a work about econ reading summary

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ECON3600

TOPIC 5 – 1974 to the present

Overview

Within this period as a whole (1974 to the present) there is considerable variation

between sub-periods. However, it is conveniently divided into two sub-periods with

the early 1990s (say 1991/92) as the dividing line. It remains to be seen how

economic historians in the future, with the benefit of hindsight, will view this period,

complicated in a way yet to be fully appreciated by, firstly, the economic downturn in

2008-09 that was associated with what has become known as the Global Financial

Crisis and, secondly, by what has been termed ‘the mining boom’.

The first sub-period is marked by two short periods of recession (at the beginning of

the 1980s and then at the beginning of the 1990s) where economic growth (the

increase in GDP/head) was actually negative. The second half of the 1970s and the

early 1980s (and in particular the years in the immediate aftermath of the end of the

Long Boom) was overall a period of subdued economic expansion and growth

(although there were a few ‘bright spots’ and the record in some individual years

showed an economic performance comparable to that in the previous decades).

Following the recession of the early 1980s the middle years of the decade (from about

1983/84 to 1989/90) were ones of significant expansion and economic growth until

the short but sharp recession which came at the end of the decade.

The years following the recession of the early 1990s (indeed the rest of the decade of

the 1990s) were ones of unprecedented and fairly uniform economic prosperity. From

the early 2000s a significant increase in Australia’s terms of trade associated with a

marked (and in some cases spectacular) increase in the price of the main mineral

resources which had come to account for nearly half of the nation’s exports.

The effects of this increase were on the one hand positive and led to a high level of

economic expansion. But this occurred in the context of low (and in some cases even

negative) increases in productivity plus negative consequences for other sectors of the

economy, including those that had been prominent in the economic development of

the 1990s. (This process is analysed more fully later in these notes.)

Then, in 2008, came what in Australia has become known as the Global Financial

Crisis (GFC) that originated with the collapse of major financial institutions in the

US. The GFC adversely affected the economies of nearly every major economy in

North America and Europe. It had severe consequences for some Australian exports

(X) and for investment (I) that relied on borrowing from financial institutions.

Nevertheless, due partly to government fiscal policy (an increase in G) and partly to

the sustained demand for major exports (particularly iron ore and coal) Australia,

almost alone among comparable high-income countries, remained relatively

unscathed, experiencing only one quarter (3-month period) where there was a

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negative increase in GDP. Thus (contrary to the experience of most comparable

countries) Australia did not actually experience an economic recession as it is

technically defined.

The effect was negative in other respects, however, and the crunch really came with a

sharp decrease in the price of many of the major mineral resources after about 2011.

All of which raised many questions about the nature (and outcome) of Australian

economic development in the 2010s and beyond.

The second half of the 1970s to the early 1980s: arrested development and

introspection

The years following the somewhat sudden end of the post-war boom were ones, on

average, of very subdued economic growth. The expansion and growth that did occur

in the later 1970s and early 1980s came primarily as a result of renewed investment

associated with a second phase of the mining boom – widely referred to by then as the

‘resources boom’ – and by the further development of mineral processing activities.

By the late 1970s the then Department of Commerce and Industry was publishing

regular summaries of investment projects on the drawing board (from which the then

Fraser government made much political capital).

But a significant proportion of these were at the ‘final feasibility’ or ‘committed’

stage (with some controversy as to just how ‘committed’ many of those in the latter

category really were). In the event from 1981 several were placed in the ‘deferred’

category (many in fact not ever to eventuate)

An illustration of the turnaround is given by the quarterly survey undertaken by the

Australian Federation of Construction Contractors: in September 1981 the survey

predicted a 25% increase in construction activity in the following year; in December

1981 this was downgraded to a 1% increase and in March 1982 further downgraded to

a 9% decline. Within the space of less than 12 months a mood of euphoria about the

resources boom turned to one of gloom.

The reason for the slump lay largely in a global economic recession, in part a

consequence of a second oil price increase. This led to falls in the world prices of

minerals and to a reduction in the demand for Australian mineral (and other) exports

which together led to a reduction in a major component of aggregate demand. These

factors also led to the deferral or abandonment of investment in new mining and

mineral processing projects which, with added multiplier effects, further dampened

aggregate demand.

While this was occurring, manufacturing industry in Australia – the engine of

economic expansion and growth for much of the Long Boom – remained stagnant,

attracting little new investment and becoming progressively more uncompetitive

internationally.

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Added to all of this was a major drought during the early 1980s which had a marked

adverse effect on aggregate demand and exacerbated the problems caused by the

collapse of the resources boom.

The upshot was that the promise of recovery from the years of low growth in the

second half of the 1970s turned into a recession in the early 1980s and a rate of

economic of economic growth that became negative for the first time in thirty years.

The period is also characterised by the hitherto unknown phenomenon of

simultaneous high levels of unemployment (associated with economic stagnation) and

inflation, formerly considered as contradictory in the sense that high levels of one

were thought to be a hallmark of lower levels of the other. The phenomenon became

known as ‘stagflation’. Stagflation was not merely an Australian problem, but

characterised many other similar countries (its causes still the subject of debate).

In terms of prevailing – essentially Keynesian – economic theory inflation was

considered to be attributable, in part at least, to what were termed ‘cost-push’ factors,

one of which was increases in wage levels. To the extent that increases in the

Australian context were especially attributable to the centralised wage fixation system

which then prevailed, and operated even in the context of subdued aggregate demand,

this resulted in a debate about the very ‘arbitration system’ as the central

characteristic of the Australian labour market..

As a consequence the period saw quite a comprehensive analysis of all the institutions

(not only the centralised wage fixation system) which underpinned economic activity

in Australia and which, by the late 1970s, in the context of mediocre economic

performance, became the subject of much public debate.

It was increasingly recognised that Australian economic growth, even though during

the Long Boom it had been historically high (for Australia), was poor relative to other

countries and that Australia’s position on the international league table of countries

ranked by their absolute level of GDP per head was now falling progressively below

the leaders [see Table C(ii).]

The nature of the debate is indicated by the title of publications at this time… two

referred to in the Reading Guide are The Crisis of Australian Capitalism (published in

1978) and Australia at the Crossroads (published in 1980) (a section in the latter

being written by Sinclair, echoing some thoughts tentatively spelt out in his 1976

lecture that ‘new model’ development had run its course and questioning whether

economic development based on manufacturing contained the basis for continued

economic growth).

By the end of the decade of the ‘70s the questioning had become louder and stronger.

What in essence was being debated was what can be termed the ‘institutional basis’ of

Australian economic development – or to put it in slightly less formal terms the whole

‘development strategy’ based on the policy of protection – the network of policies

that were implemented in the first few decades of the century to which has been

attached the label ‘The Australian Settlement’.

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(It’s important to note again that ‘The Australian Settlement’ was not any formal

‘agreement’ but rather a sort of national consensus as to the sort of framework

economic activity should be undertaken within in order to create the most desirable

form of economic and social system. It’s important to note also that it was formulated

– in the early decades of the twentieth century – when Australia was one of the [if not

the] richest countries in the world.)

Concern about Australian economic performance led to a debate about the policy of

protection – not only trade protection to assist manufacturing industry but protection

in the more general sense of insulating other sectors of the economy from economic

forces (a prime example of which was the arbitration system under which wages were

decreed by what became the Arbitration Commission and then the Industrial Relations

Commission). This in turn led – somewhat unexpectedly – to significant institutional

changes in the ensuing decade.

These were to have a major influence on the course of economic activity in that

decade but more particularly in the ensuing decades of the 1990s and 2000s.

Political context

In considering theses changes, because they stemmed from decisions of public policy

(i.e. economic policy made by government), it’s helpful to appreciate the political

context.

The end of the Long Boom in the mid-1970s was presided over by the Whitlam Labor

government, elected in 1972 after the long reign of the coalition between the Liberal

and Country parties. (The end of the boom was partly attributable to the government,

which was largely uninterested in, and lacked the competence to handle, economic

issues; but was partly a matter of bad luck for the government, resulting as it did from

fundamental trends or matters outside the government’s control.)

The Whitlam government was followed, from 1976 to 1983, by a coalition

government under the prime ministership of Malcolm Fraser. The Fraser government

is seen in retrospect as a government that did little but preside over the continuing

relative economic decline of Australia, though it did mirror to some extent the public

debate that had been initiated about the course and indeed the whole basis of

Australian economic development. Thus the late 1970s saw a division emerge within

the government between what became known as the ‘dries’ (those who favoured

economic policies which allowed the market to operate more freely and who opposed

traditional protectionist policies) and the ‘wets’ (those who accepted the status quo).

One of the dries (though not an especially outspoken or thoroughgoing one) was the

Treasurer for much of the time Fraser was prime minister, John Howard. (The

division was also mirrored internationally, with Margaret Thatcher, who had become

prime minister of Great Britain in 1979, one of the most prominent of the ‘dries’.)

In the election held in 1983 the Fraser government was replaced by a Labor

government in which Bob Hawke was prime minister and Paul Keating was

Treasurer. The Hawke government did not, however, come to power with any clear

manifesto or set of policies for reclaiming Australia’s economic decline which by

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1983 (hot on the heels of a nasty little recession) was coming to be regarded with a

degree of resignation.

The election of the Labor government thus reflected more of an ill-defined

dissatisfaction with Fraser rather than any specific support for Labor whose policies

were equally ill-defined and offered no obvious path to a more prosperous future.

Bob Hawke was succeeded in 1991 (following a somewhat messy intra-party brawl)

by Keating who was prime minister until defeated in 1996 by the (relatively

conservative) coalition of the Liberal and (now) National parties. Howard as Liberal

leader became prime minister.

The following eleven years were ones of remarkable political stability, with the three

most significant figures in the government – prime minister, treasurer and foreign

minister – all being the same people throughout (John Howard, Peter Costello and

Alexander Downer).

The Howard government was defeated in 2007 by the (relatively left-wing) Australian

Labor Party led first by Kevin Rudd and then Julia Gillard. These governments

presided over the GFC and the end of the period of high prices for mineral resources.

A (relatively conservative) coalition government under the prime ministership of

Tony Abbott was restored to power in 2013.

The 1980s under Hawke and Keating

As noted, the Hawke government had come to power without a clear manifesto, other

than a somewhat nebulously articulated support for business, labour and government

to work in a cooperative way to restore economic prosperity.

However, the government, and Keating in particular, surprised many observers by

their leaning, demonstrated from the early days of the government, towards policies

which gave due recognition to (rather than attempting to override) economic realities.

(The Australian Labor Party had traditionally been associated with policies of

protection and regulation in the belief that these best served the majority of people,

particularly those associated with employees in contrast to the owners and managers

of business enterprises.)

One of Keating’s first major policy decisions, made within months of the government

assuming office, was to (fully) float the Australian dollar so that henceforth the value

of the currency would be determined by free economic forces.

Whilst the subject of some controversy at the time, this action has subsequently been

regarded as an appropriate one. It served, however, to reveal even more clearly the

economic difficulties of Australia in relation to the rest of the world and to emphasise

the balance of payments problems being experienced.

It was the progressive decline in the value of the Australian dollar and the steady

increase in foreign debt, in the face of an ever-worsening balance of payments

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situation, that led Keating to make a statement in 1986 that summed up his growing

concern about the Australian economy and gave a hint of the policies he was to

pursue.

While not intended to be part of a major statement (it was in fact made in an interview

on the John Laws radio program) it nonetheless served to have an effect on public

opinion and paved the way for some major policy initiatives over the next decade.

It became known as Keating’s ‘banana republic’ statement.

He said, among other things:

We must let Australians know truthfully, honestly, earnestly, just what sort of

international hole Australia is in… if this government cannot get the

adjustment, get manufacturing going again and keep moderate wage

outcomes, and a sensible economic policy then Australia is basically done for.

We will just end up being a third rate economy… a banana republic.

There followed, over the next decade, a number of policy changes which amounted to

a fundamental change in the whole institutional basis of the Australian economy.

These related to every major facet of economic activity in Australia and included:

 deregulation of the financial sector – where a network of direct controls over

financial enterprises (principally banks) which made up the financial sector

were eliminated, and (as already noted) government control over the value of

the currency itself was abandoned as the Australian dollar was ‘floated’, its

value henceforth to be determined freely by market forces. Among the

changes was the agreement to allow foreign banks to enter the Australian

market (though not at the retail level) and for investment by Australians to be

undertaken overseas (which hitherto had been restricted and very limited). (In

fact deregulation of the financial sector had been initiated in the latter stages

of the Fraser government, especially by John Howard, who had been

instrumental in the establishment of a committee which effectively provided a

blueprint for financial deregulation. Within a very short period of assuming

government the Hawke government, implemented virtually in full the

recommendations of this committee);

 further comprehensive and substantial reductions in trade protection via the

tariff;

 the abandonment of various forms of assistance to agricultural industries that

in different ways shielded them from the forces of international competition

and assured them of an income in much the same way as tariff protection had

assured manufacturing industries of an income. Assistance had been given to

virtually all rural industries (even eventually the wool industry in the form of

the Wool Reserve Price Scheme) through what were generally termed

‘statutory marketing arrangements’, some dating back to the early decades of

the century;

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 the elimination of government monopolies in many industries, some of which

involved the production of goods and services that were of pervasive and

fundamental importance to the operation of virtually all areas of productive

activity, e.g. telecommunications; and comprehensive reforms to the manner

in which government business enterprises generally operated; and

 the replacement of ‘the arbitration system’ (whereby the terms and conditions

under which labour was employed in Australia – most particularly the wage

rate and the increases that were granted over time – were determined centrally

by a quasi-judicial tribunal [the Arbitration Commission, renamed the

Industrial Relations Commission]), and the initiation of a system based on

bargaining between employers and employees (which became known as

‘enterprise bargaining’).

The essence of the policy changes was the rejection of protection as a central

principle – whereby people, groups and categories of activities were shielded from

competition (both from within the economy, and overseas) in the interests of creating

an economic and social system that embodied the principles of stability, certainty,

fairness, egalitarianism and self-sufficiency. These were the sort of principles that had

come to be associated with the Australian nation and Australian people, and which

had (or so it seemed) ‘delivered the goods’ i.e. underpinned the post-war prosperity.

In place of protection, the principle that came to given prime place was that of

economic efficiency or competition and with it, reliance to a much greater extent on

the free market.

This implied abandonment of policies that shielded individuals and groups from

economic forces. In their place were put policies that exposed participants in

economic activity – whether they were producers, or suppliers of resources – to

competition from others in producing goods and services. The function of competition

was seen as ensuring that the demands – whether of consumers or those demanding

resources such as labour – would be met, and met in the most efficient and low-cost

manner possible.

Policies of deregulation – of unshackling producers from the web of controls,

restrictions and regulations designed to provide assistance to (or ‘protecting’)

different groups that had underpinned Australian economic development for the

previous seven or eight decades – were implemented with a rapidity that in retrospect

is remarkable. The term ‘microeconomic reform’ has been used widely to refer to this

network of policies.

The upshot of the policy of deregulation – coupled with favourable ‘external’ factors

(not the least of which was the fact that the 1980s was a decade of the ‘greed is good’

philosophy, together with economic prosperity in other economies to which Australia

was closely linked) was a series of years of high economic growth.

To a large extent this was based on an increase in private investment, undertaken in

the context of the newly ‘free’ economy. Central in this increase was both the ability

and willingness of domestic financial institutions to lend (not to say the new

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competitive pressure on them to do so) along with a high level of overseas borrowing

by Australian enterprises (much of it in the form of ‘portfolio’ rather than direct

investment).

The higher rate of economic expansion, in the context of continuing lower levels of

population growth (associated particularly with the continuing fall in the birth rate)

served to slow the long downward trend in Australia’s international ranking relative to

other comparable countries.

But it didn’t reverse it. Indeed the 1980s saw the relative decline being spoken about

more often and publicly, and analysed more searchingly. One example was a book

published in the mid-‘80s which included the tables that have been reproduced as

Tables C(i) and C(ii) as prime exhibits. Another was Keating’s own ‘banana republic’

statement.

Australia’s position in terms of GDP per head, which in 1950 had been 3rd or 5th

(depending on the figures used), itself a huge drop from its pre-eminent position at the

beginning of the century, thus continued to fall to the point where Australia was

ranked 16th by 1990.

And the economic prosperity of the 1980s gave way at the end of the decade to

another recession when economic growth again became negative and unemployment

– the clearest public measure of the economic situation – moved into double figures.

(Bear in mind that it was only three decades earlier when a level of unemployment

above 3 per cent was sufficient to nearly bring down the government of the day.)

The recession was caused in part by the effects of the policies of the 1980s, in respect

particularly of the financial sector.

The unleashing of domestic financial institutions led to a frenzy of lending. Many,

especially the major banks, appeared to be competing with each other to lend to

borrowers on what appeared to be an increasingly flimsy basis, and new types of

financial products and institutions (related especially to home lending) appeared.

Fearing the inflationary consequences of this the Reserve Bank, charged then as it is

now with regulating the macro-economy, raised interest rates. But it did so in to an

extent that is now (with the benefit of hindsight) generally regarded as having

overdone it, to the point where monetary policy itself played a significant role in

creating the recession.

There were also ‘external’ factors (as indeed was the case with earlier downturns)

But the recession – as great as the impact on some individuals was – was relatively

short-lived and we can regard it essentially as a blip on the long-term upward path

that had been set in train in the 1980s but resumed with renewed – and, as it turned

out, more long-lived force – after the recession [see Table D].

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The 1990s

Recovery from the recession was fairly rapid and heralded a period of high and

sustained economic expansion and growth.

After the (fairly rapid) recovery from the recession of the early 1990s a sustained

period of continuous, high economic growth meant that the standard of living – if we

use GDP per head as the proxy for this – increased by over 50 per cent in what is

historically a very short period of time… comparable to, and indeed a shade more

impressive than, that which occurred during the long boom of the post-war years.

Furthermore this occurred in a period of considerable stability in both economic – and

political – terms. Thus, well into the 2000s, most Australians under the age of 25 were

only conscious of good times economically, during which (until the election in

November 2007) the same government was in power.

The record was all the more remarkable in that it was made in a time of recession for

Australia’s major trading partner and an economy to which our fortunes were closely

linked (Japan) and a financial and economic crisis in just about every country in the

immediate region (generally referred to as the ‘Asian Financial Crisis’ which occurred

in 1997 in a large number of Asian countries).

It also occurred in the context of a relatively dismal economic record in comparable

countries of the world and in particular those who are members of the OECD

(Organisation for Economic Cooperation and Development) – and it’s these with

which Australian economic performance is generally compared.

The implication of this was that in the 1990s Australia’s fall down the rankings was

halted and indeed reversed quite spectacularly to the point whereby in the early 2000s

Australia’s position had been restored to around 8th (depending on the figures used)

and has hovered there since.

To achieve this Australia outranked nearly all other OECD economies in terms of its

economic achievements, thereby attracting the label (albeit from only one,

nevertheless very prominent, American economist) of a ‘miracle economy’.

How is this record to be explained?

The nature of Australian economic development in the period since the early 1990s

was, in contrast to that in earlier phases, more broadly based. It came to be oriented

less to a particular type of activity (agriculture in the case of ‘old model’

development; manufacturing in the case of ‘new model’ development that occurred

from the 1930s to the 1970s) and more to the principle of – to put it in somewhat

informal terms – of ‘doing what can be done best, and doing it efficiently’.

The high rates of economic growth experienced in the 1990s can be attributed largely

to increases in productivity that occurred during the decade across a very wide range

of Australian industry, including service industries – both the service industries that

were essentially linked to other industries in the domestic economy (such as

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agriculture, mining and manufacturing) and those which developed as export

industries in their own right (such as tourism, education and financial services).

And the productivity increases can, in turn, be attributed very largely to the

microeconomic reforms implemented in the 1980s and early 1990s.

Had Australia found a new ‘new model’ for economic development?

Whatever the case it appears that in the 1990s, the result very largely of the

microeconomic reforms initiated by the Hawke-Keating governments, Australia as a

nation adopted a (further) new ‘model’ of economic development.

This revolved, not around a particular type of economic activity – such as agriculture,

in the case of ‘old model’ development, or manufacturing, as in the case of ‘new

model’ development as it occurred in the post-war decades – but rather a principle: a

more diversified focus on doing whatever it is that can be done better than other

people, whether it’s within the Australian economy, or elsewhere (and with

globalisation and increasing freedom of trade that distinction is becoming less and

less clear).

This is essentially the principle of the free market. A more broadly-based – and

globally-oriented – economic development amounted, in a sense, to the triumph of

economics as a discipline… and above all to the notion of ‘comparative advantage’.

This is what essentially explains the period of sustained economic growth in the

1990s and the early years of the twenty-first century which paralleled the post-war

‘long boom’.

Mining

Mining warrants a special mention at this point because, for the whole of the period

under consideration here, mineral products constituted between 35% and 50% of

exports (actually increasing in the late 2000s to over 50%).

This was because mining was the activity in which Australia possessed a very

significant comparative advantage. It was thus a very significant part of the ‘new new

model’ of development.

The 2000s

The decade of the 2000s was a boom decade, marked primarily by an unprecedented

increase in the terms of trade that was associated with an increase in the price of many

of the minerals that were such a significant part of Australia’s exports.

Prominent among these was a spectacular increase in the price of iron ore, Australia’s

largest single export commodity, from around $13 per tonne at the beginning of the

decade to a peak of over $180 per tonne at the end of 2010 and (a more sporadic)

increase in the price of coal from under $30 per tonne early in the decade to $130 -

$140 per tonne by 2010.

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The explanation for the increases lay primarily in increased demand for major

commodities (notably iron ore and coal, Australia’s largest single export

commodities) from China and India in particular.

This had a profound positive effect on the rest of the economy. This effect was felt in

three ways:

 the income earned by the owners of mining companies (to the extent that this

accrued to Australians) and by employees was spent, thereby generating

further income;

 demand by mining companies for inputs (of both goods and services) created

production and income; and (most significantly)

 investment (I) was undertaken (directly and indirectly, i.e.in both mining

projects themselves and infrastructure to support them) to enable mining

activity to be increased. (Indeed ‘the mining boom’ was mainly about the

investment (capital) expenditure that was undertaken.

At the same time, the mining boom had negative effects. These were felt mainly via

the exchange rate - the value of the $A. The demand for Australian dollars to purchase

iron ore and other mineral resources drove the value of the $A dramatically upwards.

At the beginning of the 2000’s the $A was worth around $US0.50. It rose steadily

over the decade to be worth $US0.75 in 2005, and peaked at $US1.10 in 2011. It also

rose in value in terms of other currencies (dependent on the relationship of other

currencies to the $US.)

This benefitted importers, including importers of services (for example Australian

tourists travelling to other countries).

But it adversely affected Australian exporters. This of course included mining

companies themselves, though they were experiencing sharply rising prices that offset

this effect. For other exporters, however - including the very industries that had

prospered in the 1990s in the face of newly deregulated economy - the effects were

devastating. Hard hit for example were export-oriented industries in the

manufacturing sector, the ‘education industry’ and domestic tourist operators (i.e.

those exporting their services to foreign tourists).

A further negative effect of ‘the mining boom’ on other sectors of the economy

(though its incidence varied considerably across geographic regions and industries)

was that some inputs were ‘bid away’ from other industries by mining activities. This

was felt most acutely (and received greatest publicity) in respect to certain categories

of labour (e.g. people with trade skills, such as electricians).

Finally, other sectors of the economy were negatively affected by a series of rises in

interest rates engineered by the Reserve Bank as part of monetary policy. These were

deemed necessary such was the level of aggregate expenditure related to the mining

boom. These made investment in other sectors of the economy (e.g. manufacturing)

more expensive.

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The net result was what was widely referred to as a ‘two-speed economy’ - an

economy dominated by mining and mining-related activities but one where other

industries were advancing more slowly or actually going backwards. The process was

popularly described as a ‘hollowing out’ of the economy, where industries that had

prospered in the 1990s were stalling or shrinking.

Concerns were also being expressed that productivity (as data indicated clearly) was

increasing very slowly and in some years was actually negative. Increases in GDP per

capita were still occurring, but only because of the spectacular increases in the prices

being received for mineral resources. There was surprisingly little concern about this

whole ‘model’ of economic development, a reflection of what one economist has

termed ‘the great complacency’ that the mining boom created.

The GFC

Due to unwise, and unrestrained, lending policies of banks, particularly in the US but

also Europe, there were a number of spectacular collapses of financial institutions,

particularly in the US in late 2008.

The phenomenon was recognised and widely referred to as the ‘sub-prime crisis’ (i.e.

of banks lending to ‘sub-prime’ borrowers - those with little or no chance of repaying

the loans - particularly for housing). But the relatively few observers (including the

few economists) who foresaw a larger financial crisis evolving were dismissed as

mere doomsayers.

The problem was exacerbated by the financial institutions (particularly US banks)

‘collateralising’ their debts and on-selling the debt as ‘collateralised debt securities’.

Some Australian organisations (including for example local government bodies, and

charities) purchased these; though they turned out to be virtually worthless.

The immediate effect of the collapse of these institutions was to reduce all the major

components of aggregate expenditure as incomes were reduced. This included exports

(X) as incomes were reduced in countries that purchased Australian goods and

services.

In addition the whole international financial system was affected as financial

institutions became unwilling to lend to other financial institutions and deposit-taking

institutions found it increasingly difficult to attract, even retain, funds. (In Australia

the government was obliged to guarantee deposits with banks to prevent widespread

withdrawals.) Hence the term ‘global financial crisis’ (though the word ‘global’ was

probably rather strong as the crisis was confined very largely to North America and

Europe).

For most comparable, high-income, countries the GFC ushered in a sustained period

of low and even negative economic expansion and growth. Even the ‘strongest’

economies - those of the US and Germany - were to take until 2015 to return to the

absolute level of GDP per capita that they enjoyed prior to the 2008.

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By contrast, Australia was much less affected, although the GFC did usher in a period

of economic expansion and growth that was significantly lower than had been

experienced during the 2000s before the GFC. Thus while the average annual rate of

economic expansion from 2000 to 2008 was 3.2%, in the five years following it was

about one half that (approximately 1.6%). With the average annual rate of population

growth steady at about 1.3% this meant that the average annual rate of economic

growth (the increase in GDP divided by the increase in population) fell to under 0.5%

- compared to about 2% in the 2000s and 3% in the previous decade [see Table D].

In other words the GFC ushered in a sustained period of lower growth. But Australia

was almost alone among comparable countries in that it avoided going into what is

technically termed an economic recession (a period where the rate of increase in GDP

is negative for more than two quarters (three-month periods). Why this is so is

attributed to two main factors (although the relative importance of these remains a

matter of debate):

 the Australian government adopted vigorous macroeconomic policies in the

form of both monetary and fiscal policy; and

 the demand for Australian mineral exports (particularly from China, despite

the fall in the demand for Chinese manufactures that relied heavily on iron and

steel produced from Australian mineral resources) stayed high.

Thus the ‘mining boom’ and its ramifications rolled on. The circumstances were in

some ways reminiscent of the early 1970s.

The mining boom ends

After 2012 the price of major mineral resources fell considerably.

This was particularly marked in the case of iron ore where (while the world price

between 2010 and 2012 fluctuated) from the beginning of 2013 the price fell steadily

from around $160 per tonne to below $60 per tonne in the space of three years.

The price of coal fell from around $80 per tonne in 2010 to around $40 per tonne at

the beginning of 2015.

Overall the terms of trade, having increased spectacularly in the 2000s, fell by nearly

a third in the years following 2011.

Mining activity, particularly that by more marginal producers, was reduced or

curtailed entirely. The most obvious manifestation of ‘the end of the mining boom’

was the severe reduction in, almost the total cessation of, investment expenditure that

was directly, or indirectly, related to mining. (Indeed the ‘mining boom’ itself - as in

the case of ‘mining booms’ in previous years had been largely about mining-related

investment expenditure [I].)

An associated consequence was a fall in the value of $A. From its peak of $US1.10 in

2011 the $A fell to below $US0.75 by 2015.

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This fall benefitted industries reliant on exporting. Foreign buyers were now able to

buy Australian goods and services with fewer units of their own currency. Or

Australian producers selling products at prices determined on world markets now

received more Australian dollars for their products. The fall thus worked to the

advantage of industries such as tourism (whether it was providing services to overseas

tourists, or to domestic tourists in competition with overseas producers who were now

relatively more expensive); education (one only needs to ask a student from an

overseas country about the change in the relative cost of studying in Australia vis-à-

vis say the US); or those manufacturing industries that exported their product.

The decline in the $A was aided by a series of interest rate cuts made over the years

2011 to 2015. These were made, in line with conventional monetary policy theory, to

stimulate demand in the context of the ‘end of the mining boom’ but they also served

to make holding Australian dollars less attractive to foreign financial ‘investors’

(seeking to maximise their return on funds in the light of much lower interest rates in

other countries) and reduce the demand for higher yielding Australian dollars. (The

reduction in interest rates would probably have been even greater were it not for

concerns that further reductions would have fuelled the demand for funds to purchase

domestic real estate and thus exacerbate the high rate of increase in house prices).

Australian economic development in the 2010s, and beyond, will depend crucially on

the response to the fall in the $A. Will this lead to an increase in the production of

goods for export - and, of particular importance, investment expenditure to support

increased production?

Will the industries that were adversely affected by the mining boom be able to

respond to the new economic environment? And will they in fact do so?

A final note: has the GFC been downplayed?

The above analysis tends to treat the GFC as something of a ‘blip’. It may be that the

‘ripple effects’ of the GFC are greater than have been acknowledged and that future

accounts of Australian economic history will accord it greater significance.

The view implicit in the above notes, however, is that the ending of the mining boom

is of greater significance and could usher in a period of introspection about the

Australian economy and some institutional changes to parallel the period following

the end of the long postwar boom in the mid-1970s.

It may be that, in the words of one economist, Australians remain in the grip of a

‘great complacency’ engendered by the extraordinary good luck of the 2000s (on top

of the extraordinary good luck of possessing a cornucopia of natural resources in the

first place). If so, for how long?

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