Australia: Banana Republic Tag Warranted?

As Australia’s export mix continues to narrow, the tag “Banana Republic” has started to make aresurgence. Former Australian Prime Minister, Paul Keating, was the first to coin the term back in the mid 80’s to describe Australia’s current lack of export diversity and strong dependence upon commodity exports. Always the showman, Keating’s coining of the term was largely for political purposes, however there is some truth to his assertions.

The Australian economy has become largely dependent upon the revenues that commodity exports provide. Subsequently, the decline in global iron ore prices has effectively taken a razor to the tax revenue base that Government relies on to support their fiscal policies. Something as small as a $10 drop in the iron ore spot prices has the potential to erase up to A$10billion from forecast revenue.

Successive Australian governments have viewed the current slowing demand as an issue that can be managed through an accommodative monetary policy. The subsequent lowering of interest rates has certainly aided the domestic economy and caused depreciation in the Australian Dollar. However, exports in the non-resource sectors have still remained lacklustre and the country still faces the prospect of a 34% decline in exports.

For too long, Australia has poured incredible amounts of money into developing their commodity and resources sector, achieving great efficiency and productivity gains. However, this has come at the expense of declining investment and activity in the non-resources sector. Subsequently, whole domestic industries have either declined or disappeared. Non-Resources sector exports have steadily declined over the past 15 years, leading some analysts to question what Australia will rely upon in the coming years.

Unfortunately, the problem of export diversity has been present since 1985 when Paul Keating’s administration experienced the countries’ biggest ever deficit. It would appear that successive governments have done little to fix the systemic issue and instead of encouraging investment and productivity gains in the manufacturing sector, they simply focused upon a commodity boom.

So it begs the question, where too next for the fledgling banana republic? The reality is that the Australian government must find ways to stimulate manufacturing investment and to drive productivity and efficiency gains. Only through the development of a diverse range of evergreen industries will they be able to overcome some of the shock effects of downturns in the global economic cycle.

Ultimately, any potential restructuring of the Australian economy is likely to be problematic given the current pressures on the government budget. However, one thing is for sure, attempting currency depreciations to stimulate exports is a race to the bottom and a contest that the country can’t possibly win. If the government is serious about structural change, the time is now to take the pain to protect the future.