20th AV of the float _AFR_

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					The floating of the Australian dollar, twenty years ago this week, was one of the most
significant economic policy decisions in Australia’s history. As Paul Kelly wrote in
his survey of the 1980s, The End of Certainty, the float (and the financial deregula tion
of which it was a central element) were ‘arguably the greatest blow struck against the
protectionist, introverted, regulatory apparatus’ established in the early years of
Australia’s existence as an independent nation.

That apparatus was largely responsible for the deterioration in Australia’s economic
performance, and for the associated decline in Australians’ standard of living relative
to that of citizens of other Western nations, over the 45 years following the end of
World War II. The float helped to create the environment in which dismantling the
system of ‘protection all round’ became politically possible.

As a result of the float, the value of the Australian dollar relative to other currencies
became determined by the collective judgement of thousands of Australian and
overseas investors – who stood to gain or lose from their judgements – rather than by
the whims and preferences of politicians and bureaucrats.

For the first five years after the float, there was a remarkably strong correlation
between the exchange rate and the level of consumer confidence, as ordinary
Australians interpreted the (for the most part downward) movements in the dollar’s
value as an adverse reflection on the performance of, and prospects for, the Australian
economy. The exchange rate thus attracted political significance, as Ministers in the
Hawke Government (and their counterparts in the Opposition) used it to build
constituencies for further economic reform. The dollar’s sharp decline in the mid-
1980s thus served as an important catalyst for the liberalization of restrictions on
foreign investment in Australia, for the first tentative steps away from automatic
indexation of wages for movements in the CPI, and for the emphasis on moving the
Federal Budget into surplus over the second half of the 1980s. By the late 1980s,
when the A$ began rising again and consumer confidence no longer so closely
tracked its movements, the bi-partisan commitment to economic reform had become
firmly entrenched.

More broadly, the float contributed to the internationalisation of the Australian
economy by facilitating, as a result of the improvement in international
competitiveness flowing from the dollar’s mid-1980s decline, a significant increase in
the share of exports in GDP; and, as a result of the removal of exchange controls, a
significant increase in Australian investment overseas as well as in foreign investment
in Australia. These developments in turn strengthened the basis of support for policies
aimed at enhancing Australia’s competitive strengths, in particular trade
liberalization.

Finally, the float has had a lasting beneficial impact on the conduct of macro-
economic policy in Australia. It eventually freed monetary policy from the obligation
to support a pre-determined value of the exchange rate. The importance of this
freedom took some time to become apparent, as monetary policy initially floundered
around without any clear ‘anchor’. But from the recession of the early 1990s Reserve
Bank emerged with de facto control of what has become the most important
instrument of economic policy, the cash rate, and a credible framework for
implementing it, the inflation target.
And with the Reserve Bank’s credibility enhanced by its success in keeping inflation
within the target range, the exchange rate has been able to play its textbook role of
acting as a buffer against externally generated shocks, during the Asian crisis and
again in the aftermath of the ‘tech wreck’ and the subsequent downturn in the global
economy.

In effect, the float has contributed to a shift in the balance of economic policy making
power from Canberra to Sydney, and with it a (welcome) reduction in the scope for
the requirements of the economic cycle to be subordinated to the dictates of the
political cycle.
The floating of the Australian dollar, twenty years ago this week, was one of the most
significant economic policy decisions in Australia’s history. As Paul Kelly wrote in
his survey of the 1980s, The End of Certainty, the float (and the financial deregula tion
of which it was a central element) were ‘arguably the greatest blow struck against the
protectionist, introverted, regulatory apparatus’ established in the early years of
Australia’s existence as an independent nation.

That apparatus was largely responsible for the deterioration in Australia’s economic
performance, and for the associated decline in Australians’ standard of living relative
to that of citizens of other Western nations, over the 45 years following the end of
World War II. The float helped to create the environment in which dismantling the
system of ‘protection all round’ became politically possible.

As a result of the float, the value of the Australian dollar relative to other currencies
became determined by the collective judgement of thousands of Australian and
overseas investors – who stood to gain or lose from their judgements – rather than by
the whims and preferences of politicians and bureaucrats.

For the first five years after the float, there was a remarkably strong correlation
between the exchange rate and the level of consumer confidence, as ordinary
Australians interpreted the (for the most part downward) movements in the dollar’s
value as an adverse reflection on the performance of, and prospects for, the Australian
economy. The exchange rate thus attracted political significance, as Ministers in the
Hawke Government (and their counterparts in the Opposition) used it to build
constituencies for further economic reform. The dollar’s sharp decline in the mid-
1980s thus served as an important catalyst for the liberalization of restrictions on
foreign investment in Australia, for the first tentative steps away from automatic
indexation of wages for movements in the CPI, and for the emphasis on moving the
Federal Budget into surplus over the second half of the 1980s. By the late 1980s,
when the A$ began rising again and consumer confidence no longer so closely
tracked its movements, the bi-partisan commitment to economic reform had become
firmly entrenched.

More broadly, the float contributed to the internationalisation of the Australian
economy by facilitating, as a result of the improvement in international
competitiveness flowing from the dollar’s mid-1980s decline, a significant increase in
the share of exports in GDP; and, as a result of the removal of exchange controls, a
significant increase in Australian investment overseas as well as in foreign investment
in Australia. These developments in turn strengthened the basis of support for policies
aimed at enhancing Australia’s competitive strengths, in particular trade
liberalization.

Finally, the float has had a lasting beneficial impact on the conduct of macro-
economic policy in Australia. It eventually freed monetary policy from the obligation
to support a pre-determined value of the exchange rate. The importance of this
freedom took some time to become apparent, as monetary policy initially floundered
around without any clear ‘anchor’. But from the recession of the early 1990s Reserve
Bank emerged with de facto control of what has become the most important
instrument of economic policy, the cash rate, and a credible framework for
implementing it, the inflation target.
And with the Reserve Bank’s credibility enhanced by its success in keeping inflation
within the target range, the exchange rate has been able to play its textbook role of
acting as a buffer against externally generated shocks, during the Asian crisis and
again in the aftermath of the ‘tech wreck’ and the subsequent downturn in the global
economy.

In effect, the float has contributed to a shift in the balance of economic policy making
power from Canberra to Sydney, and with it a (welcome) reduction in the scope for
the requirements of the economic cycle to be subordinated to the dictates of the
political cycle.

				
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