incentive for household savings.

Savings habits are not controlled entirely by government policies and tax treatment,

ageing populations tend to consume their accumulated wealth as they are no longer

earning income. Both Australia and the Netherlands are experiencing ageing

populations with the current population demographics and OECD projections portrayed

below.

2005 2015 Ageing

Population % Total Pop

>65

% Work force

>65

% Total Pop

>65

% Work force

>65

Australia 12.4 24.1 14.3 30.5

Netherlands 13.6 25.3 15.0 32.1

Table 6 - Source OECD Factbook 2006

The current birth rates (Australia 0.012%; Netherlands 0.01%) {CIA World Factbook

2006} for both countries are insufficient to counter the effects of the ageing population.

Both countries rely on immigration to replenish the active workforce. As can be seen in

the table above, despite the fact that the Netherlands is experiencing a more rapidly

aging population, government policies to encourage savings are still achieving desirable

outcomes.

TBS 905 Major Assignment 10 October 2006

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Home ownership is another variable that impacts on the overall savings of an economy.

In Australia home ownership is approximately 70% {World Bank, World Development

Indicators 2003} owner occupied; by comparison The Netherlands rate is 53% {World

Bank, World Development Indicators 2003} Despite the imbalance, the price to rent

ratio’s2 are similar (Australia 213; Netherlands 204) {World Bank, World Development

Indicators 2003} in both countries. Australians have traditionally looked at houses as

safe (usually tax free for owner occupiers) investments with secure long run capital gains

hence the high participation in home ownership; this high ratio of ownership is likely to

be at the expense of savings. Dutch consumers on the other hand appear to have

enough incentives to save and invest for the future by other means which free up much

needed capital for investment in the factors of production.

One of the key differences between the two countries that also impact home ownership,

property prices, and indirectly savings is the population density. Although Australia has

a huge land mass many times that of the Netherlands; the population is highly

concentrated along the eastern and south eastern seaboards; of the OECD countries

Australia’s population concentration is the highest with 61% of the population inhabiting

10% of the region {OECD Factbook 2006}. This compares with the Netherlands figures

of just 21% for 10% of the region {OECD Factbook 2006}. The high concentration in

Australia has undoubtedly lead to improved economic opportunities and supply of

services for Australians however this has also caused upward pressure on property

prices due to the limited supply; another side effect of high density populations is the

addition pressure placed on natural resources and the environment.

2 Ratio of house prices to rents (from CPI)

TBS 905 Major Assignment 10 October 2006

Hours Worked A key indicator of how efficiently an economy is producing goods and services from its

resources is a measure of the average hours worked. This statistic is derived from the

total hours worked within a country divided by the number of people in employment.

Hours Worked

0 200 400 600 800

1 000 1 200 1 400 1 600 1 800 2 000

2000 2001 2002 2003 2004

Netherlands Australia

Table 7 - Source OECD Factbook 2006

From the Chart above, it can be clearly seen that Australians work many more

(approximately 25%) hours than the Dutch, but once again this figure on its own doesn’t

tell us much about the return from the hours invested in productive activity. To do this a

comparison between GDP per Capita and total hours worked will give an overview of the

actual productivity of the workforce.

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TBS 905 Major Assignment 10 October 2006

Real GDD Per Hour

$-

$5.00

$10.00

$15.00

$20.00

$25.00

2000 2001 2002 2003 2004

U S

$ Netherlands Australia

Table 8

When we consider the graph in table 8 it is clear that the Dutch whilst having virtually the

same GDP/Capita as Australians are enjoying a much better quality of life since they are

working fewer hours to achieve this and therefore gaining a much higher hourly rate of

GDP. The actual hours worked for both countries have a very slow downward trend over

the period and this is typical of most western economies.

The disparity in this measure is most likely explained by the distribution of components

that go to make up the GDP of the two Countries (refer table 2) the higher levels of

service industries (especially in the Finance Sector) that make up the GDP of the

Netherlands, can contribute much higher value to GDP than the Industrial and

Agricultural sectors.

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TBS 905 Major Assignment 10 October 2006

Trade Balance A further comparator is the trade balance or Balance of Payments (BOP) this is a

measure of the difference between total Exports and Imports.

Trade Balance

-30

-20

-10

0

10

20

30

40

50 20

00

20 01

20 02

20 03

20 04

U S

$ B Australia

Netherlands

Table 9 - Source OECD Factbook 2006

The Netherlands is improving its trading position year upon year, whilst Australia despite

participating in a resources boom is increasing its Trade deficit each year; domestic

demand for imported consumer goods coupled with a high value AUD is causing this

disparity. Strong Domestic demand for low cost imports is driving the trade deficit which

is being paid for with readily available credit as mentioned earlier in the report.

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TBS 905 Major Assignment 10 October 2006

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Conclusion From the data presented above, there are many similarities between the Economies of

Australia and that of the Netherlands; their GDP’s per Capita are similar and both are

reliant predominately on the services sector. However upon deeper examination of the

data it has been demonstrated that the economies really are quite different.

Australia has much greater reliance on Commodities and Agricultural produce, the

current resources boom has fuelled growth in the Australian economy; however

historically resources and agriculture have been in a long term downward trend and the

current resources activity is a normal cyclical event that will eventually return to an

equilibrium state where the downward trend will continue.

The services sector in Australia whilst contributing significantly to GDP is predominately

driven by domestic demand. The Australian economy is net importer form the rest of the

world, it digs up its resources exports them and then buys them back as value added

finished goods. The Trade Deficit is growing, and in the long run this is an unsustainable

trend; the AUD is trading at a high level which is exacerbating the situation.

Australians currently have a negative savings rate and have accessed equity in their

assets (predominately housing) to finance consumption, again in the long run this is an

unsustainable situation as there is insufficient savings that can be used for future

investment in the factors of production. Whilst the current GDP per capita is above the

OECD average, Australians work longer hours to achieve this and hence have less

available time for pursuit of any other activity. Moreover the inequity of this income

distribution is substantially higher in Australia than the Netherlands.

In contrast, The Netherlands is more mature economy and due to its size and location

has adopted an external view with respect to increasing its trade and productivity. It has

shifted its economy from the basic staples and whilst is still a major producer of

agricultural products it does this with high efficiency and also value adds to the

agricultural output with its food processing industries. Its main activities are focused on

the delivery of services and it is a major financial centre for the European Community.

This trading regime operates under a surplus with the Dutch trade surplus growing at

about 16% PA over the period examined.

TBS 905 Major Assignment 10 October 2006

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The Dutch have an enviable savings attitude and this discipline is completely at odds

with that of Australia, this saving regime will ensure that there is sufficient capital that is

crucial to allow future investment in the economy.

Overall this report has demonstrated that the Dutch have a robust economy that equates

directly to a better quality of life. On average they enjoy similar GDP per Capita as

Australia however the distribution of this wealth is more evenly distributed and they need

to work fewer hours to produce this result. National savings are in very good shape

which bodes well for the future development and growth of the economy.

TBS 905 Major Assignment 10 October 2006

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Bibliography

Books STONECASH, R. GANS, J. KING, S. MANKIW, N.G. (2005) Principals of Macroeconomics 3rd Edition Thomson South Melbourne Victoria Data Base Articles - Pro Quest 5000 ABI/Inform Global Netherlands: Economy ABI/Inform Global Netherlands: Economic Structure ABI/Inform Global Australia: Economic Structure The Scandinavian Journal of Economics Electronic Readings OECD Fact Book 2006 Accessed via UOW Library Web Sites Australian Bureau of Statistics (ABS) http://www.abs.gov.au.ezproxy.uow.edu.au: Accessed 14th August 2006 Dutch Tax Administration http://www.belastingdienst.nl Accessed 12th August 2006 Economist (The) http://www.economist.com Accessed 12th August 2006 Federation of International Trade Associations http://fita.org/countries/nl.html Accessed 10 October 2006 Netherlands Central Bank (DNB) http://www.dnb.nl/dnb/homepage.jsp?lang=en Accessed 11th August 2006 Organisation for Economic Co-operation and Development (OECD) www.oecd.org/dataoecd/0/17/36024313.xls Accessed 5th August 2006 Reserve Bank of Australia http://www.rba.gov.au Accessed 11th August 2006 Statistic Netherlands http://www.cbs.nl Accessed 14th August 2006 United States Central Intelligence Agency (CIA) https://www.cia.gov Accessed 6th August 2006