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Rudd must focus on key issues of domestic policy
article published in The Age Business , 14 October 2008
[Square bracketed sentences deleted by Ed]

Tough times in the past offer little guidance for the present worldwide crisis, writes Des Moore.
In this global financial (and now economic) crisis no economic models and no “expert” advisers can predict what is going to happen over the immediate future, let alone the next couple of years. All predictions have to be doubted because the underlying parameters on which models are based no longer exist.

Past experience with collapses in share markets and banking systems does suggest, however, we will be very fortunate to avoid a period of 3-4 years during which economic activity and employment are much lower than in the recent past.

In the three years from 1989-90, after the 1987 share market collapse, Australia experienced one fall in economic activity and an average growth in GDP of less than 1%. Unemployment jumped to 11% .

[In the same period] four of the major seven economies also experienced one fall in economic activity, a similarly low average growth rate and higher unemployment. In the depression years from 1928-35 Australia’s economic activity declined by 9.8% from peak to trough, although that was much less than the 28.5% drop in the US where GDP did not get back to 1929 levels until 1939.

Australia’s capacity to handle economic shocks has improved since the late 1980s. We have established an independent central bank, are running a substantial budget surplus, have a strong banking sector and a less regulated labour market and are benefitting from a much increased demand for mineral resources.

[But Australia is also more exposed to what happens globally, particularly through overseas borrowings by the financial sector]. Also, by contrast with the 1980s, this time around the closure or quasi-nationalisation of large numbers of big banks in the US and Europe has led to a virtual collapse of the world banking system as a supplier of credit. This creates a more difficult environment for recovery than after the 1980s.

Some commentators suggest that the panic falls in share markets have created a situation in which (lower) price/earnings ratios are now at bargain levels for quality companies. But nobody can confidently predict corporate earnings levels over the next 2-3 years. Moreover, the banking system will now be much more cautious, to put it mildly, in its lending policies to both companies and individuals.

Although the IMF and OECD have published forecasts for 2009 of over 2% economic growth for Australia and, in the IMF’s case, 0.5% growth for “advanced” economies and 9 % for China, such forecasts are rightly described in the main text as having significant downside risks. It is also not clear when those forecasts were closed off: [given the fast moving economic scene, they are probably already out of date].

Prime Minister Kevin Rudd has said that the fate of the Australian economy is tied to that of China and that he has been assured in conversations with Chinese leaders that strong Chinese growth will continue. However, even if the Chinese succeed in maintaining growth, the reality is that Australian exports depend on much more than what happens in China.

While the importance of China’s outlook is undeniable, this overlooks the greater importance of Japan as an export market.[Our exports to Japan are not only a much higher proportion of total exports (22 per cent compared with 15 per cent to China) but are not as dependent on one export as those to China, where iron ore comprises nearly half].

The French Managing Director of the IMF (a political appointee) has asserted that “the international financial architecture had failed to adapt to globalized financial markets” and “there is no domestic solution to a crisis like this”. This is an attempt by the IMF to establish itself as a global regulator and is unlikely to get far. For Australia the most important focus must be on domestic policies, including temporary protection for our banking system.

Perhaps the most important thing the Government can do is to avoid introducing policies that will add to the greatly increased uncertainty now faced by companies and individuals. Proposals such as the vast increase in labour market regulation and the introduction of an emission reduction scheme must be postponed indefinitely and the immigration program scaled back. Attempts to sustain economic activity should focus on reducing taxation rather than increasing expenditure. [Domestic action along these lines would help restore confidence].

Des Moore,
a former Treasury deputy secretary, is director of the Institute for Private Enterprise.

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