Australia’s floating dollar move was visionary 30 years ago


/ published 4 years ago

Australia’s floating dollar move was visionary 30 years ago

The country made a couple of changes. Here is a quick breakdown of how Australia managed to turn things around using a couple of economic and finance reforms in the 1980s. Can modern politicians make such bold change to move their economy?

In the 1980s, Australia was a low economic power. The country’s GDP saw just 2% increase per year. In an effort to improve the economy, the country’s government made several bold moves. But none was bolder than the reform to float the Australian dollar, which was before set at a fixed rate.

Australia’s 1980s economy reforms

The country made a couple of changes. Here is a quick breakdown of how Australia managed to turn things around using a couple of economic and finance reforms in the 1980s. Can modern politicians make such bold change to move their economy?

- The biggest notion that Australia needs to engage in new economic policy was unemployment rate, which was 9% at the time

- Federal government made a deal with Australian Council of Trade Unions. The proposal required unions to restrict wage demands in return for a government pledge to minimize inflation and implement social services

- The federal government also allowed for unions to merge

- Government also made a couple economic ideas to allow Labor to seize the opportunity, including freer trade, smaller government, deregulation of markets, lower tax rates within a fairer system, more flexible labor market, low inflation, attack on economic rent seekers, and a market-oriented economy

- In 1983, the National Economic Summit showed a move toward gradualism and a search for consensus in terms of economy growth

- Last, but not least, the Hawke-Keating government made a bold change to allow dollar fluctuation

What is dollar floating and how it helped Australia?

In simplest terms, the move made by Paul Keating allowed the dollar to change relative to other currencies. Keating served as Treasurer in the Hawke government in the 1980s, and later as Prime Minister from 1991 to 1996.

The Federal Government allowed the market to fluctuate the value of the Australian dollar between US48c and $US1.10. When the dollar was high, imports were cheaper, while exports were less profitable. It was vice versa when the dollar was high. The theory allowed the market to assess the value of the Australian economy relative to others, and adjust the dollar accordingly. Because of this, the economy was adaptable to change. Before that, the Australian dollar had a fixed rate, and the country suffered inflation because of it.

With a fixed exchange rate, the Reserve Bank was not able to effectively control the amount of cash in money markets. This hampered its ability to set interest rates. Once it was freed of the obligation, the Reserve Bank focused on keeping inflation in check, which provided stability for the country. On the 30th anniversary of the move in 2013, governor Glenn Stevens said that “float made all the difference in the world”.

The main benefits of the floating are:

- Armed Australia with a shock absorber to insulate the country from bumpy ride of global capitalism

- The government lost control of the exchange rate and gained control on its monetary system

Back in 1983, Paul Keating said that the move was essentially made to force “speculators to speculate against themselves”.

The dark side of floating

While there were many benefits to the Australian economy, floating the Aussie dollar also provided opportunity for private power to abuse its power to the detriment of the whole. One great example is the 1997 Asian financial crisis. At the time, currency traders bet that the currencies of Asian currencies would go down. They had wealth at their disposal, so they had the means to sell the currencies to push them down. And when other traders saw the currencies being attacked, they too sold the currencies with the expectations it would go down further. Once the currency was pushed below the true value, then it was purchased again with the expectations of a rise where it could be sold again. Australia managed to survive the currency war better than countries like Malaysia, South Korea, or Thailand. The attacks affected profitability of Australian business, but not to a high level.

What is better?

Nowadays, the choice is still between fixed or floating exchange rate. While Australia’s example shows that a floating rate can help kick start the economy, fixed system is still the preferred one. In 2014, the International Monetary Fund took a survey, and found out 56.6% have a variant of the fixed value systm.

In addition, it suggested that some countries would love to have a fixed system, but they do not know how to do it. This list includes smaller Asian countries like Thailand, Malaysia, Korea, Indonesia, and the Philippines.

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