No Economist, Australia is not even close to the best economy

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By Leith van Onselen

The Economist’s ludicrously Panglossian cover story trumpeting the Australian economy has been comprehensively destroyed by former Reserve Bank of New Zealand special adviser, Michael Reddell, who expertly explains why Australia is “not even close to the most successful economy”:

Productivity is, in the old phrase, if not everything in the longer-term about economic performance then almost everything. And here is a simple chart showing two comparisons, using OECD data which start in 1970. The first line compares Australia’s real GDP per hour worked to the median of the top-tier group I’ve used in various posts and articles this year (the US, France, Belgium, Netherlands, Germany and Denmark). And the second line compares Australia to Norway.

Did anyone in The Economist think of Norway – not only does it have much higher average productivity (think oil and gas and few people – and good institutions/smart people) but huge net government financial assets?

Average productivity in that frontier group of six is 20 per cent higher than in Australia. In Norway it is 50 per cent higher. And 50 years ago, Australia outperformed the median member of the six, and was level pegging with Norway…

But what really stands out about Australia, relative to the other countries, is its rate of population growth. Indeed, this is what The Economist really seems to like about Australia, lauding the country’s “enthusiasm” for immigration. Whether one looks from 1970, or just over the last quarter century or even the last decade, Australia’s rate of population growth has materially outstripped those of the other countries. In the last 25 years, Australia’s population (UN annual numbers) increased by 41 per cent, while the population of the median of those high productivity group of six rose by 13 per cent. The difference isn’t wholly about migration, but immigration is the bit governments make choices about.

In a country with an export base almost entirely dependent on a fixed stock of natural resources – farm products, mineral products, tourism – and actually with foreign trade shares of GDP among the very lowest in the OECD, it is bordering on the insane to be actively importing lots and lots more people (as successive Australian governments have been doing in the last 15 years or so). It is a quite different matter in countries – like most advanced OECD countries now – that are trading the fruit of ideas, or that are tightly bound into sophisticated manufacturing supply chains. But this is Australia – one of the most remote countries on that planet which (like New Zealand) has failed over decades to develop many outward-oriented industries that don’t depend largely on natural resources (or immigration subsidies around export education). The fruit of the (vast) natural resources is, to a first approximation, just spread more thinly…

Truly astonishing in fact, in the specific circumstances of Australia. The enthusiasm of Australian governments for high immigration to Australia is just as wrongheaded – and more culpable – as that of The Economist’s editorial writers. All sorts of daft ideas have had their day over history. This one – at least in modern Australia – seems based more on belief and ideology than any serious evidence that Australians themselves might actually be benefiting from the immigration.

Michael Reddell has hit the nail on the head here. Instead of trying to grow the economy via productivity-based reform, the Australian Government has chosen the lazy quantity-driven approach of importing people (‘quantitative peopling’). This is a particularly stupid model for a natural resource rich country like Australia, which derives the lion’s share of its income through selling commodities:

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Running a mass immigration policy necessarily dilutes Australia’s fixed mineral endowment among more people and, other things equal, makes incumbent residents poorer. It also worsens Australia’s current account deficit, since all of the extra people won’t add much to Australia’s export base, but will massively increase imports. To illustrate this point, consider the next chart showing the massive increase in the trade deficit in NSW and VIC since the immigration floodgates were opened in the early-2000s:

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Basically, all the extra migrants that have flooded into Sydney and Melbourne have barely lifted exports, since these cities don’t actually produce much that is tradeable. By contrast, imports have skyrocketed via more purchases of consumer goods like flat screen TVs, cars, furniture, etc. These net imports must be paid for, either by increasing the nation’s debt or through selling-off the nation’s assets. We’ve been doing both.

Running a mass immigration program also worsens one of the major drags on productivity: infrastructure bottlenecks and congestion, while helping to suppress wages.

Reddell’s comparison with Norway is also apt. Unlike Australia, Norway’s population growth has been relatively modest, increasing by only 47% since 1960, versus Australia’s 140% increase over the same period:

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This lower population growth has meant that Norway has not diluted its mineral wealth to anywhere near the same degree as Australia, thereby helping to bolster both per capita wealth, as well as per capita GDP:

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Norway also saved the bounty from its resources boom via implementing a genuine super profits tax and Sovereign Wealth Fund. So, instead of owing the world a trillion dollars (see next chart), Norway has instead saved a trillion dollars:

In short, Norway has adopted a sustainable growth model for the benefit of its citizens, whereas Australia has adopted a quantity-based ponzi model concentrated in urbanisation and household debt, which benefits ‘growth lobby’ rent-seekers like Highrise Harry Triguboff and Gerry Harvey over ordinary residents.

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Australia’s economy is no role model, but rather a signpost of what not to do.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.