Australia’s competitiveness: Reversing the slide

Executive summary

Since the turn of the century, Australia’s competitiveness has collapsed, contributing to the economy’s rate of growth falling below potential. Over this time, Australia has experienced an unprecedented mining boom which sustained income growth and minimised the macroeconomic impact of the global financial crisis (GFC) in 2008-09, greatly assisted by the flexibility of the exchange rate and strong trade ties to Asia, most notably China.1 However, the fact that Australia has not fared as badly as many other advanced economies since then has bred complacency in policy circles about the need to address a persistent competitiveness problem.

Download A key economic difference between Australia and other advanced economies is the relative dominance of commodity exports, which in turn means high exposure to volatile terms of trade (the ratio of export prices to import prices). For roughly a decade from 2002-03, booming commodity prices, particularly for coal and iron ore, greatly improved Australia’s terms of trade. As well as boosting national income and spurring massive mining related investment, the commodity price boom contributed to a strengthened real exchange rate (the nominal exchange rate adjusted for domestic inflation relative to inflation in major trading partners).

While the boom-related appreciation of the exchange rate led to a loss of competitiveness, this does not imply Australia has been producing goods the rest of the world no longer wants. On the contrary, world demand for Australia’s natural resources has substantially increased.

Interpretations differ about the mining boom’s impact on Australia’s economy. On one hand, the “Dutch disease” perspective highlights the negative impact of a higher real exchange rate on the competitiveness of sectors outside mining. A more plausible and positive view emphasises pursuit of the economy’s comparative advantage which has raised national income and households’ international purchasing power. A higher real exchange rate can be seen as a necessary part of adjustment to a new equilibrium.

From this perspective, the more worrying factor has been the role of domestic policies (notably fiscal and industrial relations policies) in aggravating competitiveness problems. A central argument of this Monograph is that Australia will not durably improve its competitiveness without serious fiscal and structural reform, including labour market reform.

Download complete article