Australia’s luck could be another pandemic victim – Analysis – Eurasia Review
By Tom Westland *
Australia’s golden race is over. In 2020, the country experienced its first recession since 1991, and it is likely that only very rapid growth in the fourth quarter of 2021 will prevent it from experiencing another. Even a strong recovery in 2021 will not mask the country’s major economic challenges. They are long term and structural.
Australia’s luck may finally run out.
Australians became the richest people in the world during the 19th century Gold Rush, and a succession of staples – wheat, wool, coal, iron ore, natural gas – have kept them wealthy ever since. Despite the recent market downturn, demand for Australian iron ore is likely to remain quite strong going forward, at least until competitors like the Simandou deposits in Guinea come online.
The outlook for other major exports looks less optimistic. While the global shift to renewables bodes well for some exports of minerals, such as those used in batteries and solar panels, the world is shifting to a post-fossil future and coal markets and gas – which together account for about a third of Australia’s merchandise exports – will decline dramatically. Australia’s own climate policy is a catch-all of inadequate measures and vague promises about technology. Maintaining strong economic growth will require a more serious policy, articulated around global carbon constraints and preferably incorporating an explicit pricing mechanism.
Unforced domestic policy mistakes have weakened other pillars of the economy.
The education sector, a vital adjunct to the efficient management of Australia’s resources, was, before the pandemic, also the country’s fourth export. The university sector was excluded from the federal wage subsidy program, JobKeeper, and significant cuts were needed at many universities to avoid financial ruin.
Equally damaging to the reputation of the education sector was the way in which foreign students were treated. Unlike Japan, New Zealand or the UK, international students have been excluded from wage subsidy programs, and many who found themselves trapped in Australia have been forced to turn to charity for help. ‘aid. The international education market is competitive and the relative lack of government support at the height of the recession will cost the Australian economy human capital formation in the future.
Markets, not governments, will decide where Australia’s future comparative advantage lies in the global economy. But governments are responsible for the macroeconomic environment in which labor and capital flow to their most economically beneficial use. Short-term macroeconomic resilience has been supported by expansionary fiscal and monetary policy, which cushioned the impact of the pandemic on jobs and incomes.
But the pandemic has also exposed weaknesses in Australia’s social safety net. Unemployment benefits, for example, were well below the poverty line when the pandemic hit. A temporary correction has for the most part been reversed. There will be a modest increase from the pre-pandemic rate, but it will still leave Australia’s unemployment benefits among the least generous in the OECD, especially for newly unemployed.
It is not just a matter of fairness. As Australia’s economy adjusts to the post-pandemic world, an inadequate social safety net increases the costs of risk taking and entrepreneurship. A more substantial increase in unemployment benefits complements bankruptcy law reforms which aim to increase dynamism in the deployment of capital.
However, the most important problem facing Australian leaders is one they cannot solve on their own. The last truly global pandemic was the Spanish flu in 1918, a deadly marker of the start of the interwar years. In the decades between the end of World War I and the outbreak of World War II, the world split into imperial economic blocs. Research now suggests that the pandemic has played a big role in this: countries that have been hit hardest by the virus have raised their tariffs more than countries elsewhere. The open pre-war order collapsed.
Fortunately, macroeconomic management has come a long way since the 1920s, and the global recession of 2020, while deep, is unlikely to turn into a second Great Depression. But the ongoing collapse of Chinese real estate company Evergrande is just a harbinger of a more structural slowdown in the global economy.
The most important thing for the Australian economy is that the multilateral system on which it depends is not in line with the liberal order before the First World War. There are worrying developments: the trade war between the United States and China ends and the phase 1 Washington-Beijing trade agreement was a decisive step towards the “managed” and the move away from free trade .
China’s attempts to coerce Australian policymakers by imposing anti-dumping duties and other measures on major Australian exports violated international standards, but their economic impact was limited by the fact that alternative markets were readily available. The alternatives were mainly found in countries with which Australia does not have bilateral trade agreements, which underlines the importance of the multilateral system.
If the multilateral system breaks down or becomes fragmented, open economies like Australia’s will become increasingly vulnerable to great power politics, and security agreements like the recent Australia-UK-US Pact. (AUKUS) will become an economic straitjacket.
Other countries in the region, especially those in Southeast Asia, face the same dilemmas, and working with them to refresh and renew the multilateral order is the top priority for Australia’s economic and security policy.
* About the author: Tom Westland is a research fellow at the Crawford School of Public Policy, Australian National University.
Source: This article was published by East Asia Forum