The deindustrialisation of the Australian economy

Competition from Japan and later from the East Asian Newly Industrialised Countries (NICs), has gradually displaced domestic manufacturing by cheaper imports. The policies of trade liberalisation have effectively condemned Australia as an exporter of commodities in the global market. The possible onset of adverse terms of trade with the end of the mining boom, will blow out the current account deficit and net foreign debt because of the lack of import substitution in manufactures, most notably in the capital-goods sector.

The openness of the Australian economy has also ensured that within this structural remoulding it has shared the short-term oscillations of the world economy. This boom-bust syndrome has been closely synchronised with international trade cycles.

As Australia has increased its share of manufactured imports and foreign investment over the past two decades, the structural imbalance has worsened. Each business cycle recovery has encountered the balance of payments constraint, which manifests itself in a cumulative increase in the current account deficit. A self-perpetuating cycle of low levels of domestic investment to generate endogenous saving has only increased Australia’s dependence on international capital inflows.

Consequently, Australia’s net foreign debt has gradually increased and now exceeds 60 per cent of GDP. Since the foreign debt is largely denominated in US dollars, the “valuation” effect of a nominal depreciation of the Australian dollar will have the effect of increasing the value of Australia’s private and public debt.

A cursory analysis of the composition of Australia’s foreign debt reveals the following attributes:

1.    75 per cent of the net foreign debt has been incurred by the private sector;

2.    The domestic financial sector has intermediated an increasing amount of the foreign borrowing since financial deregulation in the early 1980s;

3.    60 per cent of Australia’s gross foreign debt is denominated in foreign currencies and about 60 per cent of this is denominated in the US dollar; and

4.    The debt/equity ratio of the foreign debt has risen sharply and has been accompanied by a decline in the maturity of the debt which places greater strains on the ability to service outstanding foreign debt.

In other words, foreigners are financing Australia’s current trade deficit by acquiring domestic assets. Overseas investment in Australia is growing faster than Australian investment abroad, which means that Australia relies more heavily on the importation of capital. Foreign investors acquire a return on their investment that appears in the balance of payments as a negative entry in the net income component of the current account. Over the past 20 years, Australia has become more dependent on the inflow of foreign investment.

This severe external imbalance emerged during the era of the neoliberal ascendancy from the early 1980s onward. The basic theoretical contention of this strategy was that market liberalisation and deregulation would induce an increase in the level of productive investment and economic restructuring through the purgative forces induced by competition.

The whole strategy hinged on the dismantling of national forms of regulation, protectionism and state support for local industries. The fatal flaw of the neo-liberal program, however, was the lack of a coherent structural policy to encourage industrial upgrading and technological reconversion. After three decades of economic “reform,” the evidence suggests that Australia’s export sector resembles that of an upper-middle income developing country. The implications would appear to be quite dire in the long run.