Australian Economic Growth in Longer Term Perspective

A recent issue of The Economist highlighted the stellar economic performance of Australia – or as it was termed, “The Wonder Down Under” – arguing its economy is most arguably the most successful in the rich world.  Australia has apparently not seen a recession for 27 years, seen its median income has grown four times as quickly as the United States and has low public debt.  The Economist attributes some of this to good luck – natural resource endowments – as well as proximity to Asian markets particularly China.  However, policy decisions are also seen as important with key ones being the reform of social spending – health care and pensions – shifting more of the burden of these systems onto users as well as a more enthusiastic immigration policy which has brought in many skilled migrants.

This Australian resurgence is quite interesting given the ebbs and flows of Australian economic performance over the long run.  According to Ian McClean, in the late 19^th century, Australian incomes per capita were on average actually 40 percent higher than those in the United States with this advantage the result of high labour force participation rates, higher labour productivity and of course natural resource endowments.  Yet, by 1914 this lead over the United States had evaporated as a result of the transitory nature of these advantages.  In particular, “periods of weakest Australian growth, relative to benchmark economies, occur when the resource-based sectors of the economy have languished.”

From 1914 until the start of the Second World War, Australian incomes according to McClean averaged 11 percent below those of the United States while after the Second World War the gap grew to some 30 percent below that of the United States but narrowed after the 1970s to only 25 percent.  Where Australia differs from Canada with respect to the income difference with the United States is that Canada has always remained below the United States though the gap has narrowed over time.  GDP per capita relative to the United States for Canada according to McLean was about 60 percent immediately after Confederation and rose to over 80 percent after 1980. 

So, Australia was once the world’s richest economy in per capita GDP terms and if recent trends continue, it can be argued that Australia is well on the road to being great again.  However, it remains that despite its recent string of successes, Australia’s current performance success could very well be as transitory as it was prior to World War I.  Its pre-1914 economic growth coincided with a boom in its mineral sector that went on for almost a half century.  The gold rushes of the 19^th century produced demographic shocks – which raised labor inputs and productivity – and by 1914 the mineral boom and rural settlement phase was complete.  Thus, one could argue it was a specific resource boom that generated the superior economic performance then and favorable resource and commodity prices are the primary ingredient now.

A longer term visual perspective is useful in framing the Australian experience.  The accompanying figure takes real per capita GDP in PPP dollars from the Jorda-Schularick-Taylor Macrohistory Database for the period 1870 to 2016 for Australia as well as the G7 countries and plots it relative to US per capita GDP.  In a sense this is an updated and expanded version of McLean’s Figure 1 in his 2007 Explorations in Economic History paper.  Prior to 1900, the only two countries with higher per capita incomes than the United States were of course Australia – and also the UK.  Both declined relative to the United States and after the First World War both had lower per capita incomes relative to the United States.  After World War II, the UK and Australia both appear to stabilize at about 80 percent of US per capita income.  Incidentally, that is also where Canada sits after World War II - at about 80 percent of US per capita income. The period after World War II sees a convergence of the other G7 countries towards the 80 percent boundary with Italy veering away after 1990.  The most dramatic performances relative to US incomes after 1945 are not surprisingly for the war devastated economies of Japan, Italy, Germany and France.

In 2016, real per capita incomes relative to the United States ranged from 80 percent for Canada to a low of 54 percent for Italy.  The United Kingdom is close to the 80 percent boundary at 77 percent followed by Australia at 75 percent, then France and Germany at 67 percent and then Japan at 71 percent.  This strikes me as interesting because it suggests that there seems to be a boundary figure of 80 percent of US per capita GDP for all of these successful rich countries.  Here is Canada we often bemoan the fact that our productivity is lower than US productivity, but it seems that all things considered we have probably done the best of the bunch.  Moreover, we appear to have done it relatively consistently over the course of 150 years. 

One more thing.  When you compute the average annual growth rate in real per capita GDP from 1870 to 2016, how do these countries rank?  The highest average annual growth rate is for Japan at 2.7 percent and the lowest for the UK and Australia at 1.5 percent each.  The United States was at 2 percent and slightly edged out by Canada and Germany at 2.1 percent each.  France matches the US at 2 percent while Italy comes in just below at 1.9 percent.  To have any hopes of closing the real per capita gap with the United States over the long haul, one has to grow at more than 2 percent on average.  The only countries among the G7 that have managed that are Germany, Japan and Canada. 

Comments

[Henry Rech]

Australia has prospered because of its resource (mineral and agricultural) endowment and the willingness for foreign capital (initially British, then American, then Japanese and lately Chinese) to develop these resources. It began to fall behind relatively once industrialization of the US and Europe then Japan kicked in. (Australia did once have a useful industrial base but that has since been euthanized by ongoing removal of trade barriers beginning in the 1970s and 1980s.) Unless Australia can increase high valued production then it will fall back again. I don't know a great deal about Canada but I believe it has a small industrial base but it has benefited by being a neighbour to the most powerful economy on the planet (just as Australia now is becoming increasingly dependent on China - but is conflicted by political/strategic matters). Japan's post war prosperity was driven by American capital/technology/management/markets. It seems if you haven't got a strong and contemporary industrial base you are destined to be an economic also-ran. The main hope for countries like Australia and Canada is to develop tertiary industries in high technology and IP. But even then countries like China and India are strong competitors as well as the main industrialized economies. Twenty or thirty years ago it was Japan that was fingered as exploiting (if not stealing) western technology, now its China. I guess it doesn't matter how they've done it or are doing it.

[Lorenzo from Oz]

Australia used to suffer MORE economic instability, not less than other developed economies, so "luck" is a weak explanation for the very flat business cycle since 1991. (I credit the RBA's policy of targeting "inflation will be an average of 2-3% pa on average over the business cycle" as it anchors both inflation and nominal spending: I do that because I read Scott Sumner and Nick Rowe. Helped by the floating exchange rate, which acts as a shock absorber.)

Australia fell behind during the 1913-1983 period, because it adopted protectionist policies which taxed the resource endowment to support comparatively inefficient industries. The attempt to subsidise risk ended up into increasing the level of macro risk instability, hence the more intense business cycle. The move to a more open trade regime coincided with improved performance vis a vis US per capita income.

[Erik Poole]

Using numbers provided by tradingeconomics.com, I get for 2017:

Canada, GDP per capita: US$51,316
Canada, GDP per capita PPP: US$44,018

Australia, GDP per capita: US$55,926
Australia, GDP per capita PPP: US$44,649

Looks like Australia is doing reasonably well for itself given the potential for the Resource Curse to reduce per capita income and wealth relative to potential.

[Henry Rech]

Lorenzo of Oz,

"The move to a more open trade regime coincided with improved performance vis a vis US per capita income."

The chart above clearly shows that Australia's performance relative to the US began to stabilize 30 years before the removal of trade protection in the 1970s and 1980s and was due to the development of a protected manufacturing sector.