Australia is famously known as ‘the lucky country’. Although this was originally meant ironically, in many ways, it is. Despite embracing many of the financial sector innovations that have undone the American economy, Australia has an underlying economic lifeline: its vast natural reserves of iron ore, coal and gas mean that, as long as China’s economy continues to expand, its overall position is much healthier than the other Anglo-American economies that embraced and promoted neoliberalism with such enthusiasm in the 1980s and 1990s.
Significantly, Australian policymakers can only take some of the credit for this. One reason why the Australian financial sector is not as badly affected as elsewhere is because Australia ‘luckily’ had its own financial crisis nearly twenty years ago. When Australia’s sleepy banking sector was liberalised by a notionally left of centre Labor government, it precipitated precisely the sort of entrepreneurial lending and recklessness that have brought America’s financial sector to its knees. A desperate chase for market share culminated in Australian banks writing off nearly A$30 billion of unrecoverable debts by the early 1990s.
This may seem small beer in today’s climate, but it nearly led to the death of one of Australia’s big four banks, and represented a major crisis in a relatively small economy. As a consequence of this near death experience, the banking sector is now in a comparatively strong position. The banks are generally soundly capitalised with low levels of non-performing loans and limited exposure to the troubled housing sector in the US — an important consideration given the housing bubble in Australia and high levels of individual indebtedness. Moreover, there has been very little lending of the ‘sub-prime’ variety in Australia, and demand for housing has remained comparatively strong.
Both sides of politics in Australia have made fiscal probity a big part of domestic policy following the experiences of the 1980s and early ‘90s. Government debt has largely been paid off, and compulsory superannuation schemes have become the order of the day. The newly installed government of Kevin Rudd has used windfall tax revenues from the booming resource sector to bankroll the ‘Building Australia Fund’.
With more than A$20 billion to invest, it is overseen by a relatively independent semi-government authority, Infrastructure Australia. The federal government is now being urged by state governments and local business to spend this money in classic Keynesian style, in order to promote growth and insulate Australia from the impact of any global downturn.
True, Australia is lucky to have the option. It may not be enough, however. Australia still has the economic profile of a developing country, in that much of its affluence is propped up by a resource sector that remains hostage to developments in the international economy over which Australian policymakers have no control. If China proves not to be ‘uncoupled’ from the downturn in the US and its growth slows significantly, Australia will almost certainly be plunged into recession.
Despite Australia’s historical role in promoting the supposed merits of small government around the region, its own structures of governance remain extensive and — by contrast with the US, at least — surprisingly competent. Australia’s policymakers have moved quickly to coordinate the activities of Treasury, the (independent) Reserve Bank, the Australian Prudential Authority and the Australian Securities and Investment Commission. The hope is that these agencies will be able to provide a coherent and coordinated response to the international crisis and insulate Australia form its worst effects.
It will be an interesting test of the capacity of a relatively small, peripheral economy to withstand the backwash of global crises. The long-term geopolitical significance of recent events was clearly revealed when Rudd suggested he looked to China to underpin Australia’s long-term economic fortunes. The reality may be that no matter what Australia does, its fortunes remain dependent on the price of things that are dug from the ground.
Mark Beeson is Professor of International Politics, University of Birmingham