ECONOMICS SUPPORT SITE
For the HSC and TEACHING
ECONOMICS
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ECONOMICS SUPPORT SITE For the HSC and TEACHING ECONOMICS |
Developed for Studying For the HSC
and Teaching Economics
Australian Competition and Consumer Commission
Australian Bureau of Resource Economics
Asia Pacific Economic Cooperation
1999 ECONOMICS ADVICE LINE
ECONOMIC INDICATORS as of 14/10/99
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INDICATOR |
Current Data |
Current Data |
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INFLATION June quarter 1999: 0.4% June 98 to 99: 1.1% |
Headline 1996 to 97 1.2% 1997 to 98 0.3% 1998 to 99 1.25 (f) |
Underlying 1996 to 97 1.7% 1997 to 98 1.6% 1998 to 99 1.7% (f) |
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LABOUR
GDP/hour worked (base = 96/97) 1997 to 98 103.5 1998 to 99 106.2 Current productivity growth 3% annual |
Unemployment Rate 1995 to 96 8.4 % 1996 to 97 8.6 % 1997 to 98 8.2% 1998 to 99(e) 8.0%
September 99 to 7.4%
Long Term.Unempl. 1996 to 97 29.2 1997 to 98 31.7 1998 to 99 33.1 |
Curr. Particip Rate = 63.3%
Average Weekly Earnings ( % change Sept ) 1998 to 99 2.9% 1996 to 97 3.7% 1997 to 98 4.4% 1998 to 99(f) 3.8% June Qrt 99 0.6% |
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GDP
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1996 to 97 3.8% 1997 to 98 4.8% 1998 to 99 4.5% 2000 (f) 3.0% |
June Qrt GDP up 0.9 % (june 98 to 99 4.3%) |
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SAVINGS/INVESTMENT |
Savings Ratio 1990 5% 1995 to 96 4.1% 1996 to 97 4.9% 1997 to 98 2.75% 1998:2.2%; 99 f = 1% |
Business Investment ( % change ) 1995 to 96 14.6% 1996 to 97 17.7% 1997 to 98 11.2% 1998 to 99(f) minus 4.6% |
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CAD/INTERNATIONAL TWI (base = 1970) 1996to97 56.7 1997to98 58.5 1998to99 56.4
Terms of Trade (base=1989to90): June 97 95.7 June 98 99.7 June 99 97.1
AUD/US: June 98 63.62 June 97 72.83
AUD/JPY: Sept. 16 98 79.31 10 year av. 91.4 1999(f) 93.0 |
Total CAD Deficit………… 1994 to 95 $29 billion 1995 to 96 $22 billion 1996 to 97 $17 billion 1997 to 98 $23 billion 1998 to 99 $32.4 billion
Debt/Service Ratio ( interest as % export Y ) 1995 to 96 11.2% 1996 to 97 10.6% 1997 to 98 17.3% Note: Commodity Prices Sept97 to Sept98 6% decline |
As % of GDP 4.6% 4.4% 3.2% 4.6% 5.25% e 1999 to 2000
Net Foreign Debt ( as a % of GDP) 1996 to 97 40.3% 1997 to 98 40.1% 1998 to 99 38.8% ($228b) |
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WORLD GROWTH / REAL GDP |
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East Asia Real Growth 6.5% 1998(f) minus 1.5% 1999(f) 0.5% |
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BUDGET
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Budget Balance 1995 to 96 4.4% (minus 10.3b) 1996 to 97 3.2% (minus 4.9b ) 1997 to 98 4.6% (minus 2.0b) 1998 to 99 4.25% (2.9b) 1999 to 00(f) $5.2b surplus Fiscal balance: $5.4B Underlying budget surplus 98/99: $2.7bn; 0.5% GDP 99/00: $5.2bn; 0.8%GDP Headline budget surplus 98/99: $18.7b; 3.2% GDP 99/00 $23b, 3.7% GDP (F)
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Pub Sector Underlying Deficit (Surplus) as % GDP:
1999 minus 00 0.8
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INTEREST RATES
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90 day bank bills: August 99 4.92% Sept 98 5.19% Sept 97 5.915%
10 year Treasury bonds: August 99 6.35% Sept 98 5.91 |
US Interest rates Cut by 0.25% October 17 to 5.0% Prime rate 4.75% |
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MISCELLANEOUS
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Housing Finance up 14.7% July 1998 to 99
Building Approvals up 9.3% August 98 to 99
New Motor Vehicle Regs. down 8.7% Aug 98 to 99 |
Inventories private business: up 6.2% June 98 to 99 |
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1994/95 |
1995/96 |
1996/97 |
1997/98 |
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Gini-coefficient |
0.443 |
0.437 |
0.444 |
0.446 |
To be added
Michael Horsley, University of Sydney
Current situation: The Results of the August Crisis
In August 1998, the Russian economy underwent a catastrophic collapse. At the centre of the collapse was the devaluation of the rouble. On August 17, the Government abandoned the ( fixed ) exchange rate target and floated the rouble.
This caused a flight of finance out of the rouble and Russia. The rouble lost most of its value, and this depreciation led to severe inflationary pressures. As well, the Government announced a moratorium on payment of external debts and decided to impose capital controls. The Government defaulted on $40 billion of rouble bonds.
By February 1999 Russia was unable to pay $4.8 billion that is due to the International Monetary Fund ( IMF ) and World Bank.
Almost overnight, investors, Governments, International Banks and financiers and International institutions lost confidence in the Russian economy. Many international banks and investors lost fortunes on their investments in Russian industry, shares and currency. A new recession was seen as inevitable in Russia. The financial instability
that followed on world markets:
The reasons for the financial crisis in Russia were seen by many observers to result from:
In September 1998, a new Government under Yevgeny Primakov, managed to ease the situation, enter into discussions with the International Monetary fund, and as a result, maintain stability.
There has been wide consensus by international investors, Governments and the IMF that the crisis in Russia reflects the fundamental weakness of the Russian state and government. The central Government and the Central Bank do not have the capacity to repay Russia's debts. During 1998 tax revenues were about $1 billion a month. However Central Government expenditure at the same time was $ 1.5 billion per month.
The solutions proposed are for the Government to
It is unlikely that further loans will be made to Russia unless it complies with these policies and proposals &emdash; and carries them out.
How does the Russian economy really work?
Understanding the causes and nature of Russia's international default means understanding the actual mechanisms of the Russian economy &emdash; how does it really work? The picture that emerges is complex. For example, not all of Russia's economic indicators during 1998 were negative. Russia had a current account surplus of $18 billion in 1998. In the 7 years since privatisation commenced in 1991, a Russian middle class developed and many new industries financed by overseas investors commenced. Industrial output grew by 1.9% in 1997, and GDP grew as well. Also during 1997, employment increased considerably. It is surprising to note that bankruptcy in Russia is relatively rare &emdash; even in 1998.
In 1998, Clifford Gaddy and Barry Ickes, two observers of the Russian Economy, suggested that Russia had developed a 'virtual economy' &emdash; which had semi-market features. When the Russian economy was privatised in 1991, it was not possible for the Soviet style 'Planned economy' to develop markets overnight. They argue that in a very short time, a barter system developed so that economic entities could continue to trade. Other characteristics of this virtual economy are:
This virtual economy was described in 1997 by the Karpov Commission on the Russian economy as' an economy …. where prices are charged which no one pays in cash … where wages are declared, but are not paid …with business conducted at non market or virtual prices'. This non market system does depend on the market for cash. Cash is needed occasionally to pay wages - and sometimes taxes.
Gaddy and Ickes describe an example of this when they outline a case study of the building of the Chelyabinsk subway (Foreign Affairs. Volume 77 No 5, September/October 1998). The Governor of Chelyabinsk province declared the construction of a subway in the city as an important projects. Construction companies owing tax arrears to the state and Federal Governments were identified. The Federal Government also owed Chelyabinsk province considerable disbursements. The subway then was financed by the tax debts of construction companies to the federal, provincial and local governments in lieu of tax payments. The subway was constructed in lieu of payment. The fact that there were greater needs than for a subway &emdash; schools in disrepair, nurses and doctors unpaid &emdash; was not a priority .
'When goods are offered in kind as tax offsets, it's a seller's market'.
The semi-market economic system in Russia has many advantages. It maintains
employment at far higher levels than in a market economy and provides an important social safety net. Pensioners may not be paid in cash regularly, but they may be paid in heating and health services until cash is available. The reduced need for cash also reduces the role of the 'mafia' and associated corrupt practices that have arisen in Russia:
'The assets of the state were stolen, and then, when the state itself became valuable as a source of legitimacy, it too was stolen' (George Soros, world's leading currency trader)
This semi-market system has many disadvantages. For example, economic restructuring, especially by enterprises to meet market needs by price competition, is basically non-existent. Why become more price efficient when the firm can muddle through and still employ its workers and pay taxes in kind? As a result, fixed capital formation in Russian industry is extremely low. There is little need to invest in capital goods or purchase better technology for more efficient production to compete with other producers in the market. The semi-market system also imposes severe restrictions on reform. The IMF wishes the Government to increase tax collection in cash and improve taxation compliance. But making companies pay more tax means that they will be unable to pay cash wages for longer periods, leading to increased industrial conflict and social instability.
The semi market economy also explains why, despite some predictions of a possible 10% decline in Russia's GDP in 1999, there seems to be greater confidence amongst both debtors and creditors. The economy seems to have avoided collapse. The façade of budgetary restraint may well pay off in the future. While industrial unrest is still a problem (recent strikes by teachers and miners) there is less open defiance of central government regulations, and the curbing of illegal trade in vodka promises to deliver a healthier, if not wealthier workforce.
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