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How to save Australia's sinking dollar: Throw another hi-tech firm on the barbie.

One of the great surprises in the world financial markets this year has been the decision of the Federal Reserve to raise interest rates in the face of a declining Australian dollar. In the modern era, movements of the Australian dollar have usually been a very reliable indicator of American monetary policy. As the value of the A-dollar has a very high correlation with commodity price fluctuations, the Federal Reserve has tended to raise interest rates during periods when the A-dollar was appreciating and eased rates when the A-dollar was declining.

Why has Australia's currency depreciated at a time when the world economy and commodity prices are so robust that the Federal Reserve is likely to raise interest rates several times? There are many potential explanations, but the dominant one appears to be investor perceptions that the A-dollar has become an old-economy currency. The Australian stock market offers only modest exposure to the information technology sector, and so it is difficult for the Australian market to attract global portfolio capital flows at a time when investors are obsessed with the IT sector.

The composition of the Australian equity market capitalization provides useful insights into this problem. The sectors with the largest weightings in the market are media (18.7 percent), banks (18.3 percent), resources (14.7 percent), telecommunications (13.9 percent), insurance (5.1 percent), property (4.8 percent) and retail (3.2 percent). The technology component of the market is tiny. Software has a market weigh of 1.2 percent, while the internet sector is at 0.2 percent. In some countries, investors regard their media and telecom companies as plays on information technology, but Australia's companies are not well positioned to play a supportive role for the local currency. The largest media company is News Corp, which is traded in New York and London. As a result, investors do not have to bid for Australian dollars in order to purchase the shares. Telstra is trying to evolve into a major force in the IT sector, but its profit margins are under pressure from increasing competition while its liquidity is constrained by a high level of government ownership.

There has been a tremendous upsurge of flotations of internet and software companies in Australia during the past two years, but most of these companies still have very small market capitalizations. A few could possibly emerge as major companies at some point, but such a development is still a few years in the future.

The American dollar, by contrast, has been a strong currency in the face of a large current account deficit because of the role of its information technology sector in driving the recent stock market boom and attracting foreign capital. The IT sector now has a market value in New York of $4.5 trillion compared to $300 billion ten years ago. The IT sector represents about 33 percent of America's stock market capitalization compared to 10 percent during the early 1990s. There is also a telecommunications sector with a market weight of 8.2 percent, and a media sector with a weight of 3.8 percent. As a result, nearly 45 percent of America's stock market capitalization offers exposure to the new investor obsession with communications and technology.

Other countries are also ahead of Australia in developing large technology sectors to rival the American market. In Japan, there has been a dramatic transformation of the country's stock market capitalization. In 1997, Japan's largest companies were Nippon Telephone (6.5 percent weighting), Toyota Motor (5.2 percent), Bank of Tokyo (3.1 percent), Sumitomo Bank, and Sony (2.6 percent). Today, the largest market cap companies are NTT Modoco (a cellular phone company) at 8.4 percent of the total, NT at 5.7 percent, Softbank at 4.3 percent, and Toyota at 3.9 percent and Sony at 2.6 percent. Two other internet players, Seven Eleven and Hikari Tsushin, represent another 3.8 percent of the market. Seven Eleven has emerged as an internet concept because of its role as a distribution and delivery center for E-commerce transactions.

Germany has created a new stock market called the Neuer Market to promote listings for small technology companies. After three years, this market has expanded to a capitalization of nearly 180 billion euros with 210 companies. The Neuer market could easily double in size during the next twelve months. The largest market capitalization company now is Nokia, the Finnish cellular telephone company. Its market cap significantly exceeds the GDP of Finland and represents over two thirds of the country's stock market capitalization.

The developing countries are also rapidly developing IT sectors. Taiwan has a semi-conductor sector with a market capitalization of over $100 billion. India has a software export sector with a market value of over $70 billion, which now represents 44 percent of Bombay's total market capitalization. Hong Kong has a new internet finance house called Pacific Cyberworks with a market cap of $28 billion and a takeover offer pending for the local phone company with a value of $38 billion. China Telecom, the cellular phone company, recently overtook the Hong Kong and Shanghai Bank as the largest market cap company on the Hong Kong exchange. Its value is now over $103 billion, compared to $98 billion for the bank.

Despite the small size of the IT sector on Australia's stock market, the country is not lagging in the use of technology. As the table below indicates, Australia ranks close to the U.S. and far ahead of Europe in terms of access to personal computers, mobile phones, and the Internet. Australia's problem is that none of its companies have yet emerged as major players in these sectors and the country now has a trade deficit equal to 1.6 percent of GDP in high technology equipment compared to 1.2 percent five years ago. As a result, telecom and technology now represent less than 15 percent of Australia's stock market capitalization compared to 33 percent for the world. The experience of Nokia makes it clear that there is no fundamental reason why Australia cannot produce a major company in,the IT sector. Finland has less than a third of Australia s population and GDP, while its income tax rates are even more crippling. But despite the tyranny of distance which has been a distinguished feature of Australia's history, the country has not yet produced a major corporate entity in the information technology sector.

The A-dollar could someday benefit from the fact that the Australian corporate sector and people are embracing IT in their daily businesses. Australia has improved its economic performance during recent years by boosting the growth rate of productivity as much as the American economy. But because of the tiny weighting of the IT sector on the local equity market, investors are not giving Australia much recognition for its success at embracing technology.

What can Australia do to bolster the value of its currency at a time when it is suffering from an old-economy image? The best solution would probably be to engage in some clever marketing by renaming the currency. The Europeans recently introduced a new currency named after the continent itself. Latin American nations regularly change the names of their currencies after exchange rate reforms. At the time that Australia switched to the decimal system for currency in the 1960s, Sir Robert Menzies proposed naming the new currency "the royal." Such monarchist slogans are now out of fashion, but at the dawn of the new millennium Australia could embrace technological themes by renaming its currency "the cyber" or the "dollar. com." The major risk for the economy posed by such a change is that there could be such a dramatic upsurge of demand for Australian financial assets that the currency could become overvalued. But such a rally would also be an opportunity to correct the problem now depressing the currency. Australian firms could take advantage of the appreciation in the value of the "cyber exchange rate" to launch bids for foreign technology companies and significantly increase the weighting of the IT sector on the Sydney and Melbourne stock markets.

The Information Age: How Australia Compares

                 Austria     U.S.     Japan     EMU     High Income
                                                          Countries

Mobile Phones(a)  264        206       304      137          189
Personal
   computers(a)   362        407       202      186          264
Internet
  hosts(b)        400        976       107      122          375

(a) per 1,000 people in 1997 (b) per 10,000 people in 1998

Source: World Bank

David D. Hale is Global Chief Economist at the Zurich Group and a TIE contributing editor.