29/10/2009 - 00:00

Capital imports, deficits set to continue

29/10/2009 - 00:00

Bookmark

Save articles for future reference.

TODAY I'd like to talk about four longer-term trends that had been strongly influencing economic outcomes in Australia before the onset of the global financial crisis, and which are likely to become even more influential in the next growth period.

TODAY I’d like to talk about four longer-term trends that had been strongly influencing economic outcomes in Australia before the onset of the global financial crisis, and which are likely to become even more influential in the next growth period.

These are: (1) population ageing; (2) climate change adaptation and the prospect of climate change mitigation; (3) the information and communications technology revolution; and (4) the impact on Australia’s terms-of-trade of the re-emergence, as global economic powers, of China and India.

Over the past year, the shockwaves from the global financial crisis have obscured the intensity and scale of these forces. But as growth resumes, they will re-assert themselves. And, as they do, the Australian economy will undergo a set of structural changes more profound than anything in its history.

Just how those structural changes play out depends critically on the quality of the policy settings and decisions taken today.

Population ageing

Most of you will be familiar with the changing age structure of the Australian population, driven by the collapse in the birth rate in the 1960s and 1970s, as the baby boomers decided to have fewer children than their parents, and accentuated by increasing life expectancy.

The proportion of the population aged 65 and over has increased from 8 per cent in 1969 to about 13 per cent today. By 2049 we think this figure will rise to 22 per cent – a little over one in every five Australians being aged 65 or over 40 years from now. By any measure, this is a dramatic change in the age structure of the Australian population.

As the population ages, the share of the population making itself available for employment – what economists call the participation rate – will fall, increasing the dependency rate (which measures, broadly, the number of people not working per person in the labour force) and exerting a drag on potential per capita output growth. What many people might not realise is that over the past several decades, this same population ageing process has made a strong positive contribution to GDP per capita growth rates.

Last month, the treasurer shone a light on a whole new dimension of our thinking when he announced that, since publishing the Intergenerational Report 2007, our long-term projection for Australia’s population had increased from 28.5 million in 2047 to more than 35 million people in 2049.

This 25 per cent increase in our 40-year projections reflects the combined effect of higher net overseas migration and a recent pick up in the fertility rate of Australian women. Today’s population is about 22 million.

Are Australia’s natural resource endowments, including water, capable of sustaining a population of 35 million? What are the implications for environmental amenity of this sort of population growth? Must it mean an even greater loss of biodiversity – difficult as that might be to imagine, given our history of species extermination?

Whatever your view, one thing on which we will all agree is that substantial additional investment, in both private and public infrastructure, economic and social, will be required to support our larger human population.

Climate change

The second longer-term force affecting the Australian economy is climate change. There are three dimensions to this issue that are of policy interest: how we adapt to a changing climate; how we intervene to mitigate the extent of climate change; and the consequences of those mitigation initiatives.

The science tells us that Australia’s climate will change over the coming century. And while an already dry continent will become drier, there is good reason to consider that the impact will be quite different in different parts of the country.

The same science tells us that our climate will become more variable, with more extreme weather events affecting the places where people live.

Taking these things together, what might climate change adaptation mean for Australia? Already stretched water resources are an issue. And in adapting to climate change, does it make sense for our population to continue to be concentrated in the south-eastern corner of the continent?

We can predict that our urban infrastructure will be built to higher standards; that the building materials we use will be more energy efficient and designed to cope better with more extreme weather events. But this is just one example of a general proposition relating to climate change adaptation; it is capital-intensive, it implies higher levels of investment.

As far as climate change mitigation is concerned, all I want to say today is that the imposition of a price signal to reflect the negative externalities of greenhouse gas emissions is intended to cause a significant shift in the structure of the Australian and global economies over coming decades; quite possibly the largest structural adjustment in economic history. That is the point of doing it.

And this structural shift will also entail substantial new investments – in lower emission electricity generation sources and, more generally, in technology that will contribute to lower emissions in a variety of industries.

ICT revolution

The third key force I want to mention is the continuing impact of the diffusion of information and communications technologies. I sometimes get the impression that some people believe that the ICT revolution ended with the collapse of the dot.com bubble earlier this decade.

Instead, there are very good reasons to believe that we have only just begun to see what the ICT revolution promises.

Well, for one thing, developments in information and communication technologies have already helped to reduce the ‘tyranny of distance’ that separates Australia from major global markets.

Of particular interest is what the ICT revolution means for the tradability of services. And it could prove to be particularly important in facilitating a more sustainable pattern of population settlement on a continent of 35 million people.

China and India

The fourth long-term force affecting the Australian economy is the re-emergence of China and India. In recent years I have spoken about the structural implications for the Australian economy of their strong contribution to the global demand for mineral commodities. That demand has supported a considerably higher level of our terms of trade. And it would be reasonable to consider that, while the GFC has taken some of the heat out of our export prices, we should get used to the idea that we could have structurally higher terms-of-trade for quite some time – possibly for several decades.

Where does this place Australia in 2050?

The coming decades will be times of great structural change, with:

• an older, larger population;

• a considerably larger mining sector, relatively smaller manufacturing and tourism sectors;

• different sorts of cities, perhaps even different cities, different sorts of houses, a different pattern of population dispersion; and

• a population more connected, electronically, to the rest of the world, but in important ways as far away as ever.

These changes will test the limits of at least some aspects of social and environmental sustainability. And they also raise big questions for those who, like me, take a keen interest in economic sustainability, including fiscal sustainability.

A common thread in the forces I have talked about is a higher level of investment, lasting perhaps for some decades. That means that the Australian economy will be importing capital – and therefore running a substantial current account deficit – for many decades to come.

n This is an edited extract from Treasury Secretary Ken Henry’s speech to the Queensland University of Technology’s Business Leaders’ Forum on October 22 2009.

 

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

Subscription Options