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With 21 years of uninterrupted growth Australia stands out among OECD countries. This performance has been sustained by sound policies and, more recently, booming demand for commodities from Asia. However, temporary factors, including the 2008-09 economic and financial crisis and increased caution among households from uncertainties in the international environment, have slowed growth. At the same time, Australia is adapting to structural changes prompted by the commodity boom, a strong exchange rate and terms of trade, which, while having moderated recently, remain high by historical standards. The main challenge for policy is therefore to manage a sustained recovery, while promoting important structural changes in the economy.
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Australia has been adjusting to substantial economic structure changes linked to historically strong terms of trade, the boom in the mining sector and a very high real exchange rate. All these developments are linked to rapid growth in Asia, especially China, and the resulting demand for raw materials. They have had far-reaching effects on the economy through sharp income growth, strains on productive capacity that could affect macroeconomic stability and substantial structural changes, both sectorally and regionally, due to the geographical concentration of mining activities. Since the beginning of the recent mining boom, the challenges of the so-called multispeed economy have taken centre stage in the Australian economic debate.
The country's adjustment to the mining boom has so far produced favourable results, even as it has imposed significant strains, in particular in the non-mining tradable sectors. The development of Asia offers challenges and opportunities beyond terms-of-trade developments, as the gradual emergence of a huge middle class with potentially large demand to be satisfied will expand markets and open new ones. To take full advantage of these ongoing changes, a smooth reallocation of resources in the economy should be encouraged. The medium-term fiscal strategy should take better account of the likely increase in the economy's volatility and its greater dependence to the fluctuations of the terms of trade. Tax reforms have a useful role to play in facilitating the ongoing structural adjustments, while it is essential to maintain a flexible labour market. -
Australia’s productivity growth has decelerated markedly around the turn of the century. Part of the decline is probably temporary, but raising multifactor productivity is key to ensure that living standards continue to grow strongly, especially if the currently strong terms of trade weaken over time. Recent efforts by the government are welcome. Ensuring responsive, high quality, vocational and higher education systems is indispensable to long-term growth. Raising the completion rate of vocational students, and enhancing the level of collaboration among the key innovation players are priorities. The productivity-enhancing effects of infrastructure could be boosted by more effective and strategic planning, new sources of funding, and better use of existing capacity. Efficient pricing for infrastructure services and rapid progress towards harmonisation of regulations across states would boost competition and productivity.
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