National Economy
The arithmetic of isolation

John Edwards
September 2021

There is no doubt restrictions on travel across borders impose economic costs. The surprise in the Australian experience of the pandemic is how little the cost so far. The aggregate economic impact of border closures have so far been mitigated by the curtailment of Australian tourism abroad and by the very gradual effect of restrictions on new foreign students entering Australia. However, the longer the restrictions stay in place, the more the consequences will come into focus.

Eighteen months out from Australia’s decision to close its international border, personal travel in and out of the country remains a tiny fraction of levels before the pandemic. Yet national production in the second quarter of this year was nearly one tenth higher than it had been a year earlier, and markedly above the pre-pandemic peak. Even with the setback of the Delta variant, national output in the third quarter may still be higher than it was a year earlier. The Delta strain lockdown has set back the jobs recovery, but likely only for as long as the new restrictions are needed. Once lifted, employment will bounce back — as it did in the months following the suppression of last year’s outbreak. As the Reserve Bank persuasively argues, the Australian and global experience so far is that an economic rebound quickly follows the lifting of restrictions on work, shopping, and movement within the country.

One mitigation to the economic impact of travel bans is that it takes time for them to hurt.

Yet international travel restrictions have temporarily halted foreign tourism to Australia, formerly a big contributor to national income. By and large, new foreign students cannot yet enter the country — another big income source dented. Goods exports and imports are fine, but inward foreign investment and service exports are both down, and some of that may be due to the difficulty of international business travel. Net long-term migration boosted Australia’s population by nearly a quarter of a million people in 2019. From the second half of last year, more people have left than arrived. So how can the Australian economy be doing well when it is so difficult for people to come or go?

One mitigation to the economic impact of travel bans is that it takes time for them to hurt. Foreign student numbers are a case in point. According to government data, the number of foreign students in Australia was down by less than a fifth (to 525 982) comparing May this year to May last year. Much of the fall was in short-term English language courses. The decline in higher education was only 12 per cent. That is consistent with a sharp slowdown in new enrolments, while existing foreign students already in Australia continue their studies. Indeed, most have little choice. But the longer the ban stays in place, the larger the impact is likely to be as existing students graduate. Only now are specific student entry and quarantine programs being introduced, and so far only on a small scale. Until those programs are much larger, the number of enrolled foreign students will continue to dwindle.

Another economic mitigation is that while the entry of foreign tourists is down to a trickle, so too is the departure of Australian tourists abroad. In the year to March 2020, for example, 8.7 million foreigners temporarily visited Australia, while over 11 million Australians departed temporarily. In the following 12 months, there were only 66 000 foreign visitors, and only 141 000 Australians departed temporarily. Foreign tourists have not been spending foreign income in Australia, but Australians have also not been spending Australian income abroad. Since the latter normally far exceeds the former, the net effect of a travel ban is to increase Australia’s national income.

The Australian government should seize more targeted opportunities to liberalise entry and exit before the considerable long-term costs of isolation outweigh the benefits.

And while net overseas migration turned negative in the second half of last year and there are shortages in some areas of the labour market, there are still plenty of Australians looking for jobs. In July 2021, there were 639 000 people looking for work, and another million or so who had jobs but would have preferred to work longer hours. Prolonged lockdowns in response to the Delta variant have no doubt increased those numbers. So far, most of the complaints of labour shortages have been in hospitality, farming, and other occupations where backpackers and other temporary residents — now excluded — are commonly employed. It will take some time for labour shortages to become evident in more rapidly rising wages and a lack of critical skills. Nonetheless, the longer Australia remains shut to migrants, the sooner the shortages will become apparent.

While the international travel restrictions impose some economic costs, they have also conferred economic benefits. Australia has unquestionably experienced fewer Covid infections and deaths because of them. But the longer travel restrictions remain, the more they will hurt. Australia has, for example, gained from a substantial immigration program that slows down population ageing, brings skills in short supply, increases diversity and cultural openness, and strengthens connections with the global economy. The loss of these benefits will begin to reveal themselves over time.

The Australian government currently targets a vaccination rate that will permit a phased re-opening of the international border starting as early as 2021, allowing resumption of student arrivals and business travel, and later of migration and tourism through 2022. Meanwhile, the Australian government should seize more targeted opportunities to liberalise entry and exit before the considerable long-term costs of isolation outweigh the benefits. Like the initial stages of the vaccination program, the slow pace of approving protocols under which foreign student entry can resume in 2022 is a blot on the Australian government’s otherwise successful handling of the pandemic.

John Edwards is a Senior Fellow at the Lowy Institute and an Adjunct Professor with the John Curtin Institute of Public Policy at Curtin University.