Australian Economic Growth in Historical Perspective - Example

Name Lecturer Task Date Introduction Economic growth is simply defined as a long-term expansion of a country’s productive potential. It can be viewed from two approaches including short run and long run where short run economic growth is gauged using the percentage annual change in real national output which in turn is determined by different variable changes. Long run growth on the other hand is indicated by increase of potential gross domestic product. Long run economic growth can also be defined as a continuous process whereby increasing productivity leads to a rise in the average living standards. Economic growth is gauged through GDP of an individual and significantly varies worldwide. Any nation’s living standards depend primarily on its ability and potential to produce goods and services and this is possible when factors of production are quickly accumulated and effectively deployed (Mankiw, 2011). Economists are in agreement that economic growth happens due to rises in capital, labor and technological advancements. Solow growth model predicts that lasting economic growth occurs only when there is continued progress and advancements in technology and “factor accumulation by itself does not enable the economy to grow in the long run” (Van den Berg & Lewer, 2007:103). Policies that encourage increased devotion of capital and resources to technological improvements lead to increased growth of productivity (Taylor, 2006:128-129). Taylor (2006:128) also mentions that “A monetary policy of low and stable inflation equally contributes positively to economic growth.” Economic policies that seek ways to raise long-term economic growth are also known as “supply-side policies” since they concentrate their efforts on raising “the growth of potential GDP, which is the aggregate supply of the economy (Taylor & Weerapana, 2007:505). Two major policies that influence economic growth are Fiscal and Monetary policy. Various theories have been put forward to examine economic growth including economic growth theory, Solow model, and Romer model among others. More recent models have focused on the Research & Development role in economic growth. The Solow model draws a sharp distinction between capital and labor and focuses on capital accumulation as a possible engine of economic growth. This model leads to valuable insights but ultimately fails to provide a theory of sustained growth. Romer (1990) suggested an even more fundamental distinction by dividing the world of economic goods into objects and ideas. Objects include most goods we are familiar with: land, cell phones, oil, jet planes, computers, pencils, and paper, as well as capital and labor from the Solow model. Ideas, on the other hand, are instructions, or recipes. Ideas include designs for making objects, for example, design of a cell phone or jet engine, the manufacturing process for turning petroleum into plastic, the quadratic formula of algebra or the management techniques that make Safaricom one of the largest private employers in Kenya. Economic growth occurs as we discover better and better ways to use the finite resources available to us. In other words, sustained economic growth occurs because we discover new ideas. The division of economic goods into objects and ideas leads to the modern theory of economic growth. Romer model suggests a constant growth rate and ignores dynamics associated with transition. Solow model suggests that an economy grows while on a declining rate until the economy approaches its steady state. Since the growth rate never rises or falls, in some sense the economy could be said to be in its steady state from the start which economists refer to as a balanced growth path, where the growth rates of all endogenous variables are constant. Nevertheless, changes in some parameters of the model can change the growth rate. In the combined Solow-Romer model, if an economy starts out below its balanced growth path, it will grow rapidly in order to catch up to this path; if an economy begins above its balanced growth path; it will grow slowly for a period of time. The Romer model helps us see the overall trend in incomes around the world and why growth is possible. The transition dynamics of the Solow model help us understand why Japan and South Korea have grown faster than the United States for the last half century. In the long run, all countries grow at the same rate. But because of transition dynamics, actual growth rates can differ across countries for long periods of time. The key to sustained growth in per capita GDP is the discovery of new ideas, which increases a country’s total stock of knowledge. Increase in the stock of knowledge lead to sustained economic growth for countries that have access to that knowledge (Romer, 1990). Combining the insights of the Solow and Romer models leads to our full theory of long-run economic performance where each country’s economy is viewed as a Solow economy that sits on top of the overall trend in world knowledge that’s generated by a Romer model. Growth in the stock of knowledge accounts for the overall trend in per capita GDP over time. Transition dynamics associated with the Solow model then allow us to understand differences in growth rates across countries that persist for several decades. Protection and enforcement of property rights and contractual agreements equally play an important role in facilitating economic growth and in its absence, firms may be unwilling to invest in an economy and the transfer of knowledge that often seems to come with trade and foreign investment may be hindered. This research paper aims to examine and compare long run economic growth between Australia, New Zealand and the United States. Analysis of long run economic growth involves examining economic growth and it’s ever shifting dynamics over long periods of time. Long run economic growth is heavily influenced by increased productivity where sustained growth in real GDP per capita happens only when quantity of worker-produced output steadily rises. Long run economic growth is determined by labor, capital and technology. Worker output and productivity, on the other hand, is influenced by educational and technological empowerment. A proper examination of Australia’s economic performance can be viewed by comparing it with United States. Australia’s GDP per capita is presently almost 80 per cent of the US’s GDP per capita, having gradually risen from about 75 per cent in the mid-1980s (Banerjee, 2012,). McLean (2004) gives a simple breakdown of continuous long term growth of GDP per capita, it is prudent to utilize the three P’s: proportion of working age population, productivity and participation as average hours worked. However, participation and population can be combined and taken as worked hours per capita. Labour productivity which is GDP per worked hours summarized together as hours worked per capita is also an important framework. These variables are combined to produce GDP per capita. Considering this information, “Australia’s hours worked per capita have been between 90 and 105 per cent of those of the US over the past 40 years. Over this period, Australia’s GDP per hour worked has been mostly between 75 and 85 per cent of that of the US” (Banerjee, 2012,). Fig. 1: Australia’s long run GDP growth curve. A Fig. 2: Short term indicators (Australia’s annual GDP growth, Life expectancy, GNI per Capita, Total Population & current GDP) Fig. 3: Long run GDP growth of Australia. Fig. 4: Long run GDP growth of New Zealand. Fig. 5: Long run GDP growth of United States. Fig. 6: Comparing Australian and New Zealand’s Labour productivity. Fig.7: Comparing Five-year average growth rates of four countries. Fig. 8: GDP, FDI and Migrants compared. McLean (2004) posits that some knowledge of Australian history is essential to an adequate understanding of why the economy is as it is. Australian experience is quite unique and therefore provides an experience on issues such as the influence of geography versus institutions, the effects of colonialism or of tariff protection, the role of corruption, or the importance of social norms in shaping an economy. Of particular significance is the geographical location of the country away from other countries and by extension detached from various contributors to economic growth This implies that because the productivity gap is the main determinant of Australia’s income gap with the US, there may be scope for future GDP per capita gains in Australia from catching up with the global productivity front posed by the US. A better understanding of the causes of the Australia-US productivity gap can help shed light on how much further productivity in the Australian economy may be able to catch up with that in the US, and the role that further policy reforms may play in any such catch-up. Since the 1960s, Australia has experienced a temporal pattern similar to that of most OECD countries a slowdown in productivity growth in the 1970s nd 1980s followed by a recovery in the 1990s. Productivity gaps can at least in part be explained through various arguments including, differences in human capital as represented by historical educational attainment, differences in product and labour market policy settings and the geographic and historical context of the Australian economy. Differences in physical capital per worker and industry structures do not appear to be primary explanations for the productivity gap (Banerjee, 2012). New Zealand’s Productivity Performance (2008) portrays New Zealand’s economy in this manner; Productivity growth in New Zealand’s measured sector has been on the same level with the economy of Australia at approximately 2% per annum, however, the level of New Zealand’s productivity has slightly been higher over the last twenty years. New Zealand’s path of labor productivity performance since late nineties, with reference to the entire economy, has generally been within a range of 1-2% per annum. The official statistics for productivity growth in the relevant gauged economic sector seems to have reduced pace in recent years but still projects a continued slow but positive growth (OECD, 2011). From the data and graphs, it is evident that Australia’s growth in terms of labour productivity as a measure has almost been consistently at par with New Zealand’s economy. Considering their geographical characteristics and developments in their production industries, it makes sense that their long run economic growth has followed similar paths. The impact of technological developments are bound to influence that growth further on a positive direction as has been witnessed in sustained positive growth since the early nineties. Technology goes a long way in making work easier thus improving conditions necessary for production and subsequently ensures growth in GDP ; a major indicator of economic growth. Economic liberalisation by various governments has helped in ensuring the steady economic growth witnessed over the last thirty plus years. Chinese and Japanese influence on Australian economy cannot be ignored too. Some few deviations can be witnessed from the data presented. These can be attributed to historical events with a bearing on growth of GDP including change of government policies, immigration laws, global economic recessions, and shift in oil prices. One thing worth noting as a major contributor to Australian economic growth has been the mining and resource-based industry boom, agricultural sector and increased immigration from Asian countries. Increased exportation of produce to the Asian market has also been a major contributor to economic growth. This has contributed to the growth of the labour market; a major factor of economic growth. However, it is not prudent to attribute any positive or negative deviations to a single factor mainly because long run economic growth is attributed to a shift in a combination of factors in a continuously dynamic environment. To ensure continued long run growth, Australia ought to focus its energies on expanding the industries that have been major contributors to economic growth. This could entail greater input of technological interventions in mining and agriculture while also ensuring proper financial incentives to the relevant industries. The government also ought to ensure a sustainable cost of living and put in measures to ensure a commensurate wage system is in place to be able to maintain its all important labour force (Banerjee, 2012). Further research into the causes of the productivity gap will provide tangible benefits to understanding Australia’s long term growth. Measuring the importance of the difference in the average level of human capital on the productivity gap may assist in shaping future policy relevant to various sectors of the economy. Better estimates of the impact of workplace relations reform on the gap may illuminate a benefit of a flexible labor market that is not usually highlighted. Finally, a better understanding of the way geography and history affect the productivity gap will help illuminate how much further productivity in the Australian economy may be able to catch up with that of competing economies (McLean, 2004). This might mean strengthening economic relations by providing incentives to the important immigrants who continue to enter Australia and contribute greatly to the labor market. It is worth noting that Foreign Direct Investment (FDI) and GDP tend to follow the same path, indicating their inter-dependence on each other in terms of economic growth in all of these countries. The strength, resilience and ability of the Australian economy will rely on its ability to quickly adapt to technological changes through embracing emerging innovations and utilize them to create and capture new opportunities for economic growth. New Zealand’s economy is bound to greatly benefit from increased immigrants flowing into its country which has positive implications for its labour market; a major driver of economic development. Similarly, US economy will also benefit from increased immigrants. All these countries future will heavily be shaped by how they handle the current economic crisis through crafting of policies and creating facilitating environments for increased productivity. References Banerjee, R., 2012. Population growth and Endogenous Technological Change: Australian Economic Growth in the Long Run. 2012. ‘Economic Record’, 88:214-228. Mankiw, N. G., Principles of Economics. (ed 6). 2011. New York: Cengage Learning McLean, I.W., Australian Economic Growth in Historical Perspective. 2004. Economic Record, 80(250):330-345. New Zealand’s Productivity Performance. 2008. New Zealand Treasury Productivity Paper 08/02 OECD., 2011. OECD Economic Surveys. New Zealand: OECD Publishing. Romer, P. M., Endogenous Technological Change. The Journal of Political Economy, 98 (5): S71-S102. Taylor, J. B. & Weerapana, A., Economics. (ed 6). 2007. New York: Cengage Learning Taylor, J., Principles of Macroeconomics. (ed 5). 2006. New York: Cengage Learning Van de Berg, H. & Lewer, J. J., International trade and economic growth. New York: M. E. Sharpe. Read More