Dialling triple zero on our economy

Sovereign debt is increasing rapidly, and, some would argue, to dangerous levels. At this moment, is it ideal for the Federal Government to enter the debt markets? It could turn out that dramatic action is required; however, by then it may be beyond the government as its capacity to borrow has been extinguished by excessive borrowing in the present. At that point, we would regret the extensive use of debt now.

One of the reasons that the Australian economy successfully rode out the 1997 Asian currency crisis, and thus far the sub-prime debt bubble, was the dramatic drop in the Australian dollar. This event helped stimulate the economy substantially. Consider this: Australian mining companies can afford to reduce their prices by 50 per cent and still be receiving prices at an historic high in Australian dollars. Prior to this year the highest price that a gold miner received per ounce was $1,158 in 1980. Today, it is nearly $1,500 per ounce, in 2001 it was less than $400.

The problem is that this situation could be about to come to an equally abrupt end. The Reserve Bank has indicated that its easing cycle has come to an end, or at least a pause, which means when the carry trade on Forex markets resumes, the Australian dollar will be in greater demand, thereby driving the value of the dollar up, and reducing stimulus to our economy. No doubt the Reserve Bank’s decision was made with an eye on the Federal Government’s stimulus packages.

Equally, the downturn does provide an opportunity to address long-term challenges facing the economy as capacity becomes available, and political will to address these issues emerges.

What are these challenges?

Governments could use this capacity to alleviate some of the infrastructure bottlenecks that emerged during the boom. The two highest profile bottlenecks were infra-structure in export facilities such as port, rail and road; and the skills shortage.

Investment in such infra-structure and skills development would allow the economy in the medium term to grow at a sustainably higher rate. By sustainable I mean: a higher growth path for the economy that does not create imbalances like excessive current account deficits, or inflation.

Increased investment in education is always good. The benefits of more education have been proven almost as much as the benefits of sun screen. A policy focus in other countries that has not found broad attention in Australia is pre-kindergarten education. There are a number of studies that purport to show that every dollar invested in pre-kindergarten education returns up to seven times the investment.

Australia is strangely reliant on road transport. It is strange because we have very long distances to travel, fuel is not cheap, and our road network is not that good. Much of the lands between our capital cities are sparsely populated, and in Australia land can be compulsorily acquired, making the building of railroads comparatively easy. The vast majority of our people live on the seaboard, but virtually none of our domestic cargo is carried by ship. Our choice of preferred transport mode appears counter intuitive.

The Productivity Commission estimated that reducing the rail travel time between Melbourne and Brisbane from its current 72 hours to 24 hours, would add 0.75 per cent to GDP.

The Rudd Government should use this moment to remove whatever blockages there are to a more sensible transport infra-structure that improves GDP growth, reduces pollution and has lower depreciation costs.

Michael Porter’s analysis of company economics stated that the greater the barriers to entry in any market the better the economic returns for that industry. Put another way: the higher the market concentration, the lower consumer satisfaction. Australia has allowed, over nearly three decades, an unhealthy level of market concentration to evolve in some key sectors, these include banking, insurance, retail, petrol refining, property, the list goes on. The critical problem with this is that these sectors provide the capital, the risk offsets, and rental space that allow new entrants to enter the market.