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INTERVIEWS
WITH ECONOMISTS
MARDI
DUNGEY
You have
done some work on the international influences on the Australian
economy. What are the main findings of this work and how does
it relate to the Asian currency crisis?
Prior to becoming
an academic I spent a number of years working in financial markets.
This experience left me with some 'stylised facts' about the behaviour
of the Australian economy. One of these was that we are heavily
influenced by overseas economic conditions. In the early 1990s
some researchers were claiming that the influence of international
economic conditions on the Australian economy was fairly minimal.
I set about reconsidering this question and found that when I
refined some of the assumptions the effect of international economic
conditions, particularly in the longer term, was pronounced. Traditionally
we have looked to a selection of Western industrialised countries
to indicate international economic conditions. However, the East
Asian crisis has shown us in practical terms that the conditions
in our region can have a profound impact upon both economic activity
and our expectations of the future for the economy. And these
influences were not always in the expected direction. I am currently
extending my research to try to better understand the influences
of Asia on Australia as, I think, are many other researchers.
The East Asian crisis has definitely taught us that we are part
of a 'global' economy, which includes far more than the traditional
group of industrialised nations we have examined in the past.
Do you
think that the effect of the Asian crisis is reflected more in
the real sector or the financial sector of the Australian economy?
I think that
the effects of the East Asian crisis have been felt in both the
financial and the real sectors of the economy. In some ways the
financial sector has acted as both a conduit to and buffer of
the shocks to the real economy. By this I mean that the increased
volatility in financial markets has created costs for the trading
sector in terms of increased costs of hedging instruments. On
the other hand, the ability of the Australian financial sector
to absorb and recover from the East Asian shocks has created a
more stable domestic environment than we may have anticipated
if, for example, we had run a fixed exchange rate regime. The
effects on the real sector have not been as great as initially
anticipated, partly due to buoyant demand in the major industrialised
nations, who constitute the final consumers of many of the transformed
products produced in East Asia.
What is
your forecast for growth of the Australian economy over, say,
the next three years?
My
outlook for the Australian economy is cautiously optimistic. The
East Asian crisis has probably helped us to brake the economy
during what would otherwise have been an impressive boom. Inflation
is low, but the unemployment rate remains unacceptably high. Our
next major policy challenge is to improve conditions for employment
while retaining our low inflation environment. I think it is likely
that this combination will involve a combination of short-term
pain in the form of real wage falls, and long-term gain in terms
of greater employment and output. I anticipate that the economy
will average growth of around 2.5 per cent per annum over the
next three years. This rate of growth is less than one would desire,
but given the policy challenges, and the potential for economic
slowdown in the US, it seems to be a realistic scenario.
We have
learnt so much about the working of the economy since the Great
Depression, and particularly in the past 20 years or so. Why,
then, does the world economy move from one crisis to another?
We pour a
lot of resources worldwide into monitoring economic and political
developments in order to forecast the behaviour of our economies.
Despite this, we are repeatedly exposed to new and not so new
crises. One of the reasons for this lies in the dilemma policy-makers
face between long- and short-term policy goals. It may be that
a current policy situation is unsustainable in the long run, such
as the high capital inflows to East Asia in the late 1990s or
South America in the early 1990s, but that it has dramatic and
obvious short-term benefits. In this case it is often difficult
for policy makers to move to a more sustainable long-term policy
position. Eventually the system will act to remove tensions itself.
Another alternative source of crisis, of course, is unexpected
external shocks, the classic examples of these being the OPEC
oil price crisis in the early 1970s and the two World Wars. In
terms of the future outlook, I think that recent international
recognition that financial crises are based on a misjudgement
by both borrowers and lenders, and the subsequent discussion of
problems associated with the international financial system, are
one step towards reducing the impact of crises. However, I suspect
that there will always be the potential for the unexpected to
shock the economic system.
Do you
think that such a complex 'machine' like the economy can be adequately
or effectively represented by the simple diagram illustrated in
chapter 11? If not, what is the alternative?
Economic modelling
is a non-trivial undertaking. It is crucial to understand that
models are not intended to reproduce the behaviour of the economy
but to give broad direction to action and consequence. I like
the analogy to zoology – a zoologist can tell you the age
at which a baby elephant will leave its mother on average, but
cannot give the details about a particular elephant's behaviour.
The Keynesian cross is an example of a broad model and, as such,
is useful as a framework in which to think of some hypothetical
economy adjusting to disequilibrium. Of course, it is extremely
simplified. However, with the tools of such simple models we have
the building blocks to greater complexity and reality. From these
basic components we can build structural models specifically tailored
to the Australian economy, such as the models run by the Treasury
(TRYM), the Reserve Bank of Australia, Econtech (MM2), Access
Economics (AEM) and the Monash Model. Each of these models differs
in its emphasis and complexity and each has a place in helping
us to understand the range of possible reactions to shocks to
our economy. Australia is extremely fortunate to have such a range
of economic models available and, as we have recently seen in
debates about tariffs and the GST, the often contradictory information
such models provide, and the questions they raise, heighten the
quality of the economic debate.
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