Sunday, June 17, 2012

Even more reasons why we're lucky to be living in Australia

My last post argued that Australia hadn't just been lucky, it had been good. It's easy to focus on the shortcomings of policy - the inability of the Howard government to put Australia in a sounder fiscal position despite perhaps the most propitious global economic conditions in Australian history, the failure of the Reserve Bank and the government to put policies in place to restrict the massive expansion of debt, and the failure of the Rudd and Gillard governments to put resource taxation through earlier and at a higher rate.  But given Australia's relatively excellent economic performance I think it's time to accentuate the positives.

Having said that, I still think policy-makers must continue be aware of Australia's three major economic vulnerabilities:
  • changes in international demand for Australia's exports (mainly resources)
  • changes in international financial sentiment and supply
  • rising inequality
Of course we could add a fourth, our vulnerability to climate change and the policies required to deal with them. This fourth vulnerability undoubtedly affects the first one because dealing with climate change will affect our exports of raw materials and particularly coal, although it has and will continue to boost demand for Australian gas.

What it should also do is increase our willingness to fund basic research in renewable energy technologies. Success in this latter category will unfortunately affect our exports of coal.

Recognising these vulnerabilities should be the starting point of any long-term analysis of the Australian economy, but such worries tend to get lost in the euphoria of booms, especially long-lasting booms like this one.

We also need to be aware of the distributional consequences of adaptation to the global economy and changing technology. Openness can underpin productivity and prosperity but the political process must ensure the spreading of benefits and the sharing of costs. 
In light of much of the guff being written about the European crisis and the idea that the welfare state (once again) is the cause of crisis, I would argue that the welfare state is the reason why the crisis is so much less severe than it could be. 
Indeed, the crisis clearly shows that globalisation does not necessitate a smaller role for government. Without the prescient actions of policy-makers and an understanding of the Great Depression this crisis could have been a global catastrophe.

The future of globalisation is ultimately dependent on effective redistribution and compromise between sections of societies. In democracies (and even in authoritarian systems), globalisation must eventually produce the goods (and services) or there will be trouble. Governments can use crises to push through harsh measures, but eventually as we are seeing in Europe right now, there must be something in it for a majority of a population. (see here also for academic account of the mechanisms involved)

Unfortunately, failure of economic policies to eventually 'produce the goods' is just as likely to lead to right-wing populism as left-wing populism.

So ... be thankful that you live in Australia as this graph clearly shows. (h/t Rumplestatskin)

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