Economy Dodges Asian Crisis, But Income Gaps Growing

By Andrew Nette, IPS, 3 December 1998

MELBOURNE, Australia, Dec 3 (IPS) - Australia appears to have emerged from the last year of regional turmoil relatively undamaged, despite predictions that 1998 would prove a nightmare for its economy.

But while there is growing evidence that while Australia's economy continues to be strong, it is also becoming far more unequal.

Wealth is increasingly concentrated in fewer hands, while majority see their job security and quality of life erode.

As a small, export-dependent economy, Australia appeared particularly vulnerable to the economic shock waves that have engulfed Asia, Latin America and the former Soviet Union since the collapse of the Thai financial system in July 1997.

Australia entered 1998 exporting some 60 percent of its goods to Asia, and analysts predicted tough times as a result of falling commodity prices, weak trading partners and the extent of Australian business exposure to Asia.

Such pessimistic forecasts appeared on their way to becoming reality, when, amid unprecedented turbulence in world money markets in September, the Australian dollar fell to 55 U.S. cents, its lowest point ever.

Despite evidence that Asia is going to continue to have severe problems for at least the next 12 months, and even in the best scenario is only likely to bottom out in the second half of 1999, Australia appears to have emerged relatively unscathed.

News of Australia's economic resilience become official in mid- November, when both the International Monetary Fund (IMF) and the Paris-based Organisation of Economic Cooperation and Development (OECD) issued positive appraisals of the country's economic performance.

While it warned of a slight slowdown next year due to external factors, OECD projects economic growth of 3.5 percent in 1998, 2.5 per cent in 1999 and 2.7 per cent in 2000.

The figures put Australia's prospects for the next few years well above the expected OECD average of 2.25 per cent in 1998, 1.75 per cent in 1999 and 2.25 per cent in 2000.

The IMF commending the government for implementing sound macroeconomic policy and structural reforms, which have built the foundation for Australia's impressive record of strong growth and low inflation in recent years.

According to the United Nations Conference on Trade and Development world investment report released in early November, Australia also remains one of the most powerful magnets for foreign investors in the developed world. Foreign investment flows in 1997 climbed for the seventh straight year.

Economists say the Australia's performance is the result of reforms introduced in the early eighties, including changes to the labour market and floating of the exchange rate.

While major Australian companies such as Qantas Airways and mining giant Broken Hill Proprietary LTD have warned of possible losses in 1999, Australian banks have avoided being exposed to the level of debt experienced by their counterparts in Asia.

Edward Shann, a director of ACCESS Economics, a leading economic consulting firm, says the floating of the exchange rate helped Australia a lot.

The fall in the Australian dollar has protected commodity producers against falling prices and helped exporters diversify from Asia into new markets in the United States and Europe, he added.

There has also been some freeing up in the labour market, which has meant there has not been increased pressure for wage increases, he said. These two things combined have meant that we have so far managed to get through with remarkably little damage.

But if there have been some winners out of what's happening, there have also been a lot of losers. The gap between rich and poor in Australia is growing, according to the latest UN Development Report released in September.

Australia now has the second largest such gap in the world after the United States, while 1.7 million Australians are likely to die each year because of poverty.

Trade unions and welfare organisations believe the situation could get worse as the country's recently re-elected conservative Liberal/National Party Coalition government enters 1999 with plans to introduce U.S.-style labour market reforms.

The plan suggests slashing minimum wages and deregulating the labour market could create 900,000 jobs.

It is being pushed by the government as a way of tackling Australia's unemployment rate, which remains static at 8 percent rate. It also has the support of the IMF.

It seems to me pretty clear that lowering minimum wages provides you with more jobs, agrees Sann. The US, New Zealand and the United Kingdom all have much lower wages than we have here, they all have much higher employment rates.

While unions agree that urgent measures to stem unemployment are needed, they believe the government's plans put the burden of reform on those with the least capacity to bear it.

The U.S. model shows that while you may get some employment growth through cutting wages, you will also get a rise in the working poor, maintains John Wiseman, a lecturer in economics at Melbourne's RMIT University.

The U.S. model has held up reasonable growth rates and, in the face of it, reasonable employment rates, but this has been at the cost of increasing inequality in pay and conditions, with the bottom end being paid less and less, or having to work two or three jobs to make ends meet, he says.

It also produces the kinds of social divisions and conflicts associated with the rise of rightwing groups like the One Nation Party, Wiseman adds.

Studies already suggest the quality of life for many Australians is falling as excessive work hours erode family life, make it difficult for unions to protect workers, and see rising rates of work-related sickness estimated to cost the country well over billion dollars annually.

Rather than making the situation worse, the government should be looking at the example set in places like the European Union, where governments have moved to cap working hours, and employers and unions have agreed to remove discrimination in conditions between full and part-time work, says Wiseman.

Another alternative, say trade unions and welfare groups, is for the government to make more effort to crack down on tax avoidance at the higher end of the wage scale.