The impact of the Asian Crisis on Australia's primary exports: why it has not been so bad

Abstract

Apart from a substantial exchange rate depreciation, the impact of the Asian Crisis on the Australian economy has been surprisingly mild. An exploration of the reasons for the modest impact to date on Australia’s primary commodity exports, using a global general equilibrium model, shows the following: (i) as capital flees Asia, investment in Australia increases and the trade deficit enlarges, (ii) while Australian exports to the region generally decline, imports from the region become cheaper as the crisis countries recover in the medium run, and the favourable terms of trade effect leads to an expansion of domestic consumption, (iii) primary commodities that are used as raw materials in manufactured exports in crisis countries expand s these countries try to export their way our of trouble with depreciated currencies. Diversification also helps alleviate the impact of the Asian Crisis in the short run, (iv) the more income-inelastic primary commodities used for direct consumption fare less well than the income-inelastic foodstuffs as incomes decline in the crisis countries, and (v) Australia’s relatively low dependence on manufactured exports is a buffer as manufactured exports come under heavy pressure from exports from the crisis countries. Show more