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Australia is one of the most successful economies in the world.
Its citizens enjoy a level of personal wealth that is only matched by four or
five other places on the planet, all of which that are much smaller nations overall.
It's also enjoyed relatively stable economic output,
maintaining its record of avoiding a recession for more than 30 years.
That's all great, except for the fact that by most logical economic reasoning
Australia's economy should be a total failure.
It's made most of the same mistakes as a lot of other countries around the world right now
that are currently dealing with hyperinflation, mass unemployment, national bankruptcies,
and in some cases almost total societal failure.
But Australia soldiers on, and the question is, why?
Learning how Australia has managed to avoid catastrophe while making all of the same moves
as countries that have fared far worse could teach economists a lot about potentially
small differences that resulted in dramatically different outcomes.
So, why is it that Australia should be an economic failure?
How has it avoided all of its problems?
Is its luck sustainable long-term?
And finally, is there anything that other countries can learn from Australia's
unique approach to economic management?
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Now one thing that should be mentioned is that for most of these economic issues there
is another country in much the same position, Canada.
Although for most of these problems or opportunities respectively, Canada is facing them in a slightly
less severe way.
Also, a small disclaimer is that I am of course personally from Australia, so I would like
to believe that our current way of doing things is sustainable, although as always, just because
we want something to be true doesn't mean that it is.
Alright, anyway, Australia's success stumps a lot of economists because in many ways it
has the wealth and prosperity of an advanced economy, only with the industries of a developing
economy.
Wholes and homes make up a concerningly large share of Australia's economic output.
One of these is a notoriously unstable industry that is at the mercy of global markets,
trade tensions, and the performance of other economies thousands of kilometers away.
Australia's second-largest physical export is coal, a crude fossil fuel that most of
the world is moving away from as part of efforts to be more environmentally sustainable.
Australia is also heavily dependent on just one trading partner,
China, which buys over 40% of its exports.
Now of course, Australia is blessed with some of the most abundant natural resources in
the world, and those resources are split up between a very small population of just under
26 million people.
So unlike a country like the USA, Australia could live very comfortably off these revenues,
at least in theory.
The problem with selling unimproved natural resources straight to international trading
partners is that they are very profitable and don't require that much local production.
Now that might sound like a good thing, and to the companies extracting these resources
it is, but to the country itself it can cause some major problems.
Now we've explored the issue of the resource curse or Dutch disease in dozens of videos
on this channel before, and I don't want to repeat too much for regular viewers.
So in brief, the issue specifically relevant to Australia is that it has been very hard
to turn those natural resources into a genuine improvement in the national economy.
Exports are counted as a component of output, or GDP, alongside consumption,
investment and government spending.
But just because shipping dirt or lumps of coal overseas might make economic output
figures look good, it doesn't necessarily mean that it's doing any good for the regular
economic participants in the country.
Most major mining operations in Australia are incredibly remote and employ a relatively
small workforce of people that are transported to these locations by mining companies and
then transported back out.
These are so-called fly-in, fly-out or FIFO workers.
While these workers are on site in the mines, they have most things from food to accommodation
provided for them by the company they work for.
What this does is effectively separate one of the most lucrative industries in the country
from any type of interaction with the rest of the economy.
Something like the finance or technology industries centered around major cities in
the USA, Western Europe and Asia are also very lucrative, but they help to contribute
to the local economy because everybody employed in these jobs will go out shopping, or go
out for dinner, or really do anything to contribute to the local economy around them.
This recirculation of money means that even people not directly involved in these major
industries can still benefit from them.
But when the centers of industry are literally thousands of kilometers from major population
centers, it makes it much harder for workers to recirculate their money, and even besides
that these mines just employ less people to begin with.
Now these issues could be alleviated if the revenues from these mining operations were
pushed back into the domestic economy.
Obviously the most direct way to do this would be to tax resource sales and then use the
tax revenue to fund various government projects.
Of course regular viewers of the channel already know that the go-to example of this being
done effectively is Norway, which is another country with a vast wealth of natural resources
and a relatively small population to share them between.
The Norwegian government has heavily taxed natural resource revenues from private companies
and even set up their own state company to generate income directly.
That money is then put into a giant national savings account called a sovereign wealth
fund which invests the money and uses those earnings to fund government services.
It really is the gold standard in making sure that the resource wealth of a nation
goes to benefit the people of that nation, because unlike a lot of other industries,
natural resources won't create domestic economic activity by themselves.
Now a quick side note is that Australia does technically have a sovereign wealth fund,
the future fund.
But that money came from the privatisation sale of things like Australia's telecommunications
company Telstra.
It's also only worth about 1 7th of Norway's fund in a country with 5 times as many people,
because it receives no direct revenues from natural resources.
Unfortunately the Australian government has failed to levy direct taxes on mining,
and today a lot of the wealth generated from this industry goes largely to benefit a few
extremely wealthy individuals or international resource companies that send their profits
back to their home country.
Foreign cash transfers are not a part of economic output figures,
so a country can be bleeding money and economists would never know it by looking at GDP alone.
Now of course other industries like tech and finance have caused problems as well,
like massive inequality between wealthy people working in these lucrative jobs and everybody
else, but that still happens in Australia with mining too.
Fly-in fly-out workers are paid extremely well and can easily outcompete other regular
workers for things like housing, which is another major issue in the Australian economy.
And a handful of well-paid workers are far from the biggest cause of this crippling problem.
Housing in Australia is some of the most expensive in the world,
which on the surface doesn't really make that much sense.
The price of housing, just like the price of any other good or service,
is determined by the forces of supply and demand.
On the supply side Australia has a lot of land, it's the 6th largest country in the
world by total landmass, and on the demand side it just doesn't have that many people.
This whole continent is inhabited by fewer people than live in a few major cities around the world.
Now the reason that Australian homes are still unaffordable despite all of this land to share
around amongst so few people can teach us a lot about market dynamics.
The price of a good like a house might be the function of supply and demand,
but supply and demand themselves are determined by lots of individual factors.
Supply in Australia is the easier issue to address. Yes, the country is extremely large,
but most of it is almost totally uninhabited desert.
The vast majority of people live very close to the coast in a small handful of dense cities,
Sydney and Melbourne mostly, which are the ones that rank highly on unaffordability scales.
My own home of Sydney, the most expensive city in Australia and second most expensive in the world,
effectively sits on something of a natural bowl surrounded by mountains on three sides
and the ocean on the fourth, so there isn't really that much land available.
Australians also culturally prefer large freestanding homes which reduces the supply
of available land further because these homes take up more room than apartments or townhouses.
Around major Australian cities this has led to urban sprawl where people are living further
and further away from centres and spending longer driving to work or areas of recreation.
Now, in defence of Australian home buying habits, a large building industry has grown
in the country to take advantage of extreme home prices, but new apartment buildings have been
plagued by terrible building standards pushed by development companies that just want to quickly
flip houses for as big a profit as possible. This might sound familiar to a lot of other
countries we've explored before on this channel. Now, that has forced a lot of people that
potentially would be willing to buy and live in an apartment back into chasing a limited
supply of freestanding homes. Now, on the demand side, it's not important just how
many people are willing to purchase a good. What's arguably even more important is if
they are able to. Australians on average have very high incomes. The country has the highest
minimum wage in the world after accounting for exchange rate fluctuations. Buying houses is also
heavily supported by Australian taxation policy which excludes people's homes from certain taxes
if they make a profit on them. Buying houses as an investment to rent out is even more heavily
encouraged because people can write off expenses like the interest they pay to the bank or even
depreciation against their regular income. Now, being able to write off the expense of
holding an asset against the income generated by that asset is not unique to Australia.
Most countries around the world have some variation of this rule. What is unique to
Australia though is that these expenses don't only reduce the income generated by the asset,
they reduce any income, including the income people get from a job.
If someone earns $100,000 a year from a job and $20,000 from an investment property,
but they can show paper expenses for $50,000 on that property, they would only pay taxes
on $70,000. Australia has some of the highest income taxes in the world.
As soon as someone earns over the equivalent of $115,000 USD or $180,000 AUD, they pay 45%
of every additional dollar they earn. There are countries with high minimum tax rates,
but not many of them start from such a relatively low income.
And yes, of course $115,000 USD a year is a lot of money, but not necessarily for such an
extreme tax rate in one of the wealthiest advanced economies in the world. But don't
feel too bad for the high-earning Australians just yet, because very few people really pay
these taxes, because it's almost considered financially irresponsible to not buy a house,
claim on paper financial losses, and get charged a much lower tax rate.
The tax advantages that homes give Australians have turned them into investments more than
they are a place for people to live. Unfortunately, this has come at the expense of investment into
other areas of the economy like technical innovation, which lags well behind other
advanced economies, the USA in particular, because Australians would rather invest in homes,
and the country is not as big a market for international investment.
Overall, housing has helped the economy along in the most basic way possible,
because even terrible new housing developments still employ a lot of skilled workers to build
and sell. And that's on top of things like infrastructure development that's needed to
connect all of this urban sprawl with utilities and roads.
State governments within Australia also benefit from this whole system by collecting tax revenues
every time a house gets sold, which now, with such high home prices, forms a significant part
of their ongoing budgets. So, Australia is an economy that is just as heavily relied on basic
natural resources as economies like Venezuela, Russia, the DRC, Brazil, Saudi Arabia, and Iran.
It is also centred a lot of its wealth, economic growth, and employment around housing speculation
and poor-quality development, something that countries like China are struggling with right
now, and have already heavily impacted many countries from Sri Lanka to Iceland and even
the mighty USA. Yet, despite making the same mistakes in sometimes even more pronounced ways,
the Australian economy carries on unaffected.
That's because Australia's economic system is not about selling rocks or homes,
it's about selling Australia.
Australia is one of the most desirable economies in the world to immigrate to,
and that's because it is incredibly politically stable, it has an extremely high standard of
living, good weather, and a strong culture of diversity.
Australia is also an English-speaking country, which is already a widely spoken language,
making it easier for people moving from the USA, Canada, and, well, England to live here.
On top of that, English is the world's most spoken second language, which means a lot of
highly educated people from across the world can still speak it fluently enough to live and
work in Australia, even if it isn't their first language.
Schools in Australia are also world-class, with top universities ranking alongside or
often even exceeding Ivy League schools in the USA or similar institutions in Europe.
Even certain high schools in Australia, like James Roose Agricultural School,
have an international reputation amongst wealthy migrants who want to find a new
home where their children will be well-educated.
Education has become one of the most valuable exports for Australia,
and it pays off in more ways than just the billions of dollars worth of tuition
brought into the country every year.
We have looked at student migration in a lot of videos on this channel before,
including last time we explored the economy of Australia two years ago.
And that's because where the world's young and educated people end up is going to be
one of the most important variables that is going to determine the future of an increasingly
intelligence-based global economy.
That's on top of the global education industry being massive and very value-adding in its own
right.
A student coming from overseas to study is an almost perfect economic opportunity for
any country.
When they arrive, they're going to bring money with them to boost the local economy as they
pay for basic consumer goods and a place to stay.
As they study, they'll be paying tens of thousands of dollars a year in school fees
to universities that in turn employ a lot of people and conduct a lot of research that
can further boost the economy.
And when they're done paying all of that money and they graduate, the host country
in many cases can choose to keep the young, freshly qualified worker at the very beginning
of their career, where they can add value to the economy and pay taxes for the longest
possible time.
In Australia, it's not just students coming to make big contributions to the local economy
either.
A lot of already very highly skilled and wealthy people want to make the land down
under their home.
The country's cities may be incredibly expensive, but that's because they're
consistently ranked as some of the most livable in the world.
Quality of life metrics in Australia are similar to those of Scandinavian countries,
but places like Norway, Sweden and Denmark, as great as they are economically speaking,
also look like this for most of the year.
Whereas Australia looks like this.
These are very real things that don't get seen in economic metrics, but are still something
that some of the most in-demand people from around the world will consider before moving
to a new country to start a new life.
Other countries that compete with Australia in terms of lifestyle also tend to be quite
insular, whereas Australia actively encourages migration so long as migrants bring something
of value with them, either in-demand skills, a lot of money, or at the very least a willingness
to work jobs that nobody else in Australia wants to.
The results speak for themselves.
Australia plans to bring in 1.5 million migrants over the next four years and will have no
problem attracting this many people.
What's more is that most of them will have highly in-demand skills, will be bringing
a lot of money along with them to inject into the Australian economy, or both.
Accommodating people moving to Australia has become one of the biggest industries in Australia,
and it's also made existing Australians some of the wealthiest people on the planet.
Something like owning a house close to one of the few major Australian cities has made
people millions of dollars, because again, supply for these homes is surprisingly limited
in such a large country, and demand grows every year as hundreds of thousands of people
try to make the idyllic country their home.
On a macroeconomic scale, this success is a bit of a give and take.
On a positive note, the industry of just being a really desirable place to visit or
live is a remarkably stable thing to build an economy around.
Outside of domestic civil unrest, there's not much that's going to make Australia
an undesirable place to come as a tourist or as a long-term resident.
However, while things might look good for the average Australian,
that success has not been shared equally.
Output in the country has not grown over the past decade,
thanks to population growth has gone backwards on a per capita basis.
The country can continue to operate by just staying an attractive destination
for wealthy and skilled people.
However, wealth growth without production growth, and by extension income growth,
means that it's harder for young Australians that haven't already built up wealth to afford
the price of everything in Australia's major cities, especially housing like we explored earlier.
This also means that they do not enjoy the tax breaks that property owners receive,
so over their lives they end up contributing more while receiving less.
Of course, unaffordable housing is not unique to Australia,
it's just that in other major cities around the world,
houses are largely a result of opportunities for higher incomes.
In the USA, the most expensive cities are all places where large and highly
technical industries that pay their workers incredibly well are situated.
In Australian cities, houses are even more expensive,
but wages on average are significantly lower than major global centres.
It's not incomes that keep the price high, it's largely the demand for the lifestyle,
the openness to new residents, and the tax breaks that houses make possible driving the demand.
Unfortunately for average economic participants in Australia,
it's hard to pay for a house with a nice coffee shop and good weather.
It's this unique combination of factors that has almost made Australia a cautionary tale
amongst other developed economies of what can go wrong if they let things
like housing grow without controls. Unfortunately for Australia,
it may be in a position now where there is no turning back.
Now everybody knows the line, nobody can predict the future, least of all economists,
but Australia is now stuck between a rock and a hard place.
If it slows down migration to reduce the competition for its existing residents for
things like housing, then its overinflated market could destroy a significant portion
of the country's wealth. It can keep on bringing more people in, but if that doesn't translate to
developing more productive industries outside of building homes and digging holes, then while the
people who have already invested in Australia are going to do well, it's going to get harder
for young people to enjoy their high quality of life, which is an economic failure in its own right.
Now we've spoken a lot about immigration and foreign trade in this video,
and Australia's unique relationship with China is at the centre of both of those issues.
If you've ever wondered about what it would look like if China went on a rampage and invaded
Australia, we've made an entire video about exactly that on our geopolitics channel,
Context Matters, and you should be able to click to that on your screen right now.
Thanks for watching mate, bye.