Australian Reforms Accelerate Growth and Help Resist Contagion from Asian Crisis

• Author: Jeffrey Hayden
• Position: IMF External Relations Department
• Pages: 10-11

Page 10

Australia's economic performance in the 1990s has been impressive. The country has experienced healthy growth since the earlyyears of the decade, with inflation averaging just 2 1/2 percent over the same period. This strong showing has helped Australia resist contagion from the Asian crisis and maintain a relatively high growth rate. The recent performance contrasts sharply with the previous three decades, when falling productivity and rising inflation prompted Australia's per capita income to slip from one of the highest among Organization for Economic Cooperation and Development (OECD) countries.

How did Australia overcome several decades of lackluster performance? Beginning in the mid-1980s, the government embarked on two broad phases of reforms. In the first phase, the exchange rate was floated, exchange controls were dismantled, the market was allowed to determine interest rates, external tariffs were reduced, and competition was encouraged in a number of sheltered sectors. Moreover, public enterprises were corporatized or privatized, and the Reserve Bank adopted an inflation target. In the second phase, from 1996 onward, fiscal reforms were intensified to raise public saving, steps were taken to consolidate the credibility of monetary policy, and reforms were undertaken in the labor market and remaining sheltered product markets. As a result of these reforms, Australia's annual growth potential is estimated to have risen from 2 1/2-3 percent in the late 1980s to about 3Vi percent in the 1990s. (Potential growth rates provide economists with a measure of the rate of increase in the economy's productive capacity and may differ from actual growth rates over the economic cycle due to changes in the extent to which this capacity is used.)

But several problems persist. The unemployment rate remains stubbornly high, and national saving, relatively low. Continued structural reforms, particularly in labor and product markets, would help sustain high potential growth rates as well as Australia's resilience to external shocks.

Background

Based on GDP levels per capita, Australia was the third-richest OECD country in 1960, after the United States and Switzerland, and its per capita income was more than 50 percent higher than the OECD European aver-age. Economic performance declined during the 1960s, however, as growth in the capital stock slowed and productivity...