Australia and China keep chugging along25th November 2018
The Economist has a very good essay on the Australia miracle. It’s not just that Australia’s avoided a recession since 1991, they’ve also done better than other developed countries on a wide range of indicators, such as GDP growth, median wages and public finances (i.e. a small national debt.) Italy would do well to study Australia.
When I started blogging, some claimed that Australia’s success was due to luck. They had a mining boom when China began growing rapidly. But mining has gone into a slump since 2013, with mining investment plunging from 9% of GDP to only 3%. That’s much worse than the 2006-09 US housing slump:
Yet the collapse in commodity prices was not the end for Townsville or Australia. In fact, it was a fillip for other industries, whose growth helped to make up for mining’s troubles. The plunge in investment allowed the central bank to lower interest rates, lifting the housing business. The sinking currency, which lost 40% of its value against the greenback between 2011 and 2015, caused the number of foreign tourists and students to surge. It also encouraged foreigners to snap up flats in Sydney and Melbourne, giving construction even more impetus.
Building work had reached a nadir in the first quarter of 2012, when construction firms completed projects worth A$20bn. In the last quarter of 2017, that reached A$29bn.
And yet Aussie RGDP keeps chugging along at a 3% growth rate. How have they done it? The RBA keeps NGDP increasing:
So the secret of Australia’s success was not the mining boom, it was sound monetary policy. BTW, Australia has a much higher rate of immigration than the US. Keep that in mind when you consider the amazing rise in Australian median wages:
China’s another country that almost everyone got wrong. The NYT has a long article entitled The Land That Failed to Fail. Here’s the subtitle:
The West was sure the Chinese approach would
not work. It just had to wait. It’s still waiting.
There are lots of experts who know much more about China than I do, and indeed my commenters often suggest that I read those experts every time I do a post on China. Unfortunately, most of those experts have been wrong, repeatedly predicting the China bubble would soon burst.
Two experts that got it right were Ning Wang and Ronald Coase, who wrote an excellent book explaining the reforms that led to the China boom.
Many experts now insist that China is not a market economy, but I’d put more weight on those who got it right. Wang and Coase argued that China is much more market-oriented than it appears to outsiders, and so far they’ve been right about the effectiveness of China’s reforms.
That’s not to say China won’t have a recession at some point, most likely they will. But as we saw in South Korea after 1998, even a severe recession doesn’t prevent an East Asian country from getting rich.
PS. I wonder if younger readers will find this as hilarious as I do:
In October Mike Pompeo, the American secretary of state, accused Chinese state-owned firms of “predatory economic activity” in the region. Mr Pompeo’s predecessor, Rex Tillerson, had urged Latin Americans to reject “new imperial powers” like China, bent on extracting natural resources while issuing unpayable loans.
By all means, Latin America should avoid imperial powers.
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