*"Not making the headlines": Australia's economy is overshadowed by many people who focus on European, American and Chinese economies
Well, to make my point, here is something to for you readers to digest; the International Monetary Fund (IMF) forecasts that Australia's economy will have the most significant growth this year, in 2012 and the subsequent year, in 2013, by 3.0% and 3.5% respectively. It would certainly be surprising to most people that with the global economy powering down, all of the countries would be affected by this, even China for that matter due to weak demand from Europe and America, China's largest trading partners. Australia is an exception to this trend in global economic performance, with growth very strong in the first quarter and a slower second quarter at 4.3% and 1.3% respectively. If there is an analogy to describe this situation, it would be a sprinter and a jogger. We will represent the economic superpowers, such as China, America and Europe, as the sprinter, while Australia as the jogger. A sprinter will run his fastest and hardest, whereas the jogger will run in a consistent speed and aims for endurance. Alas, the sprinter cannot maintain its speed for a very long time and will eventually succumb to the fatigue and stop. Meanwhile, the jogger is able to maintain his/her speed for a much longer time and possibly pass through the sprinter while he's at it. Likewise, Australia to my mind has not always been spectacular, but it has always produced a good and consistent set of year end economic figures. With America and Europe continuing to perform badly and China's trade starting to soften, Australia may just jump out of nowhere and leap to the top of economic prominence.
*Sprinter vs Jogger: Australia's consistently growing economy rewarding for long term. Source: http://addisabram.wordpress.com/tag/curiosity/
Of course, we should now analyze why Australia is doing so well even in a global recession. The first reason is that Australia is self-sufficient. It has the ability to be able to rely on itself to cater for the public with its own resources and food supply. For example, the agricultural industry makes up 12% of GDP; Australian farmers and graziers own 135,996 farms, covering 61% of Australia’s landmass. It does not need to rely on other countries heavily for financial backing. The next reason, is that the banking system in Australia is independent from other countries. Foreign banks wishing to carry on a banking business in Australia must obtain a banking authority issued by APRA under the Banking Act, either to operate as a wholesale bank through an Australian branch or to conduct business through an Australian-incorporated subsidiary. Also, its reserve assets are very sufficient. Even though its external debt is around $1.37 trillion Australian Dollars, only a fifth of the debt is from the Government (lack of indebtedness to other countries) while the rest is from national companies. It is able to preserve its money supply very responsibly, unlike America who just keeps on borrowing money. The overall effect of this is that Australia would not be greatly influenced by other countries economic performances. Another reason is Australia has a large supply of resources. Many experts have asserted that Australia's abundant supply of natural resources, such as coal,bauxite, iron-ore and opal (worlds largest producer and exporter, 95% of the opal originated from Asustralian mines), is a major factor in its growing economy. The mining industry represents around 10.8% of GDP, which infers that the recent mining boom in late July has had noticeably positive effects to its exports. The increase in exports leads to an increase in aggregate demand, translating it to economic growth. Also, natural resources are essentially commodities. The commodity market is a very stable market due to near perfectly-inelastic demand for them. The constant demand for commodities and natural resources allows Australia to generate a constant source of income, backing it up well with monetary capacity and liquid assets.
*"A gift from the Gods": Australia's mines and land are full of natural resources, envied by many countries. Pictured above: Rio Tinto Mine. Source: http://www.nytimes.com/imagepages/2007/02/26/business/27miner2.ready.html
Lastly, Australia's cities are all coastal areas. Coastal areas are usually much more wealthy because the ports are good trading areas, as can be seen from China. From the east to west, the wealth of each city gradually declines, a good indicator that coastal cities are much more wealthier. Australia's trade heavily relies on ports and container ships, hence a large trade volume, stimulating economic growth.
Of course, this all seems very good. Arguably, this economic model is a near perfect one. The RBA has said the Australia's resource-driven economy has the potential to lift the global economy out of recession. However, they may be a bit too optimistic about Australia's economy bringing up the world economy, not even China could. First of all,the natural resources is not going to suffice in the long run. Official statistics from the government shows that Australia's multibillion-dollar spending boom on resources is losing momentum unexpectedly rapidly, with several projects on hold or canceled as commodity prices fall and banks become less willing to lend. This can be associated to consumer and investor confidence dropping because of uncertainty in markets. The resource boom has led to the deflation of commodity prices as weakening demand further lessens producer profits. As a result, mining companies are now laying off workers and cutting production in the hope of getting better prices for their resources. Like the "domino effect", this would not only effect Australia, but effect other countries output, thus we will likely be seeing falling GDP figures.
Carbon intensive countries, such as Australia would likely see supply side shocks in their agricultural production due to global warming. Australia's emissions of carbon dioxide during the past 25 years have risen more than twice the world average rate. The Great Victoria desert and the Gibson desert covers around 18% of the entire Australian mainland, leaving Australia unable to grow its agricultural production capacity. The increasing frequency of droughts and the depleting ozone layer leaves further uncertainty in Australia's agricultural sector.
*"A hole in the agricultural future, literally!": The depleting ozone hole layer and CFC/CO2 emissions poses uncertainty in Australia's agricultural future
Another issue that recently came in place on July 1st, was the imposition of two new taxation systems; a mining levy and a carbon tax. These two tax systems were very controversial when it came out, partly because it does not make sense to aim the tax bills towards one of their prospering industries, but also partly because it will influence consumer confidence and spending. It makes sense that most countries with cash-strapped governments are looking at the top of the income groups for money with progressive or retroactive tax systems, but Australia is looking down under, low income groups. Because Australia is carbon intensive, we could argue that the main goal of these taxes are to benefit the society by reducing the negative externalities in the form of air pollution. But if we were to use opportunity costs to illustrate this, then it means Australia are sacrificing a large potential economic growth to raising government revenue. Another problem with carbon taxes are that it is difficult to give an exact price on it (The economic cost of emitting carbon dioxide cannot be measured accurately). It forces people to bear more of the cost of carbon than it is actually worth, including its unpriced contribution to global warming. Australia, which now emits more carbon dioxide per head, is now charging A$23 (equivalent to $24USD) per tonne of carbon dioxide, which is higher than the European Union trading scheme. So overall, not many merits to these two tax systems.
No one likes taxes, if there is one stakeholder that likes taxes, then it is the government. Benjamin Franklin once stated, "In this world, nothing can be certain, except death and taxes." This may seem to dramatize the effects of tax, but they are indeed very undesirable. For instance, income taxes discourage work, corporate taxes inhibit enterprise and creates disincentive to invest, and indirect taxes may obstruct mutually beneficial economic transactions. These taxes deprive consumers from spending, and firms from raising sales revenue, meaning the amount of tax received by the government is not as much as expected. A solution to this problem is not taxing on the mining and carbon themselves, but the "rents" that producers earn. These returns on resource exports are much greater than the minimum cost required to attract the factors of production needed to extract the resources. Since commodity prices are rising, the returns have grown favourably. Therefore, it makes sense to tax the excess in returns, as it would help the government raise revenue, without demotivating producers.
Australia is a modern, developed country with a strong monetary base. Its economy has the potential to grow very much because it has been responsible with its resource management, not exploiting and using them up at a unsustainable rate. However, we have also shown that for one economy to lift up all the other economies is not very realistic. Nevertheless, if Australia's growth to is to continue, it should expand and support its enviable supply of resources and not make any controversial moves to hinder its industries.
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