I have been studying the Australian economy and this time I will show some general features of the long-run economic growth of Australia aiming at the composition of the GDP, and do a parallel with the economies of Chile and Argentina, two Latin American economies I think Australia share some similarities with as the resource-rich economy.
As developing economies, the Latin American countries grew faster than the Australian economy. The chart below illustrates the GDP index that shows the evolvement of each economy’s growth rates from 1950.
Taking a look at the GDP growth the first feature that catches my eye is the steady growth of Australia compared to Chile and Argentina. The second one is that Argentina’s growth pace was higher than Chile’s one, although the latter was more steady than the former.
Figure 1. GDP index from 1950 to 1917
The Australian GDP composition
In the long term, Australian economic growth has been driven by a combination of exports, public spending, and imports. All these components grew faster than the GDP.
The investment performed below the growth of the total economy, although it delivered a positive trend and kept close to the GDP growth (dotted line).
Figure 2. Australia GDP growth per component
In the eighties some institutional reforms took place worldwide and the economies opened up and international trade was encouraged, and Australia was no stranger to it when governments of the left and of the right carried out from 1983 to 2003 a range of market economic reforms (The Economist, 2011).
If we take a look at the data since 1980, we can see that the picture does not change much from the latter. The two main forces that boosted Australia’s economy were exports and imports which behave in a balanced way, followed by public spending.
It is well known that imports do not belong to the GDP accounting, but such imports are made up of capital goods that expand the production and productivity of the country, among other goods.
Figure 3. Australia GDP growth per component from 1980 to 2017
If we take a look at the indexes from 2000 onwards, the investment picked up somewhat and was the third-fastest component, while the public spending grew virtually as fast as the whole economy measured by the GDP.
It is clear according to the data that in general public spending and investment have translated into a growth of the external sector.
Figure 4. Australia GDP growth per component from 2000 to 2017
Note that in the last decade China has grown very fast and it is the main commercial partner of Australia, thus, the latter has benefited from the Asian country significantly with the exports of iron ore, petroleum, gas, coal, among other goods (The Observatory of Economic Complexity). If I am not mistaken, such trade has encouraged not only exports and imports, but the investment.
Differences between Chile’s and Australia’s traits
As we saw in the figures, Australia is not an economy driven by investment besides other sectors as the industrialized east Asian countries such as Japan, South Korea, and now China. As a resource-rich country, it has been driven by the external sector where investment has not stood out, sharing a very similar pattern not only to its neighbor New Zealand (Feenstra, Inklaar and Timmer, 2015) but also to the Chilean case as it can be seen below.
Figure 5. Chile’s evolvement of GDP per component
Like Australia, Chile grew mostly thanks to its external sector. One remarkable feature of Chile is its clearly external surplus illustrated in the long-run data with exports growing faster than imports.
Chile delivers neither an important long term public spending nor an investment growth rate; while the investment performed significantly below the GDP with a negative trend with an increasing gap with the economy, in Australia that variable grew below the whole economy but at least kept the same positive pace (let’s say it was stable).
It is known that compared to South American countries, Australia has delivered higher investment rates as a percentage of the total economy (figures shown in A brief comparison of Australia and South American countries as resource rich-economies).
Differences between Argentina’s and Australia’s traits
Argentina is another economy that has been subject to comparison with Australia (See this short article).
From 1950 and 2017 Argentina’s economy grew much faster than Australia’s economic growth, as we saw in figure 1. Briefly speaking, such growth was driven by the investment and the public spending that expanded together at the same pace and above the GDP.
However, contrary to the Australian and Chilean cases the external sector grew unbalanced with imports increasing faster than the exports. In other words, in Argentina, the public spending and investment growth have not translated into more exports but have boosted the imports significantly as we can see they fluctuated coordinated.
What does an unbalanced external sector mean? In the long run, if you import more than you export you are getting a debt denominated in a foreign currency. That is less monetary sovereignty.
Figure 6. Argentina’s evolvement of GDP per component
Although Australia is a rich-resource economy as Argentina and Chile are, its economy grew steadily from 1950 to 2017, a feature that the two South American countries did not share because their economies were subjected to fluctuations.
In the long run, Australia has grown thanks to the external sector which expanded together with sustained public spending that grew faster than the whole economy. On the other hand, investment performed below the GDP but with a positive trend following the trend of the economy.
The figures of Chile’s long-run growth show wide positive net exports (exports minus imports), however, contrary to Australia the public spending did not play a relevant role, and investment grew slower than the GDP with a negative trend that widened the gap with the economy.
On the other hand, Argentina grew faster than Australia and was led by a combination of components, namely: investment, imports, and public spending. However, contrary to Australia and Chile, the external sector of Argentina is its weak point. For some reason, its investment and public spending do not find a way to encourage exports.
Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), «The Next Generation of the Penn World Table» American Economic Review, 105(10), 3150-3182.
The Economist. The Next Golden State. May 28th-Jun, 2011