The world's best economies, past, present and future

There appears to be strong vindication for former treasurer Wayne Swan from a formula just published in Australia's alternative media.

The assertion has often been made in recent years, including here at On Line Opinion (OLO), that Australia emerged from the global financial crisis (GFC) as the world's strongest economy. This is now bolstered by arithmetic emerging from social media debate.

The more contentious claim that Australia's ascendancy is due to the Rudd Government's stimulus packages of 2008-10 seems also supported.

Over the last year or so, this writer has engaged robustly with several OLO authors and readers on the thorny issue of how economic management may be measured and compared internationally. These include extended online discussions last April and May, and also in August here, here and here.

These led directly to the development of a fairly simple formula which includes eight variables. These are income, growth rate, wealth, jobs, inflation, taxation, government debt and economic freedom.

Details of the construction of the formula, its assumptions and limitations, are available at another Australian online publication.

Each variable is derived from accessible online data, so calculations are readily replicated by anyone with spreadsheet software and internet access.

Primary data sources are the World Bank, the International Monetary Fund, Credit Suisse, tradingeconomics.com and Heritage Foundation.

The first application was to score and rank all economies in the world according to overall health on those eight criteria at the end of 2013. The top ten were:

1. Australia 30.23
2. Norway 28.58
3. United Arab Emirates 28.48
4. Singapore 28.13
5. Switzerland 27.95
6. Luxembourg 27.60
7. Canada 23.39
8. Kuwait 22.91
9. Sweden 22.29
10. New Zealand 21.27

The second application, published last Sunday, ranked economies before the onset of the global financial crisis. The top ten economies in 2007 were:

1. Norway 31.32
2. Iceland 31.27
3. Luxembourg 30.84
4. Kuwait 28.51
5. Finland 27.72
6. Hong Kong 26.39
7. Singapore 26.20
8. United Arab Emirates 26.00
9. Australia 25.83
10. Switzerland 25.25

Intriguingly, post-war powerhouses Japan, the USA, the United Kingdom, Germany and France are well down both lists.

The formula can be applied at any time in the past: How did Australia rank when Peter Costello inherited the ledgers in 1996? How did Australia rank when Paul Keating took them from John Howard in 1983?

Comparing the two lists compiled so far – 2007 and 2013 – reveals dramatic rises and spectacular crashes.

Australia starred, striding from 9th to clear first place. Canada climbed from 13th to 7th, Sweden soared from 18th to 9th, New Zealand zoomed from 25th to 10th, and Taiwan turned up 14th from 22nd. Others to rise dramatically were Oman, Chile and the United Arab Emirates.

The dismal demises were mostly in Europe: Iceland fell from 2nd to a frosty 15th, Ireland is idling now at 32nd after starting 14th, Finland finished 19th from 5th and the Slovak Republic slipped from 16th to 41st. Other losers were Hong Kong, Bahrain, the Netherlands and Spain.

What do these booms and busts reveal about the competing explanations for Australia's extraordinary ascendancy?

Of the five main theories, only one appears well-supported by the movements up and down the rankings.

Firstly, did a strong cash position at the onset of the GFC do the trick? The analysis suggests not. Most cashed-up economies tanked.

Secondly, budget surpluses? Again the evidence is against. Hong Kong, Bahrain, Denmark, Ireland, Spain, Finland, the Netherlands, and Iceland all had strong surpluses in 2008, yet all went backwards badly. An inverse correlation, if anything.

Was it Australia's good fortune, thirdly, to have iron ore to export? Not really. Brazil, India and South Africa also exported iron ore but all went into recession and fell in the rankings through the GFC.

Fourthly, trade with China? Yes and no. Other countries have substantial exports to China. These include the Euro Area, Hong Kong and Malaysia whose rankings all fell spectacularly. Australia and New Zealand among China's suppliers rose substantially. But was that the reason?

Consider, fifthly, countries which applied strong and rapid stimulus spending when the GFC hit in 2008.

According to an OECD publication titled The Effectiveness and Scope of Fiscal Stimulus, eleven nations allocated more than 0.75% of GDP to stimulus spending, of which Australia's was the greatest.

Of these eleven, eight rose in the ranking from 2007 to 2013, almost in proportion to the strength of the stimulus. (Luxembourg slipped marginally from 3rd to 6th but remained a strong economy. Spain fell, but may be a special case. Denmark barely budged.)

Other nations outside the OECD which implemented strong stimulus programs also rose dramatically through the GFC, notably China and Oman.

So the evidence does suggest that the overall strategy of strong direct stimulus worked in most countries. But nowhere to greater advantage than in Australia.

The new formula will also be directly applicable in the future: How will Australia rank after a full year of Coalition government? After three years? Beyond?

Abroad, applying the arithmetic will illuminate several questions: Will this be the Asian century, as widely predicted? Will the old European powerhouses regain their former glory?

And how will contrasting economic philosophies play out in years ahead?

Currently the United Kingdom ranks 27th in the world and France 29th, both having suffered badly through the GFC. In 2011 the UK changed to a Conservative government after many years of Labour. Soon after, France did the opposite, changing to a Socialist government after years of conservative UMP rule.

Which will recover faster, if either, and zoom up the table? The score derived from this formula should give an indication.

So we shall see.