Tim Harcourt

The global economic outlook has deteriorated significantly, according to the Organisation for Economic Cooperation and Development (OECD), and that could have a significant impact on the Australian economy.

The OECD outlook shows how much of a drag Europe is putting on global growth. This is a reason for concern because the world economy needs Europe to grow or at least tread water. These forecasts are pretty dire, and it’s surprising how quickly this has gone from a drama to a crisis.

In its twice-yearly report on the global economic outlook, the OECD has lowered its growth forecasts for the world’s largest economies, and has warned that the euro-zone is headed toward a recession. It also warned that the debt crisis, now affecting countries previously seen as safe havens, could massively escalate economic disruption if not addressed, and create a new worldwide credit crunch, where countries become so worried about getting their money back, they refuse to lend to one another.

The central message is to keep calm. Australia has no reason for direct concern because our trading links are strongly tied to the Asia Pacific. The last three decades of economic reform here has enabled us to move from The Tyranny of Distance to the Power of Proximity. That is, away from the UK and Europe, and more towards our closer neighbours such as Asia and the emerging economies.

The OECD has urged the European Central Bank to act decisively to prevent the euro-zone sovereign debt crisis from deepening, which could drag the worldwide economy to the brink of recession, due to the size of the European economy, and its global reach.

China has strong trade ties to Europe, because China now exports more manufactured goods to Europe than to the USA. We in turn provide most of the raw materials for those exports, and so any impact on China could affect Australia. Even if there are no green shoots of recovery in the USA and Europe, in Australia we will still need bamboo shoots in China.

I do believe however we shouldn’t be too pessimistic. The OECD did say that Australia would maintain a healthy economic growth rate of 4 per cent in 2011 and down a bit to 3.5 per cent in 2012. So we should hopefully be immune from Eurosclerosis, but the world economy overall could do with some Eurovision.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com .

Centre for Innovation and Entrepreneurship | CIE Blog

My apologies on announcing the winners of last week’s Peter Farrell Cup. Official press release or announcement coming soon. In the meanwhile, I couldn’t help building on the earlier blog post about fear of failure vs failure to start. It was nagging me to create this bubble chart based on the same GEM data with a few changes:

• Fear of failure and entrepreneurial intentions in the same chart as different axes
• Bubble area according to additional population data (since the GEM data is based at the individual level, not firm level)
• Color coded by GEM’s classification (Factor-driven economy: RED, Efficiency-driven economy: BLUE, Innovation-driven economy: YELLOW)

So, if one were to draw a linear regression line through the whole data set, then Australia would probably be middle of the road for the overall data. If you look at only the yellow bubbles (innovation-driven economies), then Australia tends to be towards the upper right, i.e., greater intentions to start (not bad), but higher fear of failure (not good). Does that mean that relative to the other innovation-driven economies, Australia is a country of “intentrepreneurs” or “wantrepreneurs”?

– This blog post first appeared on the CIE Blog.

Tim Harcourt| The Airport Economist

In 1966, Geoffrey Blainey wrote his famous book “The Tyranny of Distance” on how Australia’s destiny had been shaped by its remoteness from the United Kingdom and Europe. Coincidentally, 1966 was the very same year that Japan overtook the UK as the number one naval destination for Australian shipping.

In the decades since then our integration with the Asia-Pacific region has increased exponentially. From exporting coal and iron ore – which we still do in huge quantities – Australian lawyers, architects and accounts have played a key role in the rapid development of India, western China and Indonesia.

Today, if Professor Blainey were to contemplate another book through the lens of the past four decades his title might be “The Power of Proximity” to describe Australia’s more recent good fortune in being part of the Asia-Pacific.

It is a momentum which has reached its most significant point with the announcement of the Trans-Pacific Partnership (TPP) comprising (so far) nine of the key economies of our region.

And with Greek debt and Roman ruins undermining the “old world” economy of Europe, the Asia-Pacific presents as the main hope for economic growth and Australia is indeed lucky to be an increasingly integrated part of the regional economy. But is luck we earned following the Hawke Government’s decision to open the Australian economy and the instincts of all sides of the Australian economic and political divide to continue to embrace the Asia Pacific region.

As the culmination of that momentum, the Trans-Pacific Partnership is probably the most significant economic announcement of the 21^st century so far in terms of Australia’s future.

Joining with the US and Japan along with Singapore, New Zealand, Malaysia, Brunei, Vietnam, Chile, Peru and even perhaps Canada and Mexico in a meaningful trade bloc is a major opportunity to streamline supply chains, regulations and rules of origin across the region, as well as to facilitate trade of green and digital goods.

It could also lead the way to an even larger trade grouping encompassing all of the countries of the Asia-Pacific Economic Forum, perhaps including – after the requisite diplomatic manoeuvrings – China.

It is Australia’s great fortune that we reformed our economy in the 1980s and 1990s just as the whole Asian region started to grow. That growth has gone beyond the traditional resources and manufacturing sectors and exploded into professional services and “stateless” services such as cloud computing, environmental technologies and other areas where Australia has developed competitive advantage.

Our $1.3 trillion superannuation industry is the envy of the world and our finance professionals occupy leading roles in regional financial institutions. Integrating our financial sector, in particular our funds management industry, with the Asia-Pacific is another major opportunity which can only benefit from the TPP initiative.

A key theme of the next decades will be the low carbon economy, and the APEC meeting took the step of cutting tariffs on environmental goods to five percent.

This is excellent news for the many innovative Australian cleantech companies whose prospects have already been boosted by the passage of the Government’s carbon pricing legislation. Lower tariffs can only benefit the push for Australian manufactured environmental goods to penetrate Asian markets. It will really put the green back into the green and gold.

Trade initiatives are important for workers as well as business. Exporters, on average, pay 60 percent higher wages and provide more job security than non-exporters.

APEC is often seen as little more than an annual Colourful Shirt Convention where world leaders gather and wear the national costume of the host country, but the TPP initiative is proof that APEC does matter, and is starting to deliver.

While the Doha Round of world trade talks ground to a halt and with it the whole World Trade Organisation process, the TPP announcement – and Japan’s support – give us concrete reasons for regional optimism.

In 1957, Japan helped Australia get into Asia by forging a commercial partnership with Australia, just 12 years after World War 11. With the TPP, Japan has supported what could be the most significant partnership to date in the 21^st century.

The exciting part is that it means so much more than commodities, agricultural products and old style manufactured goods. The TPP could give our transition to the low carbon, goods and services economy of the 21^st century some major momentum.

With the TPP in place Australia will really see the Power of Proximity in action and the Tyranny of Distance no longer holding fears for trade and commerce beyond our shores.

Tim Harcourt is the first J.W. Nevile Fellow in economics at the Australian School of Business at the University of NSW and author of The Airport Economist www.theairporteconomist.com

Centre for Innovation and Entrepreneurship (CIE) | CIE Blog

There have been recent critiques about What’s Killing Australian Innovation (see our commentary on a recent talk by ASB Dean Alec Cameron, and related ABC radio interview). At this week’s TiECon Australia, TiE Sydney chapter president Dilip Rao commented that Australia is ranked 18th globally for having a ‘fear of failure’ (first being worst). Based on the GEM Global Report 2010, Australia actually shows up worse, ranked 16th out of 59 countries.While that sounds quite bad, the spread of the scores shows that Australia is nonetheless close to the average, and not that much different to, say, Germany (see figure below). The classic benchmark is the US, which is ranked 47, and still not close to being statistically significantly away from average (assuming a normal distribution).

Fear of Failure: Percentage of 18–64 age group with positive perceived opportunities who indicate that fear of failure would prevent them from setting up a business

Wait a second, but what’s this other variable, called “Entrepreneurial Intention”? Well, it’s defined as the “percentage of 18–64 age group (individuals involved in any stage of entrepreneurial activity excluded) who intend to start a business within three years” (p. 63 in the 2010 GEM report). Australia ranks poorly on this one as well (39/59) if you take the rankings at face value. Interestingly, the US ranks even lower than Australia here (44/59).

What the heck is going on?

My best guess, is that in some countries, entrepreneurship is not a choice, but a way of life. Almost everyone there has to hustle and bustle to feed their family. Meanwhile in the “Innovation-Driven Economies” it’s an optional career choice. So, focusing on the latter, what do we see?

Well, Australia ranks 6/23 on the fear of failure measure, but still very close to average for the group (US ranks 20/23 in this group). Australia also ranks 7/23 on the entrepreneurial intention measure, again still very close to average for the group (US ranks 11 in this group, worse than Australia!).

=> Claims that Australia has a fear of failure are NOT supported by THIS data
Yours truly,
The Centre for Innovation & Entrepreneurship

This post first appeared on the CIE Blog.

Vic Edwards

China could be about to witness a sharp economic contraction. Although the World Bank has played down fears of a hard landing in China, the dynamics of Australia’s relations with China are undergoing a rapid process of change, and this will reshape international and foreign policy between our two countries.

China’s growth this year is below last year’s level as weakening external demand has hurt investment and exports. Very poor Chinese manufacturing data shows it is at a 32 month low. Alas, contagion from Europe is impacting China, and that is causing pressure on Australia.

China’s economy faces growing risks from Europe’s sovereign debt crisis and from debt held by local Chinese governments but it could engineer a soft landing by easing monetary policy, according to a report yesterday by the World Bank. It expects Chinese growth will slow to 8.4 per cent in 2012.

I feel other events will also cause problems for our relations with China. There will be some reappraisal of where China stands with Australia, following the new Trans-Pacific trade-bloc know as the Trans-Pacific Partnership that includes nine nations including Australia and the USA, but China was not given an invitation to be a member nation. We should be concerned that there is now some doubt in China as to how much Australia can be trusted and relied upon.

For some years now, China has been able to rely on Australia as being a good trading partner and friendly nation no matter whether Labor or the Coalition were in power. However in just the past week President Barack Obama’s strong admonishment of China’s currency policy, the decision by Prime Minister Julia Gillard to reverse Labor’s long standing policy of banning the sale of uranium to India, and the agreement to locate a powerful 2,500-strong American marine task force near Darwin area all reshaping international and foreign policy between Australia and China. This is particularly so because China was not consulted on several of these, and Australia has been closely associated with all events. In China’s eyes, it doesn’t look good.

The World Bank has forecast that inflation will fall further, down from the 37 month high of 6.5 per cent in July, as its economy slows.

Will China react poorly to Australia by not buying iron ore, natural gas, bauxite from us?

I think not. However, it may cause them to re-evaluate their long term trading partnerships and future investments and they will most likely diversify their sources of supply – for example more iron ore from Brazil and Mozambique and less from Australia. They may also invest in developing the plant and equipment necessary to make high grade steel in these countries. However, the measures taken in the last week have also brought Australia closer to India and this may be seen as a good longer term play as India is tipped to overtake China as a production power engine in about the year 2030.

Vic Edwards is a Visiting Fellow in Banking and Finance at the Australian School of Business

Nina Mistilis

Qantas is facing a further drawn-out battle with the unions, and that may cause yet more long-lasting damage to its brand. The Qantas dispute is settling in for the long haul, now that it has been taken into binding arbitration – a move that could take months to resolve.

This confrontation with the unions has been building for years and seem and has now culminated in arbitration. All of this has taken place in full view of the travelling public. Qantas – in going to arbitration – has won what it was seeking – which is a stay on industrial action – but in the long term it seems to have lost the war.

I believe it has alienated passengers, the industry and the government, and that’s not a good position to be in. The Qantas brand is tarnished.

Negotiations between the airline and the Transport Workers Union, the Australian and International Pilots Association and the Australian Licensed Aircraft Engineers’ Association collapsed just before a deadline set by Fair Work Australia (FWA).

I believe the longer this dispute rumbles on, the more the Qantas brand image will be badly impacted.

That’s a global perception, because passengers all over the world who want to get to Australia for a holiday, or back home for work, are wondering if it is safe to book a Qantas plane, or whether it will be cancelled again. Many are saying they will never trust Qantas again, particularly in business class, because business wants reliability above everything else. Certainly, in the immediate future, the brand is tainted and they’re really behind the eight ball.

I don’t see how they’re going to catch up easily. Even if the arbitration settles on the side of Qantas, it may still hurt Qantas in the medium to long term, although I think it’s really hard to say what the long term damage will be. It partly depends on how events unfold. If it is solved quickly, which seems very unlikely, then the brand will be restored. But if it continues, and if there’s a perception – as the unions are saying – that service will drop due to the “asianisation” of the airline, then the brand will be completely damaged. Will that mean that less passengers book on Qantas? I don’t know the answer to that. Time will tell.

Qantas chief executive Alan Joyce yesterday said while his preferred option had been to resolve the dispute through negotiation, it was now time to let FWA bring the matter to a close.

But it is reliability is an important factor in terms of the branding of an airline. When it comes to the crunch, we need to get to the destination on a certain date and we cannot afford to be stranded at home, or somewhere in Australia, or abroad. So when it comes to the choice, will we choose Qantas or will we choose another airline?

Nina Mistilis is a senior lecturer in Tourism at the Australian School of Business.

Tim Harcourt

Born in Honolulu and with a childhood spent partly in Indonesia, it is only natural that US President Barack Obama should have a strong affinity with the Asia Pacific and have an internationalist outlook.

His speech to the joint houses of Parliament was a ringing endorsement for America’s economic orientation to the Pacific, the region which holds the most promise of economic growth for the next decades. America, he said, had made a “deliberate and strategic” decision to engage more with the Asia Pacific, which was “critical” to the highest priority of creating jobs in the US.

In making this choice, Obama is following the tradition of other recent Democratic presidents who, contrary to some popular opinion, are anything but isolationist in their world view. And at the same time, he is debunking another old myth: that a free trade agenda is bad for jobs growth and social equality in the US.

The conventional wisdom has been that Democrats are always trade protectionists and the Republicans firm free traders. For example, in his Boyer lectures several years ago, Rupert Murdoch claimed that the Democrats are always protectionist and Obama’s trade policies would hurt Australia. His views were echoed at the time by Australian Industry Group’s Heather Ridout.

But this is a misreading of history. Both parties have moved on both sides of the trade issue depending on the times. In fact, the Republican Party was traditionally the party of the northern states and had a large manufacturing base of support and supported protection whilst the Democrats had a strong southern base too (the so-called ‘Dixiecrats’) and supported free trade.

A glance through 20th century history shows a strong internationalist spirit running through the Democratic Presidents; Franklin Roosevelt, John F Kennedy, and Bill Clinton, under whose administration the North American Free Trade Agreement was negotiated.

Fast forward to today, and Obama’s motivation is plain to see. The US economy has stalled and is proving hard to kick start. Looking across the Atlantic, home of the more traditional economic and financial alliance, and all is chaos and uncertainty.

With Chinese savings funding US debt and economic growth in the region moving along nicely, in spite of the turmoil elsewhere, where else is the US economy going to receive a boost?
US unemployment is hovering stubbornly at just under 10 percent and Obama’s political future, and more importantly the economic welfare of millions of Americans, is dependent on the economy showing even some signs of recovery.

The reality is that inequality and rocketing executive salaries with declining real wages for American workers have bred protectionist sentiments whilst a fairer America may actually benefit from freer trade.

Real wage growth in the US stagnated under the two Republican decade of George W Bush, while the richest 1 percent of the US population control around 40 percent of the financial wealth. Republican protectionism did little to protect the people it was supposed to help: American workers.

Right now, more than ever, America needs economic engagement with the rest of the world – particularly a region, like the Asia Pacific, which is performing well. Free trade can be a part of the formula to restore growth, reduce unemployment and help make some gains on social equality. Barack Obama the liberal internationalist understands this very well. And the Trade Pacific Partnership agreement recently announced at Obama’s birthplace in Hawaii at APEC is symbolic of the President’s internationalist instincts.
Tim Harcourt is the J.W. Nevile Fellow in Economics with the Australian School of Business, University of New South Wales: www.theairporteconomist.com.

Professor Fariborz Moshirian

Borrowing costs in Italy have surged above 7 per cent, which has triggered a large sell off of French banks that hold much of Italy’s debt, and this has caused volatility in share prices around the globe.

The present turmoil will continue for some time to come, and the spotlight is now fully on France, where bond yields have jumped because its financial institutions have a large exposure to Italian debt, and have the most to lose from Europe’s debt crisis.

I think the country has no choice but to sort it out themselves.

They can’t run to the G20 for a hand out. Italian debt is around two and a half trillion euro – way too big for the European Financial Stability Facility to fund a bail out. The IMF certainly doesn’t have capacity to do that so the Italians have to do most of work to reduce their debt, make the economy more efficient, and reform the Italian labour markets. Italy is going through a major challenge at the present time. However this reform will be worthwhile in the long run and the current crisis could actually accelerate the process.

There are also major challenges facing Greece. I think now the Greek people have a clear choice. They can stay in the eurozone, or cut and run. However 70% of people in Greece say they would like to be part of the eurozone, and that means they have to now fast-track their reforms rather than agonise about them. If they did leave the eurozone, things would be very difficult. Their new national currency – call it the new Drachma – would be devalued by 50%, and that would increase the debt of all companies by 50% because everything at the moment is measured in euro on the balance sheet of companies, and so they could create more problems for themselves if they leave the eurozone. The citizens of Greece want to stay in – and it would cause huge problems if they leave. Therefore, I think they should stay in the euro.

Indeed, the road ahead for Europe looks bumpy. There are many more challenges. It’s not as if leaders got together at last week’s G20 and agreed to some specific measures which are a magic cure. We should unfortunately expect more volatile times ahead; both for countries within the eurozone, and for countries like Australia, where the stock market rises and falls because of concerns about the global economy. We may think we are insulated from the problems down under – but we are not.

France has a major problem with its bond yields, and it needs to look at the medium and longer term vision of the eurozone to see what it can do beyond austerity measures. It needs to create economic growth. Ultimately some eurozone countries might need more support from China or other solvent counties to ease the problem.

Fariborz Moshirian is a Professor of Finance at the Australian School of Business.

Tim Harcourt 

The annual APEC summit has just concluded in Hawaii. The summit ended optimistically, and it could be just the chance Australia needs to boost trade over the entire Asia Pacific region, according to a senior economist at the Australian School of Business.

Prime Minister Julia Gillard, US President Barack Obama and the heads of seven other nations have now reached an agreement on the broad outline of a new trade regime known as the Trans-Pacific Partnerships (TPP).

I feel the announcement of the Trans-Pacific Partnership is good news for Australia and good news for the region as a whole.

Trade initiatives are important for workers as well as business. Exporters, on average pay 60 per cent higher wages and provide more job security than non-exporters.

Prime Minister Julia Gillard and Trade Minister Dr Craig Emerson are to be congratulated for forging the most important initiative since APEC itself was created by the Hawke-Keating Government.

At the APEC summit opened by US President Barack Obama, the APEC members also agreed to cut tariffs on environmental goods to five per cent, as part of a push against protectionism, which grows at times of global economic instability.

Exporters will experience the benefit from being able to get environmental products which we produce into the economies of APEC countries at a lower tariff, and this can only be good news for Australian manufacturing.

The rest of the talks on world trade didn’t go as well, and there has been a lack of progress in negotiating a multilateral agreement following the Doha Round of world trade talks. However I do hope that the APEC talks will achieve a breakthrough. In 1957 Japan helped Australia get into Asia by forging a commercial partnership with Australia, just 12 years after World War II. With the TPP, Japan has supported what could be the most significant trade partnership to date in the 21st Century. Hopefully APEC can get things moving.

Indeed, Australians need to be aware of what is happening in the world. With Greek debt, Roman ruins and Europe in difficulty, it is important the world turns to the Asia Pacific region to be the economic engine of global growth and TPP will help add to this momentum.

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