International Integration of the Australian Economy

, the Bank convened a conference entitled 'International Integration of the Australian Economy'. The following excerpt is the introductory chapter of the conference volume. The structure and performance of the Australian economy have been shaped profoundly by international linkages. Despite their enduring importance, however, the strength of the links between Australia and the rest of the world have varied considerably through time. The depression of the 1930s, and then World War II, saw the trade links weakened substantially. In the three and a half decades that followed, little effort was made to rebuild these linkages, as Australia pursued a development strategy that left the greater part of the economy relatively isolated from the world. This gave Australia some of the characteristics of a 'dual economy': one part (resources and agriculture) closely integrated with the outside world, and another (larger) part that was inward looking and sheltered from the efficiency and pricing pressures that come with international integration. In the past decade, all this has changed. Australia has embraced the idea of an outward-looking, export-oriented economy, with both its goods and financial markets increasingly integrated with world markets. Arguably, today our links with the rest of the world are stronger and more pervasive than at any time, at least over the past century. This change has seen a weakening of the division between the outward-oriented sectors and the domestic sectors, and has led to many non-traded industries also feeling the impact of international integration. This increase in international integration can be seen in a number of indicators. The average effective rate of assistance to industry has fallen from 24 per cent in 1984 to about 10 per cent in 1993. Over the same period, the ratio of exports plus imports to GDP has increased from about 30 per cent to nearly 40 per cent. On the foreign investment front, the removal of foreign exchange controls in 1983 allowed Australian firms to exploit their comparative advantages on a global scale. Since the removal of these controls, outward foreign direct investment has averaged about one per cent of GDP per year; a ratio three times higher than in previous decades. Financial liberalisation has also allowed domestic investment to be financed from foreign savings to a greater extent than had been the case for many years. Reflecting this change, the current account deficit averaged nearly 4.5 per cent of GDP over the past decade, …