Australia’s challenges as it prepares for G20 summit





Australia’s challenges as it prepares for G20 summit

 18 August 2014

The G20 group has in its membership the largest 20 economies in the world, including Australia and Saudi Arabia, ranked as the 12th and 19th largest economies worldwide, respectively. Established in 1999 to a lukewarm reception, the G20 gained prominence during the global financial crisis, as governments were groped for ways to get out of the depression and were willing to try new medicines.
Heads of state and heads of government began to meet under G20’s umbrella only during the crisis. The first summit was held in Washington on Nov. 14, 2008, presided over by George W. Bush. During the early years of crises, summits were held twice a year. However, G20 early magic has been fading and some believe that the group has become little more than a talkfest, with (extremely) long communiques with very little in the way of implementation.
The ninth G20 summit will be held in Brisbane, Australia, on Nov. 15, 2014, chaired by Australia’s Prime Minister Tony Abbot. On Sept. 15, 2014, Australia’s Liberal-National coalition will mark its first anniversary in power. In last year’s election, the center right coalition won over the divided left-of-center Labour, which had managed to steer Australia through the global financial crisis.
The summit will provide an opportunity for Australia and its new leaders to chart a vision for sustainable growth in Australia and the international economy.
Australia has been able to maintain positive economic growth throughout the financial crisis and afterwards. Since last September, its economy has grown at a healthy rate of 3 percent, while unemployment remained low at 6 percent, and per capita income at $80,000, the fifth highest in the world. While the economy is dominated by the service sector (66 percent of total GDP), most of the growth is attributed to the mining sector and related services, which together represent about 19 percent of GDP, in particular mineral exports to emerging economies, especially China.
Much of Australia’s economic growth is attributed to areas of the country where mining- and resource-based industries and services are located. Western Australia and the Northern Territory, where I visited this past week, are the only states that have had significant economic growth. During the past two years, the states of Queensland, Tasmania, South Australia, New South Wales and Victoria, in addition to the Capital Territory, have had economic recessions, with some state governments cutting jobs and reducing services to cope with declining revenues.
The export-driven growth has raised the value of the Australian dollar, making Australia less competitive in manufacturing, retail, tourism and exports of education and health services. Australia’s high production costs add to that challenge: Australian minimum wage is around A$16 per hour, nearly twice the US level, and much higher than China’s $1-2 level. Skilled labor cost differentials are equally significant.
Since 2001, Australia’s trade balance has been weak despite the mining boom and rising prices. Its current account deficit of around 3-4 percent of GDP is likely to widen.
Similarly, government accounts are threatened as revenues have declined and significant budget deficits remain likely. Economists fear that the banking system, while well-capitalized, has a high level of exposure to the domestic housing market, which is overvalued by most measures.
Australia’s central bank (Reserve Bank of Australia) is trying to fix the problem by lowering interest rates, to boost growth in the housing sector and increase consumption. However, that policy has had limited impact on housing, credit growth, consumption, investment (other than mineral investment), and consumer confidence.
The mining boom has helped maintain income and buying power, as Australia has opened its mineral wealth to the insatiable demands of emerging Asian economies, especially China. Mining growth has masked declining international competitiveness in other sectors. Much like other commodity producers, the newly acquired wealth has largely gone to financing consumption and imports, rather than investment.
Economists question whether such growth pattern could be sustained for the long run, especially if growth slows down in China and India, and their demand for Australian commodities declines. Hosting the G20 will provide a platform for Australia to provide a vision for sustainable economic policy beyond exporting its mineral wealth.
And perhaps Australia will continue its streak of good luck and manage to maintain healthy economic growth for the foreseeable future, despite those challenges. Its great writer Donald Horne once wrote in his best-known work (The Lucky Country) that, “Australia is a lucky country, run by second-rate people who share its luck.” Echoing that sentiment, the Reserve Bank of Australia’s governor recently said, when asked where growth would come from to replace mining investment, “We always get this question: ‘Where will the growth come from?’ And most of the time it comes.”
Trade is also an area where Australia has done well. The Abbott Government recently signed a free trade agreement with South Korea, and a similar agreement with Japan is expected soon. Australia is also part of the Trans-Pacific Partnership, which aims at facilitating trade and investment.
Prime Minister Tony Abbott has said that the G20 needs to make a “practical difference to the global economy.” For that reason, Australian preparations for the summit began about a year ago. The government further helped start a G20 Studies Center within the Sydney-based Lowy Institute for International Policy, where I visited last year. The new center is headed by Mike Callaghan, who believes that for the G20 summit to succeed, it “must be relevant.” Australia could make the difference if it provides new approaches to address the main task of the G20, which is to find ways to restore sustainable economic growth worldwide, starting with Australia. From a GCC perspective, the answer that Australia may come up with is relevant to our economies, where deep economic diversification has been elusive and reliance on the export of crude oil is the rule.

Email: aluwaisheg@gmail.com


 














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