The Australian Model

Peter Hartcher, international editor of The Sydney Morning Herald, says the Nordic model isn't the only example of successfully combining "the vigour of American capitalism with the humanity of European welfare," Australia has emerged with a new economic model worthy of emulation:

Sun, surf and birth of new economic model, by Peter Hartcher, Financial Times:Unheralded and almost unnoticed, the world has seen the emergence of a new economic model.

It is a developed country that enjoyed faster economic growth than the US over the past decade. Yet it also offers universal healthcare and other social welfare benefits that the US does not. Unemployment is similar to America’s, but without the glaring income disparities that characterise US growth. It is a country that seems to have achieved a sweet spot, combining the vigour of American capitalism with the humanity of European welfare, yet suffering the drawbacks of neither. And it manages this while keeping a consistent budget surplus. That country, rolling into its 16th year of uninterrupted growth, is Australia. ...

Australia, which started life as a dump for Britain’s criminal effluent, was such an unlikely candidate to be any sort of economic role model that it should give hope to others. Australia’s economic development in the twentieth century seemed to be arrested at the quarry-and-farm phase. And when the founder of modern Singapore, Lee Kuan Yew, forecast in the 1980s that Australians were destined to become “the poor white trash of Asia”, he seemed to know what he was talking about. In 1970, Australian per-capita incomes were the fourth highest in the world. In the 20 years that followed, its ranking fell inexorably. By 1991, Australia was placed 19th. Other countries surged. Australia stagnated.

That changed with the 1983 election of a Labor government. ... followed by a conservative government ... who pressed ahead with another wave of economic modernisation. The net result has been 22 years of near-continuous reform. In the national budget announced on Tuesday, Peter Costello, the treasurer,... cut taxes for the fourth consecutive year and began a sweeping reform of superannuation to improve savings, while adding funding for national infrastructure and scientific research.

Australia’s per capita income is now ranked eighth in the world. In the last decade unemployment has halved. Net household wealth has doubled. ... Most economists see no early end to the expansion...

Australia is a model in another sense, too. Its socio-economic arrangements offer an alternative to the two familiar options of the American versus the European. Mr Howard says the key is balance: “There is much in American society that I admire but I have long held the view that the absence of an effective safety net in that country means that too many needy citizens fall by the wayside. That is not the path that Australia will tread. Nor do we want the burdens of nanny-state paternalism that now weigh down many economies in Europe.”

The US may be a rich country but its bounty is very unevenly shared. One result is that for the broad mass of its citizens, America has the sort of health indicators of a much poorer country. Australia has chosen a more egalitarian policy set. Life expectancy is the fifth highest in the world. Child poverty is half the American rate. No one in Australia dies because of lack of health insurance.

But neither does Australia suffer the customary handicap that goes with a humane welfare system – a crushing burden of government spending. ... The federal government has run a surplus in nine of the past 10 years. Last month it paid off all outstanding federal debt – the federal government is debt-free for the first time since the 1970s.

However, Australia is far from perfect and its reform drive has faltered in recent years. It has failed to manage properly the problems of its success. After such a long boom there is a shortage of skilled workers and the country suffers from underinvestment in new infrastructure. Further, it has a chronic current account deficit of a yawning 6 per cent of GDP. Economic reform is a continuous process. Yet it has become a case study ... illustrating that vigorous capitalism can coexist with a humane welfare system.

Update: Here's a different view from the editorial page of the WSJ. As usual, it's all about tax cuts:

Australia's Timid Budget, Editorial, WSJ: All you need to know about Australia's new budget is that the Labour Party thought it was pretty good. If only that were true. Instead, Canberra on Wednesday skirted politically unpopular, long-term structural reforms necessary to bolster future economic growth in favor of short-term giveaways. If Treasurer Peter Costello can't push through real tax reform in good times, we wonder, when can he?

To Mr. Costello's credit, his 11th budget -- a record -- sure was comprehensive. It touched income tax rates, health care, defense, infrastructure spending and pension savings, to name a few. Mr. Costello made changes in all of these areas. The trouble is, he did so too timidly.

Take the average Australian's income tax. Aussies are saddled with some of the highest individual income tax rates in the world. ... Mr. Costello addressed this burden, but just barely. He cut both top rates by 2 percentage points, bringing them to a neat 45% and 40%, and raised the income thresholds a bit -- but without indexing them to inflation. There wasn't much to do with the lower tax brackets -- the bottom quartile pays only about 3% of Australia's taxes, anyway. (That didn't stop Australia's liberals pronouncing it a "budget for the rich.") ... But not a word was said about significant income tax cuts or simplification to the code itself... Good grief.

Turning to business, the tax picture gets gloomier. ... the government's revenue take from Australian businesses has shot up in recent years, thanks mostly to the commodity price boom, from which Australian raw materials producers benefit greatly. Between the 2004-05 and the 2005-06 tax years, company tax paid is expected to increase by 23%. Yet Mr. Costello's budget ... contained only a change to depreciation measures for business, which -- while it will help -- again, doesn't do much to encourage entrepreneurship in the long run.

The one bright spot was Mr. Costello's reform to Australia's compulsory pension-savings system, known as superannuation. The Lucky Country is the only one, so far as we know, that taxes pension savings on the way into an individual's account, while it's accruing interest, and again when it's withdrawn. ... Mr. Costello announced that he'd stop taxing pension withdrawals. That is, on balance, a good thing. But if Mr. Costello could, politically, afford to cut only one of the three taxes, we'd argue that it's better to tax people on exit rather than entry. After all, the idea is to get Australians to save more, not extract more, from their pension plans.

Mr. Costello has been, on the whole, a decent treasurer. He's generally conservative, and his instincts are for lower taxes across a wider base. We suspect his recent timidity has to do with fears that cutting taxes too much could overstimulate the economy and induce further interest rate hikes. ... But even if it were true, that calculation has to be set against the surge in tax revenue that a tax cut would produce. ...

Comments

[pcs]

…has to be set against the surge in tax revenue that a tax cut would produce…

I know this is not intention of this post, but this sentence from WSJ article cited above really struck me. How come that this notion, that at best can be described as theory, is used as self-evident absolute truth? And that comes probably from the same crowd that questions Darwin’s Theory of Evolution…

O tempora! O mores!

[reason]

I'm wondering why the Wall Street Journal Editorial is being quoted at all. It seems to me that it is universally regarded as nonsense (outside of wingnutiana).

I'm an ex-pat Ossie and hope that the American model self-destructs before some idiot decides Australia should copy it. The big plus for Australia is that the Welfare State is kept modest, but universal. But I thought Holland did something similar - so why is this a new model?

The persistant high balance of payments problems have troubled me in Australia's case for a long time. I wonder if there isn't some sort of measurement problem (no I'm serious). Australia doesn't have a reserve currency like the US, so why hasn't the AUD collapsed. Of course the Deficit is not so high a proportion of exports and Australia still has a large stock of mineral resources so the prospects that it can pay the debt back are higher. Could it be the carefully selected migrants to Australia are bringing lots of capital with them? Is the sale of prime real estate in the Australian metropolitan areas to Hong Kong Chinese financing Australia's consumption? Does anybody know the answer to this?

The good news for Australians is that as I see it most Australians would not be too severely impacted by a collapse in their dollar. I'm no so compacent as far as the US is concerned.

[Robert]

There are some nice things we can learn from our friends down under (mandatory & preferential voting, taxing mark-to-market gains on assets, etc.). But realistically, few other nations outside of Canada have the unmitigated luxury taking advantage of a more or less virgin continet, its abundant resources, fertile agricultural lands & benign climate, not to mention lovely vista's that draw tourists and their hard currency from many corners. Speaking frankly, one would have to try pretty hard to mess that one up whatever the industriousness of her people and social and economic model one chose....

[anne]

http://www.msci.com/equity/index2.html

National Index Returns [Dollars]
5/10/96 - 5/10/06

Australia 12.4
Canada 15.0
Finland 20.9
France 12.9
Germany 10.0
Hong Kong 5.9
Japan 1.2
Netherlands 9.1
Norway 15.1
Sweden 14.1
Switzerland 10.9
UK 10.2
USA 9.1

National Index Returns [Domestic Currency]
5/10/96 - 5/10/06

Australia 12.8
Canada 12.5
Finland 20.7
France 11.9
Germany 10.0
Hong Kong 5.9
Japan 1.6
Netherlands 9.2
Norway 14.2
Sweden 14.9
Switzerland 10.6
UK 8.0
USA 9.1

[anne]

Notice how robust the stock markets have been of countries we pay no attention to as models. The effect does not stem from a weak dollar, for the dollar is little changed in value over the last decade, rather Australia, the Nordic countries, Canada have been remarkably competitive. Nordic stock markets are up 15.7% in dollars to our 9.1% through the last decade.

[anne]

Australia was a remarkable source of strength through the Asian currency crises of 1997-1998, and continues to be a source of strength to international investors. But, do not worry, the Wall Street Journal is doing all it can to insure Australia will languish economically through the coming decade. Duh....

[Robert]

Always be careful of your starting point Anne.

Germany's LBO of the DDR and Sweden's wrenching collapse of their banking system dramatically depressed returns relative to Anglo-Saxon countries for a number of years. Also, the Nordics are capital-intensive & asset-dominated markets (shipping & transport, forestry, energy, etc.) whose relative valuations were throttled when global liquidity creation was saner and more sympathetic with actual GDP growth.

[anne]

Oh; Australia has has a trade deficit for, well, just about forever, and, imagine, Australia is still there, close by the way as it is to, well, China :) Robert Rubin explained that a trade deficit due to domestic economic strength is not a concern, which was the case for America as the 1990s progressed.

[anne]

Robert, is fair and incisive as always and I am using convenient but arbitrary data. What has impressed me is the patient economic restructuring that has been in response to problems that will arise in every economy. The patience has characterized gradual industrial change with an intact social benefit frame, and I am increasingly convinced the change has been competitively effectual.

[Robert]

Oh yes, Anne, the Australians CAN run deficits - especially to people like the Japanese and particularly the Chinese since they are essentially asset-backed obligations - an entire continent of hard minerals & farmland, fishing rights and coastal real-estate, and Chinese can rather realistically seize the collateral at the time of their choosing should the Aussies get to smarmy. Both parties know this, though practically, merchandise trade deficits can be viewed as selling minerals and agricultural output, & parcels of the "GAFA" forward.

In financing the US to excess (i.e. accumulating chits out of proportion of their ability to spend those chits) the Chinese would be fools to rely - either upon the potential asset-backing implicit in those chits, or upon the willingness of the American people to satisfy those chits with servicable labor outside what Americans are normally accustomed to providing. In America's case, we have metaphorically sold the same promised merchandise forward to multiple coutnerparties several times over. The combination is toxic - not just to the US but potentially to the stability of the entire international monetary system. Just because there has not been overt evidence of its tenuousnes, doesn't mean it's reliable or stable arrangement. In fact, all evidence from the financial markets suggests that this financial tenuousness is going to made painfully clear to the US.

Unfortunately, as Martin Wolfe in yests FT (and others) have pointed out, the sums and imbalances involved, and the composition of US export trade makes it improbable indeed that the US will be able to succeed in "growing it's way" out of its difficulty in the shorter term, irrespective of moderate adjustments in the exchange value of the USD.

We are a rich land but are still consuming more than we can collectively afford, and more than our trading partners are NOW willing to collectively finance all things considered. Perhaps, when the dollar falls sufficiently and aggregate tax revs rise to OECD levels, our consumption of goods from overseas will be more sympathetic with our aggregate means (and ability to finance), and if agricultural terms of trade & non-oil commodity prices continue to rise dramatically, the US can tend towards converging upon sustainable fiscal and trade positions that might then make financing growth more tenable. Right now, with US fiscal intransigence, and no willingness to put a leash on US consumption, it's "good money after bad", and the markets are finally waking up to this reality.

[anne]

Though I am sympathetic to the problem of artificial consumption for the American economy in general, consumption that will be hard to balance in trade, the strength of a modern economy can be in services as much as in manufacturers or extracted or grown resources. I am thoroughly impressed by the quiet service strength of the Nordic countries, and find no reason to think we are not proportionally strong in services.

[Alejandro]

"But realistically, few other nations outside of Canada have the unmitigated luxury taking advantage of a more or less virgin continet, its abundant resources, fertile agricultural lands & benign climate, not to mention lovely vista's that draw tourists and their hard currency from many corners. Speaking frankly, one would have to try pretty hard to mess that one up whatever the industriousness of her people and social and economic model one chose...."

Argentina

[a]

I thought it interesting to see what an Australian would say, so I got this response:

=====================================
That picture (especially from Financial Times) may have
been true 3-5 years ago, but it is no longer true

*) Government is actively pushing people into private
insurance and cutting services for those who don't go.

*) The tax cuts are stupid, because they only benefit the
rich. Even when I was in the top tax bracket, I would have
prefered that money go to better the healthcare or
education, which was being demolished. And this has been a
pattern for several iterations.

*) Despite what Mr. Howard was saying, he was copying so
many USA ideas and - in general - following their party
line, that this has hurt Australia. For example, he
volunteered our best troops for the Iraq deployment without
even being asked. What followed, was an attack on
Australians in Bali, where a bomb was blown up in the
nightclub. Other harms were the ready acceptance of USA IP
laws and other things.

*) The property market boom is over and has been for nearly
two years. It will be another 6 years before the cycle gets
there as well (Australia usually has 8 year cycle).

*) Current political situation is interesting in that
public hates both parties, as neither has a strong positive
candidate. The last election was literaly choosing between
two bad options.

So, yeah. Australia used to be a nice place, but it is
rapidly going downhill.

================================

[ramster]

Not to diminish Australia but most of the things attributed to Australia also apply to Canada. Canada too has a good combination of American entrepeneurialism and European social policies. Canada has a current account surplus and the federal government has run budget surpluses for the past 9 years.

[Robert]

Alejandro

Historically, the Spaniards left a rather unpleasant legacy, more or less everywhere they went (not that absolves the Argentinians responsible). But that legacy does create a degree of difference between Australia & Argentina.

[Robert]

Both have copious amounts of minerals, land and beauty relative to inhabitants, but Canada also has the the fresh water, the timber, the hydro, and most importantly the oil, gas (or oil sands) as the case may be), whereas Australia has errrr...the GAFA and a bountiful & growing c/a deficit.

Of course the Canadians have the Quebecois, but in spite of that (really, just joking), I'd take the loonie over the aussie dollar for the long haul.

[lonesome moderate]

"But realistically, few other nations outside of Canada have the unmitigated luxury taking advantage of a more or less virgin continet, its abundant resources, fertile agricultural lands & benign climate, not to mention lovely vista's that draw tourists and their hard currency from many corners. Speaking frankly, one would have to try pretty hard to mess that one up whatever the industriousness of her people and social and economic model one chose...."

Seems to me that Venezuela is another excellent example of how to botch it. Supposedly Venezuela's oil minister founded OPEC in the seventies but eventually quit in frustration, saying that oil was ruining the country's economy.

[reason]

As an ex-pat ossie, I think I can take a longer term view than a. My mother recently said and I agree, that Australian have a peculiarity in that in General whoever rules in Canberra, doesn't in the States and vice-versa. This tends to perpetuate itself, because ambitious and talented politicians go where the power is - i.e. talent in the Labour party at the moment doesn't want to go to Canberra. But Australia is not the US, and when the US implodes (as it looks like doing at the moment) it will lose its appeal as model. Australian's are fairly homogenous (most live in large coastal cities) and in general skeptical so I don't give divisive ideological politics a long-term future there. Baby steps in one direction can and will be reversed if they don't work out.

I'm still waiting for someone to explain to me though how Australia has managed to live with such a large balance of payments deficit for so long. (Note though it doesn't have a US style balance of trade deficit and has a larger export sector). The payments deficit means a decrease in net equity/increase in net debt that imposes an increasing servicing cost. Why is it relatively stable and not exploding. Profits in Australia are not so much higher than anywhere else.

Anne,
as for US Services - what would happen if a significant part of the corporate world decided it had had enough of MS arrogance, that open source office products where now good enough and moved significantly towards Linux? Or if US merchant banks clout was substantially diminished due (a) to an idealogical rejection of the US MBA world view (b) a collapse of the dollar and their home equity markets? Both are feasible in the medium term. I don't see the future for US Services as necessarily rosy. The Best Hollywood movies are made in NZ now!-)

[gordon]

Contrary to the rosy view of Mr Harcher, here are a few facts about Australia (where I live):

Our current account deficit in the year to June 2006 is expected to be about 6% of GDP

Our trade deficit is expected to be about 1.75% of GDP over the same period, and is forecast to be about the same in the year to June 2007

Our net foreign debt at December 2005 was $473b. – about 50% of GDP. This is almost all private debt, mostly contracted through commercial banks.

In the US, some 25% of workers earn less than 65% of median earnings. Australia's situation is better, with only about 15% of Australian full-time workers in that situation. However recent legislative changes further strengthening the hands of employers against employees and unions will almost certainly see a reduction in earnings at the lower end of the range, so that Australia is likely to see a larger number of working poor in the near future.

[Emmanuel]

This proliferation of models to emulate is getting ridiculous. Trying to copy some "good" example drawn from narrow sociohistorical circumstances is difficult. This point should be obvious, but different starting factor endowments and geographic situations are difficult to replicate.

In this world, my friends, each country needs to figure out what it must do to best use its own resources and trade shrewdly for those it needs but doesn't possess. So, there's little point in mimicking the examples of Japan/Taiwan/Norway/Sweden/Finland/Australia/Canada or what else have you that are too specifically derived to be of much use. [End of sermon at the Church of The Latter-Day Political Economy.]

[anne]

Debt that can be afforded at present and is increasing only as fast as income, can be afforded indefinitely. So, budget debt or trade debt can be afforded if it is not forever increasing faster than national income. Australian currency has been relatively stable for the last decade, even through the Asian crises, and there has been no problem attracting foreign buyers of Australian trade related debt. Were the Australian dollar to lose value at some point however there would be a gain in exports and stimulus for the economy and likely increase in value of Australian assets save possibly for bonds.

[anne]

Hopefully Gordon and "A" will note further political-economic changes in Australia for us. I am impressed by how well Australia has done economically these last 2 years given the slowing housing or real estate market, and how real estate prices have held through the slowing.

As for models, Emmanuel, though we cannot be Australia or Sweden, we can certainly borrow. But, evidently Americans are in no frame of mind to borrow quite now :)

[gordon]

I quote from the ANZ (bank)Economic Outlook , June Qtr. 2006:
"The chief disappointment is that the current account
deficit (CAD) will stay high both in A$ terms and as
a percentage of GDP. The trade balance comprises
only about one third of the CAD; the remaining two
thirds is the net income deficit, which is the outflow
of capital required to service Australia’s net
international liabilities. The servicing burden has
been rising in recent years, both because the stock
of net international liabilities has been rising and
because the cost of servicing these liabilities has
been increasing in line with higher global interest
rates and increased dividend outflows (the latter in
particular reflecting the high profits of mining
companies). The CAD is forecast to remain at
around 6% of GDP in 2006 and 2007."

[anne]

Gordon, let the relative value of the Australian dollar be our guide to trade deficit stability. From this perspective, I sense no problem though long term interest rates are gently rising internationally putting a little pressure on debt financing. Australia is well positioned to be a lead banker for Asia, and has banks tough enough to wish to be so :)

[Pedro]

Hartcher's piece is tosh and barely economically literate to boot. We are hardly the only country in the world to be entering the 16th year of growth. Ranking our income at eighth in the world is unbelievable; he must have plucked that out of the air.

The current government - the Prime Minister, anyway - hates universal health cover but keeps it - albeit inflicing a thousand cuts - because it lacks the courage of its convictions.

But the main problem is current account. The fact that no-one seems to worry about it any more doesn't mean it isn't worth worrying about. It always comes back and bites us. World prices for the raw material we sell - coal, iron, wool etc - are high at present. But they will fall, as they always do. Then we will only be able to dream about a current account deficit as small as 6 percent of GDP.