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Tim Harcourt is a professional economist specialising in international trade and labour economic issues in the Asia Pacific region and in the emerging economies. Tim's passion is Australia's engagement with the global economy and the challenges and opportunities it offers business and the Australian community as a whole.

Tim has broad experience in public policy and in communicating international economic issues widely in the community. He has held senior roles in both the public sector and private sector in Australia and internationally and in the community and education sectors. In Australia he has worked for the Reserve Bank of Australia, Fair Work Australia, the Australian Council of Trade Unions (ACTU and the Australian Trade Commission (Austrade).

Publication

The Airport EconomistAustralian exporters conquering global markets
Beyond Our ShoresEssays on Australia and the Global Economy By Tim Harcourt, Chief Economist, Australian Trade Commission
Going The DistanceEssays on Australia and the Global Economy: 2004-2008 By Tim Harcourt, Chief Economist, Australian Trade Commission

Still in the right place – Australia and the global economic outlook in 2016

Posted by on February 3rd, 2016 · Publications

 

 

By Tim Harcourt*

 

It was Paul Keating who said that Australia needs to realise that we get our security in Asia not from Asia.

 

But what about our economic security?

 

It is true that Asia matters in terms of our economic security. Asia is important in terms of trade and increasingly important in terms of inward foreign direct investment (FDI) but less so in terms of outward Investment. Asia accounts for 83 per cent of our total merchandise trade (compared to just under 33 per cent 50 years ago when Geoffrey Blainey wrote his famous book “the tyranny of distance” which maybe we can now say has been replaced by the “power of proximity “)

 

But despite these trade patterns information flows are still Anglo American in nature and we are more moved by what the Fed does than the Bank of China. This is partly for historical reasons and party due to how much transparency we feel there is in economic institutions in our different trading partners.

 

In Asia we need to look at the big 3 engines of China, India and the ASEAN bloc.

 

Of course we need to look at China first as Australia’s number one trading partner especially given the market jitters already this year and concern about debt levels.

 

But despite some of the doomsday predictions China is still growing but it is undertaking one of the most significant economic transformations in world economic history. China’s decade long double digit economic growth has ended well and truly as the great Chinese export engine (“the world’s factory”) left it with “Too many shippers not enough shoppers”.

 

As a result Beijing is trying to wean itself off its Export led growth model to more focus on domestic consumption and investment. And there has been some success with the Tertiary sector already 50 per cent of its Chinese Economy with less reliance on manufacturing.

 

In addition China is still being boosted by Back end spending in what the Chinese call the “little country towns” like Chengdu Chongqing and Qingdao (the deemed second and third tier cities ) of 10 to 20 million plus each in population that provide  great markers for Australian architects urban planners landscape Gardeners and other exporters of professional services

 

So as the World Bank expects China may grow by 6.5 percent per annum instead of 7 plus. And if there’s concern about the stock market remember the Shanghai exchange is not London or Tokyo as The Chinese Stock market still only 11 per cent of household income and has much smaller impact than in other more mature economies.

 

India under Prime Minister Narendra Modi’s “Modi mania” is now getting a more favourable press. India was slower to modernise than China in terms of recent late 20th century globalisation having started its reform process in the 1990s was Deng Xiao Ping got China going in 1978. But it could be said that if China is a test match then India is a 20/20 game with a quick fire catch up in terms of growth and trade links with Australia. The World Bank regards India as a bright spot in its forecasts this year anticipating 7.8 per cent well above 6.5 per cent for China.

 

The third economic engine for Australia in Asia after China and India is the association of south East Asian nations – Asian. The ASEAN grouping which was originally a defence pact is now a full-fledged economic community of

622 million consumers representing a market worth 3 trillion Australian dollars which is the Third largest economy in Asia and the seventh largest in the world. ASEAN is an economically diverse from OECD like Singapore to the poorer nations in the Mekong delta like Laos Cambodia and Myanmar but many commentators rate Vietnam highly as hot spot to watch this year along with a high risk high return market like Indonesia. Some medium term tail winds in the trade sphere will help ASEAN with The Trans pacific partnership TPP expected to raise Vietnam’s economy by 10 per cent by 2030 through market access for its textile clothing and footwear trade and benefit Malaysia ICT sector. Whilst north east ASIA economies like Japan and South Korea are more advanced and don’t grow as rapidly as ASEAN the FTAs in place in 2016 are forecast by the DHL Export Barometer to significantly increase opportunities for Australian exporters in Seoul and Tokyo.

 

 

Outside of Asia Janet Yellen has got the us labour market back on track as the USA recovers, Europe is still suffering from Europhobia and is looking for some Eurovision and the Middle East contains some bright spots like UAE and Qatar who suffer from being the best house in a bad neighbourhood. In South America there is a bit of “Trading places” going on with Argentina on the rise thanks to the new “Macri economics” under new President Macri but former economic poster boy Brazil about to go through impeachment of its president. The World Bank expects that Brazilian economy will contract by 2.5 per cent this year and the authorities can hardly “blame it on Rio” – in fact the Rio Olympic Games represents one of the few bright spots on the economic calendar for Brazil in 2016.

 

In fact it’s hard times ahead for the “BRIC economies “with the exception of India with the world bank concerned about Brazil Russia China and South Africa all representing a drag on world economic growth.

 

So what does this all mean for us in Australia? We have to adjust to lower commodity prices and some movement from the “Mining boom to the dining boom” with more emphasis on agribusiness and demand for food security in Asia. The falling dollar is helping export competitiveness although 80 per cent of exporters now also import. The Rise of professional services in our export profile is also helping us survive the drop in commodity prices although the terms of trade are still healthy in terms of our economic history.

 

All the all for Australian our geographic position in the 21st century is in sync with our economic links as the power of proximity has replaced the tyranny of distance. And even if 2016 is a tough year for the world economy Australia is still in the right place at the right time in the Asian century.

 

 

*Tim Harcourt is the JW Nevile Fellow in Economics at UNSW Australia Business School and author of The Airport Economist and Trading Places

 

www.theairporteconomist.com

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Thais that bind – after the Bangkok blasts

Posted by on August 23rd, 2015 · Publications

The Thais that bind – after the Bangkok blasts

By Tim Harcourt*

The Thais have always been good to Australia. Dr Supachai in 1994 strongly supported Australia and its inclusion in various regional institutions and APEC when others tried to exclude us. And in 2005 Thailand and Australia signed TAFTA that helped build our trade momentum into ASEAN and the rest of Asia. In fact in terms of numbers of companies exporting and other trade outcomes TAFTA has been more successful than the trade agreement Australia signed with the USA at the same time.

Thailand has also been a good friend of South Australia. For many years the Port Adelaide submarine corporation was based in Bangkok under the capable leadership of Graham Storah. Woods Bagot, a century old Adelaide architecture firm was based in Thailand too and SMR an automotive components company based itself on the Eastern Seaboard of Thailand (the ‘Detroit of South East Asia’).

So it is especially important that Australia (and South Australia) support Thailand in its hour of need. That’s why this week, on a trade mission to Singapore Malaysia and Thailand lead by South Australia Premier Jay Weatherill that the decision was made to press on with the Bangkok leg of the trip despite the tragedy of the bomb blasts on the very Monday of the week long mission.

In fact the Australian Ambassador to Thailand Paul Robilliard says that the 80 strong Trade mission from South Australia is the largest Australian Business mission to Thailand. The Thai ministers of transport Dr Arkhom Termpittayapaisita expressed his and the Thai Government’s appreciation for the mission’s decision to continue to Bangkok so soon after the bombing in his first public appearance since his promotion in a long mooted cabinet reshuffle.

So what impact has the Bangkok bombing had on the Thai economy?

The biggest impact is on Thailand’s crucial tourism industry which has been affected over the past year by the coup and related political demonstrations. But other trade sectors of the Thai economy will continue particularly given Thailand’s key position as a trading and logistics hub for the Mekong delta which comprises their neighbouring countries of Vietnam Cambodia Laos and the emerging Myanmar (Burma). That’s why Australian transport and logistics giant Linfox sees Thailand as key to their ASEAN strategy as do other exporters and investors.

But even without the bombings what is Thailand like as a place to do business? According to Greg Wallis Australia Senior Trade commissioner in Bangkok (and a proud South Australian from Kangaroo Island) there are several myths about Thailand that need to be dispelled:

“People often think that Thailand is a poor country but it’s actually a middle income country with a large urban middle class with healthy purchasing power. It’s not a low labour cost economy either like. Cambodia Laos or Myanmar (Burma). And yes it has had 12 coups since 1932 but its political instability doesn’t adversely affect Thailand’s continued prosperity. In terms of doing Business it ranks 26 in the World Bank report ahead of the Netherlands on 27 and Japan on 29. It also has the world’s highest number of Facebook users” he explains.

There were some good signs this week on the South Australia mission. The mission included companies from a variety of sectors including premium food and wine aerospace defence education and fashion. South Australia’s Special Envoy Sir Angus Houston and Trade and Defence Minister Martin Hamilton-Smith lead a high quality aerospace and defence mission looking to form partnerships with Thai airways and the Thai aeronautical industry. This was coupled with education partnerships with the universities and TAFE SA to match Thailand’s human capital needs in skills and education.

All in all it’s been a terrible week for Thailand in a tough year in terms of political instability. That’s why after such a tragic week it was important that Australia (and South Australia) show solidarity with the Thais at their time of tragedy.

#Stay Strong Thailand.

Tim Harcourt is the J.W.Nevile Fellow in Economics at UNSW Australia Business School and author of The Airport Economist and Trading Places www.theairporteconomist.com

He visited Bangkok in his capacity as Adviser – International Engagement to the Premier of South Australia Hon. Jay Weatherill MP

 

 

 

 

 

 

 

 

 

 

Who’s afraid of the big bad world? Looking at the TPP and the FTAs.

Posted by on August 9th, 2015 · Publications

Tim Harcourt*
There has been political controversy over the Free Trade Agreements (especially with China) and the mooted regional Trans Pacific Partnership (TPP). Dry economists on the right don’t like ‘trade distorting’ bilateral agreements (they don’t even like calling them ‘free trade’ agreements) whilst many on the left are concerned about trade agreements going too far, beyond reducing tariffs and quotas, and getting involved in social policy, labour standards and the provision of public goods.
But even beyond the political debate, there is the question of what Australian businesses want from public policy as they engage themselves in global markets. Fortunately the DHL Export Barometer that annually surveys 600 Australian exporters and has done since 2003 give us a pretty good handle on what exporters think.
For the most part, traditionally trade agreements played a small part in impediments to exporting. Most businesses worry about the exchange rate (when it was too high their goods and services become expensive when it’s too low their input costs soar as 80 per cent of exporters also import) or behind the border regulations and business culture differences. For the most part they didn’t think about FTAs and certainly not the GATT or the WTO (as the WTO seems to have been as dead as a Doha for some time now).
But in the DHL Export Barometer for 2015, there’s good news about free trade agreements, which will be music to the ears of Australia’s energetic Trade Minister Andrew Robb. In surveying existing and new agreements there is evidence that exporters like Australia’s FTAs and that they actually work in a practical business sense despite the media controversy. This would also come as a relief to the hard working trade officials in DFAT, who spend months and years on negotiations (they always say a good trade negotiator is a marathon runner not a sprinter).
According to the 2015 Barometer, the USA FTA (AUSFTA) is at last helpful after a decade of implementation along with NZ, Singapore and ASEAN. In the survey, AUSFTA is benefitting exporters, with increased sales and a larger proportion of exporters claiming that the agreement has had a positive impact on their business (59 per cent). This occurred despite the USA hitting the sub-prime crisis just 3 years after the deal was forged in 2005 (the US unemployment rate has now returned to pre-GFC levels notwithstanding the commentators who predicted that the AUSFTA would “kill a country” (I assume they meant Australia). The AUSFTA was followed by New Zealand (56 per cent from CER), Singapore on 42 per cent and AANZFTA – the agreement between Australia, New Zealand and ASEAN on 44 per cent.
And in important news for the Robb agenda, the new “trifecta” of FTAs – Japan, South Korea and China– has got the endorsement of the Australian exporter community. In fact, Japan is more beneficial than expected and all FTAs to North East Asia are enticing new exporters
Japan has actually been more positive than expected in 2014 and most FTAs were thought to increase exports to that destination, enhance an online presence, and develop new products and services for that destination as well as attracting new exporters.
In terms of future FTA destinations, exporters think that India, Indonesia, the Gulf Co-operation Council and Latin America should now be on Andrew Robb’s dance card. But of all the future pacts, India drew the most negative ratings consistent with the view about increased competition from India.
But what about the controversial TPP? According to Barometer, the TPP actually received a positive response with 46 per cent (up from 37 per cent in 2014) of exporters also thought they would benefit from the TPP, 51 per cent thought it would be neutral and 4 per cent expected it would be negative. But the TPP has some complications not always apparent in an up and down trade deal, including the investor provisions that have been controversial in other jurisdictions. As Princeton economist Dani Rodrik pointed out in his famous book Has Globalisation Gone too Far? at the high water mark of the anti –globalisation movement protests against the WTO in Seattle (the ‘Battle for Seattle’), when trade agreements stray onto the turf of the provision of public goods, or legislation like plain packaging for tobacco they are likely to lose public support.
Even in the China FTA the labour market provisions have overshadowed the benefits the overall agreement would bring. And it is important to remember Rodrik’s finding that economies that are open to trade have well developed important labour market institutions and social insurance. This is reflected in my own research Why Exports are good for workers on the Australian experience (that I started at the ACTU and continued at Austrade in conjunction with UNSW Australia) that showed that exporters, on average, paid 60 per cent higher wages than non-exporters, provided better levels of occupational health and safety, more education and training, equal opportunity provisions and were more likely to be unionised. The research demonstrated that free trade grew side by side with free trade unions and support for an open economy was bolstered by improvements in productivity, efficiency and fairness in the labour market. These are important lessons to heed as we strive to benefit from the next round of FTAs.
Tim Harcourt is the JW Nevile Fellow in Economics at UNSW Business School, UNSW Australia & author of The Airport Economist and Trading Places: www.theairporteconomist.com

 

 

 

 

 

 

 

 

 

 

What’s in a game? Why Sports Economics is a big deal.

Posted by on May 28th, 2015 · Publications

By Tim Harcourt*

We’ve recently seen the growth of sports economics in academia, government and industry. Why is this so? Is it just because economists are secret sports fans who all wish they were sports commentators/writers like Denis Cometti, Gideon Haigh or Caroline Wilson? That could be part of story, as many economists believe it or not are human, and just as susceptible to being sports junkies as the rest of us. But there are some more compelling reasons as well as discovered by UK based economists Alex Bryson, Bernd Frick and Rob Simmons at Britain’s National Institute of Economic and Social Research (NIESR).

Firstly, as well all know, sport is big business. As the authors point out, the European Commission estimated that even in 2004, sport generated value added of 407 billion euros or 3.7 per cent of EU GDP, the US NFL Superbowl attracts 114 million viewers in the USA plus many more offshore, the India Premier League (IPL) dominates world cricket, and in Australia, the AFL and NRL TV broadcast rights is now almost a $2billion deal for each respective code.

Secondly, sport is a big employer. In the EU 15 million people are employed in sports, which is equivalent to 5.4 per cent of the labour force. In Australia, in the 2011 Census 95,590 persons were employed in sport and physical recreation occupations, which represented an increase of 17% on the results of the 2006 Census.

Thirdly, sport is important to health and well-being, improving our quality of life in itself but also improving productivity and the quality of labour supply right across the economy.

Fourthly, the economics of sport can shed light on fundamental economic questions particularly in the labour market, in terms the role of incentives, evidence of labour market discrimination on race and gender lines, and how competition is structured through the draft and salary cap (who can forget former Carlton and Liberal Party President John Elliott complaining of the AFL’s ‘football socialism’?).

A fifth possible reason is the international dimension of sports economics. In my period as chief economist of the Australian Trade Commission (Austrade) I came to appreciate the growing importance of sports diplomacy. At Austrade, we ran the Business Club Australia programme that ran networking business events starting from the Sydney Olympics in 2000 through to Athens 2004, Beijing 2008 and London 2012. We also ran BCA networking events at the Rugby World Cups, FIFA World Cups, and the Commonwealth Games, swimming and racing events. Thanks to BCA, Australia made gains of $2billion in trade and investment in the years between the Sydney Olympics in 2000 and the London Olympics in 2012 alone, which shows the impact that well targeted sports networking – ‘the power of schmooze’ – can have if done professionally and efficiently.

In fact, Ashley White, the architect of BCA at Austrade has now joined the sports business consultancy Bastion S&GO (Strategic and Global Outcomes), as head of its International Diplomacy division. Bastion, the first Australian sporting and marketing communications conglomerate of its kind, has recently undertaken a series of meetings across the UAE, USA and Asia to bring more investment opportunities to Australian businesses and government-led initiatives. White is taking the good work done by Austrade in Sydney, Beijing and London and extending it to Rio 2016 and Tokyo 2020, with the help of a number of leading sports and political figures including former Federal Cabinet Minister Warwick Smith, Former Asian Cup CEO Michael Brown, and existing political leaders and ambassadors. In the Federal Budget, BCA now lives on as ‘Match Australia’ and received $5.2m over the next four years to keep delivering trade, investment, education and tourism outcomes for Australia.

As well as at the federal level, another example is effective sports diplomacy is South Australia’s smart hosting of the India-Pakistan match at newly revamped Adelaide Oval during the Cricket World Cup 2015. Instead of hosting the Australia-Bangladeshi match (that went to Brisbane) South Australia bid for India-Pakistan, knowing that it was likely to be the most watched cricket match in the history of the game in terms of TV viewers (which it was). Not only that but Indian and Pakistan fans travelled to Adelaide not only from South Asia but from Singapore too and some even came from as far away Toronto to be there for the first ball bowled. Over 80 per cent of match attendees hailed from outside South Australia with large groups of India and Pakistan community making the journey across from Sydney and Melbourne. The ‘swami army’ were in force as Indian (and Pakistan) flags were seen flapping from cars at the border (that is the border of South Australia and Victoria not in the Punjab). The Premier of South Australia, Jay Weatherill hosted a major community function for Indian businesses on the Thursday before the game and an historic India-Pakistan business function was held at game itself. South Australia also hosted the Indian team in Adelaide during the series knowing the Indian attraction for Adelaide Oval where the legendary Don Bradman played so much of his cricket.

And finally, there’s increased interest in economists in the public policy implications of hosting sporting events. This could be conducting a cost-benefit analysis of hosting an event, given the experience of the Montreal Olympics in 1976 or Athens in 2004 (see my separate article My Big Fat Greek Debt) and more recently Brazil. I have just come back from Rio de Janeiro, and there is care about not over hyping then Rio Olympics in 2016 and its likely impact on the fragile Brazilian economy given the anti FIFA World Cup protests and difficult infrastructure legacy issues of 2014. And speaking of FIFA, like all industries the sports business needs corporate governance and the corruption difficulties FIFA has got itself into, not to mention the blatant violation of labour standards in Qatar the host of the 2022 FIFA World Cup shows why its everyone’s business that there be proper corporate governance and public interest in the global sports industry.

In summary, the growth in sports economics is likely to continue as the economic impact of global sport is felt more keenly in national economies. Proving that in terms of economic activity, income generation and job creation, the global sports industry really is more than a game.

*Tim Harcourt is the JW Nevile Fellow of Economics at UNSW Australia Business School and Adviser-International Engagement to the Premier of South Australia, Hon. Jay Weatherill, MP. He is the author of 6 books including Trading Places and The Airport Economist www.theairporteconomist.com

 

 

 

 

 

 

 

 

 

 

Battlers or Billionaires – Australia and China in the long run

Posted by on September 1st, 2014 · Publications

Battlers or Billionaires – Australia and China in the
long run

By Tim Harcourt*

We get a lot of free advice from billionaires about
how to deal with our largest trading partner China.

First, we had James Packer – who has extensive Casino
interests in Macau – who said we didn’t ‘bow enough’ or treat our trading
partners with enough deference.

Then, at the other end of the spectrum, we had Clive
Palmer’s outburst on the ABC and the subsequent follow up from another member
of his party, Tasmanian Senator Jacqui Lambie, that strayed into the dangerous
defence realm.

Both these billionaire interventions caused ripples in
Beijing, particular the more colourful Palmerian references to ‘mongrels’ and
‘bastards’. Clive Palmer has since apologised. But does either really have an
impact on the long term trading relationship between China and Australia?

If you look at all the Prime Ministers, from Whitlam
to Abbott, all have forged strong links to China. For instance, Bob Hawke
looked to China with his adviser Ross Garnaut’s report Australia and the North
East Asian Ascendancy, Paul Keating supported China’s entry in the WTO, John
Howard formed close ties with Hu Jintao on APEC, and Julia Gillard has her
moment in Sino-Australian diplomacy with the renminbi currency conversion.

Now Tony Abbott has his big opportunity with a
possible Free Trade. If Abbott is successful Australia will have forged a
unique hat-trick of FTAs with our three most important trading partners – South
Korea, Japan and China – in a year and a half. It’s a great achievement.

But while things seem to be going swimmingly at the
highest level, are Clive Palmer and Jacquie Lambie tapping into scepticism or
even fear in the Australian community? And is it justified?

To  answer that question, you have to say that
China has played an important role in Australia’s economic development over the
past three decades, in the same way that Japan did as it was industrialising in
the 1950s, 1960s and 1970s. As a result China is our largest trading partner,
accounting for $141,947 million or 28.2 per cent of total Australian
merchandise trade.

Further, exports create jobs for Australian workers
and China as our number one export destination plays and important role in
improving conditions in the Australian labour market. Austrade-ACTU-UNSW
research shows that on average, exporters pay 60 per cent higher wages than
non-exporters, provide better occupational health and safety (OH & S),
education and training, employment security and equal employment opportunity for
women.

So what’s the future of the Sino- Australia trade
relationship?

While iron ore and coal is a big part of the story,
Australia will move from the mining boom to the dining boom. Australia can’t
feed China on our won but we can help China feed itself. Even so, expect
‘rocks’ (resources) to dominate the primary export ledger of ‘rocks and crops’
for some time to come.

In some ways, China’s development is as much about
urbanisation as it is about globalisation and Australia will play a big role in
servicing of the second and third tier cities, places like Chengdu, Wuhan,
Chongqing, and Qingdao that my Chinese friends tell me are ‘country towns’.
When I arrive I realise they are country towns of over 10 million inhabitants!
This means opportunity for Australian architects like Place Design who moved
their office from Brisbane to Chengdu to meet the insatiable demand for
landscape gardening in Sichuan province, or Sunshine Coast horticulture company
Bassett Bark that has found China to be a happy hunting ground. In fact the
AGSM MBA Education course I teach “Doing Business in China” now includes
western china – with Chengdu and Chongqing as well as the “Bright lights big
city” of the coastal economic mega cities of Shanghai, Beijing and of course,
Hong Kong.

In fact, the story of China’s structural reform is not
only rural-urban migration but also transforming itself from being a nation of
‘shippers’ to a nation of ‘shoppers’. It wants to rely less on exports
(shippers) and more on domestic consumption (shoppers) and investment. Middle
class incomes are on the rise along with demand for consumer goods once
considered a luxury in China. That’s why Rheem hot water (remember the jingle
‘install a Rheem’) is now based outside Chengdu to service the domestic market
and BlueScope is based outside of Shanghai to transfer steel locally free of
tariffs. Add to this the opportunities in the professional services sector
like, architecture, landscape design, education and financial services (China
still has a banking system that needs to mature and be more globally
integrated.

In fact, Australia’s export relationship is more
broadly based than people think at first glance. According to ABS data, over
5600 Australian small and medium sized enterprises (SMEs) now export to China (plus
another 4900 via Hong Kong) and over 3000 are based there and are succeeding.
Australian SMEs battle their way into China and over time many have forged a
reasonable business through time and enduring relationships.

So, maybe we should listen more to the little Aussie
battler in the SME sector and less to our billionaires when seeing how to
succeed in China in the long run.

*Tim Harcourt is the
JW Nevile Fellow in Economics at UNSW Business School and author of Trading
Places – The Airport Economist’s guide to International Business:
www.theairporteconomist.com

He teaches in China as part of the AGSM’s MBA
Course in International Business and was previously Chief Economist of Austrade

 

 

 

 

 

 

 

 

 

 

 

 

 

From Russia with love – will the trade sanctions hurt Australia

Posted by on August 7th, 2014 · Publications

From Russia with love

By Tim Harcourt*

Poke a Russian bear with a stick and
he will retaliate. That’s the lesson facing Australian exporters today. When
Australia announced they were joining the USA and Europe in placing trade
sanctions on Russia in response to Malaysian Airlines MH 17 being shot down in
Ukraine, it could do so realising there wasn’t much trade to talk about.
Australian- Russia trade is only worth $1.8 billion and as our 28th
largest export destination and 30th largest import source. In fact
Russia’s main export destinations are – wait for it – the Netherlands, Turkey
and the Ukraine. It imports mostly from China (like everyone else), Germany and
the USA. Australia only accounts for 0.3 per cent of Russian imports as Russia’s
44th largest import source and we are Russia’s 99th
largest export destination (barely registering on the trade accounts).

But now Russia’s counter sanctions
could hurt agricultural exports particularly in wheat, dairy, beef and kangaroo
meat (Russia is our main export market for kangaroo meat so Skippy and the
animal rights movement may applaud Putin’s actions to ban Australian exports).

So how will the trade sanctions play
out? Russia’s actions could hurt Russia most of all. A government putting on tariffs
or other forms of trade protection is a like a government shooting its own
people during peace time. Or as the legendary Cambridge economist Joan Robinson
used to say a trade bans are like “putting rocks in your own harbour.” Putin
might well be bringing food shortages back to Russia like the bad old days of
the Soviet Union and Tsarist regimes – something the poor Russian populace has
been used to historically.  For a
democracy it would be unbearable but at an 87 per cent approval rating Putin
won’t worry about that.  As he said at
the APEC meeting in Sydney in 2007 meeting when John Howard allowed then
Opposition leader Kevin Rudd to speak: “How nice to allow your Leader of the
Opposition to speak, I would do so also, except I don’t have one.”

Will trade sanctions work? In
economic history the record is patchy. The economic evidence is mixed when
looking at trade sanctions against South Africa, Southern Rhodesia (now
Zimbabwe), Cuba, Fiji and now recently Myanmar (Burma). The evidence shows that
the economic sanctions against South Africa were more ‘psychologically hurtful’
to the apartheid regime than economically damaging, although there is evidence
that disinvestment by major institutions like Chase and Barclays had more of an
impact than trade sanctions. As in the case of Cuba and Southern Rhodesia,
trade sanctions did not have as much impact as restrictions to foreign
investment and in any case the economic distortions in the domestic economy
(like South Africa’s apartheid labour market distortions) were as damaging as
external sanctions. In any case, ironically it was the collapse of the old
Soviet Union was the key factor in enabling the white minority government to
start negotiating with Nelson Mandela and the African National Congress, making
South Africa a ‘special case’ in terms of effectiveness of sanctions.

In a well-functioning economy
sanctions can bite quickly, but as in South Africa (due to apartheid) and Myanmar
(due to having a ludicrous sized army for a poor country 300,000 men under arms,
almost the population of Canberra, despite no external threat) and Russia they
can have mixed effects. Russia has an oligopolistic, or we could say
“oligarch-listic”, anti-competitive economy so the oligarchs will choose to
absorb the sanctions or distort the effects. The west has tried to target
Russian funds abroad (in the UAE and Chelsea) as that’s where the Russian
oligarchs keep their capital but that’s going to be a difficult target.

This MH 17 Russia – Ukraine crisis
has a long way to go into terms of geo-politics and trade is likely to be just
one weapon of choice in the skirmish.

Russia Fact Facts:

Australian Exports to Russia: $736
million

Australian Imports from Russia $1057
million

Main Australian exports – wheat,
beef, butter, kangaroo meat

Main Australian imports – crude
petroleum, fertilizer, vodka

Australian investment in Russia –
$2352 million

Russian Investment in Australia $4844
million

Number of Australian companies
exporting to Russia – 377

*Tim Harcourt is the JW
Nevile Fellow in Economics, UNSW Business School in Sydney and author of The
Airport Economist.
www.theairporteconomist.com

He is formerly Chief
Economist of the Australian Trade Commission and a regular visitor to Russia.

 

 

 

 

 

 

 

 

 

 

Wake in fright – Another Malaysian Airlines disaster

Posted by on July 22nd, 2014 · Publications

By Tim Harcourt*

As a frequent flyer, particularly
around the Asia Pacific region, I, like many, awoke to the horror of more bad
news for Malaysian Airlines. This time Malaysian Airlines flight MH 17 was
allegedly shot down over the disputed Ukraine-Russia territory while making its
way from Amsterdam to Kuala Lumpur. This comes in the same year that the world
– particularly Australia – has been searching for MH 370 in the Indian Ocean
off the coast of Western Australia. Same country, same flag carrier, but a
disaster of potentially even greater proportion in global terms.

But what does Malaysian Airlines
double disaster really mean?

The first tragedy is human life of
course. Its early days but there have been reports that a large number of
Dutch, Malaysian and Indonesian passengers on board who have lost their life.
Australian Prime Minister Tony Abbott addressed the nation early this morning
to announce that 27 Australians were feared to have perished and offered his
sympathies to the families. Prime Minister Abbott had played a very public role
in announcing details of the search for the missing MH 370 whilst travelling in
China – so he must be very surprised at how much impact Malaysian Airlines has
been having on his own media agenda. The Prime Minister had just steered the
abolition of the carbon tax through a dysfunctional Senate but still hasn’t
passed his budget.

The second tragedy is one of
geo-politics. The world has been watching Vladimir Putin’s stand-off with
Ukraine in the ethnically Russian dominated east of the country but has thought
it could be hands off and narrow it to a regional dispute. Now this news puts
the cat amongst the pigeons over was it shot down, who did it (the Ukrainians
or Russian separatists) how and why? Memories of Korean Airlines being shot
down by the old Soviet Union comes flooding back. This latest incident now
drags Asia and the world into the Ukraine.

The third question is more about
economics. How will this affect Malaysia? How will it affect the ASEAN states
and the Asia Pacific more generally? Malaysian Airlines is Malaysia’s national
flag carrier and like all flag carriers – its county’s ‘brand’. Like the UK has
BA, Australia has Qantas, Malaysia has MAS and for emerging economies having
your own airline is a mark of economic success. Now, MAS which was already
close to bankruptcy before MH 370 went missing could be facing a knock-out blow
with MH 17. This is a blow to Malaysian pride, ASEAN and the whole Asian region
which will have adverse effects on trade, investment, international education
and tourism. It harms Malaysia’s economic diplomacy and its aspirations to be a
significant player in ASEAN, APEC and on the world stage.

Is it the September 11 of this
decade? It’s too early to speculate whether it could be a game changer of
global geo-politics and the international economy, but in terms of the Asia
Pacific region, its Malaysia’s blackest day.

*Tim Harcourt is the J W Nevile
Fellow in Economics at the Australian School of Business, UNSW Australia in
Sydney and author of The Airport
Economist
:

www.theairporteconomist.com

 

 

 

 

 

 

 

 

 

 

All the way but with which FTA? Australian Exporters by Destination

Posted by on June 3rd, 2014 · Publications
All the way but with which FTA? Australian exporters by destination.
Tim Harcourt*

All the way but with which FTA? Australian exporters by destination.

Tim Harcourt*
After a long lull, free trade agreements are back in vogue. Australian Trade Minister Andrew Robb announced he would get three up with South Korea, Japan and China within 12 months. Before the West Australian AFL commentator Dennis Cometti could say “That’s ambitious”, Robb got two – South Korea and Japan – on the scoreboard. Now he only has China to go, probably by the end of this year, before claiming a unique free trade ‘hat trick or trifecta’. In some ways Andrew Robb has been one of Australia’s most energetic Trade Ministers, in the tradition of John ‘Black Jack’ McEwen, John Dawkins or Tim Fischer. Whilst former Trade Minister Simon Crean negotiated Chile and the complex pact AANZFTA (between Australia, New Zealand and ASEAN), Craig Emerson preferred to “put Doha first” and preferred the multilateral system to what he considered to be ‘preferential’ bilateral agreements. Unfortunately, the WTO has been as “Dead as a Doha” for some time hence the pragmatism of FTAs and even regional partnerships, like the Trans Pacific Partnership (TPP).

In 2005, Australia signed agreements with Thailand and the USA, 2 years after Singapore. Then we had the Global Financial Crisis (GFC) of 2008 which savagely took its toll on the North Atlantic Economies. And for Australians we realised how we well have managed our own economy – with a well targeted and timed – stimulus package, and how important our economic ties with Asia and the emerging world have become. Now in the new age of FTAs, what do we know about exporters – especially small and medium sized enterprises (SMEs) – and where they go? And can we compare the two different eras of FTAs? Especially with a GFC in the middle of the period?

Fortunately, courtesy of some new research from the Australian Bureau of Statistics (ABS) we now are getting a better handle on some of these questions. When I was at Austrade I asked the ABS to start collecting this data because when it came to trade most data was concentrated on the top end of town and less so on SMEs. And most trade news tends to be ‘big picture’ whether about the Doha round in the World Trade Organisation (WTO), G20 summits and APEC.

However, whilst these big developments are important, their focus is mainly on export revenue and the gains at the top. But what about the exporting companies then? How many are there and where are they heading?

New data gives us a good feel of how exporters have fared between the days of the Thailand and USA FTAs, and the new agreements with Japan and South Korea.

According to the ABS, the total number of exporters of goods and services was 45,056 in 2012-13, There was an increase in the number service exporters, up 386 (13%) to 3,323. The number of goods exporters decreased slightly, by 35 to 43,045.
The increase in the number of service exporters was largely due to a rise in the number of exporters with exports valued at ‘Less than $1m’, up 291 (14%) to 2,367. Although it should be emphasised that the count excludes in-bound services (like tourism and education) that are also important to the national export effort.
The exporter community can be broken down by market destination for goods as well and the results make some pretty interesting reading.

First of all, as always, our Trans-Tasman cousins, New Zealand are top of the pops, with 16,217 Australian businesses having exported to the shaky isles in 2012-13. This indicates that many exporters traditionally find exporting ‘across the ditch’ relatively easy and that Kiwiland is a good ‘nursery’ to start with when learning the craft of exporting.

However when you compare to the pre-GFC days where there were 17,817 exporters to NZ, there has been a slump of 1600 exporters. This may indicated that the kick-start given to exporting from the Australian New Zealand Closer Economic Relationship (CER) is a long way in the past and the Australians and Kiwis need to think beyond trade to breathe new life into Trans Tasman economic reform. It may also be that both Kiwi and Aussie businesses have squeezed all they can out of the bilateral relationship and are now heading towards third markets thanks to the deal we have together with the ASEAN states or across the Pacific to Chile. Is also noted that NZ has had an FTA with China for some time whilst Australia hasn’t had that pact yet but may by the end of 2014.

The United States is second, with 8909 exporters.  Many small and medium businesses get their start in the USA as they are attracted by the size of the market.  But the numbers have actually fallen to the USA over the past 6 years with the sub-prime crisis taken its toll. Did the Howard Government’s much heralded FTA with the USA do much? It’s doesn’t look like it on these figures – Austrade in fact had to close a number of USA posts – but in some ways the FTA was more about two way investment than trade.

Singapore is in third place with 6125 exporters. Singapore is a mature market and more of an investment destination than an old fashioned export market. It may also be that the improvement in other ASEAN economies may have taken some business away from Singapore. After all we have had a FTA there for over a decade.

The big story of course is China with 5638 exporters, a gain of over 1300 in 6 years and now in 4th place and close to medal contention. China has not only overtaken Hong Kong in the exporter stakes, it has also taken over the UK. The data shows a weakening in ‘entrepot’ economies like Singapore and Hong Kong who traditionally tend to have lots of wholesale trading houses and act as a hub port for exporters (and importers). For instance, Singapore has played the role of a gateway port for South East Asia, whilst in the past; Hong Kong has played a similar role in the North East Asia – particularly before China opened up more to international trade and commerce.
But now exporters can go straight to China, and they do. China’s position supports the Sensis survey that showed many SMEs looking to the Middle Kingdom as an export destination – joining the larger Australian blue chip corporates such as Rio Tinto, ANZ, AMP, Elders, BHP Billiton and Woodside who have been in Beijing for some time. China is a happy hunting ground for Australian SMEs who too are learning to ‘hug the Panda’.

After Hong Kong on 4977 comes Papua New Guinea on 4959 exporters a gain just over 970 over 6 years. The data shows the importance of our near neighbours to small business exporters with three Pacific destinations in the top twenty.

Next comes the UK 4559 which has slipped behind China, HK and PNG as the Empire slowly loses its crown. The GFC has clearly weakened the UK as an exporter destination. However, in the UK’s case, the UK is still light years ahead of any other European country, indicating that many Australian exporters (like our pop-stars) head to Britain (because of cultural and historical links etc) and have use the UK as a base to expand into Europe and the rest of the world. A phenomenon known as ‘The Kylie Effect’.

The Eurozone crisis hasn’t helped matters, thanks to the Greek Crisis (see the forthcoming movie ‘My Big Fat Greek Debt’) there are only 141 Australian exporters selling goods to Greece to the value of only $10m. Our export trade to Christmas Island is more valuable than to Greece (five times as valuable) and there are more Australian exporters in Colombia, an up and coming economy in South America than to Greece.

Then comes ASEAN neighbour Malaysia on 3659, and Japan on 3053. ‘Abeconomics’ is reviving Japan’s fortunes but still very few Australian businesses set up in Japan, so the FTA could make  a lot of impact. Thailand is on 2851, ahead of Fiji on 2694, but coups aren’t good for business.

The ‘second top ten’ is still heavily focussed in Asia but includes both mature and emerging markets. Germany attracts 2541 exporters followed by Indonesia on 2500 then comes another FTA market South Korea on 2272, Canada on 2258, UAE on 2118, and Taiwan on 1997. After suffering some sharp falls, South Africa, Australia’s key African entrepot in Africa is on 1922, India in 1908, and another ASEAN state, the Philippines, on 1697 rounds out the top 20.

It should be noted in the analysis that many exporters have multiple destinations, so they may be counted twice in terms of country though not in the region. The analysis of company numbers is also not necessarily a reflection of value. For instance, whilst New Zealand attracts over 16,200 exporters and Japan only around 3,053, the value of those exports to Japan was over $46 billion, whilst New Zealand’s was worth just over $7.3 billion.

Does the data change over the years? From the limited data available, the top 20 remains pretty stable with a few countries changing positions. However, if you look at longer term snapshots, you see a bit more movement. For example, a comparison of the 1989-90 rankings with the present shows – you guessed it – China charging up the table. And even in five years China has leap frogged Hong Kong and the UK.

In conclusion, in terms of exporters, we have an exporter base in Australia that is spread far and wide across the globe but concentrated enough in the bigger markets to get a good bang for their buck. And exporting seems to be delivering to all Australian exporters – both large and small. UNSW research shows that exporters, on average, grow faster, are more profitable, more innovation and pay higher wages than non-exporters. It will be interesting to see what impact Andrew Robb’s FTAs with Japan, South Korea and (potentially) China make to this picture in a few years’ time.
*Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business (ASB) UNSW and author of The Airport Economist: www.theairporteconomist.com

Table: Number of Exporters
by export destination
Country No
exporters
2006-07
No
exporters
2012-13
Change
No
Exporters
Value
($m)
2006-07
Value ($m)
2012-13
Change
Value

New Zealand 17817 16217 -1600 9435 7309 -2126
USA 9318 8909 -409 9803 9021 -782
Singapore 6538 6125 -403 4637 6425 -212
UK 5672 4559 -1113 6146 5520 -626
Hong
Kong
5116 4977 -139 3038 2452 -586
China 4257 5638 1381 22805 77952 55147
PNG 3987 4959 972 1524 2757 1233
Malaysia 3587 3659 72 3103 5195 2092
Japan 3564 3053 -511 32623 46462 13839
Fiji 3176 2694 -482 383 305 -78
Thailand 2542 2851 309 4256 4958 702
Germany 2637 2541 -96 1444 1985 541
Indonesia 2582 2500 -82 4241 4750 509
Canada 2398 2258 -140 1768 1568 -200
UAE 2004 2118 114 2393 2322 -71
South Korea 2314 2272 -42 13086 19096 6010
India 1994 1908 -86 10103 11415 1312
Taiwan 2239 1997 -242 6191 7535 1344
South Africa 2226 1922 -304 2055 1380 -675
The Philippines 1678 1697 19 1056 1681 625
Source: ABS 5368.0.55.006
includes multiple destination exporters.

 

 

 

 

 

 

 

 

 

 

Soccernomics – the Economics of the World Cup

Posted by on June 1st, 2014 · Publications

Soccernomics – the Economics of the World Cup

By Tim Harcourt*

The Airport Economist, Australian School of Business, UNSW.

We are just a few days away from the long awaited FIFA World Cup in Brazil – the most watched sporting event in the world. Like the Olympics it happens every four years since it began in 1930 and this time the event has been controversial because of protests against the hosting of the World Cup (and Rio Olympics in 2016) by local Brazilians and most recently by suggestions of corruption in FIFA’s decision to hand the 2022 World Cup to Qatar.

As usual, most economists are soccer fans (soccer is known as football in most countries but soccer in North America, Australia, New Zealand and South Africa) and have been analysing the economic impact of the Cup, especially as they have to justify watching the games on TV over the next four weeks or so at the same time as they are analysing shares and commodity prices. But they needn’t be too sheepish about it, as sport is a big deal in economic terms and the business of the world cup has become one of the most scrutinised set of international transactions you’ll ever see (or not see).

And whilst they call economics the dismal science no one ever said you shouldn’t study an industry like sport (or art, music and entertainment) just because it is pleasurable.

After all soccer football, or ‘the beautiful game’ transcends cultures and national borders, has been the subject of economic diplomacy and the odd dispute, and touches millions of people on this planet, for better or for worse. As the Washington based journalist Franklin Foer explains in his seminal work How Soccer explains the world soccer asthe world game’,  can be used to explore the Jewish question, Hooliganism, Islam, Oligarchs, the American culture wars and many more topics loosely based around globalisation. Sure, he hasn’t mentioned how soccer can explain the fiscal cliff, the budget emergency or global warming but give the guy some time and I am sure he will in his sequel.

But whilst not being as ambitious as Foer’s treatise we can ask some basic questions on the economics of soccer.

First, it is clearly a big deal for Brazil to host the world cup again, for the first time since 1950, to much fanfare and riots, but is there a world cup effect? Is it good for the host country economy? Why are Brazil taking it on, and then the Olympics in Rio in a unique double header? What will the hosting of the World Cup do for Brazil’s global standing?

There’s no doubt that Brazil went for the hosting rights because of the prestige it would bring and would help their claim to be the world’s next economic superpower. After all they are the world’s 5th largest economy by population and the seventh (on a purchasing power parity – or ppp – basis) or sixth (on a US dollar basis) largest country in the world, accounting for between 3 and 3  ½  per cent of world output.

And the world cup is a big deal, according to Goldman Sachs, 250 million people play soccer football regularly in more than 200 countries and since the first FIFA World Cup was hosted in Uruguay in 1930, over 70 countries have participated in various qualifying rounds. But as the protestors point out, if resources are allocated away from health and education to build stadia, or of god forbid, something went wrong,

it could damage Brazil’s prestige just 2 years ahead of the Rio Olympics in 2016.  Brazil had the reputation of being “The country of the future, and always will be,” the successful hosting of the World Cup in 2014 and Olympics in 2016 would do much to bury that (perhaps unfair) perception.

Second, if there is an economic gain from hosting the world cup, how about winning it? Remember, in 1950, 200,000 people jam packed the newly built Maracana stadium in Rio de Janeiro, and Brazil just needed to draw to win the Cup. But they lost, to their neighbour Uruguay on a day that shocked the nation, and ruined the life of the poor Brazilian goal keeper who happened to be custodian of the national team on that day.

According to Goldman Sachs, a World Cup win does give a country a boost on the stock market. All the winners since 1974, have outperformed in the post final month with the exception of Brazil in 2002, that had been going through a financial crisis as was near neighbour Argentina (see my blog Don’t buy from me, Argentina). The victor outperforms the global market by 3.5 per cent in the first month, then it tails off, and for the host nation out-performance is 2.7 per cent but it tails off too, and can even under-perform in three months. Apart from the stock market, the economic impacts can be positive if the host nation uses the major event to bring forward much needed infrastructure (as in the Sydney Olympics in 2000), provides a legacy to a local area (East London in 2012 via Westfield Stratford and so on) or to showcase its global engagement to the world (Seoul as Olympic host in 1988 signalled it transformation from closed ‘hermit’ economy to advanced North East Asian global ‘hub’ of trade and commerce). In addition, there are networking effects of hosting the games or the Cup, Austrade’s famous ‘Business Club Australia’ model allowed exporting small and medium sized enterprises (SMEs) to get recognition and access to business partners and investors at the Sydney Olympics in 2000 and beyond. A famous example is ‘Rock star’ architect John Bilman, of PTW architects who built the watercube at Beijing in 2008 as a result of contacts made at Sydney 2000.

Third, what will the World Cup do for Brazilian-Australian relations? As we found in our book Great Southern Lands – building ties between Australia and Brazil, we’ve neglected Brazil for some time, as Australia looked to London whilst Brazil looked to Lisbon historically. But now as Brazil has had better economic progress than the ‘lost decades’ of the 1970s and 1980s, and has plenty of economic suitors Australia will need to do more than just woo the Girl from Ipanema if it wants to succeed in Brazil. Areas of potential collaboration include resources and agriculture, transport, better cities (urban renewal), renewable energy, education, arts and popular culture and of course sport!

Will the World Cup help with many Australians going to Brazil for the first time to support the Socceroos? One interesting fact from  the Goldman Sachs report was that amongst foreign buyers of World Cup tickets, Australians bought 41,000 or 41k tickets making it  second only to the USA (154 k), and ahead of football mad England (38 k) and nearby Colombia (33 k). Whether it is the strength of the Aussie dollar or the enthusiasm of Brazilian based Australians like Shannon Powell of the Global Foundation, who has been holding fabulous functions for the Socceroos, that’s an open question. It could be that the majority of Australians saw the World Cup as the perfect reason for a once in a lifetime extended holiday to Brazil. Even the famous committed unionist, the ASU’s Sally McManus is taking a break from her famous industrial and political campaigns to take a holiday in Brazil. It turns out she’s a soccer tragic as well as a committed labour activist.

Fourth, how with the World Cup impact on Australia’s trade and investment ties with the rest of Latin America? Chile, Peru, Colombia, Argentina etc.? As I found in in the just released publication, Latin lessons – Australia and Latin America face the Asia Pacific Century, the Andean countries of Chile, Peru and Colombia have been happy hunting grounds for Australian exporters and investors, particularly in resources, energy and education. The World Cup may draw in a bit of extra business, especially as Qantas flies to South America through Santiago, but I expect that business will go on whatever happens in Brazil this month.

And finally what will the World Cup mean for the business of sport in Australia? As I have been finding in researching my forthcoming book, Footynomics, on the battle of the football codes in Australia, there has been a time when the AFL, NRL and Australian Rugby Union officials were sort of hoping for the Socceroos not to qualify for the World Cup, because it would awaken ‘the sleeping giant’ and they’d lose their talent – on and off the field – to Australia’s fledgling soccer code.  Now given that Australia has made the World Cup three times in a row, Germany in 2006, South Africa in 2010 and now Brazil in 2014, will they be hoping for a quick exit for the Socceroos?

I think we would expect the rival football codes to want the Socceroos to do well at least out of national pride and professional respect. The big question is whether the latest scandal rocking FIFA in handing the 2022 World Cup to Qatar, with accusations of bribes and breaches of occupational health and safety and actual workplace deaths and might shake things up and bring Australia back into the picture as an alternative host. Then we would see a battle of the football codes but following a successful Australia 2022 not Brazil 2014.

*Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business, in Sydney Australia and author seven books on the international economy including the international business bestseller The Airport Economist.

His next book is titled: Footynomics – the business of sport.

www.timharcourt.com

 

 

 

 

 

 

 

 

 

 

Latin Lessons – Latin America and Australia face the Asia Pacific Century

Posted by on June 1st, 2014 · Publications

Latin Lessons – Latin America and  Australia face the Asia Pacific CenturyIntroduction – from competition to collaboration

By Tim Harcourt

Click here to read full PDF

Australia and Latin America have been separated by geography, culture and economic ties. Historically, because of their respective colonial ties, Latin America looked to Europe and Australia looked to England, and we’ve been in different hemispheric ‘spheres of influence’ ever since.But things are changing in the 21st century, as Asia and the emerging markets are on the march and Australia and Latin America find they have more in common in the Asia Pacific century than they have had in the past.
Both continents are resources richBoth continents have strong agricultural sectorsBoth rely on immigration in part for their human capitalBoth combine a rich indigenous culture with former colonial institutionsBoth survived the global financial crisis and the subprime crisis largely in tact
Whilst in the 20th century Latin America and Australia were considered to be distant competitors as commodity exporters in the 21st century are now working together through intra-industry investment and technological and management exchange top feed Asia (particularly China) and supply the region with industrial raw materials and professional services. Also we are both looking to collaborate in international economic institutions (like the WTO, APEC and G20).
Latin America and Australia also have strong potential to work together because we share common values like openness, democracy, human rights and the rule of law. In fact it was our democratic Parliamentarians who drove the bilateral relationship and recommend establishing institutions like COALAR to provide policy advice and enhance business engagement. The Parliamentarians also encouraged Australia and Latin America officials to work together and become great allies in multilateral institutions that govern the international economy such as the WTO, APEC and the G20. A classic example is the Cairns Group in the GATT/WTO spearheaded by Australia and the agricultural exporting nations in Latin America and the rest of the emerging world and more recently in the G20.
Following the parliamentarians’ lead, businesses are now looking to form similar relationships and institutions as has been developed in the political sphere. And naturally, our research and academic institutions are looking to complement this with wider and deeper  education partnerships and people relationships between Australia and Latin America.
In fact, it is the emphasis put on economic and political institutions that leads Latin America to look to Australia in the first place. Many of my Latin American hosts and guests say that Australia is the place that Latin America could be “if it turns out right.” Whilst younger generations know democracy and relative economic prosperity, those leaders in business, government and community, who have experience of darker times know how economic institutions are contributing to political stability, economic prosperity and social cohesion. And it is Australia’s economic institutions not the sunny beaches and love of sport (that Latin America has already) that explains why many leaders in political, business and community in Latin America aspire to be like Australia.
In this regard, this report has been influenced by two books. Firstly, the work by two Harvard/MIT scholars, Daron Acemoglu and James A. Robinson Why Nations Fail, and secondly, Ian McLean’s excellent economic history of Australia titled Why Australia Prospered. Both works tell us why institutions are so important in determining a nation’s future economic prosperity and political stability.Acemoglu and Robinson basically take a journey of the history of the world to see why some nations have succeeded economically and others have been a disaster even if they had similar endowments of natural resources, climate or historical culture. The central thesis of their argument is that nations who build inclusive and democratic political and economic institutions, will do better economically than nations that don’t. And this doesn’t matter if a nation has an abundance of mineral wealth and natural resources, because if they don’t get the institutions right, with democratic inclusivity, fairness and the protection of property rights so citizens have the incentive to invest, save and innovate, the nation can squander its inheritance.
McLean’s book tracking Australia’s economic history, stems from his historical work comparing lands of recent settlement, in particular, Australia and Argentina (a comparison also made by Acemoglu and Robinson in Why Nations Fail).
A century ago both Argentina and Australia (and Buenos Aires and Melbourne in particular) were two of the richest nations in the world. But whilst Australia developed inclusive institutions and resisted the squattocracy, Argentina allowed land owning oligarchs to flourish, with extractive and exclusive institutions, which forced the mass of the population to support Peronist policies. And this had an adverse impact on the historical development of economic institutions and the eventual economic performance of Argentina relative to Australia, despite both coming from good starting points in the late 19th century.
Even in recent years, at the beginning of the 21st century we can see how economic institutions and their capacity to allow economic reform when external shocks affect an export – orientated country like Argentina and Australia matter.
In fact Australia’s recent economic success is due to the reform of its economic institutions. For example, in opening up to Asia, the Hawke – Keating Government in the 1980s brought fundamental reforms such as the floating of the dollar, reduction of tariff barriers, the introduction of superannuation and undergoing domestic reform. This enabled Australia to prosper in the Asian Century turning our historical ‘tyranny of distance’ position into ‘the power of proximity’.
But as McLean shows, the contrast with Argentina, a similarly resource endowed southern hemisphere economy, couldn’t be greater. Whilst Australia floated the dollar, enabling the economy to have a shock absorber whilst we reformed our economic structures, Argentina fixed the peso to the US dollar, making exports too expensive and imports cheap, which coupled with debt and default, destroyed confidence in Argentina’s institutions and security in their property rights and banking system. Now Argentina knows it needs to rebuild trust and confidence in its institutions, so it can take full advantage of its natural resources and highly educated sophisticated workforce. And that is perhaps why Latin America – particularly Argentina – has been interested in Australia’s institutional story as much as our economic indicators.
Of course, even beyond the study of institutions, when Latin America looks to engage with Australia, it’s also pretty simple as we are an island continent – a continent for a nation and a nation for a continent. But for Australia to look at Latin America, it’s not that simple. Latin America is such a diverse and exciting place that we decided in this report to focus on the key Spanish speaking economies that have potential trade ties with Australia – Mexico, Colombia, Peru, Chile, Argentina and Uruguay after having concentrated solely on Portuguese speaking Brazil in the companion to this report titled: Great Southern Lands – Building ties between Australia and Brazil.
In each chapter a distinguished economist tells the story of their native land – its economy, its society, its political institutions and the potential for forging trade links in the Asia Pacific and with Australia in particular.
The narrative covers trade and commercial links in ‘rocks and crops’ (mining and agriculture), manufacturing, professional services and education, travel and tourism as well as the creative industries.In the first chapter on Mexico, Jose Antonio Ardavin, the Director of the OECD in Mexico City, explains the chequered 19th Century economic history of Mexico complicated by relationship with the USA (which had taken California, Texas, Arizona and New Mexico). He takes us through the recent experience of re-establishing democracy in Mexico in the 2000s, and the impact of NAFTA, the so called ‘tequila crisis of 1994’  and the 2008 global financial crisis stemming from the collapse of Lehman Brothers that hit Mexico particularly hard. But he believes that Mexico has now put that period behind it and in a new spirit of openness, democracy and moderate economic growth, and macroeconomic stability that the world may experience ‘The Mexican Moment.’ But to fulfil its potential, Mexico must he believes undertake serious economic reform in education, human capital, pension reform, energy reform and competition – a process that has since begun under President Pena Neito’s ‘Pact for Mexico’ reforms.
For Australia, along with the bilateral ties in resources, most collaboration comes in education and human capital (strong ties in higher education institutions and technical skills), and Mexico has been studying Australia’s Productivity Commission and other economic institutions. Mexico is a member of the G20 and would be a strong player in the TPP if it were to establish itself in world trade and Mexico and Australia recently joined fellow middle power G20 countries Indonesia, Turkey and South Korea in the MITKA alliance, showing Mexico’s pivotal status in Asia Pacific strategic economic policy.
Mexico’s size and scale has impressed the Australian Ambassador to Mexico Tim George who says: “What has really struck me is Mexico’s significance globally as a major exporter of increasingly sophisticated manufactured goods, its depth of integration into North American supply chains, and its enormous economic potential more broadly. Its sound macro-economic credentials, the outward orientation of its economy, its impressive and far-reaching reform agenda, and its demographics all mean Mexico is on a very good trajectory. It will be a top ten economy before long, and could go significantly higher.”
In Colombia, world renowned academic Mario Garcia-Molina explains the improving economic performance of Colombia that has been overshadowed by its drug cartel and security issues of past decades. The peace dialogues with FARC (the main guerrilla movement) are key to the country’s revival along with major investments in the health system, education and social policies to reduce inequality. Colombia is an enthusiastic member of the Pacific Alliance and APEC and attempting to escape its past and being overly tied to an Andean trade bloc alone. Australian businesses in mining and education have long considered Colombia the Latin American economy with the most potential – given its outstanding reserves of human capital with its cohort of highly educated, sophisticated, services orientated, young people – and the nation has made great strides to improve its National ‘Brand’ status and trade ties in the Asia Pacific.Peru is a classic example of the great improver in the Latin American economic stakes. Pablo de la Flor describes Peru as ‘The Andean Jaguar’ and highlights is strong growth rates (6.4 per cent p.a. on average over the decade), low inflation (averaging 2.5 per cent) and improving per capita income stakes so it reached middle income status like a hiker climbing Macchu Picchu. Peru’s success is a trading story not just within the Andean states and Latin America but also beyond the continent into Asia (China takes 17 per cent of Peru’s exports and trade with Beijing is now more important to Lima than trade with Washington DC). Australia’s contribution to Peru’s success has mainly been in mining but also in agriculture, education and tourism (Macchu Picchu but also Lima’s rise as a gastronomical destination for Australian ‘foodies’). Australian Business Leader Chris Gale, the Managing Director of Latin Resources, has highlighted Peru’s “tremendous upside as a mining country with excellent geology, very user friendly in terms of exploration and the Peruvian government has been more than helpful in terms of green fields and resource definition.”
Peru has also pushed APEC and the Pacific Alliance (being a member along with Chile, Colombia and Mexico). Peru’s main fear is running out of steam after spectacular growth and falling into the ‘middle income trap’ hence its search for new markets in Asia and the Pacific to maintain rising living standards.
Chile has of course been the poster child for Latin American economic performance for many years and kept that reputation as it transformed itself from dictatorship to a fully-fledged democracy after a carefully managed national reconciliation. As Nicolas Munoz of the Foreign Investment Committee of Chile points out, free trade and an open economy has been a cornerstone of Chile’s economic strategy and in many respects Chile has been the model that other aspirational nations in Latin America have been looking to as an example. As Munoz points out Chile is an attractive destination for foreign investors with many Australian companies like BHP Billiton and WorleyParsons basing their Latin American operations in Santiago. But the question for Chile is what next? You can only open your economy once and only negotiate so many free trade agreements with so many countries. In this regard, ‘Red Hot’ Chile is already ahead of the game concentrating on innovation and investment as well as trade, and making Chile a launch pad for innovation into third markets. Hence the work of CSIRO Chile in providing mining and minerals processing technology and training in Santiago and for Peruvian post graduate students in the northern Chilean mining town of Antofagasta. Not to mention the rise of ‘Chilecon Valley’ and other examples of Chilean innovation that is attracting attention (and investment) from Australia.
In the chapter on Argentina, high profile Argentine economist Tomas Bulat explains the role of economic institutions in Argentine history and how economic reform can unleash the potential Argentina has in agriculture, viticulture, human capital and education and even in mining if the institutional framework was improved. Bulat notes the “mood swings” of the Argentine economy but still sees ‘potential for growth’ if Argentina follows a more open economy framework being “respectful of international rules and agreements.”
Of course, many economic historians and scholars like Acemoglu and Robinson and McLean have twinned Argentina and Australia in terms of economic development but what of Argentine-Australian bilateral ties? The Australian Ambassador to Argentina, Patricia Holmes sees potential for Australian-Argentine collaboration and is making higher education ties a priority so future generations of Argentines have exposure and access to Australia in terms of their professional development so they can apply these skills in their home country. Her nominated sectors for further bilateral collaboration are primary industry and related professional services:  “The big interest is in investment and the potential of mining services, in agriculture its technology, water management and genetics.”
Finally, in the chapter on Uruguay, Mariana Ferreira Head of the Competitive Intelligence Unit of Uruguay XXI, tells the economic story of a nation whose geography seemed to work against its economics, particularly at the turn of the 21st century when its giant neighbours Brazil suffered a devaluation (in 1999) and Argentina and overall economic crisis (in 2002). But despite this setback early in the new millennium Uruguay has recovered with a respectable 6 per cent growth rate (between 2005 and 2012) and reasonable fiscal and monetary policy management. Uruguay is an export orientated open economy but with most of its foreign investment stemming from neighbours Brazil and Argentina, the USA and Europe rather than Australia and the Asia Pacific. Had Uruguay been able to be more like Chile and not hemmed in by Mercosur (the trade pact with Brazil, Argentina, Paraguay and now Venezuela) its trade and investment story could have been much different. However as the author says Uruguay is a ‘plucky’ or ‘maverick’ country and has moved fast in terms of social reform under its colourful but frugal President. Progress in social issues, in health and education, family arrangements and reducing the digital divide has been prominent. The strong interest in Public Private Sector Partnerships (PPP) has attracted interest and guidance from Australia as Uruguay attempts to balance economic prosperity and social cohesion in how it develops its national infrastructure assets. Ricardo Varela, Uruguay’s Ambassador to Australia has highlighted resources and agriculture as potential areas for bilateral collaboration: “Globalization is bringing our regions closer. Uruguay is starting some mining activities, which has brought new opportunities to do business and exchange experiences. Both countries need to feed the world, and by sharing this responsibility we shall work together.”
What is apparent after looking at each economy in detail is that there are different challenges facing Latin America in terms of political economy. There are the open economies of Mexico, Chile, Peru and Colombia that have formed the Pacific Alliance and are signing trade agreements with Asia and each other to spread the benefits of trade and investment to their population to improve living standards. Then there are more closed economies like Argentina who are more interventionist and populist running positions closer to Venezuela. Then there is Uruguay who given its open agricultural sector perhaps could be more like a Pacific Alliance country but is constrained by being tied to its larger neighbours Brazil and Argentina via the Mercosur trade pact. Accordingly, could Uruguay combine the strong social justice focussed policies of its President with the open economy model of its Pacific Alliance partners? Overall, the report’s co-authors are cautiously optimistic about the forging of stronger ties between Australia and Latin America particularly as the Asia Pacific region becomes more influential in the global economy and international political institutions. And just as we economists have collaborated to produce this report on Latin America and Australia in the Asia Pacific century, we hope our respective nations can do the same thing in terms of trade and in terms of people in years to come.We hope this is a sound start along that journey.

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