The Australian Economy: 1983-2003 and beyond
This was written for the 20th Anniversary Issue of Personal Investor magazine and appeared in the August 2003 issue.
In 1983, the Australian economy stood on the cusp of its history.
But in 2003 it appears to have escaped its past and entered a totally different age – both in the global economy and at home.
Over the past twenty years the Australian economy has become:
- Much more globalised, with growth more dependent on the success of our export industries, and Australians much more prepared to put their money in overseas baskets.
- More deregulated, as a result of financial sector deregulation, reductions in industry assistance and protection, labour regulations and laws, and changes in foreign investment and competition policy.
- Less dependent of governments, less centralised and more governed by market forces.
Investors also live in a very different world.
When this magazine first appeared in mid 1983, the 10 year Aussie bond rate was 15 per cent, and bank customers were receiving 11.5 per cent for 30 day fixed deposits – see accompanying table.
But before older readersshed too many tears of nostalgia, an inflation rate of 11 per cent was the main reason for these seemingly higher returns.
No wonder the first issue of this magazine advised that “shares and property need to return more than 20 per cent a year” to compensate for their greater risk, compared with interest-bearing securities.
Investment arithmetic has also changed radically.
In 1983, the average Australian PE was 12.9. It is currently almost double that level.
So much for the old “worry when it gets over 12 per cent” rule?
Interestingly though, average dividend yields have hardly changed, sitting around the 4 per cent level in both eras.
Super fund returns have been on a much bigger roller-coaster ride lately.
But to fully understand why 1983 looks light years away requires a closer look at our major structural and policy changes since that era.
For much of our history we rode on the sheep’s back, then on a mineral freight train, and are now travelling on a much more diverse export carriage.
Despite sharp reductions in tariffs and industry assistance, our exports have boomed. Services exports and manufactured exports have grown sharply in relative importance and tourism now brings in more foreign currency than our farm exports.
As a result, our international trade has grown in importance as a contributor to our GDP. This was largely a product of the further industrialization of Asia and our ability to meet its increasing demands for commodities and energy and of a rise in relative importance of services – largely tourism and education – and manufactured exports
The next big changes were policy ones. Who would have imagined in 1983 that Labor governments would so quickly jettison their “Light on the Hill” and replace it with the “Light of Microeconomic Reform”? Certainly no economic or social commentators of that time predicted such.
The result was the biggest set of changes in the role of the state and tax system in our history.
Privatisation and corporatisation radically changed the face of both the public and private sector.
While these changes did produce job losses they also benefited consumers.
True, the percentage of Australian jobs in the public sector fell from over one-quarter to one-sixth.
But we no longer face a monopoly telecoms provider and an airline system which saw the same planes leaving at the same times for the same price from our airports.
The accompanying scatter diagram shows how successful deregulation has been in turning Australia from a tortoise in the global productivity race to a real hare.
Over the past decade, something else particularly important has also happened.
Not only has our economy steamed ahead of most other Western economies – and particularly the US -it has also kept a much steadier course than it did in the 1970s and 1980s.
Most impressively, we appear to have broken the old rule: “When Australia’s major trading partners and/or the US catch a cold, Australia catches pneumonia.”
Why? We took liberal injections of economic reform which appear to have inoculated us from imported viruses.
The main such reforms included the following:
- The floating of the $A in 1983.
While this did not produce the much more stable currency the academics promised, it did put the little Aussie battler on the TV news programmes.
It forced us to abandon our long tradition of taking ostrich-style postures in response to changes outside our control.
Most importantly, it gave us an automatic adjustment process which helped us deal with serious downturns in our trading partners.
For example, when the recession of the early 1990s and the Asian Crisis hit, commodity prices fell and down went the $A. This made our exports more competitive and imports more expensive in $A terms, helping our economy to weather the external storms greatly, rather than waiting for politicians to set what they thought should be the right value for our currency.
- A more rational and disciplined fiscal policy.
While Mr Keating promised “An age of budget surpluses” – and then oversaw a massive deficit blow-out - the Howard Government produced the most drastic cut in Federal debt and borrowing in our history.
As a result, billions of taxpayers’ money which were being spent on interest payments to foreigners can now be used for much better purposes .
- Monetary policy is now better-informed, more forward-looking – and,so far, more successful in keeping the economy on a steady course – than it was even a decade ago.
This is largely a product of the adoption of the RBAs 2-3 per cent inflation target range and a more independent RBA.
But the last few years have also been easy ones for the RBA board. The real test of this new era will come when the Australian economy turns down sharply again.
- Labour market deregulation and decentralisation have helped raise productivity, making our exports more competitive and our manufacturers more able to compete against imports.
The result is a much less unionised and flexible workforce, with wage rises based more on productivity improvements, rather than tribunal decisions. The result of this: lower wage growth and interest rates.
There has also been a dramatic feminisation and casualisation of our workforce, enabling households to carry heavier debt burdens.
- We now have a harder-headed approach to welfare and social security policy.
While histrionic media campaigns against government efforts to get a bigger bang for every taxpayer’s dollar spent in these areas have frustrated many reforms, our welfare payments are now much better targeted and more means tested.
But there is a lot more reform to be done in these areas, given the rapid “greying” of our population.
How have the above changes affected our investment climate and institutional arrangements?
Financial deregulation certainly changed the face of our financial services sector. In the mid 1980s, Citibank even rewarded fixed deposit investors with a box of red wine on the front verandah. There has been an explosion of marketing persons since but sadly similar offers have not been forthcoming.
The growth of fund managers, funds under management and the variety of funds available also stands out.
In short, the investment environment is now much more deregulated and globalised.
When a butterfly flexes its winds in the Brazilian rain forest it does not send tingles to the hip pocket nerve of Australian investors.
But when Wall Street trembles, the other major share markets certainly shake, as the US 1987, 1997 and “New Economy” dramatic adjustments reminded us.
The downside of these changes is that they have made investor choice more difficult and investor education – particularly that provided by super funds themselves - has not kept up.
True, we have a much more efficient and dynamic economy but we also have suffered some negatives from all the reform.
Some which stand out include:
- The decline in corporate ethics.
This claim is impossible to quantify but few persons would dispute it. When AOs appear frequently outside courthouses, when there is widespread doubt in even the business community that CEOs really deserve $4-5 million salaries and all sorts of package add-ons, when major insurance companies collapse leaving investors, contractors and house builders in the lurch, there is little doubt that this has happened.
Further declines in such ethics and general business probity will threaten the whole viability of Australian business – and certainly make it even more difficult for investors to make wise investment choices.
- The need for new thinking about government regulation, supervision and competition policy.
While the financial system deregulation was, on balance, a positive development, the recent HIH scandal showed that there are also flaws in the new de-regulated environment.
There is also a big question mark over the future of competition policy. Business may applaud the retirement of Professor Fels from the ACCC but the financial deregulation experience should remind us that there are dangers of giving too much freedom to business. Media policy will be a particular wasp’s nest.
Unfortunately, the main beneficiaries of totally de-regulated markets are often the Al Capones, rather than much smaller and more honest businesspersons and investors.
On the other hand, more government regulation is no simple solution to Al Capone-style business practices either. Indeed, he gained greatly from prohibition and was only ever convicted of one offence: tax evasion.
- The decline in the quality of working life for many Australians.
While some Australians are working longer hours – in particular, the better-remunerated ones – it is a myth that average working hours have increased dramatically. Indeed, the latest ABS survey showed they have not changed since the mid 1990s.
It is the increased pressures at work - and from early retirement - which are the biggest negatives.
Australians may be retiring earlier but they are also living longer than even 20 years ago – see table.
This will put increasing pressure on super funds and other sources of post-retirement income.
- Greater income – and particularly wealth – disparities.
This is a complex question. For example, have the rich got richer and the poor poorer - as is widely claimed in the media?
We don’t have full data on wealth distribution but income distribution data shows that in fact both the poor and the rich have got richer over the past 20 years.
It is the middle 60 per cent of Australians who have suffered a decline in their position relative to the bottom 20 per cent and the richest 20 per cent.
Certainly, the standard of living has risen sharply for most Australians, whatever measure one uses. It is very hard to find a good or service which is not a lot cheaper than 1983 in terms of what really matters – how long the average Australian has to work to pay for it. (Jam, bread and waterfront Sydney properties are exceptions.)
What about the battle of the sexes?
Another myth is that Australian gender earnings differentials are great. In fact, average gender differentials are very small by world standards and largely a product of the fact that females, on average work shorter hours than males. With females thrashing males at high school and university, the remaining differentials will shrink further over the next twenty years.
What about all that debt Australians have hit up?
Here too, a few factsdispel the myths.
True, household debt has risen sharply as a percentage of household disposable income but so too have the property values of those Australians who own their homes or who are paying off a mortgage.
Most importantly, the ratio of interest payments by households to their income has only risen very marginally, despite the skyrocketing debt levels.
Looking forwards over the next 20 years, the following big questions about the investment climate stand out.
- Will the family home be the prime contributor to household wealth accretion, as it has been over the past twenty years?
Certainly, superior-located property should continue to be a good investment, unless there is a dramatic and sustained downturn in the economy and/or a much lower immigration intake. Further ageing of the population should, however, slow down the pace of family-based property price rises in the suburbs.
- Will interest rates ever return to late 1980s levels?
Unlikely, unless there are major, totally unpredictable catastrophes such as massive terrorist nuclear bombings or the destruction of Tokyo or San Francisco by earthquakes.
- Will we have another 1930s-style Great Depression over the next two decades?
There is no crystal ball which will answer this question but the Australian economy is in much better shape than it was in 1983 and our policy makers are better-informed and more astute. Expect some corrections though.
The doomsayers have predicted one for over 60 years now but if we do have a sustained bear market it will not be a repeat of the 1930s but a product of a totally different constellation of forces.
A final message which flows from our 1983/2003 comparisons: beware forecasters who make forecasts beyond next week.
Very little of what happened over the past 20 years was predicted by anyone.
Indeed, the long-run forecasters were way off the track with their predictions of paperless offices, unlimited leisure time, the continuation of communism and the like.
The one thing we can say with confidence about the next 20 years is that it will be a repeat of the last 20 years in this regard – the most important events and developments will be unpredicted and are, indeed, unpredictable.
Dr David Clark teaches Business Economics at the University of NSW and is also a contributor to Asset magazine