i j macfarlane : geography, resources or institutions? talk by mr i j macfarlane, governor of the reserve bank of australia, to “ the bottom line ” luncheon, melbourne, 25 august 2004. * * * it is always a pleasure to be in melbourne, particularly when i am in these gracious and peaceful surroundings and contributing to such a good cause as the bottom line luncheon. by a strange coincidence the patron of the foundation is hugh morgan, my fellow board member of the reserve bank, and the chairman is professor adrian polglase, an old school friend. how could i refuse the invitation to speak today? i notice on the invitation that i am listed as speaking about the economic outlook. i am afraid the author of the invitation took a few liberties here, and so i will disappoint those who are expecting an analysis of current economic conditions and prospects. we at the reserve bank put out an exhaustive account of these earlier in the month and my deputy elaborated on them a week ago. a third rendition within a month would be counter - productive, so i will speak on a different topic, although it could be considered my views on the economic outlook in a very long - term sense. i would like to look at the factors that shape the economic success of a country in the very long run that is, over the centuries - and, of course, i will pay particular attention to australia. i propose to do this by briefly examining four factors which influence growth, and which can be summarised by four distinctive catchphrases : the tyranny of distance, geography is destiny, the resource curse, and institutions matter. ( a ) the tyranny of distance the first factor is a country ’ s position on the map - its distance from other countries or its degree of isolation. my remarks on this will necessarily be heavily influenced by geoffrey blainey ’ s classic study which originated the term. we have always assumed that australia was at a disadvantage because of its relative isolation from the world ’ s great centres of commerce. this has certainly been true from the beginning. the late start of european settlement was not just because they took so long to find us, or that for the first two hundred years europeans only sighted the barren north west coast. even if they had found the temperate east coast two hundred years before cook, there would not have been an economic reason to occupy the land. there were no valuables to be exchanged with the native population, such

the more widely quoted standard share price index. the difference comes from the fact that the australian listed company sector has maintained a dividend yield of around 4. 5 per cent, on average, since 2007. bis central bankers ’ speeches about future returns. that ’ s what we need if we are to experience a long and sustainable expansion in housing investment that houses our growing population at acceptable cost, and pays reasonable returns on the capital deployed. that ’ s the sort of outcome we want, as part of the more balanced growth path for the economy we are seeking over the years ahead. another part of the balanced growth path would involve an expansion in some of the tradeexposed sectors that have been squeezed by the high exchange rate. the foreign exchange market is perhaps another area in which investors should take care. while the direction of the exchange rate ’ s response to some recent events might be understandable, that was from levels that were already unusually high. these levels of the exchange rate are not supported by australia ’ s relative levels of costs and productivity. moreover, the terms of trade are likely to fall, not rise, from here. so it seems quite likely that at some point in the future the australian dollar will be materially lower than it is today. the high exchange rate has also had a significant impact on the reserve bank ’ s own balance sheet. it led to a decline in the value of the bank ’ s foreign assets and hence a diminution in the bank ’ s capital, to a level well below that judged by the reserve bank board to be prudent. this has been a topic of some interest of late. our annual reports have made quite clear over several years now that, while this rundown in capital in the face of a very large valuation loss was exactly what such reserves were designed for, we considered it prudent to rebuild the capital at the earliest opportunity. it has been clear that the bank saw a strong case not to pay a dividend to the commonwealth during this period, preferring instead to retain earnings, so far as possible, to increase the bank ’ s capital. that rebuilding could in fact have taken quite a few years, given the low level of earnings. that is the background to the recent decision by the treasurer to act to strengthen the bank ’ s balance sheet, in accordance with a commitment he made prior to the election. the effect of this is that instead of it taking many years to rebuild the capital, it will occur in the current year