Essay/Term paper: Australia

Essay, term paper, research paper:  Economics

Australia

INTRODUCTION

Australia, island continent located southeast of Asia and forming, with the
nearby island of Tasmania, the commenwealth of Australia, a self governing
member of the Commenwealth of Nations. The commenwealth of Australia is made up
of six states--News south Wales, Queensland, South Australia, Tasmania, Victoria,
and Wester n Australia--and two territories--the Australian Capital Territory
and the Northern Territory.

Australia, including Tasmania but excluding external territories, covers a land
area of 7,682,300 sq. km, extending from Cape York (100 41' S) in the north some
3,680 km to Tasmania (430 39' S), and from Cape Byron (1530 39' E) in the east
some 4,000 km west to Western Australia (1130 9' E).

Basic Data

Population (estimates), July 1995, 18,322,231, with the age structure under 15
(female 1,929,366; male 2,032,238), 15-64 (female 6,017,362; male 6,181,887), 65
and over(female 1,227,004; male 934,374). Population growth rate is estimated at
1.31% (1995 est.). Literacy rate age 15 and over can read and write (1980 est.).

English is the official language, with modern Australian English a conglomerate
of British, American, and their own phraseology and spelling. Because
Australia is one of the most multicultural nations in the world it is possible
to find vibrant ethnic communities using almost every other world
language.Australian school children have the highest rate of learning Asian
languages, particularly Japanese and Chinese, of any industrialized western
nation - in recognition of their future as a member of the Asia-Pacific region.

Labor force is 8.63 million(september 1991) by occupation of finance and service
33.8%, public and community services 22.3%, wholesale and reatail trade 20.1%,
manufacturing and industry 16.2%, agriculture 6.1%(1987).

Political System

Australia has a federal system of government, and a long history as a multiparty
parliamentary democracy. There is no written Bill of Rights, but fundamental
rights are ensured by law and respected in practice.

The Commonwealth (federal) government and the six state governments operate
under written constitutions that draw on the British tradition of a Cabinet
Government, led by a Prime Minister, which is responsible to a majority in
Parliament's lower house. The Federal Constitution, however, also contains some
elements that resemble American practice (e.g., a Senate, in which each state
has equal representation). The Head of State is Queen Elizabeth II, the
reigning British monarch, but she exercises her functions through personal
representatives who live in Australia (i.e., Australian citizens who serve as
the Governor-General of Australia, and the Governors of the six states).
Australians are debating whether their country should become a republic, give up
ties with the Queen, revise the constitution, and adopt a new flag.

Members of the Federal House of Representatives are elected for three years, and
national elections were last held in March, 1993. Lower-house elections, thus,
are due no later than mid-1996, but earlier scheduling is a matter of discretion.
(The Prime Minister may recommend that the House be dissolved at any time, and
the Governor-General traditionally follows such advice.) Current political
commentary focuses on two likely "windows" for national elections: August-
October, 1995, and March-May, 1996.

Members of the Senate are elected for six years. June 30, 1996 is the next date
on which Senators' terms expire, and a regular election for half the members of
the Senate is due before that time, but no earlier than July, 1995.

Under complex conditions specified in the federal Constitution -- in essence,
extended deadlock between the House and Senate -- both houses may be dissolved
simultaneously, so that ensuing national elections would involve all seats in
Parliament. This "double dissolution" is unusual, and has occurred only six
times since the Constitution entered into effect (1901).

All major parties support the U.S.-Australia alliance and stress the importance
of close relations between Australia and the United States. Thus, this
longstanding and stable pattern is essentially unaffected by the outcome of
national elections.

The ruling Australian Labor Party (ALP) maintains close ties to the trade union
movement and has held office since 1983. During that period, the government has
carried out major restructuring of the economy (e.g., floating the Australian
dollar, cutting tariffs by substantial amounts, reducing and simplifying
regulations that affect business). Liberalizing trade and enhancing economic
integration with Asia-Pacific countries are major tenets of the ALP and, in
particular, of the incumbent Prime Minister, Paul Keating.

The opposition Liberal-National Coalition is often described to Americans as the
more "conservative" party. It upholds traditional social values and stresses
the importance of a free market, entrepreneurial approach to economic growth
(i.e., it promotes an updated version of the classical liberalism originated by
Adam Smith). The Liberal Party is the senior partner, holding 79 of the
Coalition's 101 seats in the current Parliament. The National Party is
identified closely with the interests of farmers, and its supporters reside
mainly in rural areas.

Two minor parties, the Australian Democrats and the Western Australia "Greens",
are represented only in the Senate but have political and media effects that are
disproportionate to their numbers. They take highly visible stands on various
economic, political, environmental, and social issues, challenging the major
parties to respond in ways that meet their concerns.

KEY ECONOMIC DATA

Australia has a prosperous Western-style capitalist economy, with a percapita
GDP comparable to levels in industrialized West European countries. Rich in
natural resources, Australia is a major exporter of agricultural products,
minerals, metals, and fossil fuels. Primary products account for more than 60%
of the value of total exports, so that, as in 1983-84, a downturn in world
commodity prices can have a big impact on the economy. The government is pushing
for increased exports of manufactured goods, but competition in international
markets continues to be severe. Australia has suffered from the low growth and
high unemployment characterizing the OECD countries in the early 1990s. In 1992-
93 the economy recovered slowly from the prolonged recession of 1990-91, a major
restraining factor being weak world demand for Australia's exports. Growth
picked up so strongly in 1994 that the government felt the need for fiscal and
monetary tightening by year end. Australia's GDP grew 6.4% in 1994, largely due
to increases in industrial output and business investment. A severe drought in
1994 is expected to reduce the value of Australia's net farm production by $825
million in the twelve months through June 1995, but rising world commodity
prices are likely to boost rural exports by 7.7% to $14.5 billion in 1995/96,
according to government statistics.

DOMESTIC ECONOMY STATISTICS

(all figures in millions of U.S. dollars*)

Calendar Year 1994 1995 1996
(e) (p)

1. Gross Domestic Product 298,613 309,038 337,700
(89-90 prices)
2. GDP Growth Rate (%)** 5.1 4.2 3.6
3. GDP per Capita 16,682 17,074 18,449
4. Government Spending 26.7 25.1 25.0
(% of GDP)
5. Inflation (%) 2.5 3.5 4.2
6. Unemployment Rate (%) 9.7 8.5 8.0
7. Foreign Exchange Reserves 10,130 12,400 13,500
(year end)
8. Avg. Exchange Rate 1.36 1.37 1.30
(US$=1.00)
9. Net Foreign Debt (year end) 119,291 118,300 123,200 10. Debt Service
Ratio (%) 11.4 12.1 12.4 11. U.S. Economic/Military
NA NA NA
Assistance

* Exchange rate fluctuations must be considered when analyzing data. **
Percent changes are calculated in Australian dollars. (e) Estimate (p)
Projection

1. General Policy Framework

Australia's gross domestic product (GDP) in 1994 was estimated to be US $317.6
billion. Real GDP is estimated to have grown by 4.3 percent, a substantial
improvement from 1993's 3.2 percent. Nevertheless, the impact of the recession
which began during the third quarter of 1989 and ended in 1991 continued to be
felt; unemployment hovered between 9.5 and 10 percent during 1994.

U.S. economic interests in Australia are substantial, including direct
investment worth approximately US $16 billion and a bilateral trade surplus of
approximately US $6 billion (up by approximately US $600 million from 1993).

Although in area Australia is the size of the contiguous United States, its
domestic market is limited by a small population (17.7 million people). The
production of agricultural commodities and primary products is an important
component of the economy; Australia leads the world in wool production, is a
significant supplier of wheat, barley, dairy produce, meat, sugar, and fruit,
and a leading exporter of coal, minerals and metals, particularly iron ore, gold,
alumina, and aluminum. Export earnings are not well diversified; in 1993,
primary products accounted for 60 percent of the total value of goods and
services exports.

The drought which Australia suffered in 1994 affected the agricultural sector
severely. The wheat crop, for example, was cut by an estimated 51 percent from
the previous year, reducing export earnings and necessitating the importation of
wheat, corn, and sorghum. Some commentators believe that the drought may reduce
otherwise-attainable real GDP growth (as shown in the data table above) by
approximately 0.5 percent.

To increase Australia's international competitiveness, the government has
continued its longstanding effort to reduce protective trade barriers and
deregulate large segments of the economy. Privatization of government services
at both the federal (airlines, banks, telecommunications) and state level (water
treatment, transportation, electricity, banks) is being pursued. The government
intends to sell the remaining 75 percent of Qantas to the public in 1995. Trade
reforms begun in June 1988 resulted in an end to import quotas on all but
textiles, clothing, and footwear, and lower tariffs on most imports. Although
the 20 percent preference given by the federal government to Australian and New
Zealand firms bidding on government contracts was abolished November 1, 1989,
and civil offsets in December 1992, some state and territory governments
continue to apply preferences in their contracts.

The Australian Government continued to provide substantial fiscal stimulus to
the domestic economy in 1994. The budget deficit reached US $9.6 billion (3.4
percent of GDP). Public sector borrowing more than funded the deficit, and took
the form of treasury notes (US $427 million), treasury bonds (US $10.1 billion),
and cash drawdowns (US $4.9 billion). As part of its Australian Fiscal Year
(AFY) 1994-95 budget, the government announced its intention to cut the deficit
to 1 percent of GDP by AFY 1996-97.

The money supply is controlled through an open-market trading system of nine
dealers who act as a conduit between the Reserve Bank and the financial system.
Transactions may involve purchases, sales, or trade in repurchase agreements of
short-term treasury securities. Depending on liquidity conditions, the Reserve
Bank may bypass dealers and buy or sell short-term treasury notes directly with
banks on a cash basis. Banks do not normally hold liquid deposits of any size
with the Reserve Bank. Instead, they hold call-funds with the authorized
dealers. If a bank needs cash on a given day, it either borrows from other
banks or withdraws funds it has on deposit with the dealers. Under the above
money supply control system, foreign exchange flows and government deficits and
credits have only limited impact on the money supply. The government also uses
interest rate changes to influence the money supply. In 1994, official
government interest rates were increased twice, by 75 basis points in August,
and a full percentage point in October, to reach 6.5 percent.

A strong supporter of the Uruguay Round negotiations liberalizing international
trade, the Australian government moved rapidly to ratify the Uruguay Round
agreements and became a founding member of the World Trade Organization (WTO) on
January 1, 1995. Australia also advocates liberalizing trade within the Asia-
Pacific region; it is a leading member of the Asia Pacific Economic Cooperation
(APEC) forum, and strongly supported the November 1994 Bogor Declaration, in
which APEC leaders set the goal of free trade in the region by the year 2020.

The challenge the government will face in 1995 is to maintain moderately high
real growth and reduce unemployment without causing a revival of inflation and a
massive increase in the current account deficit (by virtue of the impact growth
has on the demand for imports). Many economists believe that the desired gains
in growth and employment will come, but are worried that unless the government
cuts the budget deficit faster than currently planned, both of the feared side
effects could be produced by an overheating economy.

2. Exchange Rate Policies

Australian Dollar (A$) exchange rates are determined by international currency
markets. Official policy is not to defend any particular exchange rate level.
In practice, however, the Reserve Bank has a comfort range in mind when looking
at exchange rate movements. It is active in "smoothing and testing" foreign
exchange rates in order to provide a generally stable environment for
fundamental economic adjustment policies, and intervenes occasionally to combat
speculative attacks on the Australian dollar.

Australia does not have major foreign exchange controls beyond requiring Reserve
Bank approval if more than A$5,000 (US $3,650) in cash is to be taken out of
Australia at one time, or A$50,000 (US $36,500) in any form in one year. The
purpose is to control tax evasion and money laundering. If the Reserve Bank is
satisfied that there are no liens against the money, authorization to take large
sums out of the country is automatic. The regulation does not affect U.S. trade.


3. Structural Policies

Pursuing a goal of a globally competitive economy, the Australian government is
continuing a program of economic reform begun in the 1980s that includes an
accelerated timetable for the reduction of protection and micro-economic reform.
Initially broad in scope, the Australian government's program is now focusing on
industry-by-industry, micro-economic changes designed to compel businesses to
become more competitive.

The strategy has three principal premises: protection must be reduced; the pace
of reform needs to be accelerated; and industry must learn to do without high
levels of protection.

Towards these ends, a phased program to cut tariffs by an average of about 70
percent was begun July 1, 1988, to be completed on June 30, 1996. Specifically,
in approximately equal phases, except for textiles, clothing, footwear and motor
vehicles, all tariffs will be reduced to 5 percent. Along with these measures,
some of the few manufactured products still receiving bounties (production
subsidies) will have those benefits reduced each year until the bounties expire.
The Uruguay Round agreements will force faster-than-planned tariff reductions
in only a small number of cases.

As noted in Section five (below), local content requirements on television
advertising and programming and certain government procurement practices may
have adverse effects on U.S. exporters and service industries.

4. Debt Management Policies

Australia's gross external public debt now exceeds US $67.7 billion, or 23.5
percent of GDP. That figure represents 46 percent of Australia's gross external
debt; the remaining 54 percent is owed by the private sector. Gross interest
payments on public debt totaled US $4.0 billion in AFY 1993/94, representing 6.7
percent of exports of goods and services. Private sector debt service totaled
US $4.0 billion, an amount equal to another 6.7 percent of export earnings. On
an overall basis, therefore, Australia's debt service ratio was 13.4 percent,
down substantially from AFY 1992/93's 14.9 percent. Falling international
interest rates caused the drop in the debt service ratio. Standard and Poor's
general credit rating for Australia remained AA during 1994.

INTERNATIONAL TRADE

In the past 10 years, the intensity of Australia's trade has increased, and the
composition and direction have changed noticeably. Part of the shift in the
pattern of trade, especially since the late 1980s, has reflected cyclical
influences such as subdued demand domestically and among Australia's OECD
trading partners. But much of the shift is structural and has been underpinned
by policy measures which have opened Australia to more international competition.
The structural shift in the pattern of trade can be expected to continue and
accelerate. Australia has long been of lower middle rank in export intensity,
but its exports-to-output ratio has risen appreciably in the past 10 years. The
constant-price ratio has risen by about seven percentage points, reflecting
sturdy growth in export volumes. The current price ratio has recorded a more
modest rise, largely reflecting recent depressed commodity prices.

Composition of Trade

Australia's resource endowments and efficient farming, pastoral and mining
practices have given it a clear competitive advantage in primary production. A
major share of export revenue depends on sales of primary products and will
continue to do so. But commodity prices fluctuate widely and have shown a
falling trend relative to manufacturing and services. Thus, the Federal
Government sees benefit in diversifying Australia's composition of exports, and
in particular increasing its exports of services and high-value-added
manufactures.

Australia still runs a significant deficit on its trade in services. But in the
past 10 years, its services exports have grown more strongly than merchandise
exports. By 1992-93, services exports had risen to about 3.3 times their 1982-83
value, whereas merchandise exports had risen to about 2.9 times their 1982-83
value. If these trends continue, the services deficit will be eliminated in a
few years .

The broad balances in Australia's merchandise trade reflect the traditional
pattern - large surpluses on trade in primary products and large deficits on
trade in manufactures. But in the past 10 years, exports of manufactures
(especially Elaborately Transformed Manufactures or ETMs) have grown strongly.
In 1982-83, manufactures accounted for a little over 20 percent of merchandise
exports; by 1992-93 their share had risen to a little over 29 per cent - the
corresponding share for ETM exports had risen from 12 per cent to almost 20 per
cent during the same period. Australia's performance in increasing its ETM
exports compares favourably with that of other developed countries.

Traditionally, Australia's exports have been dominated by large enterprises or
by marketing bodies that pool the output of primary producers. In recent years,
however, small and medium-sized enterprises have achieved significant exports of
manufactures, and it appears likely that such enterprises will be a major source
of export growth through the late 1990s and beyond.

Inflation

After recording an annual average inflation rate of 8.25 per cent throughout the
1980s, the annual rate fell to 0.3 per cent in the December quarter of 1992. At
1.9 per cent in the September quarter of 1995, the underlying inflation rate was
below that of most of Australia's major trading partners.

Continued wage restraint, improved productivity, increased competitive pressures
and a broadly based decline in inflationary expectations have been important
influences, and have provided a significant stimulus to Australia's
international competitiveness.

Balance of payments

Australia has long maintained a position as a net capital importer, drawing on
foreign savings to allow faster development of domestic resources. As a
consequence, Australia has typically recorded a deficit in the current account.
The current account deficit in 1994-95 was $27 billion: six per cent of Gross
Domestic Product (GDP). The current account deficit improved in the early 1990s,
largely reflecting an improvement in the balance of merchandise trade, a lower
net services deficit and lower net income payments overseas.

The current account deficit has widened as imports, particularly of capital
goods, have increased in response to the strengthening domestic economic
activity. The current account deficit, forecast to fall as a proportion of GDP,
remained broadly unchanged in dollar terms during 1995-96. Current stability in
dollar terms reflects a rise in the net income deficit offset by an improvement
in net export volumes and terms of trade.

Australia-US Bilateral Trade

The trading relationship between Australia and the United States traces its
origins to early last century when American whaling and sealing vessels first
put into Australian ports during their Pacific voyages. The first American
vessel to dock in Sydney Harbor, the Philadelphia in 1792, brought a cargo of
beef, pitch, tobacco and rum that was welcomed by the early settlers.

Over the years, trade between the two countries has flourished, but the balance
of trade has always favored the United States. The balance of trade has been
running at a ratio of two to one in favor of the US since the mid-1960s, but is
fast approaching the three to one mark. In fiscal year 1993-94 (July 1-June 30),
the trade deficit was $A8,942 million, up from $A8,063 million in 1992-93 and
$A6,522 million in 1991-92.

Imports from the United States to Australia grew 7.2 percent from 1992-93 to
1993-94. In 1993-94 the US exported a total value of $A14,016 to Australia.
Exports from Australia to the US increased 2.6 percent from 1992-93 to 1993-94.
In 1993-94 Australia sent $A5,074 million worth of exports to the US.

From the US to Australia

The US is Australia's largest source of imports representing over 20 percent of
the total Australian market. Manufactured goods make up the majority of US
exports to Australia, growing from 84.8 percent in 1988-89 to 90.4 percent in
1992-93.

Principal imports from the US to Australia in 1993-94 included:

Computers ($A1,060 million) Aircraft and equipment ($A891 million) Parts and
accessories for computers and office equipment ($A739 million) Measuring,
checking and controlling equipment ($A527 million) Internal combustion engines
($A421 million)

From Australia to the US

Australia has always been reliant on trade. In the past ten years, the intensity
of its trade has increased, and the composition and direction have changed
noticeably. Traditionally, Australia's exports have been sold in the US, Japan
and the industrialised nations of Europe. In recent years, however, trade to the
industrialised countries has grown modestly relative to trade directed at the
industrialising countries of Asia. Between 1988 and 1992 Australian exports to
Asian markets grew from $US17.7 billion to $US25.7 billion, an increase of 45
per cent in five years.

Along with the change in the direction of trade has been a transformation in the
composition of trade which is evident in exports to the US. The largest area of
Australian export growth to the US is no longer in the traditional area of
primary products, such as foods, minerals and fuels, but is now in manufactured
goods.

While total exports to the US fell slightly between 1989-90 and 1993-94,
manufactured exports rose strongly, particularly Elaborately Transformed
Manufactured goods which increased at an average annual rate of 11 percent.

Exports of electrical machinery and appliances to the US increased from $A37.2
million in 1989-90 to $A115.2 million in 1993-94. Over the same five year period,
exports of parts and accessories for office equipment and computers grew from
$A87.6 million to $A306.1 million.

Principal exports to the US from Australia in 1993-94 included:

Meat of bovine animals ($A1,004 million) Passenger motor vehicles ($A151
million) Aircraft and associated equipment, spacecraft, satellites and parts
($A259 million) Parts and accessories for computers and office equipment ($A306
million) Wool and animal hair ($A167 million)

Prospects for Future Trade

Although fundamentally strong, the trading relationship between Australia and
the United States is not always smooth. There are long-standing concerns over
access to US markets, particularly for key Australian agricultural products.
Since the US introduced quotas on sugar imports, Australian sugar exports to the
US have dropped 15 percent. Access to the US market for Australian beef is at
its lowest level since 1983 as a result of the Meat Import Law. Australia is
also concerned over the impact of US agricultural export subsidies on Australian
exports to third countries, particularly for wheat, barley, malt and dairy
products.

Removal of US trade barriers and trade-distorting practices is not only in the
interest of Australian exporters, but also recent studies have identified
substantial benefits to US industry and consumers from such action. A report by
the United States International Trade Commission, released in November 1993,
concluded that simultaneous US liberalization of significant US import
restraints would result in a net economic gain of $US19 billion to the US
economy.

Consistent with the large trade and economic relationship between Australia and
the US, both countries are in continual contact. The trade policies of both
parties are well known to the other and contentious issues have usually been
aired through Bilateral Agricultural Trade Consultations (held biannually) and
the annual Ministerial level Trade and Investment Council which had its
inaugural meeting in June 1993.

Over the last decade, Australia has taken substantial steps to open the nation's
economy through micro-economic reforms and significant tariff reductions. While
some had worried that freer trade would hurt Australian business, in fact over
the past ten years, while the effective rate of assistance to Australian
manufacturing has fallen around 50 percent, Australian manufactured exports have
increased by 23 percent.

Australia has worked closely with the US in multilateral forums to address trade
liberalisation and economic issues, notably the Uruguay Round of GATT trade
negotiations and through the Asia Pacific Economic Cooperation (APEC) process.

Trade plays a vital role in the economic well-being of both the US and Australia.
While the nations' economies are very different in scale, both rely heavily on
trade to fuel economic growth. Australia and the US are committed to
liberalising trade and instituting the most efficient system of global trade
rules.

The United States is Australia's second largest trading partner. Total trade
between the US and Australia grew by 4.2 percent from 1992 to 1993 to $A19.1
billion and prospects for continued growth are strong. With regard for each
other's interests and recognition of the benefits of liberalised trade, there is
scope for further significant trade expansion and still closer economic ties
between the United States and Australia.

Trade Highlights of 1993-94

Overall merchandise trade

The growth in current dollar merchandise trade slowed during 1993-94 -
exports increased by just over six per cent while imports grew by over eight per
cent; In real terms, export growth outstripped the increase in imports - 8.4 per
cent for exports and 8.0 per cent for imports;

Australia recorded its fourth consecutive annual trade surplus - $A141
million; however, this was down by over $A1 billion on the 1992-93 level; The
Asia Pacific Economic Co-operation (APEC) group remained Australia's major
regional market, accounting for almost three-quarters of merchandise trade.

Exports

Japan was Australia's largest export market, taking almost a quarter of
total merchandise exports;
Exports to the Asian region overall grew by almost seven per cent to $A41
billion;
Elaborately Transformed Manufactures (ETMs) exports grew 14 per cent to
almost
$A14 billion - they now account for 20 per cent of all merchandise exports;
Despite a five per cent fall in export earnings, coal remained Australia's
largest commodity export;
Exports of computers and office machinery, parts and accessories increased
in aggregate by 30 per cent to almost $A1 billion - assembled computer exports
grew by over 60 per cent during the year;
The value of wool exports held steady during 1993-94 - a five per cent
increase in volume was offset by lower average prices (although prices recovered
during the second half of the year);
There were significant falls in exports of both crude and refined petroleum
oil;
The growth in wine exports typifies the increasing diversity of Australia's
export base - they have increased over the last decade at an annual trend rate
of over 40 per cent;
The latest Australian Bureau of Statistics (ABS) Manufacturing Survey
revealed that exporting manufacturers were performing significantly better