Brookings: Topics - Australia

Australia's Banana Republic Political Fiasco is Hurting It Internationally

Warwick J. McKibbin — Fri, 22 Mar 2013 00:00:00 -0400

Any Australian overseas on March 21 was glued to their internet connection, just as I was in Washington, awaiting the outcome of a key battle in the civil war within the Labor Party. After weeks of senior ministers telling the Australian people to their faces that there was no leadership issue, there had been a spill of the party leadership.

Either these more outspoken ministers were knowingly lying to the Australian people about instability in the Labor government or they were ignorant of what was going on around them. Either way, they should not still be representing the Australian people.

However, the issues run much deeper than honesty. They go to the extreme damage that political uncertainty is doing to Australia’s international reputation and ultimately the Australian economy.

For the week before the spill I had colleague after colleague filing through my office at the Brookings Institution asking questions about what was happening. After 20 years of commuting between Canberra and Washington, the interest in Australia was very different. The questions, however, were worrying.

Why was a country that had withstood the worst of the global financial crisis suddenly switching direction and following the Latin American model?

Why get on that slippery slope of backroom deals, attacking business, giving unions power over economic decision-making and abandoning the path of economic reform when the opposite had seemed to work well for so long? Australia had just become a role model for economic management. Most importantly, why was the government attacking freedom of speech? In Washington, where Congress was in a stalemate, even being unable to put together a budget, the question was why would a prosperous country like Australia squander a position that Americans dreamed of?

Political uncertainty accompanied by bad economic policies can quickly shift an economy from the path to prosperity to a populist but poor economy, such as was a far too common experience in Central and South America over the 20th century.

I found myself, as a proud Australian, on the one hand defending it but on the other hand, as an academic, having to offer an honest analysis of what was going wrong.

It came down to a number of factors. A major problem was minority government – where one party clung to power and sacrificed its very soul to make deals with minor parties and individuals. Declining popular support drove policies that distorted decisions across the economy in order to channel funds back to the base constituency, including the trade union movement. It would have been far cheaper for the economy if the government had paid direct bribes rather than distort economic activity but the latter is harder to trace, thus more popular.

When governing by spin (or propaganda) stops working because the results are not consistent with the never-ending announcement of major policy reform, a politician has no choice but to admit it was an illusion or to attack freedom of speech. This was particularly important where that freedom of speech pointed to glaring problems in the government.

If the independents, the Greens or anyone in the Labor Party have the national interest at heart they need to end the current government and let the people decide who should govern. Another six months of the fiasco will have enormous reputational costs internationally and cause enormous economic damage in Australia.

In the end the Gillard government has had at least two spectacular achievements.

It has made the Whitlam government look like good economic managers and it makes the US Congress look functional after all. Most importantly, it has made my American friends feel more comfortable with the failures of their own political system.

A happier America is good for the world economy.

Authors

Warwick J. McKibbin

Publication: Australian Financial Review

Image Source: © Regi Varghese / Reuters

Poor Economic Policy Must End No Matter Who Wins Australian Election

Warwick J. McKibbin — Tue, 12 Mar 2013 13:25:00 -0400

Over the past several decades there has been a fundamental reshaping of the global economy. The billions of new consumers and workers entering the world economy from throughout the emerging world have had two major implications for Australia.

The first has been that events outside Australia changed a range of prices including the price of commodities relative to manufacturing and the price of high-skilled versus low-skilled workers.

The second implication was that the high demand for Australia’s endowment of resources that emerging economies needed for their economic development substantially increased Australia’s income.

The comparative advantage that generated wealth for Australia also accelerated the need for structural change. All advanced economies faced structural problems, but Australians were lucky that they also had the revenue to pay for productivity enhancing reform.

When Labor came to power in 2007 there was a great opportunity to use an enormous bounty generated from the boom to fund the needed restructuring and reforming of the Australian economy. There was hope that the new Labor government would continue the work of economic reform that was the hallmark of the Hawke and Keating governments.

But before the government was able to act on the hard reforms, it was blindsided by the global financial crisis. Fiscal conservatism and sound economic management were replaced by populism. Australia had clearly changed direction when in February 2009 then prime minister Kevin Rudd declared capitalism dead. This was a great irony since the reason Australia did so well relative to other advanced economies was because of the two decades of earlier reforms that had enhanced the robustness of the economy.

Without a guiding principle that what Australia needed was economic reform based on a capitalist model with an Australian twist, the DNA of old Labor rose to the surface and the old themes of class warfare and wealth distribution rather than wealth generation dragged around a floundering ship of state. Spin without substance came from minister after minister as billions of Australian taxpayer funds were wasted. Union power was allowed to raise the cost of labor.

A poorly designed carbon tax raised the cost of energy. The cost of doing business accelerated due to a fixation with nanny state regulation. Any pretence of fiscal discipline was discarded. Large subsidies were given to the multinational car makers – the list of poor policy goes on. Australia’s competitiveness problems today are as much about high input costs caused by bad policy as they are about a strong currency.

Today Australia faces new challenges from the global economy. Europe continues to walk along a cliff without knowing exactly where the edge is. The United States has large fiscal issues to resolve but is much better placed than Europe.

An energy revolution is under way in the U.S. Our research suggests that the energy boom from unconventional oil and gas in the U.S. could raise the economic growth rate by 0.5 per cent per year for at least the next decade. Lower energy prices and a renaissance of energy intensive manufacturing such as petrochemicals are already stimulating the U.S. economy. The real factors from the energy boom – including a reawakening of investment in energy and energy related industries – are overlaying an economy where the housing market has turned upwards and where the Federal Reserve board’s monetary stimulus is already late in being withdrawn. The next phase of the global economy is likely to be a massive shift of capital out of Europe towards a growing U.S.

The energy transformation in the U.S. directly lowers Australia’s terms of trade because Australia is an energy exporter. This has important implications for exporters of coal, oil and gas. The Fed will need to move away from quantitative easing as soon as possible, which implies rising nominal interest rates. The flow of capital into a growing U.S. will probably raise long-term real interest rates globally.

Any countries with a debt problem (either public or private) will have to face a more urgent reality of painful adjustment. It is likely that good news in the U.S. will be good for exporting countries but bad for debtor countries. On balance, this is likely to be bad news for Europe.

Australia has a choice in how it adjusts to a rapidly changing and volatile global economy. Whichever government emerges in Australia in September will face tough challenges. A legacy of a decade of economic mismanagement combined with major new international risks will require unpopular decisions.

Key to improving Australia’s performance will be to move away from populist short-term policy along a path of structural reform that increases the flexibility of the Australian economy. Large investments in infrastructure and efficient pricing of congestion and other problems are needed to drive productivity growth.

These investments should be based on independent assessment of the economic returns and not the political returns to marginal seats or the lobbying of vested interests. The Productivity Commission is critical to this process.

Most urgently there is need for a comprehensive review of current government spending programs and measures to reform the tax system. Australia desperately needs the next prime minister to be a leader rather than one who is a fighter.

Authors

Warwick J. McKibbin

Publication: Australian Financial Review

It Only Takes a Spark: The Hazards of Wildfires

Elizabeth Ferris, Daniel Petz and Chareen Stark — Fri, 01 Mar 2013 00:00:00 -0500

While there are different definitions of wildfires, it is generally agreed that wildfires, whether accidentally or deliberately caused by human beings, originate outside of densely populated human settlements and that humans lose control over how the fires burn, at least for a period of time.

Compared to other kinds of hazards such as earthquakes, volcanic eruptions, floods or storms, where humans have little influence on the onset of the hazard, humans are directly implicated in causing wildfires. For example, in the US in 2011, of 74,126 recorded wildfires, 63,877 or 86.2 percent of fires were caused by humans. The way in which a wildfire spreads depends on a set of factors, including topography, weather (with dry and hot conditions usually favoring the onset of fires and wind determining their spread) and fuel (the material available for the fire to burn).

More than most other hazards, human action can not only mitigate the effects of wildfires but can intervene to prevent its onset and spread. While humans stand little chance of stopping floods or landslides once they have begun, many countries have become quite adept at successfully fighting wildfires, meaning that the hazard often can be controlled before it causes a disaster. Forests and grasslands can be burned proactively to prevent uncontrolled burning. Forest areas can be cleared of dry fuel to prevent fires from starting.

Even though they are often harmful to humans, naturally occurring wildfires play an important ecological role. The process of burning returns nutrients to the soil, destroys dead or decaying matter and can also rid forests of both disease-ridden plants and insects which harm the forest ecosystem.

The Food and Agriculture Organization’s 2010 Global Forest Resource Assessment reports that an average of 64 countries, representing 60 percent of the global forest area, reported 487,000 vegetation fires per year during the period 2003-2007. The list was topped by Mozambique, the United States, Madagascar, Poland, Portugal, the Russian Federation, Spain, Argentina and Hungary, all of which reported an average of more than 10,000 fires per year. The low number of reporting countries shows that on global levels, serious data and reporting gaps on wildfires exist.

In terms of the surface area burned by wildfires (including forested and non-forested areas), data from 78 countries, representing 63 percent of the global forest area, reveal that an average of just under 60 million hectares (148 million acres) of land was burned per year during the 2003-2007 period, an area approximately the size of Ukraine. The largest areas burnt were reported by Cameroon, Mali, Botswana, Chad, Namibia, United States, Ghana, Canada, Mongolia and Senegal.

While globally there are a large number of wildfires, a large majority of them do not cause disasters as they do not threaten human health, lives and livelihoods. The International Disaster Database (EM-DAT), which only records disasters of a certain size, reports 156 wildfire disasters in the 2000-2011 period, making up only 3.39 percent of all natural disasters recorded in the database during that decade. The 780 fatalities from wildfires that the database records make up 0.07 percent of global disaster fatalities during the period. This is still more than the number killed by volcanoes (0.05 percent), but far below the number of deaths caused by earthquakes (responsible for 63.5 percent of fatalities), storms (16 percent), extreme temperatures (13.46 percent), floods (6.2 percent) and drought.

To get a better picture of the scope of and challenges caused by wildfires, this chapter looks in more depth at some of the major wildfire disasters in recent years.

(Source: EM-DAT - The International Disaster Database, accessed 9 October 2012, www.emdat.be/)

Download the full chapter » (PDF)

« Chapter 2: Assessing the Work of Regional Organizations in Disaster Risk Management

Chapter 4 - Disaster Risk Management: A Gender-Sensitive Approach is a Smart Approach »

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Chapter 3 - It Only Takes a Spark: The Hazards of Wildfires

Authors

Elizabeth Ferris
Daniel Petz
Chareen Stark

Image Source: © Jon Nazca / Reuters

How to Capitalize on Low Interest Rates

Warwick J. McKibbin — Thu, 27 Dec 2012 16:30:00 -0500

The decision by the Labor government to jettison a surplus for the 2012-13 fiscal year is a good one. To continue with such a promise in the face of years of government overspending based on uncertain revenue outcomes would have been very damaging economically once the revenue shortfalls hit home.

However, the eventual losses from the economic management of the past decade will not be avoided by this decision. The damage will now be spread over many years rather than causing a sharp economic contraction in 2013.

The key debate in fiscal policy should be about the quality of spending and taxes and less about the size of the budget surplus or deficit. Both the spending and tax sides of the fiscal accounts need to be urgently reviewed for the economic benefits they bring rather than the votes they buy. Also, a transparent distinction in the government accounts should be made between current expenditure, including transfer payments, and capital expenditure.

Government spending can be productivity-enhancing or it can be wasted. Spending that does not generate an economic return but which is financed by debt can be very difficult to service. Taxes can destroy incentives, raise input costs and damage economic activity but they can also be used to change behavior in a way that society values. Well-designed infrastructure spending based on credible evaluation of expected rates of return can reduce input costs in a growing economy and acts like an increase in private sector productivity.

Good government is about risk management. Australia is facing a number of risks such as a declining terms of trade while undergoing enormous structural change. The problem is due not only to a strong exchange rate but also to a large rise in input costs relative to productivity. The cost of labor, energy and other costs such as inefficient environmental regulation are making Australia more uncompetitive. Working on addressing reducing input costs should be a key focus of policy.

Understanding the reason for the strong exchange rate today is also a potential source of advantage. The strong exchange rate today is partly due to the mining boom but it is increasingly due to a shift in global preferences towards Australian assets. Foreigners want to have assets that reflect Australia’s still relative high rate of return, which is due to our factor endowments and our comparative advantage relative to Asia. Economic management that is better than other countries which are in crisis also makes Australia an attractive place to invest.

This major shift in global investor preferences is potentially an enormous opportunity but it is also volatile. How should Australia respond during 2013?

The first response should be to produce more assets that foreign investors want to hold. If the capital flowing into Australia pours into existing assets there will undoubtedly be a surge in the value of these assets and perhaps an eventual crash if that funding is not used to create more physically productive assets to back the financial assets.

A more direct option that reduces the risk of this volatility is for the government to create an explicit capital account in the government accounts and issue 50-year government debt on this account. If sold to foreigners at current world interest rates, the cost of servicing this debt is locked in at very low levels for a very long time. This would take pressure off other domestic asset values to minimize asset bubbles. It would also provide a large cheap source of funds that should then be used to undertake infrastructure projects with high rates of return. The assessment of these projects would need to be undertaken independently and with full transparency. The result would be a once in a generation opportunity to avoid another asset price boom and bust and a substantial expansion of the supply capacity of the economy to support private sector productivity.

The problem is how to constrain the political process from making the mistake of driving decisions by ideology rather than economic returns. The answer surely is to place more reliance on independent institutions such as the Productivity Commission.

Fortunately, unlike many other countries, Australia is not a basket case facing a fiscal crisis. It is a lucky country that has unfortunately wasted a significant amount of national wealth on ideological exercises that did not (and possibly will not) give the rates of return that were imagined by decision makers who rolled the dice and believed in the wrong forecast. It would be a mistake to rule out what is good policy for the problems that Australia faces today because these policies were badly implemented in the past.

It is better to react now to the opportunity of cheap global finance and the benefits to avoiding excessive asset price rises over 2013, rather than waiting and regretfully looking backwards over the decade that might have been.

Authors

Warwick J. McKibbin

Publication: Australian Financial Review

Combet’s Carbon Incompetence

Warwick J. McKibbin — Thu, 30 Aug 2012 00:00:00 -0400

The federal government’s announcement that the proposed floor price on carbon would be replaced by a deal to be part of the European emissions trading system in 2015 is astounding.

It shows a complete lack of understanding of what good climate policy should be and what is in Australia’s national interest.

Worse, it raises the economic costs of the existing carbon pricing policy because it creates even greater uncertainty about the price of carbon in future years. It also creates real concern about whether the government knows what it is doing, which adds to sovereign risk.

A minority government, seeking longevity by making whatever concessions are required to whatever sectional interest presses hardest, is clearly the basis for present policy design in Australia.

Vested interests have been allowed to chip away at the carbon price scheme just as they have at most other good ideas, and in the end most Australians are worse off.

It is one thing to make large-scale economic errors when the world economy is giving Australia several per cent of gross domestic product in extra revenue each year. It is another to plan errors for future years when the global economy is looking decidedly uncertain.

In the case of carbon pricing, the idea the Australian scheme should be linked to the European carbon trading scheme is equivalent to the idea the Australian dollar should join the euro zone.

This might be appealing to the government. After all, Australia ratified the Kyoto Protocol just as it was to become redundant and many countries were planning to announce their inability to achieve Kyoto targets at the Copenhagen climate conference. Australia is joining the European carbon scheme just as it has been demonstrated to being one of many policy failures in Europe.

Surely now is not the time to subject Australia to economic shocks out of Europe through an additional channel of the price of carbon. By joining the euro zone, we would complete the trifecta of fundamental policy errors and we could then blame someone else for our economic failures. This may be politically appealing, but it is also appalling public policy.

Carbon rights are like currencies.

The value of a carbon permit depends on the credibility of the government verifying that the carbon right is backed by an emission reduction. Just like money, the only value in an emission permit is the value given to it by a government’s credibility.

The single currency in Europe is under pressure because some governments within the euro zone have not followed policies that support the value of the currency they have created. This lack of credibility not only brings down the economy causing the problem, but it can bring down the entire currency unit because a euro is a euro and its value depends on the credibility of all governments in the system.

The same idea applies to the widespread trading in emissions rights across countries.

The global system is vulnerable to the bad behaviour of a single big player in the carbon permit market. At a time when Europe’s economic judgment is widely questioned, the federal government gives up the right to determine its own carbon price and give that right to Europe. The only case for this is that Europe has greater credibility in policy design and pricing than Australia. This may be true – for now.

The enormous uncertainty over the future of the single currency project in Europe shows why policy design under uncertainty is so important. To expose Australia to the European carbon trading system is a pure cost to the Australian economy. To have a carbon price at $23 a tonne, rising to $29 per tonne in 2015 then falling into a potential abyss, is bad for investment in energy technologies. Yet the solution to climate change will largely be driven by investment in such technologies.

If joining the European trading mechanism is such a good idea in 2015, why not join now? One reason is that the government made an error in providing compensation based on estimated revenue so that whatever happens to the carbon pricing system, the compensation will still need to be paid. Another error is in understanding that the world is highly uncertain and policy should not be made based on a punt about the future. Policy should be robust to different futures.

Australia’s climate policy design has been a farce – and it keeps getting worse.

Authors

Warwick J. McKibbin

Publication: Australian Financial Review

Australia’s Future in the Asian Century

Tue, 28 Aug 2012 11:30:00 -0400

Event Information

August 28, 2012
11:30 AM - 12:30 PM EDT

Stein Room
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC

Australia’s economy and public finances have weathered the global slowdown in better shape than most of its peers, but the nation’s future is closely linked to Asia’s continued prosperity. The Asian century will reshape both the global and regional economy, and will have lasting and profound results. Australia is well placed to benefit from Asia’s mounting strength and the shifting global economic landscape, but there will also be challenges ahead.

On August 28, Global Economy and Development at Brookings hosted a discussion on the transformation of the global economic landscape and challenges and opportunities for Australia and other countries in the Asia-Pacific region. Senator the Honorable Penny Wong, minister for finance and deregulation for the Commonwealth of Australia, delivered a keynote address, and was joined by Brookings Senior Fellow Barry Bosworth for a panel discussion following her address. Senior Fellow Homi Kharas, deputy director of Global Economy and Development, moderated the discussion.

Pacific Solution #2 Sparks Humanitarian Concerns

Jane McAdam, Daniel Ghezelbash and Mary Crock — Tue, 14 Aug 2012 00:00:00 -0400

However much the debate over irregular boat arrivals has been refocused by the shocking loss of life at sea, it is plain that domestic politics continue to motivate the main players.

Australians’ paroxysmal concern with refugee boats is potent electoral poison. The report by the expert panel on asylum seekers has provided the government with a face-saving measure to renege on its electoral promise not to re-open processing centres on Nauru or PNG, while encouraging the opposition to smugly assert that its policies have been given the green light. It just remains to be seen whether the opposition really does want to “stop the boats:” for it, the boats are an electoral blessing that facilitates a discourse on government neglect and incompetence.

Read the full article » (subscription required)

Authors

Jane McAdam
Daniel Ghezelbash
Mary Crock

Publication: Crikey

Image Source: Reuters

Australia's Economy Must Adapt or Suffer the Consequences

Warwick J. McKibbin — Mon, 30 Jul 2012 00:00:00 -0400

Daily news of job losses and closure of high-profile production facilities again raises the question of what should governments do to deal with the apparent rapid transformation of the Australian economy and particularly the problems in the manufacturing sector.

The causes are many in number and vary significantly by sector. It is misleading to lay the blame for everything on a strong dollar or the carbon tax or changing government policy or the unions or poor management practices. In fact, what is needed in framing appropriate policy is a detailed understanding of the structural adjustment that Australia is facing.

In the political debate there is a tendency to oversimplify the causes. There is an overwhelming desire to find a simple common cause for everything so blame can be allocated. There is also a tendency to reject outright a driver of change that might be important because it can’t explain everything.

There are many causes of structural adjustment and many shocks occurring at the same time. Policy should be designed to respond in detail to these where possible, but within an overarching framework of what is happening and a focus on how individual policy responses fit together in a consistent fashion.

Put simply, there are many problems facing the manufacturing sector as a whole in many countries. Australia is not alone in dealing with structural adjustment.

The issues are best thought through by understanding what drives businesses to close. The problems occur when the costs of producing goods exceed the price that can be achieved from selling goods in a competitive market. Input costs include the price of labour (driven higher by labour market rigidities); the cost of capital (driven higher through financing costs); the cost of energy (driven higher, particularly in electricity, by years of neglect in infrastructure spending on generation and distribution and further increased by the carbon tax); and costs of government regulation.

After accounting for all the input costs, the strong currency is making it even more difficult to compete in foreign markets or with foreign imported products. Each sector is affected differently by each of these forces.

It is worth drilling down on the role of the carbon tax: $23 is a substantial price and it is higher than in other countries. It is not a coincidence that some industries are adjusting more quickly than others to the tax.

In the 2008 Treasury report on Australia’s low-pollution future, it is clear where the negative effects of a carbon price are focused. That report assumed global action but without the rest of the world taking action the effect on Australia will be larger than estimated due to additional competitiveness impact. The report summarises results under the carbon pollution reduction scheme (CPRS) where the government targets a 5 per cent reduction in emissions below 2000 levels by 2020.

In this scenario, the most affected sectors and the output decline by 2050 are coal mining (minus 30 per cent); oil refining (minus 37.7 per cent); aluminium (minus 45.2 per cent); and coal-fired electricity (minus 71.5 per cent).

This is the long-run outlook for these sectors. In the Treasury modelling, this takes time to unfold as the constraint of ever rising carbon prices kicks in. In reality, an industry facing such a future would begin to divest as soon as it could mobilise its funds out of these declining sectors.

It should be no surprise that we’re already seeing job losses in these sectors. It is what the carbon tax is designed to achieve. Politicians who say the carbon tax has no impact on jobs are as wrong as those who argue it is the entire story.

The carbon tax is only part of a complicated structural adjustment. The world economy is fundamentally changing and always has. What is different now is the scale of the effect of the emergence of the big emerging economies into the global economy.

As many parts of the emerging world (particularly China and India) enter the global economy, there is a fundamental transformation of production and consumption patterns around the globe.

Manufacturing has been declining as a share of gross domestic product in Australia for decades. Some things we produce are no longer competitive with foreign goods that are very similar, primarily due to the input cost structure outlined above.

On top of this decline, Australia is experiencing a mining boom which further appreciates the currency and so makes non-mining goods more expensive. Sectors that have some degree of flexibility on input costs can offset the rising currency by lowering input costs. Sectors that have rigid labour costs such as the automotive industry find it difficult to adapt. Energy-intensive industries that need high-cost energy inputs find it hard to adapt. Capital-intensive companies that need access to capital but face a high cost of funds because of global economic risk and domestic political risk cannot borrow and therefore cannot easily adapt.

Australia is being swept along by this global tide. Should we resist this change or should we adapt to the change? History gives a clear indication of the answer. Successful economies are those that adapt both their economic structures and their social structures to ride global waves of change.

A good place to start is where the rigidities are sharpest and the sources of this inflexibility. In some cases it is government that is to blame, in others, as pointed out by Treasury, it is the managerial practices in companies. One would expect the market to sort out the managerial problems eventually, but governments have a capacity and an obligation to the public to change what they do and how they do it.

As key economic managers in the Reserve Bank of Australia and Treasury have made clear, Australia has an big challenge ahead, but clearly great opportunities.

It will require a bipartisan acceptance of the national interest. It will require an understanding that governing for the few vested interests in unions or companies or regions should come second to the interest of the majority of Australians.

It will require a major role for the Productivity Commission in focusing on the costs and benefits of major structural policies. It will require an understanding of unintended consequences of legislation that locks in higher costs in labour markets, capital markets and energy markets.

It is hard to see how this change in culture can occur in a Parliament governed by minority interests.

Authors

Warwick J. McKibbin

Publication: Australian Financial Review

Carbon Pricing in Australia: Lessons for the United States

Joshua Meltzer — Mon, 02 Jul 2012 10:42:00 -0400

Australia’s Climate Change Policy – Laggard to Leader

Over the last five years Australia has gone from dragging its feet on climate change to being a leader in climate change policy. Prior to 2007 – when Australia signed the Kyoto Protocol – it was the only other country along with the U.S., Afghanistan and Sudan not to have done so. Australia’s transformation into a climate leader was capped off on July, 1 2012 with the implementation of an A$23.00 carbon tax, which will rise 2.5 percent per year and will transition to a cap and trade system on July, 1 2015.

Carbon pricing is the main policy adopted by the Australian government to reach its national target of reducing its greenhouse gas (GHG) emissions to 5 percent below 2000 levels. Reaching this target by 2020 will require a total reduction in GHG emissions of approximately 13 percent given Australia’s Kyoto Protocol target of 108 percent over 1990 levels. [1] Similar to the EU, Australia has also committed to more ambitious but conditional mitigation targets for 2020 based on two different scenarios. In the event of an ambitious global agreement to stabilize atmospheric concentration of GHG emissions at 450 part per million, Australia will aim for a reduction of 25 percent below 1990 levels; if there is a global agreement that will not stabilize emissions at 450ppm but does involve “major developing countries committing to substantially restraining their emissions and advanced economies taking on commitments comparable to Australia’s,” it will aim for 15 percent below 2000 levels. Australia has also set itself a goal of reducing its GHG emissions by 80 percent below 2000 levels by 2050.

In comparison, the U.S. has adopted a target of reducing its GHG emissions by around 17 percent below 2005 levels by 2020 and by 80 percent below 2005 levels by 2050. But unlike Australia, the U.S. is not using a carbon price to achieve its GHG mitigation target and instead is relying on a range of regulatory measures, such as Environment Protection Agency standards for CO2 emissions, tighter vehicle fuel efficiency standards and promoting energy efficiency.

Both Australia and U.S. targets are enshrined in the so-called Cancun Agreements that came out of the Cancun U.N. climate change negotiations in December 2010.

Why What Australia Does Matters for the U.S.

Australia’s climate change leadership and particularly its carbon pricing should be of deep interest for the U.S., not only for its contribution to reducing global GHG emissions but also because Australia and the U.S. share enough similarities when it comes to addressing climate change that Australia should, in many respects, be seen as an important laboratory and learning opportunity for those in the U.S. thinking about climate change and energy policy.

Given that most economic activity produces GHGs, from driving cars to heating houses to running businesses, reducing GHG emissions will require significant economic and social transformations. How countries respond to these challenges will be influenced by factors such as geography, culture and lifestyle. In this regard, Australia and the US share a number of similar characteristics that makes reducing GHG emissions particularly challenging. For one, Australia and the U.S. are both large continents – Australia is almost the same size as the U.S. lower 48 states. The U.S. population of 315 million is almost 15 times larger than Australia’s population of 22 million, but Australia and the U.S. have the first and second highest GHG emissions per capita. Moreover, the space and size of Australia and the U.S. have underpinned the need for long roads, large cars, and allowed for living in houses in extended suburbs. Australia and the U.S. have been built for this lifestyle – the infrastructure, systems of government and businesses are geared to servicing, providing for and maintaining this scheme. As a result, Australia and the U.S. will face similar costs in reaching the ambitious GHG mitigation targets set for 2050 not only in economic terms, but also in terms of lifestyle and ultimately national outlook as increased urban density and use of public transport become necessary.

These similarities also underpin the two country’s similar GHG emissions profiles. As can be seen below in Table 1, emissions from the electricity, industrial and commercial and residential sectors comprise very similar percentages of each countries total GHG emissions. And while Australia produces significantly more GHG emissions from agriculture than the U.S., this sector has been exempted from the carbon tax.

One of the key challenges for Australia and the U.S. in reducing their GHG emissions will come from the electricity sector, where alternatives to coal – the largest source of GHG emissions in both countries – are not yet economically viable (see Table 2). Moreover, coal fired power stations are sunk capital costs and will remain online for decades to come, which means coal will only slowly decline as a share of each country’s electricity generation. In addition, carbon capture and storage – the most promising solution to CO2 emissions from power generation – remains untested.

Australia is also significantly more dependent on coal as a source of electricity than the U.S. – which represents 75 percent of its electricity generation compared to 42 percent in the U.S. (see Table 2). Australia, like the U.S., also has large natural gas resources, however, it has no nuclear power – a source of base-load low carbon energy. Although Australia has approximately 23 percent of the world’s uranium reserves, there is currently no political support for building nuclear power stations. These factors highlight that reducing CO2 emissions from the electricity sector will be significantly more challenging for Australia than for the U.S.

Why Now?

Given Australia’s challenges to reducing its GHG emissions, it is worth considering why Australia – a country that produces a mere 1.5 percent of global GHG emissions – has decided to forge ahead while there is limited climate change progress in the U.S. and in the U.N. climate change negotiations. As will be demonstrated, the key factors that have motivated Australia’s climate change policy are also present for the U.S. and could be expected to drive more ambitious U.S. climate change action over time.

Economic factors have been a key driver of Australia’s decision to introduce a price on carbon. On the one hand, those opposed to climate change action have emphasized its costs. However, it is clear that the costs of reducing GHG emissions to meet the type of targets outlined above become costlier over time, meaning it is cheaper to start addressing climate change immediately. Economic modeling by the Australian Treasury has concluded that delaying global action by three years will increase the first year’s mitigation costs by 30 percent. Moreover, the cost of a carbon price is expected to slow Australia’s average income growth by only around 0.1 percent per year. [2]

Australia’s decision to price carbon was also influenced by its growing role as a major exporter of primary energy, with coal and liquefied natural gas (LNG) being the largest and second largest export earners. Pricing carbon is a strategy to avoid these exports becoming subject to the type of border tax adjustments that were proposed in the 2009 U.S. Waxman-Markey Climate Change bill, which would have extended the domestic carbon price to carbon intensive imports. The EU’s recent inclusion of all airlines departing and leaving EU airspace in its cap and trade system– which includes all EU airlines and those non-EU airlines coming from countries without a comparable carbon price on airlines CO2 emissions – is another example of how a failure to price carbon domestically can lead to exports being subject to a carbon price in foreign jurisdictions. Similarly, as the U.S. becomes an LNG exporter – and possibly expands its exports of coal – the relationship between domestic climate change action and U.S. energy exports should feature more prominently in its climate change debate. [3]

The Australian government is also committed to the productivity and competitiveness improvements that flow from pricing carbon. In economic terms, pricing carbon is an efficient market outcome that internalizes the social costs of GHG emissions. This should drive structural changes in the Australian economy as resources move away from carbon intensive industries towards sectors that will become increasingly competitive as a result of a carbon price, such as gas production, renewable energy and associated services industries. Reducing the carbon intensity of the Australian economy is also consistent with the global push towards green growth in international settings such as the G-20 and Asia-Pacific Economic Cooperation. President Obama’s support for climate change action is also focused on restructuring the U.S. economy in ways that will reduce U.S. GHG emissions and create an industrial base that can take advantage of the economic opportunities created by the expected growth in demand for green goods.[4] This has led the U.S. Government to invest in renewable energy, support the U.S. battery industry and expand clean energy research and development.

Climate change also has national security implications for Australia, particularly in the Asia-Pacific region. Rising sea levels from ice-melt caused by climate change threaten to completely inundate some pacific islands and Australia would be expected to bear a fair share of these costs, including accepting climate change refugees. Even in the absence of such catastrophic outcomes, rising sea levels combined with a warmer and more volatile climate will pose new risks for already fragile states in the Pacific such as Papua New Guinea, Fiji and even Indonesia. While Australia’s climate change efforts alone will be too small to stave off such outcomes, leadership on climate change, such as demonstrating that a GHG intensive economy can reduce emissions at low cost, can have important effects for more ambitious climate change action in other countries, including the U.S. The national security implications of climate change can also be expected to increasingly drive the climate change debate in the U.S. Recently, US Defense Secretary Leon Panetta has declared climate change to have a dramatic effect on U.S. national security, as rising sea levels, droughts and melting of the polar ice caps increase demands for humanitarian assistance and disaster relief. [5]

The Politics of Pricing Carbon

The politics of climate change are particularly difficult because of its temporal nature - the costs are immediate and identifiable - and the benefits are longer term and more difficult to quantify. Such a paradigm fits poorly with the focus of politicians on two to six year election cycles. Australia’s political experiences in negotiating the politics of climate change also provide some lessons for the U.S.

Pricing carbon is a major economic reform. But the fact that governments on the political left are advocating for market mechanisms such as pricing carbon to address climate change and conservative parties are opposing these measures speaks to the challenges of building political consensus on this issue. In Australia, the left leading Labor government drew on its history of leadership in economic reforms to emphasize pricing carbon as an important economic issue. This allowed the government to shift the debate towards the economic advantages of pricing carbon, including the development of new industries such as renewable energy. However, and as outlined above, there are immediate costs to pricing carbon, which means that governments need to also ensure that there is broad understanding of why people will, over time, be better off with a carbon price.

This leads to the key lesson from Australia’s political battles over carbon pricing: a strategy that seeks to reach agreement amongst key stakeholders only – what in Washington would be considered an inside-the-beltway strategy – will likely fail. This is what characterized the Australian Rudd government’s initial failed attempts to pass a cap and trade bill, as well as the failed efforts by the U.S. democrats to get enough votes in the Senate to pass a cap and trade bill. It is the challenges of pricing carbon outlined above – the temporal mismatch between costs and benefits and the need for climate policy to apply for the long term – that requires buy-in from the broader community into why pricing carbon is important.

Secondly, the economic dimension of climate change and carbon pricing should be front and center of any messaging. This means that the U.S. Treasury and key economic players in the White House would need to lead any renewed push for climate change legislation. A narrative that emphasizes pricing carbon as a market driven response and highlights the economic opportunities will also be important.

How Australia fares in reducing its GHG emissions and at what cost will only become clear over time. But certainly the challenges for Australia will be no less than what the U.S. will face should it decide to price carbon and aim for similarly ambitious GHG mitigation targets. These reasons alone recommend close U.S. attention to Australia’s experience.

[1] 1990 is the baseline year used in the Kyoto Protocol. Australia’s post-Kyoto targets use 2000 as the baseline. Australia’s GHG emissions grew by 1 percent from 1990-2000.

[2] Australian Government Treasury – Strong Growth, Low Pollution: Modeling a Carbon Price, July 2011.

[3] Charles Ebinger, Kevin Massy, Govinda Avasarala, “Liquid Markets: Assessing the Case for U.S. Exports of Liquefied Natural Gas”, Brookings Policy Brief 12-01, May 2012.

[4] President Obama’s State-of-the-Union Speech 2012.

[5] Speech at the Environmental Defense Fund, May 2, 2012 - www.defense.gov/news/newsarticle.aspx?id=116192

Authors

Joshua Meltzer

Investing in Children : Work, Education, and Social Policy in Two Rich Countries

Jenny Chesters , Ron Haskins and Ariel Kalil, eds. — Fri, 18 May 2012 00:00:00 -0400

Brookings Institution Press 2012 246pp.

Investing in Children: Work, Education, and Social Policy in Two Rich Countries presents new research by leading scholars in Australia and the United States on economic factors that influence children's development and the respective social policies that the two nations have designed to boost human capital development.

The volume is organized around three major issues: parental employment, early childhood education and child care, and post-secondary education. All three issues are intimately linked with human capital development. Since both Australia and the United States have created extensive policies to address these three issues, there is potential for each to learn from the other's experiences and policies. This volume helps fulfill that potential.

The authors demonstrate that in both nations, the effects of low family income and income inequality emerge early in life and persist. However, policies that increase parental employment, augment family income, and promote quality preschool and postsecondary education can boost children's development and at least partially offset the negative developmental effects of family economic disadvantage.

Contributors represent top-flight research institutions from both nations. They include Rebekah Levine Coley, Caitlin McPherran, Patrick Wightman, Sheldon Danziger, Lyndall Strazdins, Megan Shipley, Liana Leach, Peter Butterworth, Frank Oberklaid, Sharon Goldfeld, Tim Moore, Matthew Gray, Jennifer Baxter, Mary E. Campbell, Robert Haveman, Barbara Wolfe, Anna Johnson, Rebecca Ryan, Kathleen Mullan Harris, and Hedwig Lee.

Praise for the book:

"Investing in Children provides us with a unique look at three policy domains related to children’s academic achievement and a sobering picture of the tradeoffs and difficulties countries face in trying to level the playing field for children from disadvantaged backgrounds."—Sara McLanahan, Princeton University

"These papers provide important new evidence on issues that lie at the heart of efforts to improve children’s well-being, opportunities, and prospects—required reading for scholars and a wealth of ideas for policymakers."—Peter Saunders, University of New South Wales

"A timely and invaluable assessment of critical social policies aimed at addressing
inequality. High-quality data, careful nuanced analyses, and a comparative framework will ensure the value of this book to social researchers and policymakers."—Janeen Baxter, University of Queensland

"Countries should be judged by the way they treat their children. And here is the story of two big, open, and unequal nations where disadvantaged children’s issues lie at the heart of their future social and economic development. The superbly done chapters bring out the contrast and similarities in policy and note where each nation could learn from the other. Even those who normally do not read comparative policy ought to buy this book for themselves, their students, and colleagues."—Timothy Smeeding, University of Wisconsin

"This volume breaks new ground by providing evidence on some of today’s most pressing policy questions from the United States and Australia—two countries that are similar on a host of dimensions but are all too rarely studied together. The results will push scholars and policymakers in both countries to think differently about the work-family challenges facing us today as we strive to help parents balance their roles as workers and carers."—Jane Waldfogel, Columbia University

ABOUT THE EDITORS

Jenny Chesters

Jenny Chesters is a postdoctoral fellow with the Faculty of Education at the University of Canberra.

Ron Haskins

Ariel Kalil

Ariel Kalil is a professor at the University of Chicago’s Harris School of Public Policy, where she also directs the Center for Human Potential and Public Policy.

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Australia's Labor Sowing Seeds of Its Own Destruction

Warwick J. McKibbin — Mon, 07 May 2012 00:00:00 -0400

One way to judge the 2012 federal budget is to line it up against the economics of sound fiscal policy. Some widely agreed guidelines include: fiscal sustainability is related to the stock of government debt relative to the size of the economy and not just the surplus or deficit; the fiscal deficit or surplus does influence the business cycle and should be either neutral or counter-cyclical but never pro-cyclical; the quality of government spending (measured as a social or economic rate of return on the investment) relative to the cost of taxation is just as important as the scale of that spending.

The fiscal deficit or surplus in a single year is not the main indicator of a country’s success or failure in fiscal policy. A more relevant measure is the stock of government debt relative to gross domestic product. There is ample evidence that when the stock of government debt rises above 60 per cent of GDP increasing amounts of production need to be put aside to service the interest payments on that debt. This problem is reduced to the extent that debt is used to finance activities that pay a higher return than the interest on the debt. But there is a major crisis brewing when the stock of government debt rises above 100 per cent of GDP, which it has in a number of major economies. It becomes increasingly unlikely that a country can economically, socially and politically put aside large parts of production to service that debt, especially if most of the government debt is held by foreigners.

Holders of debt require higher yields to entice them to continue to hold onto debt as it becomes riskier due to apparently unsustainable government debt levels. Interest costs then rise quickly. The critical elements are the size of the debt and the interest costs relative to the growth rate of the economy. The problems in Europe are both excessive borrowing, poor investments using that debt, falling economic growth and punishingly higher risk premiums.

While the stock of gross debt to GDP in many advanced economies is more than 100 per cent of GDP (226 per cent in Japan, 184 per cent in Greece, and 109 per cent in the United States in 2013, according to the Organisation for Economic Co-Operation and Development), it is estimated in Australia the gross stock of government debt to GDP will be 28 per cent in 2013.

Rational economic analysis does not suggest that there is a fiscal sustainability problem in Australia.

However, if the budget is designed to improve fiscal sustainability then it should be judged by the stock of debt relative to GDP in a future year, such as 2016. If the budget shifts spending and taxes across years to generate a surplus in 2012-13 but does not change the stock of debt relative to GDP at some future year, then it should be judged a failure.

The second aspect of fiscal policy that matters is the shift in spending and taxes that influence the business cycle. A rise in a budget deficit during a slowdown is to be expected, just as a rise in a budget surplus is expected during a boom because spending and tax revenue generally move in line with the business cycle. When the fiscal deficit rises during a slowdown this automatically injects demand into the economy and is called an “automatic stabiliser”.

Some economists argue that governments should move even more than the automatic stabilisers to raise spending and cut taxes during a slowdown. That is, they argue that governments should run fiscal deficits when growth is below trend and run surpluses when growth is above trend. This philosophy partly drove Australia’s fiscal policy during the 2009 global financial crisis. Other economists argue that the government should not use fiscal policy proactively this way and they should only allow the fiscal stabilisers to work but do no more.

But no serious economist argues that fiscal policy should be used to accentuate the business cycle and to make economic slowdowns even more severe. Thus from a counter-cyclical fiscal policy position, the budget will be a success if it is at least neutral or to some extent anti-cyclical. It will be a failure if it is pro-cyclical; that is, removes demand from the economy when the economy is forecast to slow relative to trend. This policy would accentuate the business cycle and cause excessive economic losses in future years.

The third aspect of good fiscal policy is whether government spending yields a higher rate of return than the cost of funding this spending and whether the taxes that generate revenue lead to the lowest cost in terms of deadweight loss for the economy. Thus the economic criteria behind the choice of spending cuts and tax revenue increases will be critical. One hopes that there is a rigorous economic analysis of where changes in taxes and spending give the greatest benefit to the Australian people.

From the announcements to date the Australian government appears to show a lack of understanding of what good fiscal policy should look like. If fiscal policy is seen clearly to be pro-cyclical because the government has a large fiscal contraction when it is forecasting a slowing in the economy below trend growth, then it fails on the second criteria. And if the tax increases have large deadweight loss and the spending cuts have large economic costs because high return activities, such as infrastructure and education, are cut, then the budget will also be a failure of economic leadership.

The main question is, why do financial markets need to be persuaded that the government can manage a debt to GDP ratio of 28 per cent even though this is the second-lowest in the advanced world? It is not whether there is a surplus in 2012-13 that drives Australia’s fiscal credibility, but whether the government shows an understanding of the broad principles of sound fiscal policy.

The problem with the entire fiscal debate in Australia today is that many economic concepts have been spun so far they have lost meaning. There is serious economic damage being caused by attempting to reach political goals with no economic rationale. This is as true about the budget deficit debate as it is about the carbon tax pledge, where the world carbon price is now much lower than was forecast. Bad policy based on political motives increases uncertainty in the economy and damages investment and growth. Australians deserve policies that achieve national interest goals at least economic cost, not political goals no matter what they cost.

The unfortunate irony for the government this time around is that any macro-economic mistakes made in this budget will probably come home to roost in the run-up to the next election in 2013. The seeds of the next economic disaster are usually sown in the short term response to a current political problem. Examples abound in recent years, but none more clearly than the promise to run a surplus in 2012-13 no matter what this means to Australia.

Authors

Warwick J. McKibbin

Publication: The Australian Financial Review

Image Source: Andrew Taylor / Reuters

The Danger of Tinkering with Our Future

Warwick J. McKibbin — Tue, 03 Apr 2012 00:00:00 -0400

Superannuation should not be about targeting certain groups, it should be about encouraging people to save for their retirement.

Even talking about taxes on super without saying what you're going to do is very damaging to confidence. It's a very bad strategy to be so imprecise, as Craig Emerson has been.

This is a dangerous policy from a dangerous government. And so I would say don't decide on super policy because of that particular issue. What is its purpose—that has got to be the focus.

It also raises all sorts of other questions: Should you treat different assets in different ways? What about the value of the investment in your house?

As much as possible the government ought to treat these things in the same way. Any time the government taxes something differently it creates a distortion. It changes behaviour and outcomes.

There is a compact between the government and individuals and society. In this case it was changing the nature of the retirement lifestyle.

In the old days the government would pay a pension and everyone would get a pension.

Then in the Bob Hawke/Paul Keating era, long-term decisions were made to improve that system.

If you come along and change it you've not only broken a promise but you've created uncertainty which both damages the economy and destroys long-term planning for a successful economy.

The government has continued to follow the very strange set of policies coming out of Latin America. If you target higher-income earners directly they will simply leave the country, taking many jobs with them. The UK under Margaret Thatcher also discovered that overtaxing leads to a brain drain.

Whatever the definition of "fabulously wealthy", these people have made money because they have taken risks, they've been entrepreneurial and they've enhanced Australia's prosperity.

They are also the most mobile: they could just leave and erode the entire tax base.

I'm not saying there is not a case for changing how superannuation is taxed but you've got to do it in a way that doesn't undermine the incentive to save for retirement.

This is a government that has lost the plot. They are just floundering around trying to come up with a policy that will give them a bounce in the opinion polls and it's damaging.

What is the philosophy of superannuation? That should be the focus.

Authors

Warwick J. McKibbin

Publication: The Sydney Daily Telegraph

In Australia, A Carbon Price Over $10 Makes No Sense

Warwick J. McKibbin — Wed, 07 Mar 2012 00:00:00 -0500

The introduction of a carbon price into the Australian economy from July 1 this year is a landmark policy. It will begin the process of changing the incentive to emit carbon in Australia over a very long time scale.

Unfortunately the current policy, unless improved, is likely to cause unnecessary costs to the Australian economy in the short term. What is worse, these costs are likely to be far greater than any expected benefits.

There are many ways that a carbon pricing system can be designed but many fewer ways in which it should be designed, given the nature of the Australian economy and the uncertainty around global climate-change negotiations.

Political compromise and a lack of understanding about the role of uncertainty in designing carbon pricing mechanisms means the Australian approach is likely to be a problem once the time for implementation arrives.

What are the key problems that need urgent attention? First, the idea that the global price of carbon in 2012 or 2015 would be known with any precision when forecast in early 2011 was clearly an exercise in hope over rigour.

The starting price of $23?per tonne of CO2 was partly based on the idea that this would be close to the world price on July 1, 2012. Who knows what that price will actually be on the starting date, less than four months from now, but now the price varies around $6 to $9 per tonne.

Thus Australia is in danger of introducing a carbon price between three and four times the world price.

Second, the policy in 2015 will switch from a fixed carbon price at about $25 per tonne (in 2012 prices) or $28 in 2015 prices to a carbon trading system with a floor price of $15 per tonne in 2015 prices and no effective ceiling price. Most of the economics literature in this area focuses on imposing an effective ceiling price to bind the economic costs close to the expected benefits.

The combination of a floor and ceiling price reduces the volatility and hence the uncertainty in the expected price. Now, consider what happens if the world price in 2015 is below the floor price. Australia will have a carbon price of about $28 on June 30, 2015, which would fall to $15 per tonne on July 1, 2015.

Under this very plausible scenario, the much higher carbon prices paid by Australians between 2012 and 2015 would be unnecessary waste.

More importantly, the value of permits could drop by close to 50?per cent on July 1, 2015. This would cause enormous disruption to carbon abatement policy in Australia – much akin, but on a much larger scale, to the known consequences of stopping various renewable energy subsidies halfway through a scheme.

It is not sound policy to have such wild swings in a carbon price, yet it is a very likely scenario. This type of inconsistency destroys the incentive to invest in carbon abatement activities.

Another argument for a high carbon price in 2012 is the belief that no one will change behaviour at a price below $23 per tonne. This shows a complete lack of understanding of the investment decision process. Companies and individuals making energy production and consumption decisions take into account the expected future price of carbon and the expected volatility in that price over the horizon of the investment project.

A high price today that is expected to collapse because of a faulty design (not to mention the lack of bipartisan support) will merely cause input costs of energy to rise but generate little investment in reducing emissions. A price that is low but expected to rise in future years in a robust system, with the interests of key players aligned through clever allocation of permits, will likely generate a far greater investment response. Uncertainty stifles investment. The current carbon pricing system has too much uncertainty.

Instead of attempting to lead the debate on reducing global emissions in a world losing interest in this debate, the case for a bipartisan carbon price in Australia should be based on our national interest within a realistic assessment of how we can contribute to the global policy debate. The national interest argument is that having no carbon policy generates uncertainty, which inhibits investment in all types of energy systems, which has significant economic costs.

It is in Australia’s national interest to have the price of carbon on July 1 this year starting at closer to $10 per tonne. This price balances the benefits of reducing investment uncertainty against the costs of climate abatement policy.

It appears, as well, that this may be closer to the world price, which helps offset the potential competitiveness problems the current policy creates.

Until the world takes more concrete actions, this is where Australian policy should be focused. When the world takes greater action, the carbon price can be moved up.

The urgent question today is what will the government do between now and July 1 to fix the potential problems created by badly designing the carbon pricing system?

If the government does not realise the potential problems it faces and does nothing to address them, there is a silver lining. A significant carbon price shock will give economists a good set of data to properly evaluate the gross domestic product and employment consequences of this type of policy so we can go back and more accurately recalibrate our models for next time.

Authors

Warwick J. McKibbin

Publication: Australian Financial Review

The Year that Shook the Rich: A Review of Natural Disasters in 2011

Thu, 01 Mar 2012 00:00:00 -0500

From the earthquake and tsunami in Japan to fourteen disasters causing over a billion dollars each in damage in the United States, 2011 was particularly damaging for developed countries. Reviewing 2011’s natural disasters, Elizabeth Ferris and Daniel Petz analyze the range of disasters and lessons to be learned from those that occurred in developed countries.

2011 was the most expensive year in terms of disaster losses in history, mostly because of a spate of disasters affecting developed countries. Globally, the economic cost of disasters in 2011 was $380 billion, of which $210 billion were the result of the earthquake and tsunami in Japan. This was 72 percent higher than the losses in 2005, the second costliest year in history of disaster-related losses.

In terms of both the number of disasters and the number of people affected by them, 2011 was a below-average year in comparison with the previous decade. With 302 disasters recorded by the International Disaster Database (EM-DAT), 2011 saw the lowest number of disasters since the beginning of the millennium. The number of disasters was almost 20 percent below the average annual figure of 384 natural disasters from 2001-2010. There were 206 million disaster-affected persons in 2011, which is about ten percent below the ten-year average.

Developed countries were particularly hard-hit by disasters in 2011 as evidenced by floods in Australia, earthquakes in New Zealand, an earthquake/tsunami in Japan and a series of disasters in the United States. While natural disasters result in higher economic losses in rich countries, fewer people tend to be affected and loss of life is less than in developing countries. Higher levels of preparedness, resilience and good governance in many cases help richer countries to recover faster from natural disasters than poorer ones.

While developed countries generally have the resources to respond to the effects of natural disasters, when a major disaster strikes they still have to deal with responding to offers of international assistance.

The post-tsunami Fukushima nuclear accident in Japan poses serious questions about preparedness for technological and industrial accidents caused by natural hazards as well as questions about the safety of nuclear technology.

Examples from last-year’s disasters in the rich world show that investment in disaster risk reduction and preparedness pay off and are cheaper than postdisaster reconstruction. Still, high-impact low-probability events can overwhelm the best prepared society.

Disaster plans and defenses need to be adjusted to a new and shifting “normal.” Because of climate change, predictions are that intervals of heavy precipitation and extreme temperatures will likely become more frequent in the future. In other words, what was formerly a “once-in-a-century” disaster might become a “once-in-a-generation” disaster. Furthermore, new “once-in-a-century” disasters may simply overwhelm the current state of preparations.

Several positive trends in international humanitarian response were evident in the course of 2011, including promising developments in international disaster law, greater emphasis on disaster risk reduction and preparedness, and better communications during crises, including the use of social media in disaster response.

Post-disaster recovery and reconstruction after a major disaster are long-term processes which need much more scrutiny and attention. Examples from rich countries suggest that rebuilding processes can be participatory and can incorporate sound principles such as risk reduction and green technologies.

There are still major methodological difficulties in terms of measuring the effects of natural disasters, especially when it comes to measuring the economic costs of disasters and understanding the particular characteristics of slow-onset disasters such as drought.

The first famine in twenty years was declared in Somalia in mid-2011, demonstrating the deadly interaction of conflict, political instability and drought that can result in a catastrophe with high human casualties. Although there were warning signs in Somalia for almost a year before famine was declared, the international community was unable to prevent its outbreak due to continuing conflict and the resulting lack of humanitarian access to affected communities.

The interconnections between disasters (especially mega-disasters), media coverage and humanitarian funding means that humanitarian funding tends to be directed toward disasters that have higher media coverage rather than to those with disaster-affected populations in greater need of assistance. Thus in 2011 almost half of humanitarian disaster funding reported through the UN’s Financial Tracking Service was sent to Japan – where it made up only about a third of one percent of the total economic cost of the disaster. Overall, international humanitarian funding for disasters declined from almost $6.5 billion in 2010 to around $1.5 billion in 2011.

Global population is aging at an unprecedented scale and yet the special needs of older people in emergencies are often neglected. In 1950 around eight percent of the world’s population was over the age of 60 – a percentage projected to increase to 22 percent by 2050. In disasters such as the earthquake/tsunami in Japan and Hurricane Katrina, older people made up a disproportionate percentage of casualties. Given the fact that developing countries are also experiencing an increase in the percentage of elderly people, it is likely that a lack of focus on older persons in all phases, from planning to emergency management to post-disaster reconstruction, can result in higher fatalities among older people, long-term chronic health issues, psychosocial trauma and isolation. Treating older people simply as “normal” disaster victims denies the specific vulnerabilities that many older people face.

More work is needed to recognize the positive contributions which older people can make in reducing the risks from disasters, in disaster response and in recovery and reconstruction.

Image Source: Mike Stone / Reuters

Chapter 1 - The Year that Shook the Rich

Thu, 01 Mar 2012 00:00:00 -0500

2011 was the costliest year in history in terms of natural disaster damage, in large part due to major disasters which occurred in some developed countries. The earthquake and tsunami in Japan alone were estimated to have caused over $200 billion in damages.

This chapter looks in more detail at the disasters that shook developed countries in 2011, beginning with the Japanese earthquake/tsunami/nuclear accident – the most expensive disaster in history. While the earthquake occurred with a bit over a minute’s warning, the consequences of that disaster will be felt for years, perhaps decades, to come. Discussion then turns to the United States which experienced a string of costly and varied disasters in 2011. Unlike in Japan where energy and attention focused on a single megadisaster, in the United States, different kinds of disasters occurred in succession.

The flooding experienced by residents of Queensland in Australia in the early part of 2011 was on a physical scale greater than that of all other disasters occurring in 2011. And the earthquake that occurred very close to the center of Christchurch, New Zealand in February caused major damage to half of the city center’s buildings, leaving many of them beyond repair.

Although some of our analysis focuses on the economic costs of the disasters in developed countries, for too many people, economic losses paled in comparison with the loss of family members and homes and the disruption to their lives and livelihoods. For all of those affected by disasters – whether in rich or poor countries – it is hard to overstate the experience of personal loss.

Publication: The Year that Shook the Rich: A Review of Natural Disasters in 2011

U.S. Engagement Key to Handling a Rising China

Michael Fullilove — Tue, 28 Feb 2012 00:00:00 -0500

Last November, President Barack Obama spoke to the Australian Parliament about a “deliberate and strategic decision” he had taken to engage more fully in Asia. When it came to this region, the president said, the United States was “all in.” He also announced that by 2016, 2,500 U.S. marines will be on rotation in the north of Australia.

Obama’s Canberra speech and other elements of this reweighting have raised concerns that America is going down a containment path toward China, setting up the risk of new bilateral tensions in Asia.

It is certainly true that one of the motivations for America’s “pivot” toward Asia is the rise of China. China’s economic transformation in the last three decades has been remarkable. Increasingly the country’s new economic strength is mirrored in its growing military capabilities, which boost its ability to project power within Asia and around the world.

China has a strong hand, yet it is not clear how it will play that hand in the future. There is a notable dualism to China’s approach. On the one hand, Chinese foreign policy is neither expansionist nor extreme; in many ways, China has been slow to claim the influence it deserves.

On the other hand, it is impossible to miss China’s rising confidence and international ambition, even though they sit alongside strains of caution and insecurity. Sometimes, Chinese assertiveness spills over into bluster. Many long-time observers are pessimistic about the direction of Chinese foreign policy.

There is an uneven quality, then, to China’s international stance: usually quiet but occasionally strident; usually cautious but occasionally combative; always prickly; and never entirely predictable.

In this context, Obama’s new concentration on the Asia-Pacific makes sense. During his first year in office the president persistently sought to accommodate Beijing’s interests. Yet Beijing failed to clasp his outstretched hand.

Obama is still seeking to develop the bilateral relationship with China, but he is doing so from a position of strength. His policy is not directed at containing China, but neither is he prepared to vacate the field. The president seeks to cooperate with China. But he also intends to renew America’s presence in Asia and maintain a balance of forces in the region at a time when there is significant uncertainty about China’s future behaviour.

How should Australia try to manage the strategic triangle formed by Washington, Beijing and Canberra? Hugh White has written of the dangers of U.S.-China competition, suggesting that the region needs a concert of powers, comprising China, the United States, Japan, India, Indonesia and other countries. For our part, he suggests, Australia should try to encourage the United States to award China new prerogatives. We should also be more circumspect about speaking our mind to China on issues such as human rights and Tibet. I’m not persuaded by this argument.

The U.S. alliance is a valuable national asset for Australia. It entails the promise that we would be protected from a strategic threat, unlikely though that may be; the interactions with U.S. military forces that keep the ADF sharp; privileged access to the fruits of U.S. intelligence; and entrée to some of Washington’s inner councils – presuming we have interesting things to say. Apart from anything else, the alliance saves us billions of dollars a year in defence expenditures we would otherwise have to make to guarantee our security.

Before downgrading such a valuable asset, we need to be clear-headed about what we hope to achieve, and what we risk in doing so. When it comes to national security, I agree with the injunction contained within the Hippocratic Oath: First, do no harm. By all means, Australia should seek to influence events and power structures in Asia. But we also need to be realistic about our ability to shape the power relations of a region of billions.

If we cool our alliance with the Americans, do we really increase ability to affect events? How likely are we to change the trajectory of the United States, even if we wanted to? How easy would it be to rig up a concert of powers in Asia? And what are the downsides of cooling the alliance?

Given the uncertainty about China’s future policies, it would seem strange to pre-emptively move toward Beijing. Surely it is more sensible to balance against the risk of future Chinese recklessness by keeping the United States deeply engaged in the region and strengthening, not weakening, our alliance institutions.

I have never heard a Sinologist say that the one thing the Chinese respect is weakness. In my observation, unsolicited gifts to rising great powers are rarely reciprocated. Usually they are simply pocketed. Of course we should not try to contain China, which would be utterly impossible in any case. But neither should we back off from defending our own interests and values.

The leaders in Zhongnanhai may not have been happy with President Obama’s Canberra speech. But neither its message, nor the Darwin announcement, would have been surprised them. Beijing knows that Australia has been a U.S. ally for sixty years. We already host the joint facility at Pine Gap.

In any case, just as we should not overestimate our influence, we shouldn’t underestimate it either. We have a good deal to offer China, as a mature and wealthy country and a stable source for the strategic resources it requires. It is in our interest that the relationship between Canberra and Beijing should be strong, positive and cooperative. This is also in China’s interest.

Alliances are not always easy relationships to manage – especially alliances with the most powerful country on earth. Even like-minded countries sometimes see things differently. And less powerful allies often spend a lot of time worrying about the temper of their alliance – that it is close, or too distant.

But to paraphrase Winston Churchill: “The only thing worse than having allies is not having them.”

Authors

Michael Fullilove

Publication: The Australian

Obama’s Australian Visit and the Australia-United States-China Strategic Triangle

Michael Fullilove — Mon, 06 Feb 2012 00:00:00 -0500

Editor's Note: In remarks to the American Australian Association, Michael Fullilove discusses U.S.-Australia relations and the future of the Australia-U.S.-China strategic triangle.

I last spoke to the American Australian Association eighteen months ago. Since then I’ve spent some of my time writing a book about President Franklin D. Roosevelt. In the course of that research, I came across a wonderful story about alliances.

Immediately after the attack on Pearl Harbor in December 1941, Prime Minister Winston Churchill and his entourage made their way to Washington to confer with Roosevelt and his advisers on the waging of the war. The visitors were accommodated at the White House. One morning, Roosevelt accidentally surprised Churchill in the middle of his morning bath. FDR apologised and made to leave, but Churchill rose like a sea monster from the bathtub and stood before him, naked, plump, pink and dripping. Unashamed, he declared: ‘The prime minister of Great Britain has nothing to hide from the president of the United States.’

I am a supporter of the Australia-U.S. alliance, but any alliance can get too close. For me, that’s too close.

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Michael Fullilove

Publication: Remarks to the American Australian Association

Benchmarking Against Progress: An Assessment of Australia's Aid Effectiveness

Laurence Chandy — Tue, 20 Dec 2011 14:21:00 -0500

INTRODUCTION

Is Australia’s aid program effective? Measuring the effectiveness of aid is no easy feat. For a start, there is uncertainty about what aid is trying to achieve. Even seemingly straightforward objectives, like poverty reduction, throw up a range of questions as to what precisely ought to be measured. For instance, how should one balance the provision of temporary relief to those in need with catalyzing permanent transformation in people’s lives (Barder, 2009)? Second, it is notoriously difficult to isolate the effect of a single aid program from other factors. Aid is delivered in an environment of enormous complexity where all manner of other events shape outcomes, including actions by recipient governments, aid from other countries, non-aid flows, and the performance of the global economy. To accurately attribute impact to aid therefore requires a thorough understanding of the setting in which aid is given. Third, the effects of aid are not always immediate or straightforward. For instance, improvements in people’s skills or the performance of institutions may manifest gradually. Measurements of what aid achieves must be sensitive to the different ways change is brought about (Woolcock et al., 2009).

A solution is to focus on Australia’s approach to giving aid and see how it stacks up against international best practice. International best practice is defined here by what is known to work well in aid, either because it has been demonstrated through research, identified by aid recipients, or agreed through consensus within the aid community. The latter is captured in the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action—two statements of intent by ministers of developed and developing countries and heads of donor agencies, pledging improvements in the way aid is managed and delivered. As a member of the Organization for Economic Cooperation and Development’s Development Assistance Committee (OECD DAC), Australia is a signatory to both agreements.

While adherence with best practice principles cannot guarantee that Australia’s aid will always deliver its intended results, it increases the likelihood that those results will be achieved. And unlike the results of aid, adherence to best practice is fully within Australia’s control. Australia’s performance against best practice standards therefore serves as a touchstone of its commitment to greater aid effectiveness.

Introducing QuODA

A useful tool to assess Australia’s aid program is the Quality of Official Development Assistance (QuODA) assessment, developed jointly by the Brookings Institution and the Center for Global Development (Birdsall and Kharas, 2010; Birdsall et al., 2011). QuODA appraises donor performance along four separate dimensions, each representing distinct components of best aid practice: maximizing efficiency, fostering institutions, reducing the burden on recipients, and promoting transparency and learning. Each dimension is comprised of a collection of indicators against which donor countries are scored. Examining performance against the four different dimensions provides a basis for identifying donors’ strengths, weaknesses and areas for reform. The recent release of the 2011 QuoDA update provides an opportunity to assess Australia’s aid effectiveness based on the latest available evidence.

QuODA is used to assess Australia’s aid program in three ways. First, the aid program is appraised on its own based on Australia’s performance on the different dimensions and indicators. These results are then corroborated using other performance indexes. Second, Australia is judged against a “benchmark” donor of equivalent size, which is involved in similar development work. Third, other donor countries and multilateral agencies active in Australia’s region are assessed. These are donors with whom Australia has the option to partner or to delegate the delivery of its aid, and whose performance is therefore also relevant to assessing how effectively Australia’s aid budget is spent.

A Fragile States Lens

To help shape the analysis, particular attention is paid to the role Australia plays in providing assistance to fragile states. The term “fragility” captures a range of different country conditions, but in each case there is a failure of the state to perform some of its most basic functions, due either to a lack of political will, capacity, or a combination of the two, creating significant challenges for development. These failures are typically observed in terms of one or more persistent deficiencies of the state: its authority, its legitimacy as perceived by the country’s citizens, or its provision of services (Stewart and Brown, 2010).

Australia’s focus on fragile states is a defining feature of its aid program: 50 percent of its aid goes to countries that are considered fragile. This focus on fragile states is a reflection of Australia’s region where fragility is commonplace. Among the countries that are not fragile, many still face related challenges associated with weak governance.

Why is fragility important to this analysis? It is broadly recognized that promoting development is much harder in fragile states than in other countries. The reason for this is straightforward: governments cannot be relied upon to support the development process in fragile states, and in some instances may serve to undermine economic and social progress. This has important implications for aid. Aid delivery tends to be both a more costly and more complex task in fragile settings. Part of the complexity lies in understanding how to apply good practice aid principles. While the principles of effective aid remain just as relevant in fragile states, they cannot always be implemented in the same way as they can in other countries (Chandy, 2011).

While delivering aid in fragile states—and doing so effectively—undoubtedly presents a challenge, many donor countries are tasked to do exactly that. Australia’s region obliges it to take on this type of work. Furthermore, there is a growing consensus within the development community that helping fragile states represents one of the core challenges of global development both now and in the future. Helping fragile states has become inseparable from a commitment to fighting poverty reduction, achieving the Millennium Development Goals (MDGs), and assisting low-income countries:

Fragile states account for a growing share of the world’s poor. As global poverty levels fall, driven by progress in more stable developing countries, the share of the world’s poor living in fragile states has doubled from 20 percent in 2005 to 40 percent today. More than half the world’s poor are expected to live in fragile states by 2015 (Chandy and Gertz, 2011).

No fragile country has yet achieved a single MDG. Fragile states are home to half of all children not in primary school and half of all children who die before reaching their fifth birthday (DFID, 2009). The remarkable success of many stable developing countries in achieving the MDGs has drawn attention to the lagging performance of fragile states.

Two-thirds of low-income countries are fragile. The past decade has seen a wave of 30 (mostly stable) countries graduate out of low-income status. Of the 35 countries still classified as low-income, less than a dozen are stable.

Understanding how to deliver aid effectively in fragile states is, therefore, a vital question for the aid community over the coming years and one Australia can help to answer.

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Laurence Chandy

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