Structural change in the Australia economy under the Hawke government

Coote, Michelle. (1989). Structural change in the Australia economy under the Hawke government Honours Thesis, School of Economics, The University of Queensland.

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Author Coote, Michelle.
Thesis Title Structural change in the Australia economy under the Hawke government
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 1989
Thesis type Honours Thesis
Total pages 81
Language eng
Subjects 14 Economics
Formatted abstract
      The term structural change generally means the shifting of resources between and within different sectors of the economy. Structural change is an on going process and occurs in response to changes in an economy's domestic demand and international trading patterns. During the 1970s, Australian industries experienced the effects of some significant changes in trading conditions. Long term shifts in the world pattern of comparative advantage and industrial structures, the formation and extension of trading blocs - such as OPEC and the EEC - and the associated changes to established trading relationships all contributed to pressures for significant changes in Australia's trade pattern. Despite these pressures, Australian has basically continued to sell primary commodities in return for manufactured products.

      From the early 1980s, the Australian economy has been faced with a serious external imbalance characterised by large current account deficits, high and rapidly rising foreign debt and growing debt servicing costs. The external position has deteriorated substantially, with the current account deficit widening to over 6 per cent of GDP in 1985-86 and reaching $17882 million in 1988-89.

      Movements in the trade balance have been strongly correlated with changes in the terms of trade. For a considerable period, the prices paid for our exports have not kept pace with increases in prices for our imports. Australia is a small economy which is largely unable to influence international economic conditions. It is therefore dependent on trading conditions on world markets for the prices it receives for its exports relative to the prices it has to pay for its imports.

      From 1983 to 1986, deteriorating terms of trade played a major role in the worsening external position as excess world supplies of raw materials and agricultural products depressed prices relative to manufactured imports. Many mineral exports are facing increased competition from supplies from developing countries at a time when there is low growth of world demand for minerals due to a combination of slower economic growth, product substitution and energy conservation measures. The adverse effect of this long term decline in Australia's term& of trade is compounded by increasing exclusion from major world markets for our agricultural products from the EEC and more recently, the USA.

      Australia's economic problems also derive in part from an excess of domestic demand over supply financed by increased foreign borrowing. Domestic demand increases during the 1980s have been of such a magnitude that they could not possibly have been met in full by domestic production. To the mid 1980s, under the impetus of expansionary policies and recovery from a major drought, the Australian economy grew rapidly in output and employment. That growth induced strong growth in imported manufactures. Restrictive fiscal policy, high interest rates and a reduction in real household incomes led to a fall in domestic demand in the first half of 1986, which contributed to a reduction in import volumes. However, in the second half of 1987, the pattern of growth changed markedly; the decline in interest rates and a rise in real wages let to a recovery in domestic demand, concentrated in private consumption, residential construction, and machinery and equipment investment. As a result, imports rebounded. Despite this development, the current account deficit decreased as commodity prices recovered in the latter part of 1987, constituting an improvement in the terms of trade. Tight monetary and fiscal policy is continuing to be directed at curbing demand pressures on imports. However, fiscal restraint is all the more important, as excessive reliance on monetary policy will jeopardise the needed expansion of investment.

      Given Australia's existing trade structure and the likely persistence of excess supply in world commodity markets, it would be unwise to rely on rapid rises in either volumes or prices of agricultural products and raw materials to correct the external imbalance. The manufacturing base of the country needs to be broadened by the development of a viable and competitive manufacturing sector. In addition, imports need to be replaced by domestic production to reduce the gap between domestic demand and domestic supply. This constitutes a shift of resources into the traded goods sector.

      Governments can influence the allocation of resources between the various sectors of the economy, and within those sectors, through industrial policies. The focus point in this thesis is on some aspects of the present Government's industrial policy and whether these policies have, or will, facilitate the structural change that is necessary to bring about an improvement in the current account deficit.

      One of the most direct ways that Governments influence the allocation of resources is through protectionist policies. This is discussed in Chapter One. Past protection policies in the manufacturing sector are discussed in some detail to compare them with the new initiatives taken by the present Government in respect to assistance to the manufacturing sector.

      The allocation of resources in the economy is also directly affected by changes in the exchange rate. This aspect is covered in Chapter Two. The floating of the exchange rate in December 1983 was followed by substantial depreciations of the Australian dollar in 1985 and then again in mid 1986. Economic theory states that a depreciation of the home currency should be accompanied by import-substitution and an expansion in exports. Because of the various factors that hinder this process, this Chapter mainly focuses on reasons why it is neither prudent nor effective to rely on exchange rate adjustments to achieve the changes necessary in the manufacturing industry.

      Chapter Three discusses the general incentives that have encouraged industry research and development, the deregulation of the financial system and the establishment of a venture capital market. Again, there is some discussion on previous Government initiatives to make a comparison with the present Government.

      If the economy's capacity to supply goods through import replacement and export expansion is increasing, then investment, production, and employment in the manufacturing sector should be increasing. These aspects are taken up in Chapter Four.

Document type: Thesis
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Created: Tue, 30 Nov 2010, 10:09:44 EST by Muhammad Noman Ali on behalf of The University of Queensland Library