Alan, your previous analysis was wrong, as I pointed out. It hasn't suddenly corrected itself. No country had the level of mining investment which we had. Mining investment together with no debts(Costello), together with a well regulated banking system (Costello) got us through the GFC. Brazil is not a valid comparison, as I have previously mentioned and for reasoned which I mentioned.

Alan
Chart 3 from the paper you linked to on budget balances supports Ergas’ position, not yours. So does the work of the PBO Ergas appears to have drawn on. If his methodology takes the mid-point of the PBO’s upper and lower range of the structural balance, it looks to me like it gives the result you describe as “untrue”:

http://www.aph.gov.au/~/media/05%20About%20Parliament/54%20Parliamentary%20Depts/548%20Parliamentary%20Budget%20Office/Parliamentary%20Budget%20Office%20Stuctural%20Budget%20Balance.ashx
(page 2 figure 1)

You said:

“Here’s another approach: If your scenario is right, Rhian, then the country second to Australia in “trade with China AND terms of trade AND a sound financial sector AND strong fiscal position AND stimulus” would have done second best. Right? “

Wrong.

Every economy is different. An economy with none of these thing going for it could have fared far better than Australia if it has some other source of growth; any country with all of them could fare worse if some other factor detracted from growth. These things were significant for Australia, not necessarily anywhere else.

China's growth is not uniform. Hong Kong exports mainly services to China, Japan mainly manufactures, Australia mainly commodities. Unless demand and prices for manufactures, services and commodities are rising equally – which of course, never happens – then China’s growth will not have the same effect on all its trading partners, even if they are equally reliant on China for exports.

But – trade with China is clearly a factor. The world's fastest growing economies in the past five years (GDP growth of 10%+ a year) have all recorded extraordinary growth in exports to China. These are

Qatar, - 13.1% a year GDP growth, 65% a year growth in Chinese exports.
East Timor 11.5% a year GDP growth, 69% a year growth in Chinese exports
Turkmenistan - 11.1% GDP growth, 177% a year Chinese export growth

(data from IMF and CEIC)

Hello again,

@Yabby, re: “No country had the level of mining investment which we had. Mining investment together with no debts, together with a well regulated banking system got us through the GFC.”

Afraid all the evidence is completely against this, Yabby.

Having no debts was absolutely no help. Evidence is overwhelming.

IMF’s database shows nine countries in net surplus in 2007 — apart from a few oil-rich Islamic republics and poor African states. These were Australia, Bulgaria, Chile, Denmark, Estonia, Finland, Kazakhstan, Norway and Sweden.

If low debt was a cushion, then all these nations should have survived the GFC. They didn’t. All fared disastrously.

I agree Australia had strong mining investments. But other countries had other strong investments.

If your theory was valid, then whichever countries come second, third and fourth to Australia on your criteria should have also done relatively well through the GFC, if not quite as well as Australia.

There's no such correlation.

@Rhian, re: “Chart 3 from the paper you linked to on budget balances supports Ergas’ position, not yours.”

Refer the text below chart 3, Rhian: “The estimates suggest that the structural budget balance deteriorated from the mid-2000s, with the point estimate of the structural budget balance falling into deficit just prior to the GFC.”

So clearly structural problems did not originate with Labor, as Professor Ergas would have us believe.

Re: “Every economy is different. An economy with none of these things going for it could have fared far better than Australia if it has some other source of growth; any country with all of them could fare worse if some other factor detracted from growth.”

Correct. That is my point also. There is nothing magical about trading with China, or selling iron ore. The same effects should have worked with any export sold anywhere.

But research shows it didn’t happen in any comparable economy. Plenty of other OECD countries had strong sources of growth. But only two avoided recession.

They were Australia and Poland – which according to the IMF implemented the largest early stimulus interventions.

Coincidence, Rhian?

Cheers,

AA

Alan

There is a world of difference between the diminishing structural surpluses we saw in the later years of Howard, and the burgeoning deficits we saw under Labor. There is no reason why Howard’s diminishing surpluses should cause Labor’s chronic deficits. Bear in mind we are talking about a structural budget balance here; the business cycle or fiscal momentum had nothing to do with it. It was entirely the result of government policies.

There is indeed nothing magical about trade with China or selling iron ore (and coal and LNG and gold….). But they can have strong economic impacts. The data show that the world’s strongest economies in the past five years are ALL resource economies, most with strong links to China.

They also show that no developed country came close to Australia in its terms of trade boost. Since 2007, Australia’s terms of trade have risen by 32%, the 12th fastest growth of 198 countries analysed by the UN. All of the other leading countries are developing resource exporters (Mali and Burkina Faso had the largest terms of trade increases). The nearest of the developed economies is Norway, with 17% growth in its terms of trade - about half of the stimulus we enjoyed.

http://data.un.org/Data.aspx?q=terms+of+trade&d=WDI&f=Indicator_Code%3aTT.PRI.MRCH.XD.WD

Hi Rhian.

Re: “a world of difference between the diminishing structural surpluses we saw in the later years of Howard, and the burgeoning deficits we saw under Labor.”

Correct.

Re: “There's no reason why Howard’s diminishing surpluses should cause Labor’s chronic deficits.”

Correct also. There’s no causality. The former was to contrive electoral support during the final terms of a teetering government. The latter was an appropriate response to the worst recession since the 1930s.

Re: “Bear in mind we are talking about a structural budget balance here; the business cycle or fiscal momentum had nothing to do with it.”

Agree.

Re: “The data show that the world’s strongest economies in the past five years are ALL resource economies, most with strong links to China.”

Not sure, Rhian. Perhaps if we gauge ‘strongest economy’ simply by GDP growth. Another category might be the eight nations with triple A credit ratings with all three agencies: Australia, Singapore, Norway, Sweden, Switzerland, Germany, Luxembourg and Canada.

Only one has strong resource exports to China.

Furthermore, some countries whose exports are predominantly resources had zero or negative GDP growth, including Serbia, Brunei and Jamaica.

You earlier identified Qatar, East Timor and Turkmenistan as exporters to China with strong growth – between 11.1% and 13.1%pa.

Not sure Qatar is instructive here, Rhian. Only about 5% goes to China. East Timor? Do you have the percentage? Turkmenistan is a good example, however.

But other small economies with no China trade have also had strong growth, around 9% or above, including Afghanistan, Azerbaijan, Ghana and Panama.

Of course exporting resources is highly advantageous. As is trade with China. But there seems neither theoretical basis nor supportive empirical data for the contention that Australia’s sudden recovery after being whacked by the GFC in Q4 2008 and its subsequent rise to top of the world is due to either.

The evidence still seems to support the 'overwhelming 2008-10 stimulus' theory.

What’s your explanation, Rhian, for Poland – with the second-strongest stimulus response – being the only other OECD economy with just one negative quarter in 2008?

Thanks. Cheers,

Alan

Alan
We’re discusisng a STRUCTRAL deficit lasting more than a decade, according to forward estimates. A temporary, cyclical, deficit is an appropriate response to a recession. A persistent structural deficit is not.

Your article attacks the proposition that the China factor helped Australia escape recession. The overwhelming weight of evidence, and authoritative commentaries, disagree with you. You are shifting the goalposts again by introducing credit ratings. That is a different issue.

China accounted for 5% of Qatar’s GDP in 2012. Qatar is export reliant (exports are 70% of GDP) and Qatar’s exports to China have grown rapidly since the GFC (1200% between 2006 and 2012). So Chinese exports represent stimulus to Qatar’s economy of about 4 percentage points of GDP – about the same size as Rudd’s fiscal stimulus in Australia.

Of course not all commodity exporters enjoyed the same export and terms of trade boost that Australia did. The effects depend on what they export and where they export too. Why on earth do you expect these to be uniform across commodity exporters?

And of course not every economy with strong economic growth has strong links to China. I have never said that, nor has anyone else.

You continually try to misrepresent others’ arguments by trying to turn a particular country’s experience into a universal formula. That’s why your frequent references to Poland are so silly. You are trying to reduce a complex multifaceted story – what caused different economies to respond to the GFC differently – to a single, shared, explanatory variable.

I have never argued that Chinese connections are either necessary or sufficient to determine which countries escaped recession and which didn’t. Clearly there are lots of other factors at work.

But for many countries, growth in Chinese prices and demand WAS clearly a decisive factor. Australia was one of those countries. The data I have laid out – on Australia’s export growth, terms of trade growth, and mining investment growth – prove conclusively that the Chinese/resource factor was very significant in helping Australia to escape recession and supporting its relatively strong economic growth since the GFC.