omyThe Impact of Globalisation on the Australian Economy
Globalisation is not new. Australia has been involved in trade, investment, financial flows, technology transfers and the migration of labour since its foundation as a colony. What has changed is the size, direction and influence of these transfers, especially since 1980. There are a number of factors that have aided this transformation. They include:
The expansion of new markets – foreign exchange and capital markets are linked globally. They operate 24 hours a day with dealings any where in the world possible in real time. Financial deregulation and the floating of the Australian dollar since 1983 intensified the impact of globalisation on the Australian economy.
New technology and the tools of globalisation – the internet, email, mobile phones, media and communication networks have all sped up the process of globalisation. They have increased the spread and speed of knowledge transfer and communication. Australian consumers can buy products from any nation in the world, transfer funds between accounts or purchase shares in any major market. Australian businesses can market their products at a fraction of the cost and be exposed to a global market place of competition. This potentially is the closest we will ever come to the perfect market.
New institutional players – The World Trade Organisation (WTO) has growing authority over national governments, as does the IMF with its restrictions and controls it can impose on nations requiring assistance. Multinational corporations have more economic power than many nations. Hedge funds and financial dealers are able to manipulate financial flows and subsequently exchange rates, leaving nations helpless in their wake. This in turn renders traditional economic policy tools virtually useless.
New rules and restrictions – Multilateral agreements on trade, services and intellectual property rights, backed by strong enforcement mechanisms, reduce the scope for national governments to develop their own economic policies.
What is Globalisation?
Globalisation is the growing economic interdependence among nations as reflected in increasing actual movement across nations of:
and the capacity to move and the potential movement across nations of those 5 elements.
The Impact of Globalisation on Australia’s Trade
Australia’s trade policies, since the middle of the 1980’s, have been geared to opening domestic industries to the global market (Graph 1). A prime focus of structural reform has been to subject the private sector in Australia to more competition from both domestic and international sources’ (Treasury, 1999). Australia has traditionally had high levels of protection, since the 1950’s in areas like textiles, clothing and footwear and motor vehicles. In the early eighties the effective rate of protection in the TCF industries was in excess of 200% and 57.5% for passenger motor vehicles. While some people would argue that cutting protection will reduce employment. Most industries that were heavily protected during the 1970’s and 1980’s still suffered losses of employment and were not efficient enough to compete in export markets.
Graph 1: Effective Rates of Protection in Australia
Source: Productivity Commission
Cuts in protection have increased imports but the increased efficiency has led to a comparable rise in exports. The value of exports plus imports of goods and services has risen from 32% of GDP in 1975 to 48% of GDP in 2000 (ABS), reflecting the growing influence of globalisation on the Australian economy. Table 1 shows the effect of cutting protection in manufacturing industry in Australia from 15% in 1989/90 to 6% in 1996/97. It led to an effective reduction of the net subsidy equivalent, ie. the amount of subsidy that would have to be paid to have the same effect, as the current level of protection. This fell from $10.2 billion to $4 billion. Production rose in real terms by 8.9% and the manufacturing trade balance, while still negative, has also improved.
Table 1: The Effects of Cutting Protection in Manufacturing in Australia
Source: Productivity Commission
The impact of globalisation has also changed the structure of Australia’s trade. There has been considerable growth in manufacturing and service industries with limited growth in the rural sector (Table 2). This reflects a combination of changes in world demand and domestic structural reforms.
Table 2: Annual Growth in Exports, by Sector, 1985-86 to 1995-96.
Source: Australian Bureau of Statistics, 5368.0
Globalisation and Financial Markets
The spread of globalisation especially since 1990 has introduced many new elements into the financial markets and what determines the value of a nation’s exchange rate. This does not just apply to Australia, but as we saw in the later half of the 1990’s, to many other nations in the world. Firstly, trade in goods and services makes up a much smaller proportion of the demand and supply for currency. In the world economy, payments for international trade only account for about 1% of foreign exchange transactions. The total foreign exchange requirements for exporting and importing of goods and services in Australia is less than 3% of the total use of the foreign exchange turnover in Australian dollars (Reserve Bank Bulletin, Table F7 and Australian National Accounts, 5206.0). The main purpose for foreign exchange trading is international financial transfers of funds. Financial flows take many forms. The fastest growing area has involved interest rate, currency, equity and commodity derivatives. Interest rate and currency derivatives make up approximately 98% of the total value of derivatives traded.
More than 50% of the daily foreign exchange turnover against Australian dollars involves swaps and options (Reserve Bank Bulletin, Table F.7). This growth in hedging and short-term fund transfers has increased exchange rate volatility (Graph 2). The movements in the Australian dollar in January 2001 aptly demonstrate this. The announcement of a 0.5% interest rate reduction by the US Federal Reserve led to a fall in the Australian dollar by almost 2% within 24 hours. Normally, a fall in interest rates should have increased the Australian dollar but foreign exchange traders thought that the reduction in interest rates would increase profits in the US, in the future, so would increase the US dollar. Within a further 48 hours the Australian dollar had risen 3 percent. This time the traders argued that the 0.5 percentage point decline might not be sufficient to prevent a recession in the US economy. This uncertainty and speculation has increased the volatility in the rates and in turn has encouraged further speculation of large profits to be made, in the short-term, from correctly predicting these fluctuations.
The Reserve Bank has highlighted the increasing role of chartist behaviour and market dynamics such as trend-following or momentum trading in determining exchange rates (Reserve Bank Bulletin, November 2000). This relates to traders following the trends or charts of previous movements in exchange rates and economic data to predict what will happen to the exchange rates in the future. This tends to lead to a ‘herd’ mentality of ‘follow the leader’ and less reliance on economic fundamentals, as has been demonstrated in recent months.
Summarising the fluctuations in the Australian dollar in 2000, it could be concluded that when funds flow into the US then tend to flow out of Australia and the Australian dollar falls. When there is uncertainty in the US markets, investors seek out Australia and other relatively stable economies, and the Australian dollar rises. Interest rate differentials (and future expectations) also continue to play a part in determining the level and direction of the dollar. There is what the Governor of the Reserve Bank (Macfarlane, 2000) refers to as the intrinsic tendency’ for foreign exchange markets to continue to go in one direction, and overshoot the correct level and “to come up with explanations to justify their overshooting”. There is also the increasing tendency for volatility as fund managers attempt to maximise profits from frequent changes in the direction and levels of currencies.
Graph 2 – US Dollar Movements Against the Australian Dollar
Source: Reserve Bank of Australia.
Globalisation and Technology
Despite repeated reference to Australia being an old economy’, there is considerable evidence to support Australian growing acceptance of technology and globalised communication and trade. A recent OECD publication (1999) rated Australia highly amongst the 27 OECD nations for its involvement in the information and communications technology sector (ICT). Australia was ranked:
3rd highest in ICT expenditure as a percentage of GDP;
6th highest in personal computer penetration;
8th highest in internet hosts per 1000 population;
3rd best in internet access costs; and
3rd best for secure web servers for electronic commerce.
The Australian Bureau of Statistics (ABS) also reports a growing acceptance of online shopping amongst Australian consumers. More than 1.3 million Australian adults purchased or ordered goods and services for their own private use over the internet. This was a 66% increase in the 12 month period to November 1999.
Australians are continuing to embrace IT as part of their daily activities. This is particularly true of the internet, where the number of Australians who use this technology to shop, pay bills, access services or simply surf continues to rise. Overall, half of the adults in Australia, or 6.9 million adults, accessed the internet during the twelve months to November 2000. This compares to 1999 levels when 6.0 million adults, (44 percent of the total) accessed the internet.
There is increased use of the internet at home and in the workplace. Almost one third (32 percent) accessed the internet at home, while a quarter (25 percent) accessed from work and a similar number (24 percent) accessed the internet at sites other than home or work. In contrast, the rates for the equivalent period in 1999 were 21 percent at home, 21 percent at work and 25 percent at sites other than home or work.
The growth in home internet use is reflected in the increase of the number of households with home internet access. By November 2000, 2.7 million (37 percent) Australian households had home internet access, up from 1.7 million (25 percent) in November 1999. Expectations are that every second household will have home internet access before the end of 2001.
Globalisation and the Labour Market
The international movement of labour has been growing since the 1960’s. About 2.3% of the world population live outside their country of birth and 1.5% of the world’s workforce works in countries other than those of its citizenship (Bryan, 1999: 5). This trend is on the increase with the World Wide Web opening the door for skilled individuals to apply for positions in almost any country in the world. Newspapers, such as the Australian or Sydney Morning Herald, offer Australian school teachers jobs in places such as China, Indonesia, Saudie Arabia, England, Canada and the USA at wage levels, often, more than double, that which they currently receive. Highly skilled labour is being drawn from Australia by the high salaries being offered overseas, especially due to the current low value of the Australian dollar. This brain drain will accelerate as the global economy expands.
The second component of globalisation involves the potential impact of changes in the global market on economies. This means businesses consider the potential entry of international competitors into their markets. Businesses plan pricing strategies and employment policies based on what could happen if cheap foreign producers or TNC’s entered the market. It also means businesses consider, or threaten to set up, their operations in countries where profits are expected to be greatest, eg low wage countries, where unions are suppressed and there are low corporate tax rates. Governments and employers use these fears to push for labour market and workplace reforms. This has occurred in Australia with the move to individual contracts and the growing casualisation of the workforce. While some highly skilled workers may benefit from this, the lowly skilled and marginalised workers tend to lose out through poorer working conditions and less job security.
The Implications of Globalisation for Economic Policy Makers in Australia
The Australian Governments in recent decades have been moving Australia more into the international market place. There has been in Australia ongoing structural reform over the past two decades: including sustained tariff reform; financial market reform; reform of the operation of government business enterprises; enhancing national competition policy; changes in foreign investment rules; tax reform; labour market reform; reform of corporate governance arrangements and others. The Treasury (1999) points out the prime focus of reform has been to subject the private sector in Australia to more competition from both domestic and international sources and to improve the performance of public utilities. The desired benefits of these reforms are lower prices and increased productivity, which in turn reduce input costs for other industries and increase aggregate employment opportunities. The other desired benefit is to integrate Australia more fully into the global economy.
While the implications of these policies in themselves have many consequences, the increasing integration of Australia into the global economy has consequences in itself. Some economists argue that globalisation has limited the ability of governments to use fiscal and monetary policy to manage the macroeconomy and achieve full employment (Latham 1998). The Treasury believes that globalised financial markets can impose severe costs on governments that pursue what the markets view as inappropriate policies, and it is probably true that bad’ policies are more readily penalised by investors than previously. It is worth noting that the importance of overseas investors’ views of Australian policy does not arise from globalisation per se. What has changed is that technology has increased both investors’ access to information and their ability to act quickly based on that information. In Australia’s case, financial markets are essentially concerned with Australia’s ability to achieve strong sustainable growth, without rising inflation or unsustainable current account deficits. They can certainly react quickly and adversely to policies that they believe would adversely affect these indicators. The problem is, as already noted, that financial markets do not always follow economic fundamentals. As Ian Macfarlane (2000), Governor of the Reserve Bank of Australia, stated in November 2000.”The exchange rate has behaved during 2000 in a way that no-one predicted.”
The effectiveness of Reserve Bank intervention in the foreign exchange market is becoming less and less as financial markets expand. While the Reserve Bank can probably be quite effective at pushing the Australian dollar down by selling the currency, it is very limited in pushing it up. The RBA only has its limited foreign reserves to buy the Australian dollar. The value of Australia’s foreign reserves fell from $22billion US in December 1999 to $16billion US in September 2000. The amount of Australian dollars traded in one day in Australia’s foreign exchange market exceeds its total foreign reserves. As was seen in the Asian crisis in 1997 in Thailand, running down foreign reserves will not always halt a currency decline. The US Federal Reserve is probably the only central bank that can strongly influence the decisions of fund managers.
The financial traders and dealers seek a low inflation, low interest rate, low current account deficit, high growth, budget surpluses and small public sector. If the Government does not achieve these policies, the markets will punish it. If they do achieve them, the markets may still punish them. Any way you look at it, Australia is integrated into the globalised world economy and is dependent on the activities and policies of globalisation. Australia’s future will move with the ebb and flow of globalisation.