Australian Economic Policies Essay, Research Paper

Australian Economic Policies

Despite it s relatively small population, Australia can be considered one of the important trading nations of the world. In 1991 alone the value of Australia s exports of goods and services amounted to $51955 million from a total GDP of $377 114 million, which accounts to 14% of the total GDP.

From our earliest days as a prison farm, when the number of convicts sent to Botany Bay was the key influence on our economic health, through to the present, when forthcoming speeches by the Governor of the US Federal Reserve can send our markets into spasm of paranoia, what happens outside Australia has had profound effect on the hip pocket nerves of all Australians. But is Australia simply in the hands of international banksters and agencies, which pull the strings to make us dance? Or, are many of our problems associated to the fact that we try to ignore developments in the world economy and do not undertake appropriate actions?

Democratic governments such as in Australia function in the interest of their electors, and therefore are inclined to implement policies, which will ensure their political survival. The characteristics of these polices have to benefit the economy by offering protection of business interests and securing domestic industries from foreign competition. Usually these policies are aimed at dealing with economically advanced nations and therefore restrict the expansion opportunities of less-developed countries through high protection barriers such as for example high tariffs. To understand this conflict more clearly, we must comprehend what are protection policies, how are they used and which ones apply to the Australian economy.

Protection is any policy implemented by the government to provide domestic producers with artificial advantage over foreign competitors. Free trade is based on purely market forces without any intervention by governments.

In the real world, international trade blueprints are far different from those proposed by the notion of free trade. Markets of countries are commonly disfigured by the protective manners of governments, which execute numerous measures to certify that domestic industries endure in opposition to foreign competition and even compete in global markets.

Tariffs are the central protection feature. A tariff is an indirect tax imposed on a given imported commodity when it enters a country. Although tariffs generate revenue for the nation s government they also amplify the price of imports in attempt to persuade consumers to purchase locally manufactured goods.

Another protective instrument used in addition to tariffs are import quotas, which in the recent years have become popular by the Australian Government. They are imposed on imports for which there is inadequate demand.

Therefore, consumers who consistently purchase imported goods are paying the landed cost of the item in addition to the tariff imposed by the government. Ironically, those who buy local produce are obligated to pay a price, which is higher than what it would be under free-trade conditions. Overall outcome is that all consumers wind up paying more regardless whether the commodity was locally produced or imported.

A quota specifies in what amounts a product can be imported. For example, a motor vehicle importer may be allocated a quota of 140 units per month. If they exceed the allocated quantity, the additional vehicles are seized in bond by the custom authorities until the importer is entitled for the next period s quota. In the mean time, the importer will sustain penalties that are intended to discourage such practises.

Import licensing is a popular protective measure also, and is closely related to the use of quotas. For a car dealer to import vehicles into the country, they must posses an import licence. The availability of licenses is determined by the extent to which imports pose threat to locally produced goods. Again these costs have to be passed onto the consumers that choose to purchase these imported commodities.

A subsidy is a grant paid to a producer by the government to offset production costs. This allows the product to be sold at a lower price margin. In Australia, where many industries are found to suffer a cost disability relative to their foreign counterparts, governments have often chosen to subsidise production costs to allow such industries to survive against foreign competition. Subsidiaries are paid from general government revenue, which means that all taxpayers share the cost burden providing this protective device.

An embargo is a complete ban on the import or export of a certain type of good. An example of an export embargo was the ban on the export of live merino sheep from Australia. This ban dated back to 1929 when it was taken advantage of the fact that Australia had developed a breed of sheep that produced what it was believed finest wool in the world. To monopolise merino wool production, the embargo was imposed. It was due to the fear that if export of live sheep was permitted, our industry would be threatened by wool production elsewhere in the world. In 1978 however, the Australian government permitted the export of small flock of merino rams to China.

Quarantine regulations are intended to immobilize the spread of disease. Trade involving livestock and perishable commodities, such as meat and cheese is often restricted by such regulations offering local producers an advantage. A recent example of this would be the outbreak of the foot and mouth disease, where exceptionally severe quarantine regulations would have been imposed against many perishable goods from the United Kingdom.

Technical specifications are also a strong protective device. For instance, Australian motor vehicles are right-hand drive compared to the left-hand drive produced in the United States. This technical difference indicates that Australian motor vehicle industry is successfully sheltered from US competitors. Another example of this would be our 240 volt electricity supply system.

Throughout the past century, there have been many disputes around the implementation and the features of protective policies. Business companies and politicians have developed a set of arguments that have been used over and over again to justify the presence of protection in Australia.

Infant industry argument supports the suggestion that in their early years of establishment, industries may experience teething problems and therefore must be protected. Many heavily protected infants however, never developed to become self-supporting adult industries. Instead they remain infantile monsters with an ever-increasing appetite for protection.

Self-sufficiency argument was predominantly popular in the post war years. The defence argument was that we must be self sufficient in the case of war, which was used to justify government assistance to oil exploration companies in the 1960s. Supporters of this argument believe that Australian industry should be diversified enough to ensure that we are not over dependent upon other nations. If we give to the self-sufficiency argument we must ask ourselves To what extent? and At what cost? .

The employment argument is probably the most difficult of the protection arguments to dispute. In recent decades it has been used extensively in Australia to maintain protection for the textile, clothing footwear and motor vehicle industries. Protected industries provide employment opportunities for Australia s labour force.

Advance Australia argument: In the past years, businesses and the government have promoted slogans such as Buy Australian made and Advance Australia in effort to sway local consumers to shop local products. Buying Australian-made products may not always be the best solution for the economy, even if it is the best resolution for the organization promoting it.

Dumping argument: Occasionally you will hear of industries seeking protection from dumping by foreign producers. Dumping is a procedure of selling a commodity in a market at a less than marginal cost. It is similar to the way shop assistants cut the price of goods to clear the stock. In reality, dumping is a practise that can only be sustained for s short period of time. No producer can afford to sell their goods indefinitely at a price that is less than the marginal cost. The protective devices are constant in their role, but dumping is sporadic and unpredictable. In addition tariffs and quotas do not deter foreign producers from dumping.

Balance of payments argument: On occasions where Australia had encountered an unfavourable balance of payments, it was argued to reduce an outflow of payments to foreign producers though imports by intensifying protection. Protection discourages not only imports but also enhances the cost structure in general which has the effect of increasing our export and therefore making them less attractive in abroad markets. For this reason there is no validity in arguing for protection to overcome balance of payments problems.

Low wages abroad argument has been regularly exercised in Australia in justification of our proximity to Asia. The argument claims that high labour costs in Australia mean that our producers are unable to compete with products released from low labour cost countries. Nonetheless this does not validate protection ladies and gentlemen. What most supporters of this argument fail to notice is the fact that productivity is one of determinants of wage levels. In countries where wage level is low, we usually find that labour productivity is low. Australia has infrastructure where excessive levels of productivity are available and our workers are in a position to demand high salaries to achieve high standard of living they have come to expect. If a foreign worker produces one tenth of what an Australian employee produces in a day there is no rationalization that the wage levels should be the same.

Protection is a firmly well established trait of our economy and its elimination would be a lengthy process. But many economists confront governments with arguments that emphasize the unattractive characteristics of protection using these as some of their main arguments.

The strongest argument against protection is that it encourages inefficient resource allocation.

Economists have argued that a heavily protected producer is likely to prefer the stability and security offered by protection rather than the anxiety and doubt of global rivalry. These producers acquire a sluggish viewpoint in the absence of foreign competition. A trend takes place among them to retain outmoded techniques of production that play a factor to inefficient allocation of resources.

Protection implicates the redistribution of amounts of capital in the form of higher prices paid by consumers and subsidies reimbursed by tax payers. As I mentioned earlier tariffs and quotas increase the shelf prices of goods, and low-income earners are not recognised from high-income earners.

In example, tariffs and quotas protect our motor vehicle industry. A consumer walks into a car dealer and purchases an imported vehicle with a $20,000 price tag attached to it, which without protection costs would cost $12,000. Therefore these consumers are paying $8000 to support our domestic industry.

On the left, a consumer who purchases a locally produced vehicle might pay $15000, which can happen to be $3000 over the free trade price of the import. Again the consumer is paying $3000 in tax to support our domestic industry. The costs are too high.

If the cost configuration linking nations alters and the government proceeds to boost the level of protection of domestic industries the effect is higher prices. This result is further erosion incomes of consumers, and contributes to inflation pressures within the economy.

The combination of inefficient resource allocation and higher prices prove that the public will experience lower living standards than might exist with lower levels of protection present. Using the examples of motor vehicles, consumers are forced to pay more for both local and abroad produce. Therefore, consumers who purchase vehicles posses less income to spend on other goods and services, which they may have purchased, had there were no protection for the motor vehicle industry. Is this what we want Australia to become in the future? I think not.

Comparative advantage

This principle argues that nations may benefit from specialisation and trade in cases where one nation has complete lead over another in production of commodities. Us the following example:

+ There are two countries Australia and New Zealand

+ Each country has equal amount of resources but imbalanced quality

+ Each economy produces only two products, wheat and speedboats.

+ Resources in each country are perfectly mobile.

Figure A 1 and 2 shows the possible production curves for production of wheat and motor vehicles in Australia and New Zealand. In comparison Australia has and absolute advantage over New Zealand in the production of both commodities. Therefore, it appears visible that Australia has nothing to gain from trade with New Zealand. Table B proves this to be incorrect.

Lets assume before specialisation Australia produces 6million tonnes of wheat and 200,000 speedboats. On the left New Zealand produces 2 million tonnes of wheat and also 200,000 speedboats. At this stage, both economies are operating in satisfaction to the local consumption. The total annual production of two countries stands at 8million tonnes of wheat and 400,000 speedboats.

Table B shows that Australia has the greatest absolute advantage in the production of wheat and that New Zealand has the least disadvantage in the production of motor vehicles. If the principle of comparitive advantage is applied so that Australia concentrates its resources on production of wheat and New Zealand concentrates its resources on production of speedboats total annual output of the two nations will rise to 10million tonnes of wheat and 400,000 speedboats. In this case, gain from specialisation is in wheat production. Now Australia can trade its surplus wheat, provided that 200,000 speed boats be reimbursed in return.

Some of the goods and services Australia would have a comparative advantage in producing in the global economy would be agricultural commodities such as wool, coal, gold meat, aluminium, iron ore & concentrates, wheat, alumina, petroleum products, crude petroleum oils.

For much of the period up to the 1960 s, we rode on the sheep s back. A term awarded to our economic position when we relied on export of wool as our main long term export. Figure 2.1 illustrates our current export situation, where we can observe that it has deteriorated to third place behind coal and ore.

In recent years we have also seen a significant growth in services exports such as tourism, foreign students paying to study in Australia, accountants, financial advisors, sports players, doctors and in a whole range of other exports.

IN such a world, Australia has no choice but to accelerate our efforts to make our economy more competitive on international markets and be very careful not to alienate customers abroad by exercising of severe protection policies. Especially consumers who do not have to purchase their goods and services from Australia.

As the 1996 OECD Economic Outlook document states, the most successful economies of the 90 s have been countries, which have reduced barriers to trade and reduced government regulation of their economies.

In conclusion, it would be economic suicide for Australia to try to return to its turn-of-the-century Fortress Australia approach.

If we do not strive to achieve market of Free Trade, Australian economy will continue to come down with pneumonia every time a international economy sneezes.