Australia, A Country Report 1716 Essay Example

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.

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.

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.

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.

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;