Decades of Economic Growth - What Are the Policy Issues - Essay Example

Macroeconomic Policy [Name] [Course] [Lecturer] [Unit Code] [Date of Submission] Introduction In the past few decades, successive Australian governments have conventionally aimed at realizing three main objectives in an economy: These are economic growth, internal balance, plus external balance. All the same, these objectives are intended to uphold nationwide economic growth at the same time as keeping up low inflation and restraining the amount of overseas debts along with liabilities. An economy’s stage of economic growth keeps changing as a matter to the ups and downs of international dealings (Banks, 2010). To play down these fluctuations, the government influences demand to carry on sustained growth, with low inflation along with low joblessness, but, given that these macroeconomic policies affect the demand-side, they cannot be brought into play solely: they are employed alongside microeconomic reforms that influence the supply-side of the economy. The two major instruments used by the government are the fiscal policy and the monetary policy. Australian has embarked on yet another year of economic growth backed by amazing performance that is unparalleled in Australia’s economic past as well as in the midst of erstwhile developed economies in this era. The future of Australia’s economy will be closely correlated with the reforms over the coming years as regards expertise, the natural surroundings, demographic development, public customs as well as social affairs. Governments’ rejoinder to these factors will too with certainty manipulate the future of Australia (Stevens, 2013b). A number of these factors, as a matter of fact, are intrinsically uncertain. Even so, this paper appreciates the limits of uncertainty and what end results are more likely in view of drifts in major drivers of prospective alteration plus their connections. Decades of Economic Growth: What are the Policy Issues After the economic decline earlier on in the 1990s, Australia’s economy started to emerge in the late 1991. To date the Australian economy has been growing in all quarters apart from three. In several periods economic growth was sluggish except that no year ended with a negative growth (Stevens, 2013a). The year to the March quarter of 2009 recorded the lowest rate of growth at 0.7 per cent followed by 1.4 per cent in 2000–2001. Despite the fact that growth has been positive, these two periods of economic activity decline led to obvious rise in unemployment. The phase from 1991 is the longest time of growth that Australia has recorded in history no other urban country has reported continuous growth more than the past two decades. Actually, numerous urbanized countries have gone through two periods of negative growth for that duration: one in 2001 after the crumple of the dot-com bubble; and the other in 2008 after the US sub-prime housing bubble caved in. Still in the midst of the leading emerging economies, a similar stretched period of growth is uncommon, since the majority of these economies were variously affected at given time by these crises (Parkinson, 2012b). Therefore, Australia’s performance has shown a rather remarkable growth. This could partly be attributed to the reality that the populace grew robustly within this time, principally in the latest years. Another school of thought states that Australia was just fortunate arguing it was well-placed to benefit from the China’s emergence given its locality as well as the export composition (Parkinson, 2012a). Even though these factors cannot be wished away they simply offer a portion of the elucidation. China’s narrative has been noteworthy no more than the past five years; the majority of it extensively is forthcoming. Japan has been another Australia’s key exporter, but it has gone through a rather restrained economic growth more than the past two decades. Too a number of other of Asian business associates has undergone an exceptionally brutal financial system collapse in the 1990s (Stevens, 2013b). Other contributing factors include: 1). various reforms to competition as well as industry policy, executed over a stretched period of time have opened up the business sector and invited more competition; 2). labor market reforms dating back to the late 1980s, boosted the labor market elasticity in responding to fluctuating trade and industry conditions with no outsized sways in unemployment or untenable strain on wages; and 3). assorted reforms to the economy enabled it to have better power to rally the financing requirements of the economy and made Australia more striking to overseas investors. Generally, these reforms threw in a considerable raise in productivity in the 1990s. The Reserve Bank of Australia produce a ballpark figure of 1.5 per cent of annual output, for the duration of that decade, Australia was able to turn out just by using capital and labor more resourcefully (Parkinson, 2012b). Source: RBA Sorry to say, in recent times, this rise in productivity apparently has slowed to a large extent. Maybe this could be to a certain extent a measurement issue; it could be a manifestation of the economy being fairly fully employed in recent years; or as a result of the waning effects of the previous economic reforms. This poses a key challenge to policy makers. On the other hand, policy makers nowadays understand clearly that the resources boom is shifting gear towards a new chapter. The resources boom has at all times had three phases. Firstly, commodity prices rise incredibly. Consequently, Australia's terms of trade went up to very high levels not experienced before. The 2008/09 global economic crisis interrupted the prices but the increase picked up from where they were left off rather speedily. The soaring prices have been fairly constant chronologically leading to the second phase, where companies producing resources boosted their outlay to gain from need for raw materials, particularly iron ore and natural gas, as well as to a small degree coal. Outlay in the resources sector gained from just about 2 per cent of GDP on average (it had hanged around this point for the most part of the earlier 50 years) to hit the highest point of close to 8 per cent (Stevens, 2013a). The immense ascent is at this moment over and Australia is glaring to a prospective decline, with vague timing. It may perhaps be a pretty huge fall. The third phase is at present on the move with expected investment expenditure being withdrawn. Policy ‘Instruments and Targets’ The relation between monetary effects on economic actions to particular doings by particular public institutions is instant and express. The analysis of the manner in which these public institutions' doings influence key elements of macroeconomic goings-on conventionally entails the art of monetary economics. Provided that various macroeconomic results are undoubtedly favorable to others, for instance, stable prices more willingly than inflation or prosperity more willingly than prevalent unemployment, the subject of whichever government measures will more probably lead to more sought-after results is not simply innate but expected. The Reserve Bank is that public institution that is mandated to institute monetary actions to achieve a desired end result. Writings on targets along with instruments of monetary policy have advances correspondent to the craving to pull monetary economics closer to the real activities of Reserve Banks. A Reserve Bank has the capability of exclusively settling on, openly all the way through its own actions (the "instruments" of monetary policy), those dimensions of economic actions that it has in mind for its function, plus other aspects of public policy and autonomous services, to impinge on (the "targets") (The Economic Conversation, 2013). Policy instruments are monetary variables that the government is able to manipulate directly and that institute a cause and effect relationship with the targets (Stevens, 2013a). There are several types of policies where each is defined by its instruments: These are; Monetary policies that make use of instruments in the money market, for instance, open market operations (OMO), foreign currency dealings, discount rate, among others; Fiscal policies that utilize the government budget as an instrument, especially variation of taxation levels along with government expenditure; Institutional policies, whose instruments are changes in laws, centralized funding and taxation programs, as well as trade, labor/capital systems that may have an effect on macro variables. The policies can interact in any manner, on purpose or not. For example, once the government raises wage funding interventions for unemployed workers purposely to trim down overall unemployment, it is initially an institutional policy as it entails crafting a new-fangled establishment. However the policy too has a fiscal spin-off, given that – at first - it calls for supplementary government expenditure (Parkinson, 2012a). An institutional policy alters the game’s set of laws. Keynesians say that “A Central Reserve Bank that does not mull over monetary policy as soon as it hears that unemployment is declining would not be performing its function”. A monetarist has no business to do with the unemployment agenda. Thereby, this confirms that monetary theory prefers instruments and targets mutually. Economic Theory Application The current operating environment dictates the conduct of any policy guideline. Policy actions taken in previous times presumably cannot have similar dependability. The monetary policy transmission process constituents are almost certainly working rather in a different way than on other circumstances. Consider this; the actuality that policies in key economies have been at awfully bizarre instances for quite some time presents a tricky situation in the face of the probable effects on the exchange rate, albeit, apparently, the exchange rate has been performing more usually lately (Parkinson, 2012b). In actuality the rest of the world has enjoyed rather stumpy interest rates, a well-built craving for safe and sound assets, widened spreads stuck between the cash rate and other important rates for the economy, and people seeking situations of lesser leverage have been central factors in expounding on the reason the cash rate has been quite low down weighed against the setting up to the mid-2000s. Underneath all these occurrences is the outstanding climax of the resources outlay boom more than before (Battellino, 2010). The guiding factor has been the supple inflation targeting structure Australia has had in place for 20 years up to this moment. This outline has enabled correct and sensible action when required. This has experienced a considerable moderation in monetary policy ever since late 2011. Believably, the inflation point of view may pay for some extent to ease policy additionally if considered necessary to hold up demand, although, recent data does not support that (Stevens, 2013a). Conclusion Australia has had a wonderful growth performance over the past two decades, taking the advantage of an extensive process of economic reform as well as the espousal of discreet and well-organized economic policies. This has been facilitated by an elaborate Reserve Bank that has utilized financial policies and targets as required amidst the global financial crisis and the peak of the mining investment boom that Australia has enjoyed recently – though it is changing. Thanks to the flexible inflation framework that has made work much easier for policy makers and the country as well (OECD, 2010). References Banks, G. 2010. Successful Reform: Past Lessons, Future Challenges. Keynote address to the Annual Forecasting Conference of the Australian Business Economists, Sydney, 8 December 2010. Battellino, R. 2010. Twenty Years of Economic Growth. Address to Moreton Bay Regional Council. Redcliffe, Queensland. Accessed 8 7 November 2013 OECD. 2010. Economic survey of Australia 2010. Accessed 7 November 2013 Parkinson, M. 2012a. Australia’s Place in the New Global Economy. Address to the CEDA State of the Nation 2012. Canberra. Accessed 6 November 2013 Parkinson, M. 2012b. Challenges and Opportunities for the Australian Economy. Speech to the John Curtin Institute of Public Policy, Breakfast Forum. Berth. Accessed 4 November 2013 Stevens, G. 2013a. Economic Conditions and Prospects. Address to the Economic Society of Australia (Queensland) 2013 Business Luncheon, Brisbane, July. Stevens, G. 2013b. Economic Policy after the Booms. Address to Anika Foundation Luncheon. Sydney. Accessed 7 November 2013 The Economic Conversation. 2013. Policy Making: Policy Instruments. Accessed 4 November 2013 Treasury. Australia to 2050: Future challenges. Commonwealth of Australia: 22. Read More