© 1998 International Monetary Fund

Production: IMF Graphics Section

Cover design: Massoud Etemadi

Typesetting: Joseph A. Kumar

Library of Congress Cataloging-in-Publication Data

Australia : benefiting from economic reform / Anoop Singh … [et al.]

p. cm.

ISBN 1-55775-732-1

1. Australia — Economic Policy 2. Australia — Economic conditions — 1945–. I. Singh, Anoop. II. International Monetary Fund.

HG605.A77358 199898-8648

338.994—dc21CIP

Price: $25.00

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Foreword

Australia’s economic performance has been impressive in recent years, with its record on both growth and inflation comparing favorably with that of other OECD countries. Unlike previous recoveries, real growth has been evenly paced, averaging more than 3½ percent per annum since the cyclical trough in 1991. Another striking aspect of this recovery has been inflation performance. Since 1991, underlying inflation has averaged just 2¼ percent, and never exceeded 3⅓ percent.

The recent good record is in sharp contrast to the performance during much of the postwar period. From the 1960s through the 1980s, per capita income growth rates were significantly lower than in other advanced economies, causing Australia’s income rank to slip steadily from one of the highest in the OECD to merely average levels. At the same time, unemployment gradually increased from low levels in the 1960s to OECD average levels in the 1980s.

Poor economic performance in the past has focused the political and economic debate in Australia on long-run issues of structural change. Attention has centered on two ultimate objectives of public policy—per capita income growth and unemployment. The economic challenge has been recognized as not just that of recovery from cyclical difficulties, but fundamentally that of longer-run issues of structural change crucial to Australia regaining its leadership role among industrial countries. This book identifies the principal constraints that have affected long-run economic performance in Australia and discusses the extent to which successive reform agendas have reduced these constraints.

The book concludes that the economy’s growth potential has increased from the range of 2½–3 percent in the late 1980s to around 3½ percent currently, because of higher productivity and investment in the 1990s in response to the reforms thus far. Moreover, additional reforms in several areas have the potential to increase long-term growth further. Ultimately, Australia’s success in raising per capita incomes and reducing unemployment will depend on the strength of its structural transformation efforts.

The book is based on material originally prepared for Article IV consultations with the Australian authorities, particularly the consultation concluded in early 1997. Against the background of the turbulence in Asian and international financial markets, the book raises a number of key issues and policy challenges that remain at the forefront of the debate on Australia’s future economic performance. The project was directed by Anoop Singh, and the team consisted of Josh Felman, Ray Brooks, Tim Callen, and Christian Thimann, all of the Asia and Pacific Department of the IMF.

Hubert Neiss

Director

Asia and Pacific Department

Acknowledgments

The authors acknowledge the valuable comments provided by many colleagues at the IMF, including Tamim Bayoumi, Martin Parkinson, and Ramana Ramaswamy. The authors would also like to acknowledge past contributions by Roger Kronenberg, Mahmood Pradhan, Paul Cashin, John McDermott, and Ling Hui Tan. The authors appreciate the contribution of Dr. Jeff Borland of the Australian National University to the chapter on the labor market. Natalie Hairfield and Fritz Pierre-Louis provided excellent research assistance, while Constanza Bryant, Ranee Sirihorachai, and Margaret Tan provided unstinting secretarial support. The authors are also grateful to Jeff Hayden of the External Relations Department, who edited the book for publication and coordinated production.

The views expressed here, as well as any errors, are the sole responsibility of the authors, and do not necessarily reflect the opinions of the Australian authorities, the Executive Directors of the IMF, or other members of the IMF staff.

Contents

• Foreword

• Acknowledgments

• 1. Overview

  • Anoop Singh and Josh Felman

• 2. Australia’s Long-Term Economic Performance

  • Christian Thimann

• 3. The Deterioration of the Current Account

  • Tim Callen

• 4. National Saving

  • Tim Callen

• 5. Inflation and Monetary Policy Reform

  • Ray Brooks

• 6. The Labor Market

  • Josh Felman, Ray Brooks, and Tim Callen

• 7. Product Market Reform

  • Ray Brooks and Christian Thimann

• 8. Medium-Term Outlook for Potential Growth

  • Ray Brooks and Christian Thimann