The Politics Of The Exchange Rate

The overnight news that the Australian dollar fell below 50 U.S. cents on international money markets is a significant symbolic political event.

Herald-SunIn the aftermath of a decline in economic growth in the December quarter, and with the latest unemployment figures due to be released today, the news could not come at a worse time for the Howard government.

Indeed, media reports today suggest that the Liberal Party has all but written off its chances of winning the Ryan by-election on Saturday.

The exchange rate has played a part in Australian politics for many decades now. Prior to 1983, the value of the Australian dollar was determined by the government of the day. During the 1950s-70s, the National Party (then known as the Country Party) governed in coalition with the Liberal Party and used its numbers in the House of Representatives to manipulate the exchange rate to favour primary producers and rural exporters.

A lower Australian dollar means that the income earned from exports increases. At the same time, the price of imports increases. Since many consumer products such as computers, televisions and clothing is imported, the decline in the dollar will push up prices.

By contrast, a higher Australian dollar reduces the price of imports, but also reduces the value of exports.

Historically, the National Party has favoured a lower dollar to protect its rural industries and constituents. The Liberal Party has favoured a higher dollar because Australian industry imports much of its capital equipment.

In 1971, the Country Party threatened to break the coalition arrangement if the dollar was not devalued. In a display of raw political power seemingly beyond the capacity of the current party leadership, the Liberals under William McMahon acquiesced.

In 1983, the Hawke Labor government began the process of deregulating, internationalising and globalising the Australian economy. A decision was taken to unpeg the Australian dollar and allow it to “float” on international exchange markets. This decision is now seen as one of the most crucial ever taken in managing the Australian economy.

Back then an Australian dollar was roughly equal in value to an American dollar. A decade earlier, it was valued around $1.20 US. Throughout the 1980s and 1990s, the value of the dollar hovered around the 80 cent mark.

It appears that the current exchange rate is a reflection of several factors. Firstly, economic growth has stalled. Another quarter of negative “growth” will technically amount to a recession. Secondly, there is a belief that Australia is still largely an “old economy”, dependent on manufactured goods and rural exports, rather than newer technology and information-based industries. All of this is against the backdrop of the introduction of the Goods and Services Tax and the attendant slump in areas such as housing.

During this year, the Australian dollar has been the second worst performing currency, falling 10% in value against the American dollar. Only the Turkish lira has performed worse.

More worrying is the fact that the dollar has fallen in value against other major currencies aside from the American dollar.

Politically, the drop below 50 cents is an important psychological moment, focusing attention on the exchange rate and contributing to a sense of economic malaise. In fact, the situation today is really no more or less serious than it was several months ago. The decline has been steady and consistent.

There will now be renewed concern within the coalition government about its electoral prospects. The Ryan by-election looms as even more significant than previously thought.


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