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Inside Australia: How economic reforms and structure affect BOP

Australia is one of the most beautiful countries in the world. Its beautiful beaches, healthy environment,
and wild animals- almost everything falls right in place. But looking inside, how is the economy of
Australia going? What economic problems do Australia faces? How do Australian economists address
these problems? What policies does the Australian government formulate in order to resolve these
problems? These are few of the questions that will lead us to understanding how the balance of payments
of Australia is going.
The Problem:
According to Economy Watch, for more than 50 years, the Australian economy had persistently
large current account deficits (CAD). One of the factors that results to such is its narrow export base.
Australias export base includes all of the products that Australia produces for export. In comparison to
other advanced economies, Australia has a high reliance on the exports of primary industries. Australias
narrow export base is regarded as an economic problem. Australia produces few advanced technology
items, making the economy reliant on imports. Also, it is said that Australia does not have adequate
manufacturing sector resulting to higher current account deficit. Australia has one of the worst CAD
performances amongst all advanced economies. Consequently, the growth of foreign liabilities will mean
that lenders will be more reluctant to lend to Australia or invest in Australia. Second, increased servicing
costs will reflect a large net income deficit on the CAD. A high CAD may also decrease the confidence of
overseas investors in the Australian economy. This may result in a depreciation of the Australian dollar,
which will increase the price of imports and increased cost of servicing foreign debt increases. High CAD
also constrains future growth. Growth is forced to be limited to keep the CAD at a sustainable level.
Solution:
With regards to the increasing current account deficit, many economists suggest two major
solutions for the problem of Australian economy. First, Australia needs to change its export structure. It
can do so through widening its export base by producing more manufactured goods and exporting many
more services. Secondly, Australia should enhance its international competitiveness. If Australia is not
competitive on its international scale, it will be very difficult to improve trade performance. So to avoid
this, international competitiveness of Australian businesses should be improved. Australia can do so by
paying attention to specific industries and their performance. Economic reforms would also be of great
help. Economic reform policies are those government policies which aim to improve the efficiency and
productivity of producers within Australia. These reforms attempts to address structural factors which
affect international competitiveness such as inflation, wages growth, productivity levels and efficiency of
the public sector.

Since balance of payments records all the transactions between one country and the rest of the
world, it is important to consider the external as well as the internal factors that affect the economy. Even
the richest country cannot keep calm when it comes to economic matters; likewise, a country who sits at
the lowest rank doesnt mean they will stay in that place forever. As the saying goes, everything is
unpredictable.

^ Leading Edge, R: "Australia in the Global Economy", Tim Dixon and John O'Mahomy, page
133 .
http://www.economywatch.com/world_economy/australia/economic-forecast.html

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