The Paradise of Diversity – why Trade, Investment, Migrants are all bound for South Australia

By Tim Harcourt*

Something happened to South Australia this year that didn’t surprise me but may have surprised some doubters in the eastern states and maybe even some cynics back home.

The world renowned documentary maker, National Geographic chose Adelaide to lead its 21^st century cities programme. Of all the cities in the world, and all the cities in Australia (many of who are much larger and economically more influential) Nat Geo went for Adelaide. And not only was Adelaide the leading city in Australia to front the programme but National Geographic invited Adelaide to lead the world.

So why did they choose Adelaide? Nat Geo wanted to pick a city that had globally connected businesses – like Coopers and Penfolds, and globally connected individuals like Scott Hicks and Shane Yeend. But it also wanted to pick a city that had a certain creative energy, that invested in education and the quality of life, was connected (with free Wi-Fi in the city), and had a smart approached to public transport and was coping well with climate change in terms of urban design and logistics.

Of course a visit to Adelaide helped with the impressive new sky line – the new Adelaide Oval, the ‘Cheese grater’ (the SA health and medical research  institute building), the museums and monuments of north terrace and Colonel light’s green belt (the parklands around the city was almost like nature’s air conditioner was the comment of one of the Nat Geo visitors).

And of course it wasn’t just the city’s physical infrastructure that impressed Nat Geo it was the people that made the city too. The US academic Richard Florida has written about ‘creative capital’ and the tendency of cities with strong cultural industries and cultural diversity and tolerance to do better than cities that are homogeneous and intolerant without a big arts scene. And this influenced Nat Geo’s thinking about choice of city for the 21^st cities documentary. They wanted to choose a vibrant city and Adelaide was perfect for them with live music, small bars, lots of international students and young people in the CBD and a strong cultural creative scene. Part of their trip coincided with “Mad March” and they soaked up the Fringe, the Festival of Arts, WOMAD and the Adelaide Writers Festival and they were impressed with how well Adelaide could put on a major international motor racing event like Clipsal whilst simultaneously running major arts festivals. They heard that Adelaide was the ‘Creative Capital’ of the nation, and we certainly delivered in spades.

And finally then there was the quick access that Adelaide brings. In a matter of a couple of weeks of finding out Adelaide was interested, NatGeo flew into Adelaide’s international airport with ease to see the Premier Jay Weatherill and together with the strong early support of dynamic Adelaide Lord Mayor Stephen Yarwood things happened instantaneously. Nat Geo was impressed with how well the South Australian Government, the City of Adelaide and the Economic Development Board lead by Raymond Spencer could make things happen so easily and smoothly.

So whilst the headlines about Holden dominated (and given the plight of so many car workers and small businesses affected they should) South Australia was getting on with creating new industries and new jobs for a post Holden future. The National Geographic documentary is a good way to showcase the many things happening in Adelaide across industries and across borders. Adelaide is a globally connected, modern city with an outstanding commitment to education, social reform and a good quality of life for all its citizens.

That’s why we have the great “Generation Export” companies like Ellex, Redarc, Seeley International, Biosa, Techport Amigo, Laucke Flour Mills, Rossiters, Wallcann, Era Publications, Ceberus Sciences, Precise Advance manufacturing Group, Amorini Australia, APC technology, Norman Sheun Architects joining the likes of our icons RM Williams, Haighs, Beerenberg, Coopers, Maggie Beer, Wolf Blass and Penfolds all doing things globally from their local base in South Australia. You meet all these proud South Australian Generation Exporters off shore when traveling as an airport economist. I have witnessed Michell process wool in Shanghai, Film maker Shane McNeil make productions in Shandong China and have seen a double act by Penfolds Wine maker Peter Gago and SA master chef Steve Baker put on a premium wine and food show in Shanghai. Not to mention running into our young McLaren Vale wine makers taking their technology and skills to Mendoza, Argentina.

And there’s also “Generation Expat” South Australians doing well from South London to South Mumbai Shanghai Santiago and Sao Paulo.  Like entrepreneurs Anthony Ceravalo of ECNLive, Lance Stewart of Wavana, Andrew Grill of Kred and Lyndon Gasking of Get lunched.com. And people like Amanda Stranks, from Oxford University, Hugh Bailey from Macquarie, Emma Kate Codrington, a young Adelaide designer.  Of course many come home, like Andrew Hough who returned to The Advertiser after getting many scoops on Fleet Street and many keep in touch via the SA Government’s “Generation Expat” linked in site for job opportunities, news from home and general conversation about the future of South Australia.

And whilst many young South Australians look for career experience (and a good time!) beyond our shores, we are also getting the benefits of new talent coming to the state. South Australia is receiving the benefits of immigration and cultural diversity. Just a stroll down the Central Market during Chinese New Year can tell you that the city is thriving with international students – there are almost 30,000 in South Australia now compared to just over 11,000 a decade ago – from China, India, ASEAN and increasingly the Middle East, Europe, Africa, Latin America and emerging markets. Over 1 in 5 South Aussies are born overseas, and 50 per cent of our exporters and 2/3 of our entrepreneurs are immigrants. When the boat comes in, or in modern times the plane, we all benefit as an economy and a society.

I wrote in  recent piece that South Australia was called ‘The Paradise of Dissent’ in the 19^th century but I think given the multitude of opportunities across industries from advanced manufacturing to creative industries, and the influx of creative talent from Asia means South Australia can be called ‘The Paradise of Diversity’ in the 21^st century. And that’s why you have a world class film maker like National Geographic choosing Adelaide, South Australia to head their prestigious documentary series about the world class globally connected but liveable cities of the 21^st Century.

*Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business, UNSW and author of The Airport Economist: www.timharcourt.com

Raised in Adelaide, he is the Adviser – International Engagement for South Australia

Kiwis can fly: What’s next for the CER between Australian and New Zealand?

By Tim Harcourt*

I travel to many economies for a living. About 58 in 5 years at last count. But if you or I wanted to travel the ultimate underperforming economy, one with double digit inflation and unemployment, an Olympic gold medal standard for strikes, a fixed exchange rate, few foreign tourists or foreign students and protection all round, then we’d have to be a time traveller and go back to Australia in 1983. You’d find all those aspects, in Australia 30 years ago, despite the mineral wealth we still had, plus you’d be flat out getting a decent Chinese, Thai or Vietnamese meal anywhere.

In fact the only place worse economically than Australia then (given natural endowments) was New Zealand. At the time, the Kiwis were regarded as the most regulated economy in the developed world (apart from communist East Germany) and they had an inflation rates and mortgage interest rates both at 16 per cent and the top marginal tax rate at 66 per cent to show for it. New Zealand trade was also heavily regulated, tariff ridden and subsidised, and exporting was considered a mugs game as it pretty much took a cabinet submission to get a ship load of frozen peas through the docks. The UK joining the European Union had stuffed New Zealand’s lucrative export markets and they were turning inward as a result.

But that all changed on both sides of the Tasman in 1983 when we signed the Closer Economic Relations (CER) deal which was the successor to the New Zealand Australia Free Trade Agreement (the original NAFTA) which was considered to be more a ‘non aggression pact’ than a true free trade agreement (and believe me we needed a non-aggression pact with New Zealand after Trevor Chappell infamously bowled an underarm in a controversial cricket clash between the trans-Tasman rivals in 1981).

The CER was the first deal of its kind and it unleashed a new export culture on Kiwis and Aussies who had been used to protection as if it was a national pastime. The CER enabled Kiwis and Australians a foothold in the outside world and allowed local businesses to venture beyond their own borders.

The CER has been an essential part of the transformation of the New Zealand and Australian economies (as the American economic commentators say, “we went from down under to down wonder,”) and I must say as an ‘airport economist’ from an Australian point of view and I see Australia’s global transformation everywhere I go from China to Chile, Korea to Kazakhstan, and Mumbai to Mongolia.

But I must admit wherever I see Australian export presence beyond our shores, I also see New Zealand too. If there’s Beerenberg jam from Hahndorf in the hotel or on the plane, I bet there’s New Zealand Anchor butter there too. If there’s a good South Aussie Shiraz or Cab Sauvignon, at hotel restaurant, I bet there’s a Kiwi sauvignon blanc from Marlborough or a pinot noir from central Otago there too. If there’s an Australian manufacturer checking out how to join a global supply chain, I bet Fischer and Paykel have already been there too. In fact, when I worked for Austrade as chief economist and visited China, South Korea, Chile etc I was always offered a briefing from the NZ Trade Commissioner (experts like Pat English, now head of the NZ-China Business Council) as well as my own colleagues in the Australian embassy too.

So why has Australia prospered? And why has NZ? Is it just rocks and crops (minerals and agriculture)? In the Australian case, yes, that’s part of the story. And you can probably explain the Australian-NZ economic divergence in terms of Australian mineral wealth that NZ lacks. But lots of nations have minerals but are not economically successful. This is because Institutions also matter.

This is the essential message of Why Nations Fail (by Harvard/MIT) and Why Australian Prospers by Ian McLean, a distinguished economic historian from the University of Adelaide, my honours supervisor and originally, a Kiwi (of course!).You can see how economic institutions matter if you compare the economic history of Australia and Argentina (see my article ‘Don’t buy from me Argentina’), where two nations with very similar resource endowments, reliant on immigration, started in a similar place in the 19^th century (in fact Argentina was richer than Australia) only to see the latter’s position squandered by poor institutions, a lack of trust and poor public policy choices.

And trade matters too. Like Australia and Argentina, if you compare the economic history of NZ and Uruguay, the South American country too was richer than NZ in the 19^th century, but as the New Zealand Institute of Economic Research (NZIER)’s Chris Nixon says, we locked them out of world trade via the Ottawa Agreement of 1932 that reinforced Commonwealth preferences in trade. And in today’s very different global trading regime it is better to be an insider like Australia and NZ not an outsider locked out like Uruguay squeezed between Mercosur giants Brazil and Argentina. Just imagine if Uruguay had the trade position of say Chile, another smaller South American economy but one that is open and looking west to the Asia Pacific?

But when we look at the multiplicity of trade agreements in today’s global economy the CER is certainly the star of the show and CER played a big role too in the prosperity of both Australia and NZ. It is considered to be “world’s best practice” when it comes to trade agreements, and given the state of the NZ and Australian economy in 1983, it needed to be.

CER has brought benefits to Australia and NZ on both the macroeconomic and microeconomic level.

There are bilateral benefits, at the macro level, as it allowed trans-Tasman trade to recover, which had actually been higher in the 19^th century than in the 20^th. Federation didn’t help, Trans Tasman trade went backwards then, but domestic policy hurt both countries. On the investment front too, it allowed Trans Tasman investment to increase almost 60 fold.

At the micro level, perhaps more importantly, CER gave Australian small and medium enterprises (SMEs) a kick start in heading over the ditch. There are now over 16,400 Australian exporters selling goods to New Zealand (around 34 per cent of SMEs sell to NZ) and many small companies got their big break in the export game, selling “across the ditch”. Ducats, a Shepparton based ice cream company, who had been a domestic business for 83 years before CER selling ice cream to Dunedin (not quite the south pole but close!) to the south pole, is a good example as is Brisbane based Digsiport (set up, dare I say it, by a former Wallaby) who also used NZ as a nursery market for global expansion. And there are others in professional services such as Attache a software accounting firm, not to mention ties ups in banking (Commonwealth Bank and ASB) and law (Minter Ellisons and Rudd Watts and Stone).

In turn CER enabled Kiwi SMEs to go global as the majority accessed CER of all the other trade pacts, and it helped with market access as well as giving NZ businesses scale. As NZ Trade and Enterprise says: “CER created for NZ businesses a single regional domestic market five times the size of New Zealand itself.” Not only did CER, became a ‘model agreement’ for the rest of the world but it gave Australia and NZ a great platform for opening up to Asia, Latin America and the rest of the world (especially in emerging markets) and when you think of what market access Australian exporters had in 1983, 2003 and now in 2013, It’s not a spaghetti bowl of trade agreements but a comprehensive set of regional and global agreements that the CER enabled us to be a part of.

So what’s next for CER?

It some ways we’ve grabbed the “low hanging fruit” in terms of tariff barriers and subsidies, it now gets a bit harder now as we try and harmonise intellectual property (IP), industry standards, competition policy and even consider combining our productivity commissions (surely they’d believe in improved efficiency!)

There has often been talk of a common currency (former Australian Deputy Prime Minister and Trade Minister Tim Fischer wanted to call it the ‘Zac’ short for ANZAC) but we need to be careful not to go too far – that’s NZ political scientist Shaun Goldfinch’s warning who has studied economic reform in both countries – and you only need to glance at Europe and the problems a common currency has caused.

But there are things we can still do with CER for our mutual benefit. Yes we can use CER as a model for other economies looking to open their economies. We can use CER as a springboard into Asia and Latin America and other emerging markets. The benefits of an “Anzac” business mission to a third markets (such as an ANZAC biotech mission to Chile) would be potentially more beneficial than a marginal increment in the bilateral relationship. And we’ve already seen many examples of these ANZAC Partnerships such as the PGG Wrightson Genomics & Australian Molecular Plant Breeding CRC, the New Zealand Bio Pacific Futures & Australia’s Horizon Science, the NZ Government Solid energy – Australia’s geosequestrian CRC, and the aforesaid Australian – NZ Biotech Partnership Fund.

Using the CER to create third market trade and investment opportunities is important to both nations, as when the terms of trade comes off, if high exchange rates continue, we will need to boost productivity, and our trading ties in Asia and Latin America can play a big role in this quest. Sure some institutional integration is useful but respecting national sovereignty under what the NZIER calls the ‘collaboration-co operation’ model. This has occurred with the Productivity Commissions, in competition policy and in areas where Austrade and New Zealand Trade and Enterprise could potentially pool services in third markets. And we also co-locate our Geneva Missions to the WTO, NZ has membership of Australia’s state ministerial council on international trade and there’s potential for cross board appointments and in our Industry Capability Network

In conclusion, CER is world’s best practice – it has to be – and it has survived many twists and turns in the Trans Tasman relationship over the past 30 years. Because the NZ-Australia relationship is strong but we have had some tensions (in the air in aviation and along the ground thanks to the Chappells), cases of mistaken identity (Russell Crowe, Sam Neill, Phar Lap, Pavlova and many more), and an up and down history in the relations of our political leaders both in the past and today. We have also been left us with different perceptions of the relationship that we have struggled with from Australian federation to today. The CER has always given is a frame work to deal with these ups and downs. But given that leadership matters, I must conclude that as an Australian I admire the leadership of one of New Zealand’s greatest leaders, Sir Edmund Hillary, (to whom I am distantly related) who climbed Mount Everest but also I understand from relatives he was a hell of a bee keeper as well. And I think in terms of economic reform, CER allowed us to climb many mountains and together as NZ & Australia, trade partners but sovereign nations, and like Ed Hillary, we’ll be able to tackle many more economic peaks beyond the horizon in years to come.

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

http://blogs.unsw.edu.au/theairporteconomist/

www.theairporteconomist.com

This article is based on an address to the Australian and New Zealand Leadership Forum in Sydney, 27^th November, 2013. Thanks to Chris Nixon of NZIER for his comments and assistance.

Balancing wealth creation and wealth distribution is the Australian way.

By Tim Harcourt*

The Hawke-Keating Labor Government was one of the most successful governments of the western world. It was also Australian Labor’s most successful federal government in the post-war period by a country mile.

Whilst Thatcherism and Reaganism are often held up by conservatives as exemplary administrations, the same could be said of Hawke-Keating, not just in Australia but around the world.

In fact, the Hawke-Keating economic performance was superior to anything that high deficit ‘trickledown’ economics from Reagan or that Margaret Thatcher could conjure up in her long years of UK Conservative rule.

For instance, if we compare Hawke versus Thatcher, the economic record speaks for itself.

In terms of GDP, Australia outperforms Britain in 12 out of the 18 years compared since Mrs Thatcher begins her term. In terms of inflation, Australia had a lower inflation rate than Britain for 9 out of the 18 years. In terms of the labour market, the UK unemployment rate was 6.5 percentage points higher than Australia, with a higher proportion of long term unemployed people in the UK than Australia for every year of comparison.

Australian Labor’s success at a time of prevailing Conservative tide in the Anglo-American world did not go unnoticed. In fact future British Labor Prime Ministers Tony Blair and Gordon Brown whilst in Opposition were so impressed with Australia that they regularly visited our wide brown land to rejuvenate the intellectual capital and future policy agenda of ‘New Labour’ in the UK before winning office in 1997 and enjoying a long period of successful government initially under Tony Blair’s ‘Third Way’ banner.

As Paul Keating said in an interview with me: “I said to Tony Blair, our way was not the third way, but the only way”. In fact, in some ways selling “The Third Way” in Australia has been like trying to sell “The Joy of Sex”. To quote Paul Keating: “We were more interested in doing it than finding a label for it.” 

Tony Blair’s ‘Third way’ program for modernisation, was provided with a successful model in the Hawke-Keating government – one of the few successful social democratic governments that survived a political and intellectual era dominated by the right in most industrialised democracies.

But it wasn’t the third way that Tony Blair followed it was the Australian way.

One of the great lessons of this historically successful period of Labor government of 1983-96 was the balance struck between the wealth creators and wealth distributors. To govern successfully and continually, Labor needs both to function in tandem. Prime Ministers Hawke and Keating knew this, the business leaders knew this and the Australia Council of Trade Unions (ACTU), so ably led by Bill Kelty knew this through the forging of the successful Prices and Incomes Accords.

Bob Hawke knew the importance of encouraging businesses to invest through stable macroeconomic conditions, wage restraint and employment creation. Hawke could build consensus with business whilst ensuring workers received improvements through the social wage with Medicare, Education and Skills development and tax cuts.

Paul Keating, the son of a boiler maker – turned entrepreneur, knew that financial markets needed to be conducive to growth and regional expansion. His own Bankstown based father had been knocked back for a loan from an established bank when wanting to expand to Malaysia, so as Treasurer Keating democratised finance so all Australians could embrace the opportunities of the coming Asian Century.

Bill Kelty, not only forged the Accords with both Hawke and Keating, but also created the Australian superannuation policy framework that has become the envy of the world. In a stroke of genius, as union membership fell in the 1980s, the workers instead became owners of capital in the 1990s through the industry super funds. The workers took control of the commanding heights of capitalism – that are now jointly managed by employer representatives – and provided pools of savings for sustainable investment. It has taken the conservatives a long time to realise what has happened – hence their issues with highly competitive industry funds in today’s financial system and their tendency to prop up rivals to the industry funds.

However, in today’s Australia, there is a polarising of our political economy. Some on the right with large mining and media interests want to create wealth but don’t want to redistribute it. Sometimes it seems they would prefer an oligarch friendly government protecting their vested interests. They are suspicious of trade unions, NGOs, environmental and consumer groups and sometimes it seems democratic government itself.

On the other hand, some on the left want to redistribute wealth but have no interest in how it is created. They want to ban mining but at the same time claim they have the tax revenue from the resources industries to spend.  They are suspicious of business and entrepreneurs in general. They have no interest in economic policy.

But the Australian polity should not be a battle between wealth creators and wealth distributors as the Hawke-Keating-Kelty reform period shows you need both to function effectively as an economy and as a society.

In essence, a growing economy allows you to pay for a national disability scheme, for superannuation, Medicare, better occupational health and safety, and it enables you to take better care of the environment.

A growing economy with high employment, high wages and rising living standards helps improve productivity and competitiveness.

Growth and employment creation is not about mean industrial relations laws like Workchoices.

It is not about destroying the environment.

It is not about locking generations out of quality education and employment.

It is not about attacking the contribution of our newest Australians nor the culture of our oldest Australians, our indigenous people.

Growth and employment depends both on wealth creation and wealth distribution.

It is Labor that combines the best of the right to ‘have a go’ by our entrepreneurs and the right to a ‘fair go’ for workers, middle income and low income families.

Bob Hawke, Paul Keating and Bill Kelty knew the value of Labor supporting both the growth creators and growth distributors.  

In this historic ballot for the Australian Labor Party – one of the oldest political parties in the democratic world – Labor is not electing just an Opposition leader in this ballot, nor someone to be solely popular in inner city branches and amongst rusted on activists.

Labor is electing a future Prime Minister. Someone who understands the Australian way and the need to balance wealth creators with wealth distributors.

Bob Hawke Paul Keating and Bill Kelty knew this in their successful run of Labor Government. 

Party members need to think about the lessons of the Hawke-Keating-Kelty legacy and how it applies to today’s Australia when then they think about their decision. Balancing wealth creation with wealth distribution to enable good economic policy to benefit all of society is the key lesson of that successful period.

It’s the Labor way. It’s the Australian way. It’s the only way to return Labor to Government.

*Tim Harcourt was ACTU Research Officer/Advocate during the Hawke Keating Government and has been an economic advisor to several Federal Labor Cabinet Ministers and Two Labor Premiers. He has also worked as Chief Economist of Austrade and at the Reserve Bank of Australia and in the private sector in Australia and internationally and currently at UNSW. His grandfather was an adviser to the Curtin-Chifley Labor Government of1941-49. These views are his private views and not the views of any of the institutions he is associated with, past or present.

Turning Japanese:  the future of the Australian Japanese economic partnership.

Tim Harcourt*

When thinking of Australia’s future in the Asian Century, most minds turn to China, perhaps India, ASEAN and the rest of emerging Asia.

But it’s really Japan that Australia should thank for enabling us to get a foothold into the East Asian region in the first place. In fact, we were talking about ‘Abe- nomics’ over 50 years ago in 1957 when Trade Minister Abe (the current Prime Minister’s grandfather) signed the Commerce Agreement with John ‘Black-Jack” McEwen, Australia’s Country Party Deputy Prime Minister and Trade Minister. (in those days the Country Party now National Party always took the trade portfolio and Black Jack McEwen was followed by National Party icons like Doug Anthony, Tim Fischer in the trade portfolio in a tradition that was only ended a few weeks ago when the new Prime Minister Tony Abbott took trade off the Nats and gave it to Liberal Andrew Robb).

The 1957 agreement with Japan was of historical significance as it enabled Australia to finally embrace its geography and take commercial advantage of the industrial giant that Japan later became. Back in 1957, with the memory of the Pacific war still in everyone’s mind, and with cold war tensions afoot, it took great courage to negotiate the deal, and as it turned out, great foresight given Japan’s subsequent economic development. Japan played a crucial role in developing Australia’s export potential and gave us the confidence to embrace the region further with the Asian Tigers, ASEAN and now the emerging giants of China and India. In many ways, it was Japan who allowed us to break free from the ‘tyranny of distance’ mentality to embrace our geographical position in the world. Thanks to Japan – and our trade officials’ initiative to forge the agreement in 1957 – the tyranny of distance has been replaced by the ‘power of proximity’.  Thanks to the rise of Japan and the rest of Asia, and our own efforts, Australia now finds it self in the right place at the right time.

But that’s the history, what about the future? There no doubt that China is replacing Japan as the main driver of Australia resource export development – playing a similar role now that Japan played in the 1960s and 1970s – and there are also signs that AEAN and India – despite recent troubles – is on the march as well. But given all the success we’ve had with Japan in the past, what more can be done in the future?

How can Australia and Japan widen and deepen its economic relationship over the next 20, 30 or 50 years?

I think future of this overall happy economic partnership will depend on the seven ‘F’s of Australian-Japan economic relations.

The first F is the Free Trade Agreement currently being negotiated with Tokyo. There’s plenty on offer, particularly in agriculture and services. Australia is seeking cuts in tariffs and non-tariff barriers and more openness in Japan’s previously closed rural and services markets whilst Japan is seeking energy security – particularly in LNG. Both nations are seeking to expand investment in each other’s countries.

However, despite the potential gains to be had from the FTA – estimated to be A$39 billion and A$27 billion to the GDP of Australia and Japan respectively– there is still little awareness about the agreement. In fact, according to a survey of FTAs released by logistics company DHL, only 13 per cent of Australian businesses knew that there was an FTA being negotiated with Japan, compared to 44 per cent who knew about the pact with China.

The second F is Foreign Direct Investment. Whilst Japan is a major investor in Australia, Australian companies could invest more in Japan. And with a more open Japanese economy there should be more opportunity for Australian businesses to work in-market in Japan. According to research by Austrade, Sensis and the Australian Bureau of Statistics (ABS) over 3,600 Australian businesses export to Japan and 14 per cent of all Australian exporting small and medium enterprises (SMEs) sell to Japan, although very few base themselves there. In fact there are fewer than 100 Australian businesses have offices or investments in Japan despite their long-held position as on of the top export destinations for Australia.

The third F is Finance. As pointed out by Huw McKay and Malcolm Cook in a paper for The Lowy Institute, Australia and Japan are the leaders of the region when it comes to the size and sophistication of their financial markets. China may be growing but their market is still in its early stages of development. Japan and Australia could play a key leadership role in financial issues facing the Asia Pacific region particularly as there have been frequent calls for reform of the world’s major economic institutions such as the International Monetary Fund, the World Bank and the G20.

The fourth F is Freeing up services. Whilst Australian-Japanese trade flows are dominated by resources, there’s clearly room for expansion in trade in services between the two nations. During his term, former Prime Minister Koizumi introduced a number of reforms in areas like education, healthcare and government services which were regarded as ‘untouchable’ parts of the Japanese economy.  A new wave of reform under Abe-nomics has the potential to really open up the economy especially given Japan’s return to growth and with it a community that is much more conducive to microeconomic reform. According to a local services sector expert, Professor James Kondo of Tokyo University, Australian exporters have a comparative advantage in many areas that will open up: “The healthcare, wellbeing, education and the lifestyle sectors have traditionally been closed in Japan, but this will soon change to Australia’s benefit.” As the ANZ’s Tom Kenny has said: “The reflationary macroeconomics (of Abe) introduced so far have had a positive impact on confidence, expectations and now activity. However, to lift Japan out of its long term funk will require reform aimed at improving long term potential growth.”

The fifth F is Freeters. Whilst Japan is often talked about as the land of the greying sun because of is ageing demographics, there is an influential younger generation with different attitudes to travel, culture and work. This is particularly evident in the labour market, where the Japanese tradition of life-time employment and salary-men working for the same company has been replaced by the ‘freeter’ phenomenon where causal employment and ever changing jobs and careers changes the dynamics of the Japanese employment relationship. There has been debater about the freeter concept. Some older scholars have claimed it is the choice of younger people to not be tied down to one employer or one job, whilst many freeters themselves claim that they would prefer more job security but cannot find permanent positions because of the changing nature of work in Japan. The freeter phenomenon however has opened up opportunities for Australian service exporters specialising in job placement and career services. For example, Australian Terrie Lloyd, President of Linc Media, has set up an on-line recruiting company, Dai-job.com aimed at ‘freeter’ job seekers. He sees this as a boom market as “Traditionally Japan engineers society, but now Japanese society is opening up in a manner that is neither engineered or controlled.” The rise of the Internet, mobile phones, SMS messages, Lloyd believes is “setting up a whole new youth sub-culture based of the information revolution which is more open to western influences than ever before.”

The sixth F is Football. In cricket we have the Ashes against England and in rugby we have the Bledisloe Cup against New Zealand as well as a ferocious trans-Tasman rivalry in netball, but what about Japan. It could be that football (soccer) is the answer. With Australia in the Asian Football Confederation in FIFA and the Asian clubs championships we are likely to develop a strong football rivalry. This is already happening at club level not to mention at the FIFA World Cup.

The final F is Feminisation. As well as the ageing population, Japan is becoming more female. This is occurring in the economy (more women shareholders, entrepreneurs and consumers), in politics and in society as a whole. This is changing the nature of Australia’s services with Japan. For example in the key sector of tourism, short, intense tour bus holidays are being replaced by longer, more health conscious, reflective activities from Japan’s new class of retirees. This is helping grow opportunities for health and well being, education and creative based activities instead of the just the old golf and karaoke routine of the salary-men of long ago. If you think Bill Clinton’s ‘soccer moms’ were important back in 1996, just wait until you see the economic and political influence of Japanese women in future years. And as Japan’s population ages, and its dependency ratio increases (UCLA Economist Gary Hansen thinks this will increase up to 2050 as net debt to output has already reached nearly 150 per cent) Japan will need to rely on increasing the participation rate of women in the work force to enlarge the tax base as well as better society.

In conclusion, whilst it has been a very successful partnership for Australia and Japan, there’s plenty that can be done in the future.  Even healthy relationships need to be worked on. It’s a matter of keeping the dialogue open, keeping it fresh, working on the old trouble spots, and looking for more areas in which to blossom like a cherry blossom garden in Kyoto. It is a bit like preventative medicine – you may be healthy but there are things you can do to maintain and improve your health for the economic benefit of both nations.

*Tim Harcourt is the J.W.Nevile Fellow in Economics at the University of New South Wales, Sydney, Australia and author of The Airport Economist www.theairporteconomist.com

Thanks to Tom Kenny, Gary Hansen, Tomoko Ichikawa and colleagues at Austrade Japan for their assistance.

References:

Gary Hansen and Selahattin Imrohoroglu (2013) “Fiscal reform and Government Debt in Japan: A neo-classical perspective.” September.

Tim Harcourt (2014) Trading Places – The Airport Economist Flies Again (forthcoming).

Tom Kenny (2013) “Japan macro update.” ANZ, August.

Freo Nelson Mandela – the Dockers help Africa rebuild.

Tim Harcourt*

The Fremantle Dockers after years of battling in the AFL have finally made their first Grand Final. After playing an extraordinary high pressure style of football they got over the reigning 2012 premiers the Sydney Swans and now have the right to play hot favourite Hawthorn. Coach Ross Lyon has taught Freo how to play a tough blue collar brand of high pressure football which together with some amazing skill from the likes of Pavlich, Boundy, Fyfe and has moulded the Dockers into a lethal combination. The late and great Freo fanatic and gifted journalist Matt Price would be smiling in heaven right now.

However, there’s another side of the Fremantle Dockers that’s not so well known. Fremantle has strong business and development ties to Nelson Mandela’s South Africa. I found this out quite by accident at the mining conference Mining Indaba in South Africa, which is the show piece of mining exploration, equipment and technology in Africa.

Whilst I was at Mining Indaba I met an unusual participant. He was a sports executive rather than a mining magnate and he was meeting the most important people in the resources sector in both Australia and Africa at the specially appointed ‘Australia lounge’ at the event. He was pretty happy as he has just managed to raise $250,000 in sponsorship for his club from a number of South African companies, including the major South African partner, Nkwe Platinum. His name was Darren Beazley he’s a former dot com executive working at the time as General Manager of Strategic Partnerships for the Fremantle Dockers Football Club after stints with the Western Australian Cricket Association (WACA) in Perth and the AFL in Tasmania. He was also a pretty handy footballer himself with Swan Districts in the WA state competition and is a third cousin of Kim Beazley. Whilst the Beazley’s are known as a famous Western Australian political dynasty there are sporting ties as well. Kim Beazley’s mother Betty was an athletics coach who trained the famous Western Australian runner and Olympic medallist Shirley Strickland.

So why was a Fremantle Docker all that way across the Indian Ocean in South Africa? According to Darren Beazley it was partly about player development and partly about commercial sponsorship. In terms of sponsorship the AFL clubs know they have a limited pool of dollars to attract in Australia, even in mineral-rich WA, and therefore they have to look for new frontiers. As Beazley puts it: “The sponsorship pie is only so big, so we’ve got to find another pie. That’s why we are involved with NKWE and looking to get involved further in the South African resources sector.”

On the field too, South Africa is also proving to be a new frontier for AFL player talent. The game is expanding rapidly in North West of Pretoria which serves as the Dockers’ development zone. South Africa is considered to be a promising area for the AFL with regular visits from the AFL as well as GWS Giants coach Kevin Sheedy and indigenous icon of the game Michael Long, all of whom have  regularly visited South Africa.

The AFL has also run a successful Auskick programme in South Africa (know as footyWILD) that has helped health and development in the townships (reducing smoking rates). Australian entrepreneur Andrew Douglas, who runs the Cape Town based-Salamander group has helped drive the footyWILD programme along with Corporate Social Responsibility (CSR) programmes for corporates in South Africa, Australia and India. He sees Africa as “full of untapped opportunities, with plenty of growth for social entrepreneurs as well as traditional resource companies.

Indeed, at the Cape Town conference, Mining Indaba a 10,000 plus strong gathering of global mining interests – it does feel like an extension of extension of WA’s mining interests and there are plenty of Perth residents at the conference consisting of former South Africans and the home grown variety. The Australian delegation at Mining Indaba seems to read like a who’s who of Perth and on the other of side of the Indian Ocean, Perth is a mini-Johannesburg as well, with lots of South Africans who have settled in the West.

There were fears that after the heady days of the anti-apartheid struggle, that Australia would forget South Africa. Even Tansey Coetzee, a former Miss South Africa, said her main aim was to make sure the world “didn’t forget South Africa now that apartheid is a distant memory.” However, it looks like that there’s no danger in that occurring  as Australia’s two-way trade with South Africa was worth over $2.4 billion last year with 2320 Australian companies exporting to South Africa in 2011-12. Whilst the big miners provide the lion’s share , there are plenty of Australian services exporters in Africa who do a lot on the training and technology side. Companies like Mincom, Micromine and Ghekko were big players at Indaba and Australia’s expertise in technology, training and logistics spills over to a number of sectors. South African agriculture, manufacturing and education (particularly the TAFE sector) industries to are also expected be a big attracters of Australian technology, investment and know-how in years to come.

There was also a big Australian presence in Pretoria too at Centurion Park as the Fremantle Dockers played Carlton as part of Mining Indaba.

Whilst there weren’t quite cries of “Freo Nelson Mandela” at the game, the Dockers did win and clearly made a bit of progress on both the development and on the commercial side in the Rainbow nation.

Whilst thinking of Africa and development with think of big concerts run by Bono and Bob Geldof.

But maybe something a little bit more low key but equally hard working and effective – like what the Fremantle Dockers are doing in South Africa – could be the way to go.

Whether helping Africa and beating Hawthorn – the Fremantle Dockers now have plenty to do.

*Tim Harcourt is the J.W.Nevile Fellow in Economics at the University of New South Wales, Sydney, Australia and author of The Airport Economist www.theairporteconomist.com

Once were worriers – Australia’s golden age of economic policy making.

By Tim Harcourt*

We are not winning the Ashes or the Rugby but in terms of economic management Australians are world beaters. But you wouldn’t know it from all the gloomy economic talk in the press sapping business and consumer confidence.

In case you missed it Australia unlike many other industrialised countries avoided the worst economic crisis that has bedevilled the global economy since the Great Depression (note the term they use in the USA – ‘the Great Recession’ – rather than the more technical and even benign sounding ‘GFC’ that we use in Australia).

So what? Well if you want to think about what could have happened go to a European country like Greece or Spain or check out the more depressed areas of the UK or the USA. Or even closer to home, take a look the excellent ABC show ‘The Years That Made Us’ by Chris Masters on Australia’s own experience during the Great Depression itself. Masters uses his own family and community to explain the hardship that beset working Australians as result of the international economic crisis following the Wall Street crash of 1929.

In fact the only thing missing in Masters’ excellent oral history was a discussion of economic policy in the 1930s – the very core of Australia’s recent success as a nation.

In the Great Depression of the 1930s there was massive unemployment (Australia had one of the highest levels in the industrialised world) and Australian governments on the advice of Australia’s fledgling economics community did the worst things possible in terms of policy.

In what we would call an “austerity plan” today the Commonwealth and State governments cut government spending, tightened credit, kept the exchange rate fixed, cut wages (the Arbitration Court actually tried to implement a 10 per cent cut in the Basic Wage in 1931) and jacked up tariffs.

As a result the slump in Australia was longer and deeper than it should have been and it eventually took putting the economy on a war footing in World War 2 to get out of it

By contrast in 2008 facing the financial turmoil of the sub prime Australia economic management was world class.

Economic policy makers did the exact opposite of what was tried in the 1930s.

They increased government spending through a well timed and well targeted stimulus packages in the advice proffered by then Treasury Secretary Dr Ken Henry to “Go hard, go early and go households.”

And it worked. The Nobel Laureate Professor Joseph Stiglitz when visiting Australia in 2010 said Australia was “lucky to have, probably the best designed stimulus package of any of the countries, advanced industrial countries, both in size and in design, timing and how it was spent and I think it served Australia well.” (I interviewed Stiglitz on that trip to Australia and he said he was “widely impressed with the state of economic and social policy” and had taken a special interest in indigenous labour market policy “where most work clearly needs to be done in the long term.”

As well as the fiscal stimulus, the RBA did their bit by quickly loosening monetary policy.

Wages were able to rise in line with productivity and minimum wages was adjusted upward rather than cut.  

The flexible exchange regime introduced by the Hawke-Keating government meant the dollar could weaken and act as a ‘shock absorber’ to contain the external impact of the crisis (as it also did during the Asian Financial Crisis of 1997-99 when Australian exports got badly bruised by events in Asia).

And tariffs were kept low and our commitment to an open economy was strengthened in the Doha WTO talks. As then Trade Minister Simon Crean said at the time, “trade could act as an additional stimulus” globally when demand was depressed in the worst affected economies.  

And our unsung heroes, the Australian exporter community actually adjusted to changing global conditions by cutting hours rather than jobs to minimise the overall pain in the Australian labour market.

The whole package of this period – fiscal, monetary, wages and international trade policy – worked a treat in contrast to the Premiers Plan and the associated austerity package implemented by Australian governments in the 1930s urged on then by the economics profession.

In fact, the response to the GFC by Australia represents an innovative period in the history of Australian economic policy making. And overcame past doubts about the efficacy of fiscal stimulus in a global crisis.

As Dr Ken Henry says in his keynote address to the Symposium in honour of Professor JW Nevile here at UNSW:

“…the government and its advisers are in no doubt that without the large fiscal stimulus, and its having been delivered in such a timely fashion, the Australian economy would have suffered a very deep recession.

Yet the scepticism about the efficacy of the fiscal response is understandable: like many other countries, Australia has a poor history of fiscal activism; indeed, this recent period might be the only instance in Australia’s history of a fiscal stimulus having insulated the economy from an external shock that would otherwise have produced a deep domestic recession. That is to say, it could be a unique achievement.”

The success of this golden age of economic policy making is outlined by Jim Chalmers in his excellent new book ‘Glory Daze’ (anyone who can work in a Bruce Springsteen song into the title of an economics book gets my vote!).

In Glory Daze, Chalmers outlines how the politicians (despite interpersonal rivalries so well documented now) kept their cool and worked together with the Treasury and RBA – as well as with officials in financial and political capitals around the world as international coordination of policy making was transformed.  As a by product we now have a restructuring of international economics institutions with the resulting rise of the G 20 as a preeminent global policy making body.

Chalmers narrative is lively and dramatic – a real “West Wing” of Australian economic policy making as Australia bucked the global trend and avoided recession

And most importantly all that frantic energy and drama was worth it because it worked.

As evident in a new paper by my colleague Professor Raja Junankar at UNSW,

Australian avoided the contraction and mass unemployment that has plagued other advanced industrial economies since the 2008 crash.

According to Junankar, when you compare Australia with other advanced industrialised economies like the US, UK, and both strong and weak economies in Europe (e.g. from Germany to the crisis ridden economies in the south next to the Mediterranean ) we score better in terms of GDP, employment, inflation, current account, budget deficits and debt ratios. As Junankar says: “Even the ‘wunderkind’ Germany took three years before its GDP returned to the pre-2008 levels….All other countries had higher unemployment rates than Australia in the post-2008 period.”

Junankar notes praise for Australia in official international policy circles including the OECD which says:  “With 21 years of uninterrupted growth Australia stands out among OECD countries.”

So there you have it, when it comes to economic management in recent times, Australia is outstanding by international standards.

But why is the story not better known?

The answer is Rats, Rent seekers and the Rabid 24 hour news cycle.

There is clearly a disconnect between the evidence of our economic success and the plethora of survey and campaigns to illustrate hardship, pessimism a lack of business and consumer confidence or alleged government waste.

As market economist Adam Carr says in Glory Daze:

“Pessimism is a disease in this country and like rats, lacklustre economists are playing a significant role in spreading it.”

And behind every rat plugging a business confidence survey is a rent seeker. Rent seekers aim to capture rents and redistribute income and wealth their way at the expense of others with no net welfare gain to society. You see it in changes to laws and taxes. You even see it in the exchange rate. Retailers like Gerry Harvey of Harvey Norman will bemoan a high dollar as his retail outlets can’t then compete with online imports from the USA (especially with different tax treatment) and make claims on the government and the RBA to “do something about it”. The issue facing Harvey Norman may be structural – due to long terms industry trends in retail and the rise of the online global consumer – but it is still easier to blame the government and the RBA.

Put the rats and rent seekers together with the rabid nature of the 24 hours news cycle with hysteria about polls and surveys, a bit of a gotcha journalism, and some hyper partisan opinion dressed up as ‘analysis’.

There is also a fair bit of irresponsible economic commentary around by people who should know better. Recently, the shadow Treasurer Joe Hockey said that the Australian economy is ‘volatile’, because of recent changes in the exchange rate. As demonstrated at a time of turmoil in most advanced industrialised economies, Australia has an enviable record in terms of economic growth and employment and the movements in the floating exchange rate have saved us from serious ruptures in the real economy.

The recent period of Australian economic management should be one of the proudest moments in our history. Over time economic historians will find this to be the case and we will revel in just as we did about Hawke Keating reforms and the like. But it’s a debate we have to have now because otherwise we’ll miss one of Australia’s greatest moments in history, a moment captured in our own lifetime (and outlined brilliantly by George Megalogenis in his book ‘The Australian Moment’). But if we miss it or fail to realise it we might fall into the same trap as the austerity ridden economies like the UK that may have a new Royal Baby and the Ashes but not the jobs to go to after the celebrations are over.

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

The Power of Proximity – Australian exporters in the Asian Century.

Tim Harcourt*

The Global Financial Crisis (GFC) of 2008 really 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.

One aspect of the GFC that has not been discussed much is whether exporters – particularly small and medium sized enterprises (SMEs) – have abandoned Europe and North America and focussed their efforts on Asia entirely. Has the famous ‘Tyranny of Distance’ (as the celebrated economic historian Geoffrey Blainey termed it) turned into the “Power of Proximity’? Did the GFC make a big difference in SME exporter behaviour in terms of choice of destination, or did it just accelerate a trend that was already happening?

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, Free Trade Agreements (FTAs) or in more recent days the US-EU trade pact.

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?

 First of all, we now know that there were 44,751 exporting businesses in the ‘exporter community’ in 2011-12.  This tally comprises 43,080 goods exporters and 2,937 service exporters – although 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, our Trans-Tasman cousins, New Zealand were top of the pops, with 16,449 Australian businesses having exported to the shaky isles in 2011-12. 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. 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 (the AANZFTA pact forged by Simon Crean when he was trade Minister) or across the Pacific to Chile.

The United States is second, with 8797 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 5 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 6226 exporters. Singapore is slipping due to domestic economic pressures and improvement in other ASEAN economies and other attractions in the region.

The big story of course is China with 5493 exporters, a gain of over 1200 in 5 years and now in 4^th 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’.

Next comes Papua New Guinea on 4967 exporters a gain of 980 over 5 years. The data shows the importance of our near neighbours to small business exporters with three Pacific destinations in the top ten. Although Fiji is losing ground – coups are not always good for business.

Then comes the UK with 4759 which has slipped behind China, HK 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 163 Australian exporters selling goods to Greece to the value of only $30m. Our export trade to Christmas Island is more valuable than to Greece and there are more Australian exporters in Colombia, an up and coming economy in South America.

Then comes ASEAN neighbour Malaysia on 3616, and Japan on 3148. ‘Abeconomics’ is reviving Japan’s fortunes but still very few Australian businesses set up in Japan. Thailand has improved its standing as a gateway to the Mekong Delta region and being an epicentre of manufacturing, tourism and professional services.

The ‘second top ten’ is still heavily focussed in Asia but includes both mature and emerging markets. Germany attracts 2598 exporters followed by Indonesia on 2584 Then comes South Africa on 2320, Australia’s key African entrepot in Africa, Canada on 2309, South Korea on 2239, India in 2125, the UAE on 2124 followed by Taiwan on 2027. New Caledonia also continues to hold its place in the top 20 just shading out The Philippines.

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 almost 16,500 exporters and Japan only around 3,148, the value of those exports to Japan was over $51 billion, whilst New Zealand’s was worth just over $7.5 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. The micro-economic performance of Australian exporters will be very important as Australia engages in the world economy in the Asian Century.

*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

Source: ABS 5368.0.55.006 includes multiple destination exporters.

Brazil – too big to ignore

Click here to read full PDF

By Tim Harcourt and Mark Thirlwell*

For most of our respective histories, Australians have typically ignored Brazil. That was partly down to the tyranny of distance, as the two great southern lands were so far away from each other that it was a case of “out of sight, out of mind”. Our colonial ties were very different too. Australia looked to the British Empire and Brazil to the crumbling Portuguese ; our legacy was transportation theirs was slavery;  and while Australia looked to London, Brazil looked to Lisbon. Brazil, with political instability and economic crisis, seemed like a place with too many problems that was best to keep away from (except at carnival time).    More recently, the sheer importance of our bilateral economic relationship with China sometimes seemed to leave little room to consider other emerging markets.

But times are changing and the rise of the new Brazil has seen many international delegations flying down to Rio, (and Sao Paulo, Brasilia, Belo Horizonte, Porto Alegre and the rest of Brazil’s burgeoning metropolises) to seek stronger economic ties with Brazil. Brazil is being overrun by international business diplomatic delegations from the US, Canada, Germany, Japan, China and increasing the emerging powers of Asia, the Middle East and Africa too.

Although we are hardly a first move, Australia has now joined the pack with significant investment in Brazil by Pacific Hydro, Westfield, and major resource, agribusiness and infrastructure players. The Australian Government has also redirected resources to Brazil and Austrade has made a strong push to strengthen ties with Brazil when the spotlight hits the country with the FIFA World Cup in 2014 and the Rio Olympic Games in 2016 with its highly respected Business Club Australia programme.

So why all this attention on Brazil?  As we highlight in a new report, there are several good reasons for Australians to pay more attention to this other great southern land.

It’s economic.  Brazil is already a major global economy. Brazil is the world’s fifth largest country by population and the seventh (on a purchasing power parity 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 (depending on how GDP is measured). As an agricultural, mining and aviation exporter, it’s a food aerospace, resources  and energy superpower with Petrobras, Vale, Embaer, JBS Beef and Ambev some of the world’s most influential multinationals and investors.  Granted, Brazil’s recent economic performance has disappointed.  Growth last year slumped to less than one per cent and policymakers must now manage a complex macro environment.  But key fundamentals, including sheer size and vast ecological wealth, keep Brazil firmly in the ‘too big to ignore’ camp.

It’s diplomatic. As a member of the BRICSA grouping (Brazil, Russia, India, China and South Africa), Brazil is playing an important role in international affairs as we have seen in the World Trade Organisation (WTO) and G20 multilateral fora.  Brazil has undertaken a charm offensive in the developing world under the ‘South-South banner’. Under President Luiz Inacio ‘Lula’ da Silva, Brazil opened up 53 new embassies in Africa and has expanded its sphere of influence across the globe.  The diplomatic initiatives have continued under President Dilma Rousseff: A Brazilian will be the next head of the WTO.

It’s because of China. Australia now faces a resources rival in Asia. We saw at the height of the global financial crisis (GFC) that Australia and Brazil were the two largest beneficiaries of the Chinese stimulus package, as Brazil and Australia’s resources and energy stoke China’s rapid urbanisation and industrialisation.

It’s because of shared challenges.  Like Australia, Brazil has had to manage the complexities of the current resource boom, the challenges of Chinese investment into sensitive resource sectors, and the side-effects on its exchange rate from quantitative easing and the so-called currency wars.

None of this is to deny that there are risks to Brazil’s outlook. Our co-author Patrick Carvalho, who outlines Brazil’s recent macroeconomic achievements, has also warned of: “Weak infrastructure, inefficient bureaucracy and tax system, expensive and unfair pension system and despite some recent improvement, high crime rates.”  As he reminds us, “economic development is a marathon not a sprint” And Brazil is still some distance from the finish line.

However, for all of these challenges, as the world’s 6^th largest economy, Brazil is an important player, and like with the Girl from Ipanema, it’s now Australia’s turn to do the wooing.

* Tim Harcourt and Mark Thirlwell are the co authors, along with Fernando Cardim and Patrick Carvalho, of Great Southern Lands: Building ties between Australian and Brazil, a report by the Lowy Institute & COALAR launched by Senator Bob Carr, the Australian Minister for Foreign Affairs.

Click here to read full PDF

Australian exporters survive higher dollar, carbon tax

By Tim Harcourt*

It was quite a day when Ford announced the end of its operations in Geelong and Broadmeadows. What was amazing was the massive saturation of media of reaction. I think we must have heard from a galaxy of politicians – ministers, opposition leaders, premiers, deputy premiers, mayors, deputy mayors. Then we heard from a massive number of journalists, mainly from the Canberra press gallery, a few market economists and then onto to the retired politician-commentators. Finally we heard from car industry analysts and the odd economist or two who have actually worked on the car industry (like Nicholas Gruen) or manufacturing in general (like Goran Roos).

But from all the noise we heard that the main reasons for the Ford closure were “the high dollar, labour costs and the carbon tax.” Despite the complicated reasons behind Ford’s decision, related to strategic issues in the global car industry (that we foreshadowed in the Bracks Review into the automotive sector) they were drowned out by the chorus of high dollar, carbon tax and labour costs.  And now somehow they are assumed to be fact, as the actual reasons for the automotive sector’s woes – and Australian manufacturing’s in general – despite any available evidence in support.

The Ford closure led me to ask if these reasons apply in general to the Australian export sector in general – particularly in manufacturing.

Fortunately, the DHL Export Barometer, that regularly takes pulse of Australia’s exporter community can give us a good steer of the long terms issues affecting their businesses, and any global risks and opportunities that are on the horizon. The report also give us a feel of how a major issue – like the exchange rate or policy change – may play out in the medium term. Some of the data in the survey makes interesting reading in light of the headlines we may hear according to conventional wisdom.

Firstly, on the exchange rate we often hear that “The high dollar is killing manufacturing exporters.” The Barometer asks this question regularly and has found the impact of the rising dollar to be variable across sectors. However it is agricultural exporters and domestic tourism that are the most adversely affected. These sectors don’t have the assistance of high commodity prices like mining, or imported components like manufacturers. In fact, according to the Barometer 74 per cent of all exporters now import, compared to only 35 per cent two years ago.

Secondly, we hear that “Australia is a ‘two-speed’ or ‘patch work’ economy”. Yet in this Barometer it is the mining sector that has had the biggest drop in confidence as super-profits wear off to become just plain old profits. In fact, manufacturing exporters have the highest profit expectations of all sectors with 52 per cent expecting and increase this year compared to 42 per cent of mining exporters. From the survey results, it seems that reports of the death of manufacturing have clearly been exaggerated.

Thirdly, we hear that “It’s all about China.” The surveys showed China is important to exporters but so are South East Asia, Middle East, India and North America. Even New Zealand was regarded as important export market as exporting small and medium sized enterprises (SMEs) could use it as a nursery or ‘test bed’ for the products and services. On the competition side exporters also saw China, USA, India and New Zealand as their greatest competitive threats.

Fourthly we hear that “the carbon tax is killing industry”. This was a big fear when 61 per cent last year thought the carbon tax would adversely their business. In 2013, 58 per cents said it had “no impact”. Perhaps for a majority of exporters, the carbon tax is like the dog that barked but did not bite.

Fifthly, we hear that we should go “All the way with FTAs”. Most exporters think free trade agreements are useful to grow their businesses, but so are export market development grants (EMDG) and government assistance off shore through Austrade offices.

Finally, we hear that “Setting the federal election date gives us ‘certainty’”. In reality it makes very little difference. 67 per cent said the setting of 14 September had “no impact” on their business plans.

So when you come to analyse the Ford decision or any other major policy change in any sector of the economy. Have a close look at the data and get a feel to what the businesses, workers and communities are saying. As the reasons may be a bit more complex than what might first appear on a quick door stop when the TV cameras first appear.

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

He also was the international economic adviser to the Bracks Review of Australia’s Automotive Industry

Hawke hit Thatcher for six in the economic Ashes

The former Australian PM is a clear winner

By Tim Harcourt

In terms of an economic legacy, did Thatcherism work? Or did Bob Hawke’s strategy to “Bring Australia together” through consensus rather than conflict achieve better outcomes?

To answer this question, I consulted my UNSW colleague Raja Junankar who worked and lived in both the UK and Australia under Thatcher and Hawke. He looked at gross domestic product and industrial production, employment and unemployment, inflation and international trade through both the Thatcher and Hawke eras.

In terms of GDP, Australia outperforms Britain in 12 out of the 18 years compared since Mrs Thatcher came to power.

 In terms of inflation, despite Mrs Thatcher’s monetarist philosophy of ‘fighting inflation first’, Australia had a lower inflation rate than Britain for nine of the 18 years.

In terms of international trade, Australia had a positive balance for 10 out of the 18 years, whilst Britain’s worsened over 1983-88 and then improved, partially thanks to the proceeds of North Sea Oil.

In terms of the labour market, Thatcher and Hawke had very different approaches. Thatcher, ‘deregulated’ the labour market, abolished the minimum wage, encouraged industrial confrontation notably with the miners’ union and encouraged “the right of managers to manage”.

By contrast, Hawke adopted a ‘consensus’ model with the Accord with the ACTU, introduced a ‘social wage’ (providing Medicare, Superannuation, education and training, labour market adjustment and tax cuts) in exchange for industrial peace and nominal wage restraint with an inflation target. Hawke also initiated a National Economic Summit of business, farmers, unions and community groups at the start of his term, something Thatcher never would have contemplated as a so called ‘conviction’ politician.

In terms of the labour market, Australian employment growth succeeded Britain’s in all but 3 of the years covered. In terms of unemployment, the Thatcher Government made 17 changes to the official measurement of unemployment (all of which lowered the unemployment rate). Even so, Australia achieved a lower unemployment rate in the 1980s, Britain in the 1990s, until a reversal saw Australia again outperform Britain.

Over the whole period, if the difference between the unemployment rates of Britain and Australia are accumulated, the UK unemployment rate was 6.5 percentage points higher than Australia, with a higher proportion of long term unemployed people in the UK than Australia for every year of comparison. On the labour market, Australia clearly outperformed Britain.

Thirdly, there’s the economic legacy now. It’s over 23 years since Margaret Thatcher left Downing Street and 22 years since Bob Hawke was Prime Minister. In 2013, the economic positions of Australia and Britain are in contrast.

Hawke’s bet of opening the Australian economy to Asia, and converting the famous ‘tyranny of distance’ to the ‘power of proximity’ has paid off as Australia has been transformed from the double digit inflation and unemployment of 1983  to the best performing economy in the OECD, which has avoided any recession in 22 years despite the global external shocks.

By contrast, Britain has an unemployment rate of 7.8 per cent with 2.52 million people unemployed (compared to Australia’s unemployment rate of 5.6 per cent and almost 686,900 unemployed) and is over reliant on industries like financial services that were hit in the GFC. As Australia’s economy grows, Britain’s contracts, and the UK has an inflation rate above its central bank range unlike Australia. Australia shades Britain in terms of GDP per capita as well.

In conclusion, to be fair to Margaret Thatcher, she did show remarkable courage on non-economic issues, such as staring down the IRA terrorists who tried to assassinate her or standing up to the Soviet Union (particularly when they were oppressing Solidarity trade unionists in Poland) although she did have a blind spot on South Africa and race issues. But when it comes to the Thatcher economic legacy, when compared to Australia’s experience at around the same time, you’d have to say that the evidence clearly shows that in economic policy, Bob Hawke has won the Ashes for Australia.

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