Download The Australian economy in the 1990s

The Australian Economy in the 1990s
Commentary at the Melbourne launch of the volume of papers
from the Reserve Bank of Australia’s 2000 Conference
at a seminar hosted by the
Economic Society of Australia (Victorian Branch)
Thursday 26th October 2000
Saul Eslake
Chief Economist
ANZ Banking Group Ltd
My comments are based largely on the papers by Brad de Long, David Gruen and
Glenn Stevens, and Charles Bean. I want to highlight a few key points from each – in
so doing probably doing full justice to none – and then relate these points to some
issues which have taken on heightened relevance in the wake of the more recent
decline in the Australian dollar.
De Long’s paper is from the US perspective, and – as is quite common in such a
perspective – doesn’t stray far from the shores of that country. To be fair, he may not
have been asked to. However that doesn’t mean that his paper does not contain some
important insights which are relevant to the Australian situation.
De Long is an unabashed optimist. He concludes his paper with the observation that
“the future looks brighter than at any time since the beginning of the 1970s.” Of
course the beginning of the 1970s marked the end, rather than the onset, of an
extended period of strong low-inflation growth. But if de Long intended any irony, it
is well concealed.
After considering, and dismissing as too small to have been significant, the conduct of
fiscal policy as a major contributor to the acceleration in US economic growth during
the 1990s, de Long comes down unequivocally in favour of the productivityenhancing role of IT investment. “It looks more likely with each passing month,” he
says, that “the computer has come of age as a macro-economic factor.”
Moreover, he continues, “ we can forecast with some confidence that the productivity
speed-up in the US will not evaporate.” Indeed, he expects productivity growth in the
US to continue to be strong “for at least the next decade”. And although the only other
country which gets a specific mention in his paper is Finland, de Long argues that
“there is every reason to think that productivity growth outside the United States is
about to accelerate as well”. Presumably, this includes Australia.
I should note in passing that the discussant on de Long’s paper at the conference, Bill
White from the Bank for International Settlements, presented a very different
perspective. In his view, what the US had experienced in the latter part of the 1990s
was not a “new era”, but instead a “credit-induced asset price boom which would lead
inevitably to recession”, and that we might one day look back on the boom in IT
spending “a massive misallocation of resources … financed with other people’s
money, especially European direct investors”.
De Long’s analysis of the sources of the acceleration in US productivity growth relies
heavily on the recent paper by Oliner and Sichel, to which I want to return anon.
David Gruen and Glenn Stevens cover a broad range of issues in their paper, but the
over-riding theme is an analysis of why the Australian economy performed so much
better in the 1990s than it did in the 1980s, or indeed had been expected to perform at
the onset of the decade. Rightly, in my view, they ascribe a somewhat greater role to
the improvement in the conduct of macro-economic policy as a contributor to the
better performance of the Australian economy in the 1990s than de Long does to the
performance of the US.
There are two other aspects of their analysis, which are also covered in Bean’s paper,
which I want to highlight here.
2
The first is the point that labour productivity growth was both faster, and more
broadly-based, in Australia than in the US during the 1990s. They note that much of
the acceleration in productivity growth between the 1980s and the 1990s was in the
non-traded sector of the economy, especially in wholesale trade, retail trade and
construction – according to Gruen and Stevens, “not those one might have expected”;
while productivity continued to grow at a rapid rate, though not significantly different
from that experienced in the 1980s, in utilities, mining and communications.
In fact, wholesale and retail trade and construction are precisely the sectors that
should have benefited from the sort of labour market reforms implemented during the
1990s – ie reforms which permitted more flexible patterns of work, albeit without
policy-driven changes in the structure of relative wages. These reforms should also
have contributed to continued strong productivity growth in utilities, mining and (to
some extent) communications. Indeed the only surprise is that there does not appear to
have been a similar improvement in the transport and storage sector.
Gruen’s and Stevens’ conclusion is that “the 1990s experience seems to be one of
more rapidly approaching the technological frontier, rather than benefiting directly
from the rapid productivity growth in the production of the new economy”.
Their view is supported by Charlie Bean, who uses a very simple regression to show
that “the explanation for Australia’s good comparative productivity performance is
not to be found in ‘new economy’ explanations”.
Bean instead finds “rather more plausible” the reforms to Australian product and
labour markets – in contrast to the previous three decades of “redistributing rents” –
as an explanation of Australia’s improved productivity performance.
He cautions that “most of the structural reforms should primarily have a once-off
level effect, although they take some years to work through fully”. Drawing on the
UK experience, he warns of the “the dangers when policy makers and private agents
erroneously mistake a once-off increase in the level of national or personal incomes
for a permanent increase in its growth rate”. And, in a very different take from de
Long’s, Bean suggests that “Australian policy makers and households would be
unwise to project the recent high rates of productivity growth into the future.”
These observations on the sources of Australian productivity growth are important
because a sharp divergence now appears to be emerging between labour productivity
growth trends here and in the US. Since the first half of 1998, productivity growth
(measured on a four-quarter moving average basis) has accelerated by nearly 2 pc
points in the US, whereas in Australia productivity growth has decelerated by more
than 2 pc points.
To be sure, at least some of the acceleration in US productivity growth is likely to
have been cyclical. On the other hand, since Australia’s overall GDP growth rate has
been little changed over this period, very little of the apparent slowdown in Australian
productivity growth would seem to be due to cyclical factors.
3
Labour productivity growth - Australia and US
5
% change from year earlier
(4-qtr moving average)
United
States
4
3
2
1
Australia
0
-1
91
92
93
94
95
96
97
98
99
00
Sources: US Bureau of Labor Statistics; Commonwealth Treasury website.
But if Australia’s productivity growth primarily reflects ‘dividends’ from microeconomic reforms – as both Bean and Gruen and Stevens suggest – whereas the US
productivity growth stems mainly from IT production and investment – as de Long
suggests – then given the flagging political enthusiasm for micro-economic reform in
Australia this apparent divergence may be a warning of the shape of things to come.
Gruen and Stevens raise the “important question for Australia” of “how much it
matters to miss out on the monopoly profits that are expected to be generated in the
new-economy sectors of the US”.
They don’t answer that question, although they assume – as is customary among
Australian policy-makers – that “many of the dividends from the productivity gains in
the new economy are likely to ultimately accrue (sic) elsewhere – to other sectors of
the US economy and to other countries”.
How much confidence can we in fact have in this assumption? If Robert Gordon’s
analysis of the sources of the acceleration in productivity growth is correct, then the
answer may be, “not very much”.
Gordon, as is well known to those who have followed the US debate on this subject,
attributes nearly all of the acceleration in US labour productivity growth since the
mid-1990s to either cyclical factors or the productivity growth in the computer
manufacturing industry itself – although in more recent work he concedes that last
year’s revisions to the US national accounts have lessened the contribution of cyclical
factors to the productivity acceleration.
On the other hand, work by Stephen Oliner and Daniel Sichel of the Federal
Reserve’s research staff attributes just over 0.8 pc point of the 1.0 pc point
acceleration in US labour productivity growth between the first and second halves of
the 1990s to information technology, with 45% of this contribution (0.37 pc points)
coming from productivity gains in the manufacture of computers and semiconductors, and 55% (0.45 pc points) from the use of IT throughout the non-farm
business sector.
4
My colleague Tim Toohey has applied Oliner and Sichel’s methodology to the
Australian data, and finds, consistently with Bean and Gruen and Stevens, that IT
‘capital deepening’ has made an almost negligible contribution to the acceleration in
labour productivity growth in Australia between the first and second halves of the
1990s, and that nearly all of this improvement is attributable to faster multi-factor
productivity growth – which, by convention in Australia, is in turn attributed to
structural reforms.
Australia
Labour productivity growth
United States
91-95
96-99
91-95
96-99
1.71
2.75
1.53
2.57
0.57
0.66
0.51
0.96
0.28
0.21
0.07
0.34
0.22
0.10
0.23
0.23
0.05
0.59
0.27
0.10
0.35
0.42
0.11
0.14
na
na
0.44
0.31
0.75
1.64
0.48
1.16
Contributions from IT capital deepening
Hardware
Software
Communicn’s equipment
Other capital deepening
Labor quality
‘Multi-factor’ productivity
Sources: S.Oliner & D. Sichel, The Resurgence of Growth in the Late 1990s: Is Information Technology
the Story, FEDS Working Paper 2000-20, March 2000; Tim Toohey, ‘Information Technology and Productivity’, ANZ Economic Outlook, October 2000.
Almost by definition, Australia seems fated to miss out on whatever contribution the
production of IT hardware and software is making to overall productivity growth in
the US – and even on Oliner and Sichel’s analysis, that’s close to half of it.
Let me turn now to the second aspect of Gruen and Stevens’ paper that I wanted to
highlight, which is the debate about the importance or otherwise of the current
account deficit. Under the heading “The Dog that Didn’t Bite” – a slightly inaccurate
allusion to the dog which didn’t bark in the Sherlock Holmes story Silver Blaze, that
being the ‘curious incident of the dog in the night’ which revealed to Holmes that the
dog knew the perpetrator of the crime – they note that “at no time during the 1990s
did the predictions of those most pessimistic about the current account look like they
would be realized”, and that instead “the 1990s experience has been kind to the
consenting-adults view of the current account.”
This is indeed unarguable, especially if the point of contrast is with some of the more
extreme views of the consequences of large current account deficits which were
around at the beginning of the decade.
Gruen and Stevens provide four reasons for the diminished importance of the current
account deficit: the fact that it self-evidently did not prevent the economy growing at
just over 4% per annum over the course of the decade; the fact that “necessary
adjustments”, as they put it, “were taking place in the economy’; the sharp turnaround
in the method of financing the deficit, from debt to equity; and the decline – as
opposed to the often-predicted increase – in the ‘risk premium’ on Australian assets.
5
One possible factor which Gruen and Stevens don’t mention in this context is one
which they do mention, earlier in their paper, in the context of the reduced volatility
of GDP growth in the 1990s compared with previous decades – namely, that the
external shocks hitting the economy were smaller than they have been in the past and,
specifically, that “the smoother course of the US economy in the 1990s may have
been particularly important in contributing to the smoother outcomes in Australia”.
Might this not also be true with regard to the current account deficit? That is, might it
not have been easier for Australia to finance its current account deficit in the 1990s
than it was during, say, the second half of the 1980s because the US current account
deficit – and hence the competition with Australia (among others) for internationally
mobile capital which it represents – was smaller, on average, in the 1990s than in the
second half of the 1980s?
This question seems especially important in the present circumstances where,
although Australia’s current account is now smaller than it was a year or so ago, we
seem to be encountering rather more difficulty financing it, at least without a
significant depreciation of our exchange rate.
In that context, it is useful to recall that although one effect of the Asian crisis was to
enlarge our current account deficit, another was – courtesy of the massive capital
outflows from Asia which were an intrinsic element of the crisis – to make the
financing of that deficit easier.
It seems to me that the only plausible explanation for the weakness this year in the
Australian dollar (and the currencies of other countries or regions which are seeking
to finance current account deficits) against the US dollar and the currencies of
countries which are running current account surpluses, is that the US current account
deficit is now so large that it is (at least in the first instance) pre-empting almost all of
the internationally mobile capital available from the countries which are running
surpluses – in a way that it has not previously done – forcing other countries which
are seeking to finance current account deficits in competition with the US to lower
their exchange rates in order to entice the required capital inflows.
Current account balances
400
$US billion
Japan, other
East Asia and
Western Europe
300
200
100
United States
0
-100
Australia
-200
OPEC
-300
Latin America
-400
Russia
-500
-600
96
97
98
99
00
01
Sources: IMF; Consensus Economics Inc.; Economics@ANZ. 2000 and 2001 figures are consensus
forecasts, except for OPEC countries which are from the IMF’s World Economic Outlook.
6
Put differently, it is much easier for Australia to finance a current account deficit of,
say, between 4½ and 6% of GDP when the US current account deficit is less than,
say, 3% of its GDP – as it was until the June quarter of last year – than when the US is
trying to raise the equivalent of more than 4% of its GDP in the international capital
markets, as it has been (rather successfully) doing since the December quarter of last
year.
Since the US has been absorbing such a disproportionately large share of the world’s
available capital, it does seem that the trend which Gruen and Stevens noted towards
equity financing of Australia’s current account deficit has gone into reverse. During
the 1999-2000 financial year, more than three-quarters of the current account deficit
was financed by borrowing, the highest proportion in any financial year since 199192.
Current account financing
5
% of GDP (4-qtr moving average)
Net debt
4
3
2
1
0
Net equity
-1
91
92
93
94
95
96
97
98
99
00
Source: ABS.
Analysts have struggled to find any consistent link between the magnitude of
Australia’s current account deficit and the exchange rate for the Australian dollar: in
most multi-variate regressions of the exchange rate, it is barely significant and
sometimes has the ‘wrong’ sign. However, there appears to be a somewhat stronger
correlation between the US current account deficit and the A$-US$ exchange rate
than between the Australian current account deficit and the A$-US$ exchange rate:
indeed a simple bivariate correlation exercise suggests 45% in the former case as
against a mere 15% in the latter.
On the face of it, this would appear consistent with the notion that the sustainability or
otherwise of Australia’s current account deficit cannot be considered in isolation from
conditions in international capital markets more broadly. Those conditions were, as it
happened, rather benign from an Australian standpoint in the 1990s. Who knows
whether they will be as benign in the coming decade?
Which brings us full circle to the issue of productivity growth which occupied the first
half of these remarks.
7
The A$ and Australia’s current account deficit
-2
US cents
% of GDP
Australia's current account deficit
(left scale)
-3
100
95
90
(e)
-4
85
80
75
-5
70
65
A$ vs US$
(right scale)
(monthly average)
-6
60
55
-7
50
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
Sources: ABS; Datastream; Economics@ANZ. September quarter 2000 current account deficit figure
is an estimate, including transactions associated with the Sydney Olympics.
The A$ and the US current account deficit
2
1
US cents
% of GDP
US current account deficit
(left scale)
100
95
90
0
85
-1
80
75
-2
-3
-4
70
A$ vs US$
(right scale)
(monthly average)
65
60
55
50
-5
83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00
Sources: US Department of Commerce; Datastream; Economics@ANZ
In his discussion of Australia’s current account deficit, Bean concedes that “it may be
optimal for foreigners always to have a net claim on part of the country’s output”, but
is nonetheless unconvinced that Australia’s deficit is sustainable, suggesting instead
that “at some stage in the future a fundamental improvement in the balance of trade
on goods and services is going to be required.”
“The real question,” Bean says, “is whether this is going to come about through an
increase in future supply (which might well be the case if the productivity revival
were to continue) or through a reduction in domestic demand … If the recent high
[productivity] growth rates are sustained, then the external debt-GDP ratio will tend to
stabilize … if the rate of [productivity] growth were to return to the rates seen in the
70s and 80s, one would expect the explosive growth of the external debt-GDP ratio to
continue, absent direct policy intervention to correct the problem.”
8
To the extent that both the production and use of new technologies, as opposed to
further structural reforms, are going to be the source of much of the productivity
growth which can be expected going forward, then Australia may well have more of a
problem in achieving high productivity growth by international standards, and in
financing its current account deficit, than it has done in the 1990s – at least until such
time as the Australian orthodoxy, that most of the benefits from technological
innovation accrue to users rather than producers, gains much more support from both
hard data and market sentiment than has thus far been the case.
In the meantime, Australia’s (rather unusual) position as a relatively intensive user but
insignificant producer of IT products will both add to Australia’s current account
deficit, and make it more difficult to finance.
Bean sees the picture as “a cause for mild concern”, although he notes that the degree
of “irrational exuberance” (not his phrase) is less here than in the UK at the end of the
1980s, and that Australian policy makers are better placed to weather any consequent
storms. That strikes me as a fair summation.
It was a privilege to have been able to attend this year’s Reserve Bank conference,
and to have heard presented and discussed such a wide range of thoughtful and
informed papers on the performance of the Australian economy over the past decade.
Anyone looking for insights into that performance, the reasons for it, and the
evolution of some of the key policy debates of this period, will find that this volume
represents very fruitful reading.
References
Bean, Charles (2000), ‘The Australian Economic Miracle: A View from the North’, in
Gruen and Shrestha (eds.) (2000).
De Long, J. Bradford (2000), ‘What Went Right in the 1990s? Sources of American
and Prospects for World Economic Growth’, in Gruen and Shrestha (eds.) (2000).
Gordon, Robert J. (1999), ‘Has the “New Economy” Rendered the Productivity
Slowdown Obsolete?’, Working Paper, Northwestern University, 14 June
(http://faculty-web.at.nwu.edu/economics/gordon/researchhome.html)
Gordon, Robert J. (2000) ‘Does the “New Economy” Measure Up to the Great
Inventions of the Past’, Working Paper, Northwestern University, 14 June
(http://faculty-web.at.nwu.edu/economics/gordon/researchhome.html)
Gruen, David and Shrestha, Sona (eds.) (2000), The Australian Economy in the 1990s,
Reserve Bank of Australia, 2000.
Gruen, David and Glenn Stevens (2000), ‘Australian Macroeconomic Performance
and Policies in the 1990s’, in Gruen and Shrestha (eds.) (2000).
Oliner, Stephen D. and Daniel E. Sichel (2000), ‘The Resurgence of Growth in the
Late 1980s: Is Information Technology the Story’, Federal Reserve Board, March
(http://www.bog.frb.fed.us/pubs/feds/2000/200020/200020pap.pdf).
Toohey, Tim (2000), ‘Information Technology and Productivity’, in ANZ Economic
Outlook, October, pp. 17-19 (http://www.anz.com/Business/info_centre/ economic_
commentary/AEO%20October%202000.pdf)