( diagram 1 ), it is apparent that the deficit has varied between about 3 1 / 2 per cent and 6 1 / 2 per cent of gdp, with an average of 4 3 / 4 per cent. most importantly, there has been no on - going trend deterioration - the trade account has improved at a rate sufficient to offset the increase in net income payable abroad. the widening in the current account deficit that we expect in 1998 / 99 will be the fifth such cyclical widening in the past 20 years, and i think that people now accept this as a part of our economic cycle. you will note that i am only talking about cyclical movements in the current account. the broader issue of whether we should accept an average current account deficit of 4 3 / 4 per cent of gdp in the long run would require another paper as long as the one i am presenting today. it would focus on our national savings performance, both in respect to governments and to the incentives that are provided to the private sector. but that is for another day. on previous occasions, the cyclical widening of the current account deficit usually reflected a mixture of external influences, such as a fall in the terms of trade, plus some significant internal imbalances or policy deficiencies. as examples of the latter, domestic demand in the earlier widenings ran at unsustainably fast rates, usually in excess of 7 per cent per annum for a time. similarly, in all but one of the earlier widenings, australia ’ s inflation rate was higher than the world average, and again on two occasions, we were running a significant budget deficit. on this occasion, we have none of these imbalances. the widening of the current account deficit will be essentially the result of an external contraction of demand, with domestic demand running only slightly faster than trend. the foreign debt situation is not as threatening now as the most pessimistic people in the mid - eighties feared. looking at a graph of the ratio of foreign debt to gdp ( diagram 2 ) shows that it nearly tripled between 1982 and 1986 ( from 12 per cent to 33 per cent ). many people feared that it would continue to rise at this rate, but it has not. in the nineties, it has averaged a little over 40 per cent, where it currently is. another widely used measure of debt sustainability - the ratio of debt servicing to exports ( diagram 3 ) - showed a somewhat similar pattern. it rose from 6 per cent to 22

mr. macfarlane discusses the changing nature of economic crises talk by the governor of the reserve bank of australia, mr. i. j. macfarlane, to australian business economists on the occasion of the 13th annual forecasting conference dinner in sydney on 4 / 12 / 97. it is a pleasure to be here this evening to talk to the australian business economists. i looked back over my files and i noted that this is only the second time i have addressed this group ; the previous occasion was nearly seven years ago in february 1991. at that time, i spoke about asset price booms and busts, particularly the latter. you may think i have a one - track mind, but the same subject - - only with a different location - - is going to figure prominently in what i have to say tonight. 1. types of economic crisis i want to talk about the changing nature of economic crises, and then draw out some conclusions for australia. at the risk of some oversimplification, i think there have been two basic types of economic crisis. the old - style economic crisis i will call type i, and the new - style, which has come to prominence over the past decade, i will call type ii. most of these crises occur in developing countries, but developed ones have not been immune from them. the standard way that countries - - particularly developing countries - - got into trouble in the past was that their governments did the wrong thing by running bad fiscal and monetary policy. governments ran large budget deficits and did not finance them properly - - they wrote cheques on the central bank, which is colloquially known as printing money. interest rates were held artificially low ( or negative in real terms ) and money supply ballooned, resulting in accelerating inflation, a loss of competitiveness, large current account deficits and a collapsing currency. this was a type i economic crisis, and the imf has a standard set of arrangements for dealing with this problem. just about every developing country ended up in this predicament at some time or other. some of the latin american countries did it again and again. we skirted perilously close to it in australia, particularly in the mid - 1970s, but did not end up in the hands of the imf. the united kingdom, however, did. it suffered a classic type i economic crisis in 1976, and needed a support package from the imf, with the usual conditionality requirements. the type ii problem is very different.