Why Anglo-Saxon nations have the fastest-growing economies

  • @TheIndyBusiness
SYDNEY - How long can the Anglo-Saxon boom continue? Most people in the arena of business and finance talk of the world as a three-zone economy: the Americas, Europe, and East Asia. It is a perspective that excludes the enormous populations of Africa and the Indian sub-continent, but in harsh economic terms it is pretty realistic, for those three zones do account for close to 90 per cent of the world economy.

If you look at the world that way, the Americas, particularly North America, are growing well, most of Europe (excluding the United Kingdom) has only recently started to show reasonable growth, and much of East Asia is still struggling to escape recession.

But there is another way of thinking of the world. If you think of a global economy defined by language and culture instead of physical proximity, there is 40 per cent in the English language zone and 60 per cent in the rest.

Now extend the definition of the English language zone beyond those countries where it is the mother tongue - the United States, the UK, most of Canada, Australia, New Zealand, Ireland and Singapore - to places where it is widely spoken, for example, Scandinavia and the Netherlands. Roughly half the world economy is in this wider English language zone.

If you see the world that way, you immediately spot a strange phenomenon. This half of the world is, by and large, doing pretty well. Growth is high; unemployment is low; governments are in surplus. Meanwhile, the other half of the world is finding the going much tougher. Even the parts that have escaped recession are struggling with double-digit unemployment.

But there is a darker side to Anglo-Saxon success. Most of these economies are in balance-of-payments deficit and while inflation remains low on the conventional retail and wholesale measures, property prices have risen sharply. Maybe these more worrying features are signals of a fragility to the success story.

The most remarkable example of a large English-speaking economy outperforming is Australia. Two years ago everyone assumed that Australia would be caught up in the backwash of the Asian economic collapse. Much of its exports went to Asia and it had spent a lot of time trying to convince the world that it was part of what seemed to be the most successful part of the world economy, the East Asian time zone.

That didn't happen. Look around the glistening buildings and bustling streets of Sydney and it is hard to believe that two years ago everyone was fearful that the economy would follow the rest of the region down the slot. For example, at the beginning of last year in the wake of the East Asian crisis, the Economist Intelligence Unit cut its forecast for Australian growth to only 1 per cent in 1998. The country managed 4.9 per cent. This year the consensus forecast is for more than 3 per cent.

So instead of behaving like an Asian economy, Australia is behaving like an Anglo-Saxon one - rather in the same way that the UK has followed the US growth pattern rather than the continental European one. Understanding why this should be gives some clues to the answer to a wider question: are the cultural, social and financial ties that link the English-speaking world together more important that the physical location of the country concerned?

The explanation for Australia's success story comes in three parts. The first is very conventional. When the Asian crisis struck, most countries in the region found their currencies being devalued. Australia was swept up in this turmoil, and the Australian dollar fell by about 20 per cent against the US one. On the back of that devaluation, exports recovered quite well, though the growth was not to the East Asian region, but rather to the US and Europe.

Again there is a parallel with the UK: the ejection of sterling from the Exchange Rate Mechanism in 1992 laid the basis for export-led recovery. As in the UK, the fall in the exchange rate did not lead to any significant inflation. In fact, at a consumer price level Australian inflation is lower than the average for industrial countries as a whole.

Of itself, however, this first part of the explanation would not account for the astounding growth last year. It would account for part of the outperformance, but not all of it. The second bit of the explanation lies, I think, in the delayed response to the structural reforms that the government has been making. Viewed though British eyes, Australia has been making, over the past 15 years, pretty much the now-standard market reforms: privatisation, deregulation, changes to welfare eligibility, and so on. The big tax reforms,which include a cut in income taxes and the introduction of a Goods and Services tax (a sort of VAT) come next year.

There is, unsurprisingly, a great political debate going on as to the quality of the reforms and the social consequences thereof. But the bottom line has been that there has been a strong surge in domestic demand and the economy has been able to respond to that increase in demand by upping its own game. Productivity has been sizzling upwards, as it ought to when output grows sharply. Growth overall during not just last year but the past six years has been faster even than that in the US.

But even these two parts of the answer do not absolutely explain the surge in demand. I think that for that, you end up talking about consumer psychology. To over-simplify, English-speaking people seem, when they get an additional wodge of spending power, to go out and buy. Most other societies - Japan in particular, but also much of the Continent - are more reluctant to do so. It may be partly a function of the high home ownership in the English-speaking world.

People will spend rather than save because they know (or at least hope) that they can rely on the value of their home if things go wrong. It may just be that we have a less "responsible" approach to the world. But the Australians, like the Americans, Canadians and Britons, like spending money. In an age of inflation, with economies teetering on the brink of runaway price rises, that has frequently been an embarrassment. In an age of near-deflation, where prices and demand are liable to fall off a cliff, the willingness of consumers to spend can be the difference between growth and recession.

Maybe, just maybe, there is a fourth leg to this argument. Maybe the burst of new communications technologies, in particular the Internet, but also the falling cost of communications more generally, is linking together the English-speaking world and enabling it to take advantage of technical changes that the non-English speakers find difficult. I don't think one should not make too much of this, at least not yet. But it is uncanny, isn't it, that the fastest growing countries during the Internet Age of the past five years have been English-speaking ones?