Australian way of managing economic reforms

This article appeared originally in Gulf News: link to original article

Economic reforms are expected to be painful. The pain, though, is short-lived and limited to the initial stages of implementation.

For the “patient” countries, or governments, the long-term dividend is always worth the short-term sacrifice. Economic policies must be planned by economists – even if executed by non-economists – and they should be carried out all the way without reneging on them under pressure.

In the Middle East and North Africa (MENA), resource-rich countries are better positioned to carry out economic reforms as they can absorb shocks using their stash of foreign currencies. That is in addition to benefiting from the relatively higher prices of oil today, compared to estimations of a much lower price down the road once peak demand has been surpassed.

The problem is that high commodity prices and high central bank reserves made it hard to sound the alarm on key economic reforms that were much needed to chart a country’s economic future. I was recently reading a working paper on economic reforms that took place in Australia post World War II, and how those reforms laid the foundation for Australia’s current stretch of economic growth, without a recession in 27 years.

Being rich with commodities and with the same vulnerabilities to fluctuations in their prices, I could not help but ponder the similar context between countries in MENA and Australia, and yet the distinct economic paths taken.

Below is a summary of the main economic reforms that should have taken place in MENA around the same time but did not, resulting in today’s economic stagnation.

Managing privatisation

The first takeaway is the move towards privatisation, limiting the government’s role in the economy. There is a caveat here, however. No matter how measured the move to privatisation is, there is always an immediate negative effect on employment rates.

In Australia’s case, the protection and support came from the government in extending non-financial benefits, made possible by reaching a compromise with workers’ unions, where financial benefits are reduced but jobs are protected. Such non-financial benefits extended to healthcare, education and pensions, thus improving the social safety net.

In comparison, MENA’s past privatisation rate is a mere fraction of that in Australia, and state-owned enterprises (SOEs) are in control and responsible for the drag on its economic growth.

Currency handling

The second takeaway relates to how Australia managed its dollar. The Australian Dollar (AUD) was initially pegged to the British pound. In due time, Australia decided to move from a hard peg to a crawling peg in the 1970s, where the AUD is allowed a bandwidth in its fluctuations, without the need for intervention from the Reserve Bank of Australia (RBA).

A decade later, the AUD was floated. The float meant that the AUD’s value is determined by market sentiments rather than what the government thinks is the right value for the AUD, which by extension balanced the commodities and non-commodities sectors in driving economic growth.

For instance, a lower AUD encouraged exports from other sectors, which also supported the cause of economic diversification and job creation in those sectors as part of Australia’s economic overhaul. Foreign debt was also hedged in AUD to stabilise its value and lower the risk of foreign debt that is expensive to service, meanwhile introducing capital depth in Australia’s financial markets.

Abandoning currency pegs in MENA is a question of when not if, and they will need to have the technical expertise and prowess to manage independent monetary policies.

Pace of reforms

The third and final takeaway is continuity in pursuing economic reforms, subject to periodic reviews and any needed tweaks. Economic reforms need breadth and time, thus patience by both governments and those governed. Economic reforms require perseverance in carrying them out despite pressure to scale them back or to revoke them altogether.

That being said, there are two main points to be considered here.

One, there has to be buy-in from all stakeholders. To do that, the logic behind carrying out those economic reforms must be clearly communicated to all stakeholders along with the expected timeline, not only to enact economic reforms, but to start seeing the benefits from them. Two, the planning and carrying out of economic reforms must be institutionalised, not personalised.

Otherwise, any realised gains will be short-lived and will be foregone before fulfilling the purpose of those economic reforms. In such a case, having to go back to the drawing board can prove harder and more hurtful for the economy.

What is worse than a bad policy is the right one being carried out half-heartedly.

The last takeaway is probably the most relevant for countries in MENA. While there is no doubt that it is much harder to catch up with other countries in terms of economic progress, nonetheless, it does not eliminate the need for reforms in MENA. What it truly means is that those economic reforms are going to be much more painful than if they were carried out four decades ago.

Whether it is by limiting the government’s role in the economy, floating MENA currencies, or genuine, continuous economic diversification efforts; it is now or never.

One of the paper’s concluding remarks highlighted that high income shields low productivity. This is probably one of the main issues taunting MENA’s economic progress and future growth given their huge, but quickly depleting, stash of foreign currencies. Australia, despite being a resource-rich country, has taken painful steps to reshape its economy and re-chart its path in a way that enabled it to withstand the Asian financial crisis of the late 1990s as well as the 2008 financial crisis.

The last thought that I want to leave you with: How can continuity be ensured in economic policy planning in MENA countries?