Time bombs set during good times starting to explode
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“Stunned, stupefied, anaesthetized, lobotomized” are the exact words to describe the
vulnerability of the Australian economy. The dependency of the commodities price
sustainability to balance the financial deficit maybe will be the greatest mistake that the
country has ever made.
Aristotle once said that “thinking regarding first principles is basically like starting your
reasoning with only the most essential building blocks”. So, what Aristotle theory has to do
with the Economic recession that everyone is talking about? Let’s take it this way, Aristotle
explained about the problem that you have today can be traced from the foundation that you
used to build the subject, in the context of the Australian economy, global expansion policy is
the source that they have to review to solve this problem.
There is no doubt that globalisation has completely changed the roots of the Australian. It
diminished the trade barriers that made every country in the world felt that they have the
same chance to grow. It also has brought a lot of trade free deals that led to the resources
boom from which it has generated 5% growth in the GDP and 14% increase in income for
the last decade (Grenvile, 2014).
Source: Graph from RBA paper: The Effect of the Mining Boom on the Australian Economy.
The graph showed how globalisation takes a role in empowering the Australian Economy.
Moving swiftly on, we looked at the trend that shaped the Australian economy. As we can
see on the graph below, 1960 has marked the glory of the country in trading environment
which it changes the entire element of import and export. From the journey, we can see that
the percentage of the trade contribution to the economy has shifted to 20% which is very
impressive for the country that has only 23 million of the population (O’Brien, 2015).
Source: Australian Bureau of Statistics (ABS), Australian national accounts, cat. no. 5206.0,
ABS, Canberra, March 2016.
Figure 2 show the Exports, imports and trade balance as a proportion of GDP in select G20
However, this rapid growth will not be continued if there is a hole in the economic system.
According to Max Corden, an industry that resulted to the rapid growth that surpassed 40%
of the GDP in a short period of time is called a “Dutch disease” which it explained about if
one of the sectors failed, it will affect another industry and eventually affect the whole
economy and drive them to a great recession (Corden, 2012).
Here’s what we know about Australia economic problem.
The car industry exit that the country proposed has become their Armageddon.
The automotive industry in Australia has acquired almost 8.5% of the population which
provide 1 million jobs to the Australian (Valadkhani, 2005). The vigorous shut down policy
without creating another industry to bail down the person that lose their jobs will shrink the
entire economy. Obviously, policy makers will create another policy to balance the
economony, however according to Dr Aviral Kumar Tiwari who is a Post-Doctoral Fellow at
Montpellier Business School, France,” the stabilization policies taken by the authorities will
have a long effect on the unemployment rates for the Australia where shocks to
unemployment is persistent” (Tiwari, 2012).
He famously quotes in his research about the long-term effect on the unemployment rates.
The question is, why it will leave such a horrible impact on the economy? So, just imagine 1
million workers have their mortgages which the financing that takes place is $656,800 that is
based on the average house price in Australia. If there is a drastic change that makes
people can’t pay their mortgages. The bank will increase their interest rate because they are
losing money in the mortgage default and this will create inflation (Taylor, 2017). Federal
reserve will try to solve the problem by printing more money to increase the money supply so
that people can afford to pay the interest rate. This is the analogy “too much, too quickly is
bad” take place where there is a surplus in the money supply, and it reduces the value of the
currency. The price of the scarcity product will increase, and the unemployment rate will
continuously increase because there Is no growth in the economy.
The great 21st-century resources boom has come to an end.
As we all know that Australia is the largest exporter of the iron ore. Economist has labelled
that the price of this type of commodities will never go down alongside the revolution.
However, as always, this good attract a lot of interest from another country which surpassed
that theory. Brazil is willing to dig inside their heritage only just to focus on the iron ore export
(Topf, 2016). When the export is not being manipulated by Australia anymore, it will reduce
the demand for the iron ore from Australia, in other words, they are not the one that can
decide on the world market anymore. When that happens, the dependency of the export
revenue to the country is not reliable anymore.
Nonetheless, China property boom increases the demand for the iron ore and have taken
the large proportion of the iron ore in the world market. They like to flood their economy with
the real estate industry as they know how big the market size for a house in China is. China
has 1.3 billion people and finding a family to buy a house is a piece of cake. That’s the tricky
part actually because every time we look at the booming of industry, there will always be a
dawn from that. So, what is the implication that will come after the decline of the housing
market in China? The iron ore price will go back to their stone edges where there were
traded as $12.50 a unit compared to $89 now (Jericho, 2014).
Whenever there are problems, there is always a solution, and for this case, the solution is
not as easy as what we thought it would be. For Australia to survive and avoid the
catastrophe of the crisis, there has to be a drastic change in the policy. Hypothetically,
reviewing the shutdown of the car manufacturing sector is highly favourable. Rather than
shutting down the industry, Australia can increase the price of the car and input a high tax to
the imported car. Let’s make Malaysia as an example from which they implement 200% tax
on the imported car to promote their public vehicles. So, what is the feasibility of the idea in
increasing the tax tariffs of the imported car?
Australia will be able to cover the operating cost of the car that is made in here. As we all
know, the wages line is the only major focus problem in this industry because the profit
margin that they earned in producing the car in Australia is minimal. The result of the policy
will increase the demand of the local cars that were made in Australia because it will be
cheaper to buy in here rather than buying import product.
Lastly, the catchy “time bombs set during good times starting to explode” headlines will not
be a headline anymore if someone can come out with an idea that can eliminate all the
possibilities that can make Australia to be in recession.
O’Brien, G. (2015). Australia’s trade in figures – Parliament of Australia. [online] Aph.gov.au.
/pubs/BriefingBook45p/AustraliaTrade [Accessed 2 Sep. 2017].
Corden, W. (2012). Dutch Disease in Australia: Policy Options for a Three-Speed Economy.
Australian Economic Review, 45(3), pp.290-304.
Valadkhani, A. (2005). Cross-country analysis of high employment-generating industries.
Applied Economics Letters, 12(14), pp.865-869.
Taylor, D. (2017). Are Australian households on the edge of a debt crisis?. [online] ABC
News. Available at: http://www.abc.net.au/news/2017-02-15/households-on-the-edge-ofdebt-crisis/8265696
[Accessed 2 Sep. 2017].
Tiwari, A. (2012). Unemployment hysteresis in Australia: evidence using nonlinear and
stationarity tests with breaks. Quality & Quantity, 48(2), pp.681-695.
Topf, A. (2016). Vale opens largest iron ore mine in its history | MINING.com. [online]
MINING.com. Available at: http://www.mining.com/vale-opens-largest-iron-ore-mine-history/
[Accessed 4 Sep. 2017].
Jericho, G. (2014). China’s housing market is on the brink of collapse. Should Australia be
worried?. [online] the Guardian. Available at:
[Accessed 4 Sep. 2017].
Reserve bank of Australia (2016). The Effect of the Mining Boom on the Australian
Economy. [image] Available at:
[Accessed 4 Sep. 2017].
Australian Bureau of Statistics (ABS) (2016). Exports, imports and trade balance as a
proportion of GDP in select G20 economies. [image] Available at:
/pubs/BriefingBook45p/AustraliaTrade [Accessed 4 Sep. 2017].