Australia's enduring expansion

• Author: Craig Beaumont
• Position: IMF Asia and Pacific Department
• Pages: 317-325

Page 317

Wide-ranging structural reforms and improved monetary and fiscal policy frameworks have helped Australia's economy grow since 1992. Unemployment, inflation, and government debt remain low, while the economy has become more resilient. But this did not happen overnight. Australia's incremental approach, particularly to labor market reform and trade liberalization, spread adjustment costs over time and enabled the country to sustain its reform efforts.

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Australia's enduring expansion: A handsome dividend from sustained reforms

Australia is now enjoying its 14th year of economic expansion. Unemployment has fallen to less than half its 1992 level, real incomes have risen rapidly, inflation has remained low, and net government debt has been virtually eliminated-all in the context of an increasingly stable and resilient economy (see chart below). These excellent results reflect wide-ranging structural reforms and improved frameworks for monetary and fiscal policies.

The start of Australia's structural reform process is often linked to the floating of the Australian dollar in December 1983.While the float was driven by the need to restore Reserve Bank of Australia (RBA) control over domestic interest rates in the face of increasingly volatile capital flows, this step proved to be a launching pad for broader structural reforms. The sustained implementation of reforms was also motivated by Australia's relatively weak economic performance in preceding decades, which had resulted in a long downward slide in per capita income levels relative to other advanced economies.

At the outset of reforms, Australia's economy was sheltered by high tariffs, domestic competition was limited by government monopolies, and labor markets were rendered inflexible by the centralized "awards" system for setting the wages and working conditions of most employees. The initial phase of reforms in the mid-1980s included financial sector deregulation, reductions in external tariffs, commercialization and privatization of public enterprises, and the liberalization of key sectors such as aviation and telecommunications.

Removing interest-rate controls, liberalizing international capital flows, and allowing the entry of foreign banks brought deeper and more competitive financial markets. However, this phase was also associated...