Australia’s Future Is Through Innovation Not Financial Services

The macro and micro economic reforms of successive Australian governments since 1983 are widely acknowledged as having provided the foundations of the continuous economic growth over the last 21 years. Over this same time horizon the economies of many Asian countries, notably China and India have grown rapidly through export trade and today each of those countries have an estimated middle class of 300 million. This net exporter trend is likely to continue for the foreseeable future as Asian economies have a lower cost of production.

Importantly, we can learn from the USA on how it responded to the same challenges that Australia has today. Labour market reform is only one of many initiatives that have allowed the USA to transform its economy. Despite the current budget deficit issues, the USA is well positioned to continue sustained economic growth, whereas Australia has a long difficult path ahead.

There are two important factors that will impact on Australia’s economic growth over the coming decade that require Government focus. Firstly, the Australian financial services sector is too large and is becoming a drag on economic growth. Secondly, Australia’s poor history in commercialising its innovations.






Risk Free Rate of Return

The benchmark for the risk rate of return is a zero coupon bond.  Since the GFC and the dislocation of the capital markets in Australia it is arguable that the risk rate of return is now the weighted average price of the banking index. The basis of this argument is that even though equity holders rate last in a wind up, in Australia the Federal Government has explicitly guaranteed all Approved Deposit Taking Institutions (ADIs) meaning there is a floor on possible un-realised capital losses. This guarantee has taken 2 forms, there is the retail deposits guarantee and the wholesale funding guarantee, i.e. the Government is supporting the banks liabilities. Importantly, the Federal Government has also singled to the market it will in the future support the banks, thereby confirming its position on moral hazzard. This in turn adds to the dislocation of the capital markets as asset pricing needs to some how reflect this Government support.  The Federal Government must take steps to address this, if the markets are to return to correctly pricing and valuing assets and businesses.