Australian Economic Growth in Longer Term Perspective
A recent issue of The Economist highlighted the stellar economic performance of Australia – or as it was termed, “The Wonder Down Under” – arguing its economy is most arguably the most successful in the rich world. Australia has apparently not seen a recession for 27 years, seen its median income has grown four times as quickly as the United States and has low public debt. The Economist attributes some of this to good luck – natural resource endowments – as well as proximity to Asian markets particularly China. However, policy decisions are also seen as important with key ones being the reform of social spending – health care and pensions – shifting more of the burden of these systems onto users as well as a more enthusiastic immigration policy which has brought in many skilled migrants.
This Australian resurgence is quite interesting given the ebbs and flows of Australian economic performance over the long run. According to Ian McClean, in the late 19th century, Australian incomes per capita were on average actually 40 percent higher than those in the United States with this advantage the result of high labour force participation rates, higher labour productivity and of course natural resource endowments. Yet, by 1914 this lead over the United States had evaporated as a result of the transitory nature of these advantages. In particular, “periods of weakest Australian growth, relative to benchmark economies, occur when the resource-based sectors of the economy have languished.”
From 1914 until the start of the Second World War, Australian incomes according to McClean averaged 11 percent below those of the United States while after the Second World War the gap grew to some 30 percent below that of the United States but narrowed after the 1970s to only 25 percent. Where Australia differs from Canada with respect to the income difference with the United States is that Canada has always remained below the United States though the gap has narrowed over time. GDP per capita relative to the United States for Canada according to McLean was about 60 percent immediately after Confederation and rose to over 80 percent after 1980.
So, Australia was once the world’s richest economy in per capita GDP terms and if recent trends continue, it can be argued that Australia is well on the road to being great again. However, it remains that despite its recent string of successes, Australia’s current performance success could very well be as transitory as it was prior to World War I. Its pre-1914 economic growth coincided with a boom in its mineral sector that went on for almost a half century. The gold rushes of the 19th century produced demographic shocks – which raised labor inputs and productivity – and by 1914 the mineral boom and rural settlement phase was complete. Thus, one could argue it was a specific resource boom that generated the superior economic performance then and favorable resource and commodity prices are the primary ingredient now.
A longer term visual perspective is useful in framing the Australian experience. The accompanying figure takes real per capita GDP in PPP dollars from the Jorda-Schularick-Taylor Macrohistory Database for the period 1870 to 2016 for Australia as well as the G7 countries and plots it relative to US per capita GDP. In a sense this is an updated and expanded version of McLean’s Figure 1 in his 2007 Explorations in Economic History paper. Prior to 1900, the only two countries with higher per capita incomes than the United States were of course Australia – and also the UK. Both declined relative to the United States and after the First World War both had lower per capita incomes relative to the United States. After World War II, the UK and Australia both appear to stabilize at about 80 percent of US per capita income. Incidentally, that is also where Canada sits after World War II – at about 80 percent of US per capita income. The period after World War II sees a convergence of the other G7 countries towards the 80 percent boundary with Italy veering away after 1990. The most dramatic performances relative to US incomes after 1945 are not surprisingly for the war devastated economies of Japan, Italy, Germany and France.
In 2016, real per capita incomes relative to the United States ranged from 80 percent for Canada to a low of 54 percent for Italy. The United Kingdom is close to the 80 percent boundary at 77 percent followed by Australia at 75 percent, then France and Germany at 67 percent and then Japan at 71 percent. This strikes me as interesting because it suggests that there seems to be a boundary figure of 80 percent of US per capita GDP for all of these successful rich countries. Here is Canada we often bemoan the fact that our productivity is lower than US productivity, but it seems that all things considered we have probably done the best of the bunch. Moreover, we appear to have done it relatively consistently over the course of 150 years.
One more thing. When you compute the average annual growth rate in real per capita GDP from 1870 to 2016, how do these countries rank? The highest average annual growth rate is for Japan at 2.7 percent and the lowest for the UK and Australia at 1.5 percent each. The United States was at 2 percent and slightly edged out by Canada and Germany at 2.1 percent each. France matches the US at 2 percent while Italy comes in just below at 1.9 percent. To have any hopes of closing the real per capita gap with the United States over the long haul, one has to grow at more than 2 percent on average. The only countries among the G7 that have managed that are Germany, Japan and Canada.