21 February 2022

Our grand reopening a chance to rebuild

After almost two years of being largely closed to the outside world, Australia’s international border is re-opening. Skilled migrants and international students have been able to enter for a couple of months, and from 21 February vaccinated tourists and visa holders will once again be permitted to arrive.

Closing the border was a key component of the pandemic response and delivered both economic benefits and costs.

The main benefit of the border closure was that it was a powerful tool for largely keeping the COVID-19 virus out of the country.

This allowed time for Australians to prepare for the eventual arrival of the virus and, critically, for vaccines to be developed. Although it would have been better if the vaccine rollout had been earlier – there was quite a delay between vaccine development and widespread take-up -- by the time COVID-19 was actually widespread in the community, Australia had high vaccination rates.

It has also had far fewer deaths from COVID-19 when compared with most countries largely as a result of this approach, as has New Zealand, which followed a similar strategy. Superior health outcomes have helped support better economic outcomes. Significant monetary and fiscal stimulus also played a key role.

However, the closed border strategy also delivered significant costs.

Most obviously was the virtual cessation in arrivals of international students, tourists and migrants. The value of Australia’s international education exports fell from AUD40 billion in 2019 to AUD23 billion in 2021. International tourism collapsed even further, although because Australians typically spend more abroad than foreign visitors spend when they come, net tourism exports actually rose.

Of course, this was little comfort for tourism operators reliant on overseas visitors. Net migration has been a drag over the past two years, as more people chose to leave than those who arrived.

Stalled migration has weakened the demand for goods, services and infrastructure and is a key reason why the economy is still 4.4% smaller than it would otherwise have been if it had continued to grow at its pre-pandemic trend, as of the latest figures.

It also means that unless we catch up for the lost migrants that did not come, by, for example, doubling the normal migrant intake for the next two years, the population and economy will likely be permanently smaller than otherwise.

No migrants also led to fewer available workers.

Our estimates suggest that closing the border has meant that 400,000 to 500,000 fewer workers have come to Australia than otherwise might have done so. This is a key reason why the unemployment rate has fallen so rapidly as the local lockdowns have ended. There is strong demand for workers, but far fewer than normal to draw on.

The closed border has also contributed to some less obvious but important costs.

With skilled migrants not arriving and Australians choosing not to go overseas to work or study, some local firms have missed out on the knowledge spill over and technology transfer that comes from these interactions.

It would be remiss not to mention the great benefits that come from Australians being able to travel abroad for pleasure. Life lessons, experiences and connections with family and other networks that come from travel boost people’s welfare and help to keep our geographically distant country well-connected to the rest of the world, delivering economic benefits.

Re-opening of the border will see some of these challenges resolve rapidly, while others might take some time.

With its high minimum wage, currently record high job vacancies and good health outcomes the country should be an attractive destination for migrants looking for work. This includes international students, who often use studying as a pathway to migration and seek casual local jobs to support them through their studies. We expect a strong bounce back in migration and student numbers.

Tourism may take longer to rebound, as long distance holidays may be in less demand in a global pandemic. Chinese nationals are typically a large component of international students and tourists and China is still maintaining its COVID-19 zero approach with strict border controls.

Although we expect migration and student arrivals to ramp up, there may be an offset from local workers finally heading overseas after having delayed their plans.

Policymakers should also strive to use the pandemic shock as an opportunity to re-assess the way Australia’s international people connections work. A focus on reforms to Australia’s education exports industry and the migration programme could help to make sure the country attracts the right skills to best support a lift in productivity growth. After all, one of Australia’s biggest challenges pre-pandemic, which is likely to remain a problem, is a lack of productivity growth.

Closing the border was the right tactic at the time, and re-opening it, as is happening this week should help Australia return to being a strong and globally interconnected trading nation.

This article by HSBC's Chief Economist for Australia and New Zealand, Paul Bloxham, first appeared in The Australian on 21 February 2022.