The Luckiest Country

Sydney—When Lehman Brothers failed in September 2008, Australians felt dangerously exposed to what was locally dubbed the global financial crisis, or the “GFC.” Government debt was low and its banks had not indulged in much American-style sub-prime housing lending or dubious financial engineering. But as a capital-importing and commodity-exporting economy, Australia would be highly vulnerable to a seizure in global financial markets and a collapse in world trade. And Australian families had borrowed too much, largely to finance what suddenly looked like a bubble in housing prices. This ultimately showed up in heavy foreign debt channelled through the banking system. Cracks appeared in the second-tier banks, sending a flood of cash into the big banks and under family mattresses.For the past few years, China's voracious appetite for raw materials had created a boom in Australia's export sector, as Chinese blast furnaces devoured ton after ton of Australian iron ore and coal. Now, though, Australians feared a collapse of the American consumer market—tightly coupled with Australia's China boom. In the last quarter of 2008, the economy had contracted modestly. Dark clouds were gathering from every direction, and the specter of another Great Depression rattled the nation's confidence. Prime Minister Kevin Rudd hadn't helped matters by talking up the peril, describing it as a rolling economic security crisis. To prevent this nightmare, the Australian government had launched a massive stimulus—public-works spending ramped up, interest rates slashed, house-buying subsidies increased and cash handouts provided to lower-income citizens. In an appearance on national television in March 2009, Rudd presciently suggested his government's stimulus response would provoke “the usual political shit storm.”By early June 2009, just about everyone had expected the national accounts for the first three months of the year to confirm a second consecutive quarter of contraction—the popular definition of recession. The governor of Australia's central bank predicted “a significant contraction” for the first half of 2009. The Treasury minister agreed. “The worst global recession in 75 years means it is inevitable that Australia will be dragged into recession,” Rudd declared in late April. It was the first time any Australian government had officially provided such a forecast.On June 3, Rudd waited in the office of a senior cabinet colleague for the tidings from the Australian Bureau of Statistics. It was delivered by Rudd's senior economic adviser, Andrew Charlton, a protege of American economist Joseph Stiglitz. As soon as Charlton finished, Rudd reportedly let out an expletive of excitement and high-fived one of his colleagues. He would not have to deliver the “inevitable” bad news he had warned Australians to strap themselves in for. Instead of being dragged into the worst global economic crisis since the Great Depression of the 1930s, Australia somehow had increased its production of goods and services in the first few months of 2009. The economy had quickly rebounded from the worst global financial crisis since the 1930s. Alone among the developed nations that belong to G-20, it was not being sucked into a world recession.Over the next two years, the economic picture stayed remarkably strong. Two years after the Wall Street meltdown of September 2008, the Australian economy was 4 percent bigger, having only contracted slightly in the first few months of the crisis. Of 31 developed nations surveyed by the Organisation for Economic Co-operation and Development, Australia ranked third in post-crisis economic output, third in employment, and second in export volumes. Two years after the financial shock, 500,000 more Australians were employed than before it, and the jobless rate was headed back down below 5 percent. In stark contrast to its economic peers elsewhere in the world, Australia was faced with an emerging shortage of skilled labor, owing to the biggest mining boom in the country's history.The nation's currency reflected its economic vigor, reaching parity with the U.S. dollar for the first time in nearly three decades. Converted into greenbacks, Australia's per capita national income outstripped America's for the first time in a century. Australians lived, on average, in the world's most spacious houses. And the value of those homes was increasing, even in the wake of a crisis defined in part by a collapse in real-estate prices. The four big Australian banks that financed these dwellings remained among the dozen in the world that comprised the list of the highest, AA-rated banks, along with the likes of the Royal Bank of Canada, Credit Suisse, and the Bank of Singapore. Federal government debt remained modest in size and AAA-rated in quality. Two years after the crisis, 20 percent more Australians were travelling abroad than prior to it. Aussie accents littered New York, London and Paris, marvelling over how cheap things had become—at least when translated back into suddenly potent Aussie dollars.Currently, the economy is entering an unprecedented third decade of uninterrupted annual growth. Earlier this year, the nation was gripped by the massive floods that swept down from Queensland through the Murray-Darling basin, causing billions of dollars of damage to the city of Brisbane and to regional roads, rail lines and coal mines. Yet financial markets and economists still expected the Reserve Bank of Australia to lift its 4.75 percent official interest rate by mid-year to prevent the country's extraordinary modern prosperity from overheating the economy. Not bad for a country that a generation ago risked becoming the “poor, white trash of Asia”—in the words of Singapore's then-leader, Lee Kuan Yew.Yet growing pains have brought their own discontents, and those who presided over the economic miracle found themselves hard-pressed to profit from it, as Rudd found when he was deposed by his own deputy barely a year after Australia's recession reprieve. It is a rarity in Australian politics for a first-term prime minister to be brought down by his own party before he can face the people again in an election. And Rudd's abrupt fall came as a disturbing shock to many Australians. But, by April 2010, his poll numbers started to slide sharply—a tribute in part to his sudden back-flip on some pledges that had been popular, especially his reversal on plans to make Australia's worst polluters pay for their carbon gas emissions. Taking quick advantage of this drop in popularity, factional powerbrokers—some of whom had been left on the outside under Rudd— pressed his deputy, Julia Gillard, to challenge the prime minister. Within hours of news leaking out that she'd agreed, Rudd's support had collapsed. By the next morning, June 24, Rudd did not even contest the vote by Labor MPs. His leadership simply lost its way, explained the new prime minister, whose broad Australian vowels belie her arrival as a child immigrant from Wales in the mid-1960s.Even with Rudd gone, Gillard could only muster the narrowest of victories in the federal elections held two months after she became the first female prime minister of Australia. But her election made history in another way, too. She now heads Australia's first minority government in six decades. Her government is reliant on the support of two rural independents in the lower house of Parliament, and confronts a Senate where the left-wing party, the Australian Greens, holds the balance of power between Labor and the conservative Liberal and National parties.The electoral indecisiveness that produced this result is a recipe for weak government and suggests a troubling national complacency. While the rest of the developed world is desperate for growth, both major parties went to Australia's post-crisis election promising to rein in the nation's most rapid immigration and population expansion since the 1960s. One of Gillard's first vows as prime minister was to reject Rudd's support for a “big Australia.” Australians have simply become ambivalent about economic growth. The financial crisis hit a mining and energy boom that had pushed Australia's annual population growth to over 400,000 people, or 2.2 percent, one of the fastest of any developed economy. Mining development called for importing more skilled workers. But buoyant growth in national income itself was boosting the demand for imported labor in the cities.The problem was that housing, transportation and utilities infrastructure in the big metropolitan areas of Sydney, Melbourne, and Brisbane was lagging behind this population surge. Australia's unusual pattern of settlement, concentrated in a handful of coastal cities, was becoming a bottleneck to its mining-boom economy. Planning failures meant that housing supply failed to ratchet up to meet the boom in housing demand. (Unlike in the United States, this meant the crisis did not leave Australia with a surplus of housing stock.) Residents in leafy suburbs objected to official efforts to increase dwelling density around their sprawling quarter-acre housing blocks, with a couple of cars in the driveway and a swimming pool in the back yard. Congestion was worsening on major urban roads and on public transport. Electricity demand was rising sharply as a result of population growth, the mining boom and the growing demand for air conditioning that accompanied rising incomes. But energy supply was failing to keep up, producing double-digit increases in household power prices.The political debate centered on projections from the Treasury department that Australia's population was set to rise from 22 million to 36 million people by 2050. The projections actually assumed that the mining boom spike in immigration would correct back to the previous long-term average. But many Australians asked how these extra people would be accommodated—inevitably in the major cities. It is a big question politicians are still struggling to answer.Australia's reprieve reflected a fundamental shift in national fortune as the financial crisis convulsively shifted the economic weight from the established rich nations of North America and Europe to the rising powers of China and India. Among already-developed nations, Australia was uniquely positioned to benefit from this change.Settled by Britain in the late 18th century as a penal colony, Australia quickly became a home for the human refuse of the world's first great wave of industrialization. It developed an early 19th-century economic base by supplying English textile mills with wool from its vast flocks of sheep as well as cereals and meat exports— all products of the wide-opened lands Britain lacked. There followed a gold rush in the 1850s. But primary industries were not considered a strong enough foundation upon which to build a nation. So the federation of the continent's six colonies into the Australian nation in 1901 coincided with a strategy to promote urban manufacturing behind a high tariff wall.By the 1960s, Japan's post-war industrialization opened up Australia's vast iron ore deposits in its desolate northwest Pilbara region. Yet a protected and increasingly inefficient manufacturing sector was considered by some critics as lacking expertise and modern sophistication. In 1964, the writer Donald Horne famously described Australia as The Lucky Country. “Australia is a lucky country, run by second-rate people who share its luck,” Horne charged. By the mid-1980s, the reliance on the farm and the quarry collided with the sharp fall in global commodity prices. Australia risked “becoming a banana republic,” warned Labor Treasury minister Paul Keating.Then, beginning around 2003, the Lucky Country found itself the prime supplier of raw materials to the blast furnaces of the mother of all industrial revolutions. Australian iron ore was stoking the very Chinese industrialization that in turn was recycling a massive export surplus into excess U.S. consumption, up and an American housing bubble that would down the global financial system. China now accounts for nearly half of all global and its voracious appetite for raw materials an in commodity prices. By 2008, the of iron ore from a ton in to a the of coal coal more than this financed a national pay through mining and government and and demand for It a for to flood into what is up as the biggest boom in the country's all the are through an that or in a suggests Reserve Bank of Australia governor well as China's blast the boom is Australia into an energy The biggest of the next will gas the Australia and it to massive that it into and it to In the gas by will the of percent of the nation's annual is by Australia's economic the of trade. The China boom this of export to by percent its previous average. China's industrial the of goods that Australia the China's demand for raw materials the of the mining Australia The been least three than those by like Canada, New and “The strong rise in Australia's of over the past decade could well turn out to be the biggest shock to economy in the of the Treasury in a last along with the Reserve been Australia's most economic as this is a sharp contrast to the mid-1980s, when commodity export and the of 20 percent below the average. 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But the weak reversal a on left Rudd was a political by few his own his poll numbers he became vulnerable to the who to his is that both of politics on how much Australia to its carbon emissions. 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But it to its boom economy in it is to as a for a a Australia to how it can being the country in the

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