Ladies and Gentlemen
I am delighted to have the opportunity to be here tonight to address the annual dinner for members of the Sydney Society of Financial Analysts. Tonight's dinner coincides with the Chartered Financial Analysts Recognition Ceremony, and I would like to congratulate those guests whose achievements will be recognised shortly.
Yesterday, the Treasurer, Peter Costello released the Mid Year Fiscal and Economic Outlook for the 2000-01 year.
That document confirms the extraordinary economic era which we are currently living through here in Australia, both in terms of the strength of the economy, and the Government's fiscal position.
Tonight I want to summarise briefly the position we are in, discuss how we got here, and examine our prospects for future growth, looking particularly at the issue of the 'new economy'.
Australia: A picture of strength….
Australia has been, over the past few years, toward the top of the world growth league.
We have already achieved thirteen consecutive quarter of annualised growth above 4 per cent – a record that is unprecedented since the quarterly National Accounts were first compiled in 1959.
In fact at the height of the Asian economic crisis, Australia's economic growth was above that of the major industrialised economies; it was at least twice that of the OECD average and even higher than that of the much-touted US economy.
We have achieved all this at the same time as recording low inflation.
Since the Government was elected in March 1996, inflation has averaged a little over 2 per cent per annum.
Moreover, since March 1996, around 800 000 Australians have gained employment, with more than half of these opportunities being created in permanent, full-time employment.
The national unemployment rate has now fallen to 6.3%.
And yesterday's Mid Year Economic and Fiscal Outlook projects solid employment growth in the year ahead, with the prospect of unemployment falling below 6% in the next couple of years.
….through a judicious mix of macroeconomic and microeconomic policies
This period of low-inflation growth, with falling unemployment is clearly the best economic circumstances Australians have enjoyed in recent history.
What is the key to this performance?
One of the key factors has been a marked increase in our productivity growth.
Australia's productivity performance over the latter half of the 1990s is the envy of most of the industrialised world, including even that of the United States.
In fact, this week the Australian Bureau of Statistics released National Accounts Data for the 1999-2000 year, which shows that our labour productivity growth rates in the current economic cycle is higher than that for any cycle since 1964-65.
Since 1993-94, labour productivity grew at 3.1%, compared with an average rate of 2.4% for the whole period between 1964-65 and the present.
In other words, what we are seeing today is a golden era of prosperity not seen since the expansion of the post-war period.
With higher productivity, we can produce more – but without the inflationary pressures which have marked previous expansions.
So what exactly has underpinned such a strong rise in productivity in Australia?
Essentially two things: stable macroeconomic policies and an ongoing microeconomic reform agenda.
On the macroeconomic front, we have a stable and transparent monetary policy, conducted by an Independent Reserve Bank.
The Bank's anti-inflation charter and its credibility were enhanced in 1996 with the Statement on the Conduct of Monetary Policy – essentially an agreement between the Treasurer and the Governor of the Reserve Bank, reaffirming the Bank's target inflation range of 2 – 3% on average over the economic cycle.
The credibility of Australia's fiscal policy has also been enhanced through the Charter of Budget Honesty, also introduced in 1996.
That Charter requires Governments to spell out their fiscal management strategy, and sets out enhanced reporting requirements.
In the case of this Government, the medium term fiscal strategy involves:
- maintaining surpluses over the forward estimates period while economic growth prospects remain sound;
- no increase in the overall tax burden from its 1996-97 level; and
- improving the Commonwealth's net assets position over the medium to longer term.
This stable macroeconomic framework is only half of the Australian story. It has been microeconomic reforms which have effectively made the job of macroeconomic policy advisers much easier.
Microeconomic reform has consisted of attempts to inject more competition, encourage greater innovation and harness productivity growth across a range of sectors.
The micro-economic reform agenda in Australia has been so far-reaching that I will not deal with it in any detail here, but some of the key steps have been:
- Deregulating the telecommunications sector, and the part-privatisation of Telstra;
- Competition policy, which has extended competitive pressures to a range of previously sheltered domestic industries;
- Reform of industrial relations, especially the shift towards enterprise bargaining at individual workplaces;
- Corporatisation (and in some cases) privatisation of government enterprises, to encourage greater commercial focus and efficiency;
- Financial sector reforms, such as the Wallis reforms, which have given us a more competitive and more efficiently regulated financial industry;
- Corporate law reforms, to reduce the regulatory burden whilst enhancing investor confidence;
Of course, we can now add to this list tax reform, including the abolition of several inefficient indirect taxes, reductions in personal income tax and the reform of Commonwealth-State financial relations.
In addition, through the Review of Business Taxation, capital gains tax has been reduced, and our company tax rate will fall to just 30%.
This reform task is only the first part of the equation.
Australian firms, consumers, workers and investors have embraced these pro-competitive reforms, and the end result has been the productivity boost which we have observed in the latter part of the 1990's.
….and by harnessing the benefits of new technology.
Can this productivity performance be continued?
One of the key determinants will be the extent to which Australians embrace new technology.
By 'new technology', I mean more than just the physical use of computers and information technology. It refers to the ability to adopt new innovations right across the board: implementing new production methods or adapting to new commercial opportunities.
Australia's move to an open and competitive economy has helped to create a culture conducive to innovation and adaptability and our recent economic performance indicates the success of that approach.
Nonetheless, we are now seeing a debate over whether Australia is well placed to continue our strong growth performance.
Specifically, the controversy hinges on whether Australia is an 'old economy' or a 'new economy'.
There are two basic objections to this controversy.
Firstly, there appears to be some confusion as to whether productivity improvements come primarily from the production of IT hardware, or the use of IT throughout the economy.
The second (and related) objection, is that the 'old economy – new economy' distinction ignores the fact that the primary benefits of new technology are to be seen in efficiency improvements in traditional industries.
For example, there seems to be a persistent perception (not least from some Australians) that we are an old economy because we are not a big producer of computer hardware and software.
Ironically, on this score our rapid take-up of new technology is actually a bad thing, because it leads to a large trade deficit in computer hardware.
But if having a trade surplus of IT equipment is a test of a new economy, then the United States, with the world's largest trade deficit in computer hardware, would be the oldest economy in the world!
The more important point is that Australia is rapidly adopting new technology.
According to OECD figures, Australian spending on Information and Communication Technology as a percentage of GDP is amongst the highest in the world.
- Already over half of the households in Australia have access to a computer at home.
- The concentration of mobile phones in Australia – at over 30 per cent of the population – is well advanced of the OECD average of 20 per cent.
- Over a year ago, around half of the farms in Australia owned or used a computer.
- Australia's is one of just 6 OECD countries with an above average number of both Internet hosts and secure servers per capita.
On the basis of these statistics, it has been judged that Australia's e-commerce readiness is among the highest in the world – closely behind the United Sates.
Because of these developments, and the fact that Australia is still heavily investing in information technology, Goldman Sachs has judged that Australia is now ripe for a second wave of productivity improvement.
This is attributable to the application of new technology rather than its production or invention.
In borrowing the words of the Federal Reserve Chairman Alan Greenspan, 'there is, with few exceptions, little of a truly old economy left. Virtually every part of our economic structure is…(being)… affected by the newer innovations.'
What this means is that traditional industries can benefit from lower transaction costs and more accessible information as a result of new technologies.
It is primarily those benefits which have helped to lift Australia's productivity growth to historically high levels.
If I can recall my earlier remarks, I noted that Australia's productivity performance over the latter half of the 1990s was the envy of most industrialised economies.
Research conducted and recently published in the Federal Reserve Bulletin in October 2000, identified Australia as only one of four countries whose productivity growth has exceeded that of the United States.
It noted that over the later half of the 1990s, Australia's productivity grew by around 3 per cent per annum, well above growth of 2 per cent achieved in the United States.
In addition, the OECD's Growth Project identified 6 economies which had achieved a significant lift in trend GDP per capita growth in the 1990's.
These countries were Australia, the US, the Netherlands, Denmark, Norway and Ireland.
Looking to the future, Merryl Lynch recently released its Global Ranking System, which assessed countries' growth potential in the years to come.
On this score, Australia ranked third in the world behind Sweden and Singapore – and ahead of the United States!
According to the Merryl Lynch study, Australia scored particularly well on the 'technology' category, the 'Government' category, and the 'people' category, which assessed indicators like the skill level and productivity of the labour force.
These international testimonials indicate that Australia's stunning economic performance has been recognised, as has our growth potential for the future.
They perhaps also indicate that we should put aside the old economy-new economy debate and simply look at the scoreboard.
The scoreboard indicates that whether by international or by historical standards, we are currently living through a period of extraordinary productivity growth
Conclusion
However, we should be mindful that it is good policy which has put us in this enviable position, and it is good policy which will keep us there.
Resting on our laurels would see us slide back down the relative economic ladder. And it should be remembered that this was Australia's fate for much of the 20th century (at the start of which, we were the wealthiest nation on earth).
The issue is not so much whether our economy is old or new, but whether it is open, internationally competitive, resilient to shocks and adaptive to change.
It is those qualities which have enabled us to make such rapid progress in recent years.