Economic growth and the Australian economy

This is taken from a talk I prepared for the 2017 Economic Update Conference for the Economic and Business Educators of NSW (slides and complete talk are attached).

This year marks Australia’s 25th year of continued economic growth. We’re on target to hit 26, when we’ll match the record amongst OECD countries.

Growth has been faster in Australia — both in the aggregate and per capita terms — than everywhere else in the OECD. While we are boasting about 25 years of growth, Japan has gone from lamenting the “lost decade”, to lamenting the “lost score”. We have also enjoyed a period of remarkable stability. In the 25 years prior to 1991 we had 6 recessions, and 27 negative quarters. Since then, zero recessions and only four negative quarters.

How did we achieve this? Well first came the tough decisions. In the years before the recession, the Australian economy was inward looking and protectionist. Industry policy was about import substitution, labour markets were rigid, the economy lacked competition, and there were tax inefficiencies, regulated prices and limits on how the financial sector could operate. Spearheaded by National Competition Policy reforms, monopolies were broken up, price controls were ended, competition was introduced and government policies were brought under greater scrutiny.

Second was the enormous technological developments in the ICT space. From 1991 to 2017, we’ve gone from no internet (as we know it anyway) to internet access being deemed a fundamental human right.

Third was the rise of China and the resources boom. No one back in 1991 expected China to become what it has, certainly not at the pace at which it did. China’s population grew, became richer and more urbanised. Australian exports to China went from $1.5 billion in 1991 to $107 billion today.

And fourth, population growth. Australia’s population growth rate is the second fastest in the OECD (after Luxembourg). While other countries are struggling to manage their ageing populations (of which we have one too), Australia has aggressively sourced skilled labour from overseas. About a million new jobs were created between 2010 and 2015. 63 per cent of these were filled by recent migrants, including 72 per cent of full time jobs.

What does the future have in store for us? No one knows how long this growth streak will last. There are those that are nervous about us hitting 26. But we do know a few things that will continue.

We’ll get older.

We’ll become more connected with the rest of the world.

We’ll have new, powerful technologies that will infiltrate how we work and consume and live.

And despite all the hype, things will probably look very similar to the way they do now.

It’s easy to get caught up in the potential of new technologies. But our system has a high degree of endogeneity built into it. Prices adjust, wages rise and fall, enrolments go up and down. Incumbent firms don’t sit idle when threatened by some start up, or new technology — they fight back.

As an economy, we’ve done really well over the past 25 years. We survived the Asian Financial Crisis, the popping of the dot-com bubble and the GFC in 2008. It wasn’t all due to the resources boom, but of course it helped.

In any case, it’s not about the last 25 years, it’s about the next. And those factors which led to previous success won’t necessarily be there in the future.

Future economic growth will depend on future productivity growth — which is right now, about half of what it needs to be.

In the past we’ve relied on reforms to competition policy, tax, regulation and trade to lift productivity. None of which seem to offer any real “needle moving” potential. We could perhaps spend our way out through infrastructure or education. But both have a very long run payoffs that won’t solve our current problems. There may be some room to move on industrial relations, but that has its own set of issues.

What I think we’re ultimately left with is innovation.

Innovation is critical to productivity growth and we don’t seem to be very good at it (certain types of innovation at least anyway). The potential is there to make a splash, we just need to figure out how.