Taking it Yuan step at a time – do we need an FTA with China?

By Tim Harcourt*

The Prime Minister’s visit to China is of immense importance to her personal standing foreign policy and to the future of Australia’s economic relationship with the Middle Kingdom. China’s relationship with Australia as export destination, import source, and trading partner has grown in leaps and bounds and despite the occasional PR skirmish, the investment relationship is pretty healthy too.

The show case of this official visit was the announcement of convertibility of Australian dollars into the Chinese Yuan (or reminbi). This is good news for Australian exporters – especially small and medium sized enterprises (SMEs) – who don’t have the large capacity to hedge on currency like Rio Tinto or Woodside do.

This is not an insignificant number of companies now. According to new ABS data, nearly 5300 Australian companies export goods to China with another 5024 selling to Hong Kong (mainly as a base for the Chinese market). This now dwarfs most European destinations and even North East Asian Giants Japan on 2773 and Korea on 2187, and when you add the 3000 plus Australian companies with an office in China, the Prime Minister’s announcement is a welcome one.

According to Sensis, more exporting SMEs export to China (and ASEAN) than to Europe so the Chinese market is a big deal. Much will depend on the Chinese financial services sector to develop – and Australian companies like ANZ, Macquarie and AMP are helping in this regard – but the convertibility move is a good first step on the long march to seamless economic ties between Australia and China.

The other main issue of the visit (apart from geo-political issues like North Korea) has been the potential free trade agreement (FTAs) with China that has been in negotiation phase for nearly a decade.

Whilst FTAs with China incite passions in places like USA, Canada and South Korea, in Australia the response has been relatively benign. In fact, when the DHL Barometer first surveyed Australian exporters about FTAs, most wanted an agreement with China than they did with the USA or Thailand – despite our historical and defence ties with Washington DC that we have never had with Beijing (or Bangkok for that matter).

According to the survey 45 per cent thought a FTA with China would be positive, 45 per cent neutral and only 10 percent negative. This compared to a 25 per cent positive rating for the USA, and 21 per cent for Thailand.

There was some opposition from manufacturers (although of AiG members the exporters were quite positive relative to import competing manufacturing businesses), some mixed views on market access from the agricultural sector but an overwhelmingly positive response from resources, education, tourism and professional services.

The view from China was primarily positive except for concerns about the impact of open access on agricultural products on poor regions, although leading agricultural representatives have noted that Australian and Chinese agricultural interests are largely complementary.

Do we need a FTA at all? Key investments in both countries will still take place with or without a FTA, but it does provide a framework for streamlining the multiplicity of issues that impact Australia’s ties with a complex economy like China’s.

A FTA would certainly show again how important Australia has been as a friend of China’s a key moments, with the recognition by Gough Whitlam in 1972, support for China’s entry in the WTO, and the support given to China by Australia at a multilateral level, despite more aggressive anti-China stances by our allies.

For China, keen to lock in resource and food security to guarantee growth and prosperity for a majority of its 1.3 billion population a FTA with Australia would be a desirable economic objective.

What if China slows? There are signs of credit adjustment in the housing market, and a tight labour market in China, and Beijing’s stance on the currency shows a caution about the social effects of wage-price inflation in a tight labour market.

But most of the warning signs of a slowing Chinese economy have not come just from foreign economists, but also from the Chinese authorities themselves. China knows it has to manage an adjustment to a slower growth economy with more focus on domestic savings and investment than exports and to do so it needs Australia’s help.

Accordingly, the Prime Minister’s conversion offer, and overall framework for the bilateral relationship, still puts Australian in the right place at the right time.

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

The Mandarin Chinese version of The Airport Economist will be launched in Beijing on April 23^rd.

Uruguay – the plucky country

 by Tim Harcourt*

 Reporting from Montevideo, Uruguay

Uruguay is the classic small player who `punches above it weight’. It only has 3.3 million people and is dwarfed by its larger neighbors Brazil and Argentina. But economically it historically was a wealthy country. According to Uruguay´s Deputy Economy Minister, Luis Porto in 1870 Uruguay – like Argentina and Australia – one of the world’s richest economies. This was was largely thanks to its rich agricultural endowment. For a small nation it was not only rich but also competitive on the world sporting stage. It won the inaugural FIFA Football World Cup in 1930 and then backed it up in 1950 in a shock 2:1 win over hotter than hot favorites host nation Brazil at the newly built Maracana Stadium in Rio de Janeiro in front of 200,000 people (mainly shocked Brazilians who have been haunted by the result ever since).

When Uruguay was wealthy it was known as the ‘Switzerland of the southern hemisphere’ but in the modern context the best comparison is probably with New Zealand. New Zealand and Uruguay have a lot in common. Both are small countries dependent on agriculture, services and tourism and are also economically tied to the fortunes of their neighbors. But whilst New Zealand has benefited from having ´The Lucky Country´Australia as its main next door neighbor, Uruguay has had Argentina. Argentina´s woes are well documented (see my companion piece ´Don’t buy from me, Argentina) and Uruguay is strongly influenced by the boom bust cycle of the Argentine economy in terms of trade flows. But Uruguay also has Brazil next door, and the fortunes of their enigmatic neighbour have been on the up in the past decade compared to poor performances overall in the 1980s and 1990s. 

In fact, Uruguay, Brazil, Argentina Paraguay and Venezuela make up the common market trade pact MERCOSUR. And it would be expected that Uruguay, like Chile could benefit from being a small open economy opening up to other nations including its economically larger neighbours. But unlike Chile (see Red Hot Chile Peppers the world with FTAs) Uruguay can’t sign up to an FTA with another country without the permission of its Mercosur partners. In fact, Uruguay finds itself almost squeezed by the new divide in Latin America. The nations who have formed the Pacific alliance and looked towards institutions like APEC, Mexico, Chile, Peru and Colombia have largely supported free trade and open economies even when the global financial crisis of 2008 was at its worst. On the other hand nations like Argentina, Venezuela and Bolivia have supported protectionist and populist policies, partly in response to the excesses of the IMF in the region (and elsewhere) during the 1990s. the question remains about the eleephant in the room, Brazil, and which way it will fall. When I was in Mexico, most Mexican economists and business representatives claimed Brazil was already going down the protectionist path, particularly when it comes to Mexican industrial products (see The Mexican Moment) but the world is hoping Brazil will keep an open economy stance as it gain more economic weight on the global scale. In any case, Uruguay may be keen to be seen as a ‘Pacific style´ South American nation in terms of philosophy but not so in terms of geography on the Atlantic side of the continent wedged between Argentina and Brazil and with Mercosur acting as a straight jacket in terms of its further trade liberalisation aspirations. many Uruguyan businesses also compalined that despite the existence of Mercosur most of their goods and services got tied up in behind the border red tape in both Brazil and Argentina.

So what about Australia and Uruguay? Again its a case of a small population but plenty of energy and influence. There are around an estimated 30 000 Uruguayans in Australia, mainly of whom were in exile during military rule. As democracy is well entrenched now many of have returned to investment in Uruguay’s highly lucrative agricultural sector. Agriculture is the main focus of Australian investment, with collaboration between Australian and Uruguayan R & D and agribusiness technology. Trade and investment ties are greatly assisted by the very active Uruguayan Australian Chamber of Commerce which aspires to be like the Israel Australian Chamber of Commerce – another organistaion that seems small in trade terms but larger than life in terms of business outcomes. There is also some Australian presence in Uruguay. The fast ferry you take from Buenos Aires to  Montevideo is made by Incat in Tasmania and there are a number of Uruguyan-Australians who are prominent in farming and business community organistaions.

Australia´s Ambassador to Argentina, Uruguay and Paraguay, Patricia Holmes believes that mining is potentially attractive investment opportunity for Australia but it was notiecable that Uruguay, like Colombia, Argentina and some other South American countries was still undergoing a debate about mining and its impact on farm land and the environment. Again, like in Colombia, Australia has the opportunity to help develop corporate social responsiblity (CSR) practices, to help achieve a mining industry that is environmentally sustaianble and in sync with agricultural development as well.

Uruguyan business interests were also surprised (pleasantly) by the Australian model of consensus (built up under the Hawke Keating Government’s Prices and Incomes Accord) and the capacity of trade unions and business to work together in Australia´s recent past on economic and industry issues. Whilst not as divided as the Argentinian polity, Uruguay still struggles to get its main interest groups around the table in the national interest.

In some ways the Uruguyan psyche is fed by being caught between two large neighbours and finding it therefore difficult to shine. They are also mindful that they can’t keep living on past glories whether its economically back to 1870, or in football terms dining out on the glorious World Cup winning teams of 1930 and 1950. But Uruguay also is a rugby nation as well as a football nation and in fact the national team ‘ the teros’, were on the same plane as the airport economist flying out of Monetvideo on the way to Buenos Aires and onward to Qatar and Hong Kong for the Hong Kong Sevens (the airport economist will also be in Hong Kong during the Sevens but that timing is of course a coincidence!). So perhaps a rugby analogy is appropriate. The teros may never reach the dizzy heights of the almighty New Zealand All Blacks, but economically being a small successful trading nation like New Zealand punching above its weight in the international business arena is not a bad thing to be. It may no longer be ‘the Switzerland of the southern hemisphere’ as it was in 1870 but now being the New Zealand of South America may suit Uruguay given its committment to openess, excellence, human capital development and occassionally being able to knock larger players off. In short, Uruguay can live up to its reputation for being ´the plucky country´ (´El Pais Corajudo´).

*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

He travelled to Uruguay courtesy of the Australian Department of Foreign Affairs and Trade (DFAT) and the Council of Australian Latin American Relations (COALAR). Thanks are due to Ambassador Patricia Holmes, Lisa Davidson, Magdalena Luppi, Norma Ramiro and Fernando Perez Tain for organising the visit to Montevideo. He would like to thank his hosts – the Uruguyan Australian Chamber of Commerce and Australia´s Honorary Counsul Diego L.Paysse for hosting his visit to Uruguay.

The Department of Youth: Can Colombia rebuild its social capital?

By Tim Harcourt*

Reporting from Bogota, Colombia

The Australian state of South Australia recently went through a brand exercise to help sell the state and its capital city Adelaide to the world in terms of trade, investment, education and tourism. There’s no doubt the Adelaide (disclosure – the airport economist grew up there and advises the Premier) is a civilized pleasant city (in a progressive state that is relatively small in population) as it was recently voted Australia’s most liveable city.

Many states, cities and nations now invest a lot in place ‘brands’ to attract business, students and tourists – even immigrants. As far as liveability goes, Adelaide has plenty going for it, with a pleasant climate, affordable housing, world class education and a lively cultural scene.

But imagine if you were given the same task for the South American country of Colombia instead of South Australia? It would be a tough gig. After all, Colombia is the place where just a decade ago it had the highest homicide rate in the world, where a third of legislators had links to paramilitary groups, where the political system was dysfunctional. Despite the amazing efforts of the past decade, thanks in part to the policy of ‘democratic security’ initiated by then President Alvaro Uribe, many parts of the country outside the main cities do still suffer from guerilla violence in particular given the pressure of the peace talks. Colombian trade unionists have also been particularly targeted according to the International Confederations of Free Trade Unions (ICFTU) as documented by Harvard political scientist James A. Robinson, the co-author of the celebrated book Why Nations Fail, though the government has made serious efforts to reduce these attacks.

Whilst visiting Bogota, the capital of Colombia, I actually met with the man in charge of selling the city and the country to the world, David Mello. He explained that despite its history, that Colombia and Bogota in particular, had plenty of going for it. “We are 5 hours from New York, Mexico City and Sao Paulo, we attract 78 per cent of all foreign direct investment that comes to Colombia in growing new parts of the economy like professional services, engineering, light manufacturing, life sciences, biotechnology and information and capital services.” Mello is also proud of Bogota’s social agenda: “Our program Bogota Humana, celebrates diversity in the city in terms of tolerance of Colombia’s different races, religions and gender preferences. We want to promote human development and reduce anti- discrimination so the city can be regarded as a cultural, tolerant hub of creativity and culture. We are very proud of the fact that Bogota was selected as one of UNESCO’s World Cities of Music.”

Mello is an example of the new generation of young Colombians wanting to project a different image to the world than its troubled past. Every major business leader I met in government and chambers of commerce in Bogota (and in Medellin on a previous visit to Colombia) was under 40, highly educated with international experience. For example, Ana Milena Cortazar Mejia, the International head of ANDI, Colombia’s main chamber of commerce group, was young an accomplished with multiple degrees, had lived in China and Japan and speaks Mandarin. She explains: “Young Colombians have a world view, we look to Asia now as much as we look to Europe or the rest of the Americas and we see Australia as a great reference point to Asia, an important bridge. And importantly, we see Australia as a symbol of good practice in business and economic management.”

Australia as a ‘Symbol of good practice’ is a view shared by many Colombian business leaders and government officials according to Crispin Conroy, Australia’s Consul General in Bogota and leading Australian expert in Latin America. “The emerging Colombian resources sector is facing key challenges in dealing with the environment, community issues, indigenous rights and tensions with agricultural land owners. Australia is a leading proponent of Corporate Social Responsibility, and Colombian companies are looking to the Australian example.”

A visit to the Terranova project a coal mine owned by New Age Exploration, showed what is needed in Colombia. The mine has good quality coal but its antiquated mining practices will soon get an injection of capital to lift its occupational health and safety standards. Austrade-UNSW research shows that on average, Australian businesses that venture abroad in export and outward investment help raise health and safety standards (and average wages, conditions and employment security) in emerging markets in Latin America, Asia and Africa. Colombia and Terranova is no exception. In fact many Colombian mine managers are Australian educated including New Age Exploration’s Carlos Felipe Barrera, who studied at graduate level at the University of New South Wales (UNSW). Barrera believes his education in Australia was “pivotal” to his career in the resources sector. “Australians are highly professional, practical and easy to work with. Studying there made a big difference as I was amongst cultures from all over the world – particularly Asia – and it advanced my professional development when I returned to Colombia. Australia was an excellent bridge to Asia for me personally.”

Barrera is not alone. According to Conroy, “At last count there were 10,000 Colombians students in Australia, second only to Brazil on 16,000 and ahead of Chile, Peru, Argentina, Uruguay and Mexico. They are a vibrant, dynamic, lively group on Australian campuses and having an Australian education is now becoming well regarded in business circles here. They also have a great work ethic and strong service culture. I am regularly contacted by enthusiastic young Colombians looking for internships with Australian companies.”

Colombian students are very active in promoting their country and make good ambassadors abroad particularly given Colombia’s image issues from the past due to drug wars, high crime rates and political unrest. According to Ana Milena Cortazar Mejia, ANDI runs a strong alumni program to promote messages about the country for Colombians abroad to spread throughout their business and education networks. Recently young Colombians ran a social network campaign to ensure that foreigners spelt their country’s name right (that is, Colombia not Columbia as in Columbia University or British Columbia in Canada). That may be a sign that the Colombian brand is turning around through the strength of its young educated, internationally focused population.

So whether you are in Adelaide, South Australia or Bogota, Colombia, your brand matters. It shapes how the world sees you and determines how you will attract investment, trade and people. As a young Colombian business professional Monica Ramirez put it: “Our generation in Colombia is part of a ‘small and silent revolution to turn around our international image and economic fortunes. Colombians used to believe in education so they could get out of the country now we invest in education so we can stay and make a contribution to the country’s future.”

*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

He travelled to Colombia courtesy of the Australian Department of Foreign Affairs and Trade (DFAT) and the Council of Australian Latin American Relations (COALAR). Thanks are due to Crispin Conroy and Monica Rameriz for hosting my visit to Colombia.

The Invisible Hand of God: Returning to Argentina

By Tim Harcourt*

Reporting from Buenos Aires, Argentina

In order to measure the standard of living across international borders, The Economist magazine invented the ’Big Mac Index’ to see what its cost to buy a ‘Big Mac’ hamburger in McDonald restaurants in each country in the local currency. It’s a very rough rule of thumb to make international economic comparisons.

But try getting a Big Mac in Argentina. I noticed here on my recent trip to Buenos Aires that The Big Mac and its price are not on the board on any McDonald’s restaurant you walk into in Argentina (there is a ‘Triple Mac’ listed), although you can ask for it.

Why? Is it because the Argentines don’t want some sneaky economist to record the price and get a handle on Argentina’s inflation rate and its relative cost of living? It could be. But locals explained to me that it is due to random price controls imposed by the Argentine Government. In order to combat inflation, the government randomly selects items – Big Macs, mobile phone and the like – that are bought universally in an era reminiscent of the price controls of the early 1970s in places like Australia and the USA. So Big Macs are priced artificially low, so McDonalds doesn’t want you to buy it and the government wants you to think inflation is under control and consumer items of affordable to the average Argentine.

This is an example of both the randomness of a microeconomic policy in modern Argentina despite growth spurts ‘between crises’ as the locals say. This is also classic example of the lack of transparency in Argentina’s economic institutions that causes economic dislocation.

Another example concerns an Argentine icon – Diego Maradona. When Argentina last won the World Cup in 1986, Argentina defeated England in the quarter finals, thanks to two goals by Maradona. One was the famous ‘hand of god’ where Maradona punched the ball over England Goalkeeper Peter Shilton and into the net. The other – which was the sealer – Maradona took the ball in defence and dribbled majestically past nearly the whole England team before again defeating Shilton and English hopes. Yet when Maradona was interviewed years later he was most proud of the ‘’hand of god’’ as a form of innovation and genius even though it was against the rules. This is an amazing statement given how his raw skill and individual brilliance, allowed him to (fairly) score the other goal which effectively won the match – and later the World Cup.

Perhaps these examples – the BA Big Mac and Maradona’s choices are symbolic of some of the problems facing Argentina currently. Argentina has brilliance and flare, a beautiful country, great resource endowments and a great stock of human capital (bolstered by immigration). Yet by the policy choices it makes and the institutions it forms, at crucial times it severely underperforms as an economy. After all, a country’s institutions – political and economic – make a real difference to their progress according to the seminal work by Daron Acemoglu and James A. Robinson, Why Nations Fail. According to the authors, political rights and property rights make a big difference so all players know the rules of the game. Institutions rely on transparency and trust, in economics, in politics in sport as in life.

As noted in various economic studies, institutions are thought to be the big difference between the economic development of Argentina and Australia. Economic historian Ian McLean has famously looked at the difference for example in landownership in 19^th century agriculture in Australia and Argentina. Whilst Australia broke up the “squatters” grip on agricultural land to democratize land ownership, in Argentina (as in most of Latin America and Africa), a group of elites managed to control land for a longer period. As a result the urban working class, consisting of many Italian and Spanish immigrants who flocked to Argentina at the turn of century (1 in 4 people in Buenos Aires in 1870-1900 was born overseas) were landless and turned to Peronist protection and economic intervention. And despite bouts of liberalization for a short time, this interventionist impulse remains with Argentine policy institutions. By contrast, Australia re-made its economic policy agenda over the last 30 years, slowly but surely opening up its economy, whilst maintaining strong social protection (not trade protections) through a Prices and Incomes Accord with the trade unions, and the provision of the ‘social wages’ through universal health care, education, labour market programmes and pensions (superannuation), with appropriate targeting and means tests.

But despite the divergence with Australia and the recent woes Argentina still has great potential. It still has a major resource endowment in terms of agriculture and untapped mineral resources. In fact, institutional reform could make a big difference to Argentina’s mining industry. At the moment, half of the Argentine provinces still ban mining, and when I was in Argentina, the Brazilian mining giant Vale pulled out of the province of Mendoza because of regulatory uncertainty.

 A concern in Argentina is the impact of mining on agricultural land, the environment and indigenous rights. Corporate Social Responsibility (CSR) is very important to the Argentine community and there is potential for Australian mining companies who are world leaders in CSR, to help develop this in Argentina as they have in the rest of Latin America, particularly in the Andeans states of Chile, Peru and Colombia.

Another bonus to Argentina is that economically speaking it now has good neighbours mostly in Latin America.  Compared to the 1980s and 1990s, Brazil’s economy has vastly improved, Chile is the ‘Jaguar of South America’ (the equivalent of an Asian Tiger), Uruguay has strengths in agriculture and times are vastly improving in Peru and Colombia. During the global financial crisis of 2008, Latin America was neither a cause nor a drag on global growth. Argentina has for once, found itself in a sweet spot in the world economy, and can forger stronger ties regionally.

Finally, there’s human capital. Argentina has large reserves of human capital and individual Argentines still excel in international management, science, research, sport and culture on an international scale despite the problems at home. There’s still an opportunity to tap into the talent banks abroad and encourage Argentines to bring their learning back home to help reshape institutions. Whilst there are not as many Argentines studying in Australia as there are Brazilians and Colombians, on average they are high achievers and integrate well on campus and into Australian society overall.

But there is still a big need for economic reform. Economic reform in Argentina was a bit like Nirvana – it was big in the 1990s – but there’s hasn’t been not a lot since. The efforts of Dominic Cavallo, for example, were a bit too short sharp shock and hence caused reform fatigue and another crisis. By contrast, the Australian gradual model of the Hawke-Keating era, opted for a medium term strategy opening up the economy to Asia and the rest of the world whilst maintain strong social institutions to absorb any economic dislocation.

But there is a good piece of news. The authors of Why Nations Fail, see Democratic rights as important as property rights and in 2013, Argentina celebrates 30 years of the restoration of democracy. For Argentina to succeed, it needs to restore its economic institutions to build trust and transparency, just as it has done in terms of democracy.

Australia has shown in its last 30 years of economic reform, you can couple price signals and market mechanisms with strong social institutions providing healthcare, education and other safety nets to support social justice. By combining price signals and market mechanisms with social protection (not trade protection) Argentina can potentially rebuild its institutions and make important steps on the road to long term recovery.

And a good way to start is to build price signals back into the Argentine economy, starting with the Big Macs at McDonalds and perhaps Maradona could boast about his truly brilliant goal rather than when he showed economists how the invisible hand really worked in practice rather than in theory.

*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

He travelled to Argentina courtesy of the Australian Department of Foreign Affairs and Trade (DFAT) and the Council of Australian Latin American Relations (COALAR). Thanks are due to Ambassador Patricia Holmes, Lisa Davidson, Magdalena Luppi, Norma Ramiro and Fernando Perez Tain for hosting in Buenos Aires.

By Tim Harcourt*

Reporting from Mexico City and Monterrey, Mexico

One thing I didn’t expect to hear on my visit to Mexico is a lot about Brazil. Mexico
sees Brazil, as the other large economy in Latin America as a bit of a rival fighting for its place in the sun.

This has intensified in Mexico as the world’s attention turns to Brazil in the lead up to the FIFA World Cup in 2014 and the Rio Olympics in 2016. It’s hard enough at the best of times, trying to get anybody looking at Mexico City, but even harder currently, when the whole
world, or so it seems, wants to go to Rio.

And it’s not just about the World Cup and the Olympics. Mexico also sees Brazil as a rival economic model in Latin America. Whilst Mexico had been committed to an open economy, they argue, even in the face its own ‘Tequila crisis’ of 1994-95 and the global financial crisis of 2008, Brazil they say, has resorted to protectionism, particularly against Mexican industrial goods (in the automotive sector in particular). There is a view in Mexico that in Latin America, Mexico, Chile, Colombia and Peru are the good guys committing to openness to trade and
foreign investment (Mexico has the most number of free trade agreements signed in the region, followed by Chile) whilst Brazil leads the bad guys of protectionism with Argentina the baddest guy in town in terms of anti-trade policies. Although, it must be said there is admiration in Mexico for the success that Brazilian President Lula and his successor Dilma had in fighting poverty in Brazil (based on measures they say that Brazil copied from Mexico – of course!)

But regardless of the merit of these endless comparisons with Brazil, Mexico in its own right does have a good story to tell
in recent years.

First, there’s Mexico’s macroeconomic story. Over the past decade, with the exception of the Lehman Brothers crisis affected year
of 2008, growth has been positive territory, with the just over the 3.9 per cent rate of 2012 expected this year. Inflation has been halved over the decade, and the fiscal situation is respectable (fiscal deficit is 2 per cent of GDP and Net Public Sector Debt 34 per cent of GDP – half of Brazil’s and one third the size of the USA’s).the structural reforms of new Mexican President Pena-Nieto in tax, social security, education, pensions and competition policy are expected to achieve a sustainable growth rate of 5 per cent per annum (compared to 2 per cent p.a. over the past decade).

Second, there’s the Mexican globalization story. Mexico is an open economy with trade accounting for 60 per cent of GDP. It can reach
two thirds of the global economy with its plethora of free trade agreements (FTAs) and as both a Pacific and an Atlantic country has strong connections by sea and by air. Mexico is an enthusiastic supporter of the Trans Pacific Partnership (TPP) and the Pacific Alliance within Latin America. The TPP countries represent a market of 658 million people and a combined GDP of US$20.7 trillion, so it has not surprisingly attracted interest from Mexico.

You can see the globalization of the Mexican economy even with a day trip to Monterrey. According to Rolando Zubiran, Deputy Minister
for Foreign Investment for the state, 80 per cent of US-Mexican economic activity passes through Monterrey, with its 2 railroad lines, large automotive sector, healthcare sector and 127 industrial parks. “Our aspiration is to be the ‘Bangalore of Mexico’” he explains. There are strong links between Monterrey and the Asia-Pacific too, including with Australia. Automotive components maker Metalsa is based in Monterey and has plants in Cheltenham and Clayton in South East Melbourne and another auto components maker Katcon manufactures in Keysborough,
Victoria. Food manufacturer Gruma-Maseca is another local company who launched the line ‘Mission flatbreads of the world’ in Australia and is a key sponsor of Prime Minister Julia Gillard’s favourite AFL team, the Western Bulldogs.

Third, there’s Mexico’s ‘demographic dividend’. Mexico’s average age is 26 so it has an enormous supply of human capital hungry for
skills and education. Seeing Rolando Zubiran the young dynamic state official in Monterrey strut his stuff with his young team shows how enthusiastic this generation is for Mexico to succeed. The main question is whether Mexico can keep them and if there will be a reverse of the brain drain that has occurred to the United States in the past.

That’s the good news, I hear you say, now tell me the bad news.

The main risks to Mexican economy are institutional. As the influential book Why Nations Fail, by Daron Acemoglu and James Robinson at MIT and Harvard University respectively, Mexican political institutions have been historically weak, and that has had long run negative economic effects on Mexican entrepreneurialism, competition policy, property rights and democracy.

The first institutional issue is corruption and the related need for structural reform. The new President of Mexico, Enrique Pena-Nieto in his
first six months of office is conscious of the need for economic and political reform in Mexico. The President has just arrested Elba Esther Gordillo, the president of the Mexican Teachers Union for corruption.  Gordillo, whom some Mexicans regard as a particularly odious character flaunted great wealth including mansions in San Diego, California, and private jets all allegedly on member’s money. This was quite a shock to an Australian observer for whatever your views on education policy, the teacher unions in Australia are clean as a whistle known for their frugality and carefulness with members’ money. To make matters worse, Mexican teacher salaries are lagging behind the rest of the labour force and are low by international standards.

For this reason, education reform is at the top of the new administration’s agenda along with the related issue of labour reform and
pensions. Gabriel Casillas, Chief Economist of Casa de Bolsa-Banorte, a particularly thoughtful commentator and analyst, believes that pension and payroll tax reform could make a significant impact on Mexican economy by encouraging more workers from the informal sector to join the formal sector of the labour market with enormous implications for productivity, which would boost bank assets and provide a fiscal dividend to the budget with increased direct income taxes.

The second related issue is, of course, security. In key towns and regions in Mexico, security issues have re-emerged in Mexico with drug related gang violence. This is frightening foreign investors and of course, many Mexican citizens themselves.  In Monterrey, Rolando Zubiran, who enthusiastically explains the region’s economic success, partially thinks that changes in social media and technology amplify the impact
of isolated violent incidents. But he agrees that there is a problem in terms of both perception and reality. As a result, Mexican will continue to spend a large part of its economic growth dividend on security and public safety.

The third issue is competitiveness and the influence of China. After China joined the WTO, many of the gains Mexico made
with the NAFTA agreement with the USA and Canada, were eroded, particularly in manufacturing. Now as China’s labour market tightens as its demographics work against it (“getting old before you get rich”) it’s expected that Mexican wage rates will be surpassed by China’s
(aside from productivity issues that are notoriously difficult to measure and compare).

And the issue about China brings us back to that old Brazil-Mexico rivalry again. There is a famous story
that was told to me by Dr Alfonso Guerra, a distinguished international official from The Bank of Mexico, Mexico’s
central bank. When told by a Brazilian official that “Mexicans are not Latin American, they are North American. They all speak English as 80 per cent of their exports go to the United States,” the Mexican official apparently replied: “Well then you Brazilians should speak Chinese if you look at your current account.”

Well the Mexicans do have some reason to be wary of Brazil’s increasing global profile when they hold the World Cup in 2014 and Olympics in Rio in 2016. After all who was the last nation in Latin America to host both the World Cup and Olympics within three years? It was Mexico in 1968 and 1970. That was Mexico’s moment, and with Brazil getting the sporting action in 2014-2016, Mexico hopes it will be its economic attributes that will attract the world’s attention in years to come.

*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

He travelled to Mexico courtesy of the Australian Department of Foreign Affairs and Trade (DFAT) and
the Council of Australian Latin American Relations (COALAR). Thanks are due to Ambassador Tim George, Rachel Moseley, and Radek Divis for hosting in Mexico City and Monterey.

Business Cycles – the economics of Lance Armstrong

By Tim Harcourt*

So who’s the dope now? Lance Armstrong, the man who once was a seven time winner of the Tour de France, spoke to US talk show supremo, Oprah in a no holds barred tell all confessional.

So why did he do it? Surely the risk of being caught doping was too much. What was he thinking? What were the incentives for Lance Armstrong to take this extraordinary path of drug ridden corruption in an major international high profile sport?

Our good friends Steven Levitt and Stephen Dubner have already given us a few clues and a good framework in their famous bestseller Freakonomics. In one of my favourite chapters, ‘What do School teachers and Sumo Wrestlers Have in Common?’ they outline the economic incentives to cheat in the classroom and the Sumo ring.  As the Freakonomics authors say everyone responds to moral incentives and social incentives because as WC Fields says – a thing worth having is worth cheating for. If morality is how we would like the world to work and economics represents how it actually works, then it’s no surprise that sumo wrestlers, school teachers and Lance Armstrong and his cyclist mates act like this. It was a classic case of ‘prisoner’s dilemma’, as you had to take drugs to compete in the Tour de France, and if you didn’t you wouldn’t qualify. Once the ring was set up, no one could confess on their own without consequences. And Armstrong as the leader of the pack, made sure everyone was juiced up and was not going to confess to the anti-doping authorities. But like sumo wrestlers, school teachers and Enron executives, the great Lance did eventually get caught and as they say in Freakonomics if you wondered whether business executives cheat because they think they have a sense of entitlement, then ask how they became business executives in the first place!

So that’s the microeconomics of Lance – what about the macro big picture?

First,  there are clearly implications for the sport of cycling. The official cycling body clearly got caught with their lycra down on this one and will need to clean up the sport or lose sponsors and community sport.

Second, there are implications for Livestrong – Lance Armstrong’s charity for his fellow cancer sufferers and survivors. There is a whole infrastructure built up around the foundation and surely any damage on to the Lance Armstrong brand must have had collateral damage for foundation as well?

Third, there may be economic implications for special events like the Santos Tour Down Under back home here in Australia. According to latest estimates, from McGregor Tan, Tour Down Under in 2012, generated $42.2 million in economic impact, with 760,000 visitors, compared to $43.3 million in 2011 (with 782,4000 visitors) and $41.5 million (770,500) in 2010. This compares well with the economic impact half a decade ago in 2008 of only $17.3 million (with 548,000 visitors). The Tour Down Under has been building strongly and sustainably over a number of years now and will continue to do so as it further establishes itself as a major international sporting event. And despite the obvious effect of drawcards, Test Cricket survived without Bradman, Golf without Tiger woods, AFL without Carey and Santos Tour Down Under will be sustainable even without Lance Armstrong.

And fortunately, rather than relying on one event, South Australia has hedged its bets. As well as the Santos Tour Down Under, and the future benefits of the Adelaide Oval development (especially the return of AFL to the famous ground), Adelaide’s position as the Creative Capital of Australia is illustrated by its cultural iconic events, the Adelaide Festival, Fringe and WOMAD. Together, with the Clipsal 500,  according to the McCrann report, they are estimated to have contributed around $81.1m economic impact to the state and attracted 46,481 interstate and international visitors in addition to the 796,700 local South Australians.

So, doping or no Doping, Lance or Lance-less, the show must go on! And it will go  on with cleaner and greener cycling at the Santos Tour Down Under in South Australia in 2013.

*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

He is also the inaugural Adviser – Global Engagement to the Premier of South Australia, Hon Jay Weatherill, MP. 

The Dollar dazzles but Aussie battlers still build new export markets
 
By Tim Harcourt*

Tully, in North Queensland, is a great place for a holiday, especially if you like it wet. But it seems that if the price is right, and they can afford it, don’t most Australians prefer to holiday in Thailand or even Tuscany, rather than Tully?
 
The fact that once exclusive European holidays are now within the reach of more Australians is one of the many upsides of our strong dollar. With the dollar at or over parity for most of the past year, everything from overseas holidays to imported cars and appliances are cheaper.
 
This is not going un-noticed by the average Australian. A record number of Australians are holidaying overseas and the planes on the routes to Los Angeles are packed to the gunwales. If Qantas still had the monopoly there their international division wouldn’t be having such problems.
 
The same thing is happening in the retail sector as Australians are going on line in record numbers to shop (for imports) in the US from their (imported) i-pads. This is a natural reaction to a once in a generation change in relative prices. And surely anyone who complains about the democratisation of access to imported products is being positively un-Australian, surely?
 
There is, of course, a noisy anti high dollar lobby out there. Manufacturers, tourism operators and the retail sector keep telling us that every cent the Aussie moves upwards is another nail in their coffin. They paint a picture of an Australia denuded of all industry but for mining, and invoke an apocalyptic scenario of what will happen when we are all mined out. And even miners are now complaining of Australia being a ‘high cost’ market. Even market economists have chimed in rebasing their interest rate forecasts because of the (alleged) massive destruction the Godzilla dollar is doing to the Australian economy.
 
The vision is a bleak one but it is also misleading. We can feel their pain, but the reality is that the majority of our exporters don’t let fluctuations in the exchanges rates ruin their business plans. In fact a new DHL survey shows that only 20 per cent believe the exchange rate is a factor in their decision to invest in or expand their overseas operations. And around a quarter of large enterprises and SME’s have some form of currency hedging in place. Exporting is a tough business but the winners are the ones who play the long game, and hang in there in markets where they ultimately gain respect and build relationships.
 
The other thing about exporters is that two-thirds of them have now become importers. Often they are importing capital goods which they are using to develop and build their capacity and their business. We are talking trucks, aeroplanes, manufacturing equipment, and power generation turbines.
 
As a young economy still in the process of capital formation this importing of capital is necessary and positive, and indicative of a strong economy. It is in the interests of the long term strength of our economy, and it is being helped along by the strong dollar.
All this is part of living in the global economy with a floating exchange rate with an economy going through – largely positive – structural re-adjustment.
 
A look across the southern hemisphere to the example of Argentina is a cautionary tale on what can happen if we get so hung up on the exchange rate that we seek to take it out of the control of market forces.
 
Tying the value of the Argentinean peso to the US dollar saw the two currencies become interchangeable, with ATM’s dispensing either currency. But when the local economy went sour and everyone wanted to change their pesos for dollars, the financial system had a seizure. Meanwhile, the success of neighbouring Brazil – with its floating currency – has been well documented.
 
Some of us might not love our high dollar, but we must learn to live with it and recognize the way it is reflecting a change in our economy. As Reserve Bank deputy governor Philip Lowe pointed out earlier this year, Australia’s exports of “traditional” manufactured items such as cars and building goods has been in decline in recent years, while sales of professional services, scientific and specialised machinery sales have been rising. The Asian Century white paper illustrated this point showing the employment growth in areas like health care and social assistance, professional, scientific and technical education as well as construction and mining.
 
And as Australia has undergone structural reform nearly three decades after the float of the dollar, our labour market remains the envy of the OECD. High dollar, open economy but low unemployment. It’s a pretty powerful combination even if Australians are exporting to Asia, buying imports online from America and taking their holidays in Tuscany and Thailand rather than Tully.
 
 *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

Hello to the age of Asia

An Interview with Frances Adamson, Australia’s Ambassador to China.

TIM HARCOURT:       Was growing up in South Australian important to you in terms of opportunity?

FRANCES ADAMSON: Growing up in South Australia in the 1960s and 1970s, I certainly had a belief that anything was possible, and that a good education and hard work could lead one in potentially all sorts of directions.  Although I grew up with a keen interest in South Australia and Australia I was always aware of the region and indeed the world beyond, and no doubt was influenced by South Australia’s multicultural heritage.

TH: How important was the study of economics at Adelaide University to you in your later career as a diplomat?

FA: I graduated from the University of Adelaide with a degree in economics in 1985, and it was that degree which opened up opportunities for me in Canberra.  I had a choice of graduate entry to either Treasury or the Department of Foreign Affairs, but chose Foreign Affairs. 

It was certainly my economics background which lead to my first posting to the Australian Consulate General in Hong Kong in 1987.  There I was responsible for economic matters, including analysis of Hong Kong’s role, then mainly as an entrepot, in China’s opening to the outside world which had commenced in the late 1970s. 

Although I am not a professional economist, I’ve always felt my economics background has given me a good grounding in and understanding of the workings of individual economies and global economic developments.  After more than 30 years of economic reform, China’s economy is now a major driver of global growth.  The complementarity of the Chinese and Australian economies is strong and all Australian states benefit from this, whether through trade in goods and services, investment flows, visits by tourists and students or the exchange of ideas.

TH: Your mother was a very prominent Cabinet Minister in South Australia, did she influence your interest in public service and representation?

FA: My mother, father and extended family have had an interest in serving our wider community and have done so in a variety of ways.  My sister, Christine, is a Supreme Court Judge in New South Wales, and my brother, Stuart, an ordained pastoral care worker. I was certainly attracted to diplomacy as an opportunity to serve Australia overseas.

TH: The White Paper on the Asian Century talks about the importance of language. How important is it speak Mandarin? In diplomacy and in business? Should Australians speak Asian languages or be ‘Asian business’ literate’?

FA: The White Paper emphasises the importance of learning Asian languages and also the broader idea of Australians becoming more Asia-literate – more knowledgeable about Asia and its many countries and cultures, and more comfortable with working with the people of Asia to strengthen and deepen our relationships.  During my visit to South Australia I will be visiting Highgate Primary School and Adelaide University’s Confucius Institute to speak to students studying Chinese there.  Learning a foreign language is not easy, but communicating with people in their own language is very rewarding, and I highly recommend it.

TH: How does South Australia fare in China? Is South Australia on the radar? How important is a state brand overseas?

FA: China is South Australia’s largest export market and an important source of tourism and students.  South Australia’s two-way merchandise trade with China in the first half of this year was worth a little over A$3.5 billion, with South Australian exports to China accounting for A$2.2 billion of this.  South Australia’s largest exports were minerals, including iron ore and copper, and while South Australia may not share the high profile of the largest mineral producing states, it is well-regarded as a reliable source of the minerals that are helping to fuel China’s economic growth.

South Australia is also well-known for its high quality agricultural products.  South Australian exports of wine to China in the first half of the year were worth $111 million, and iconic brands like Penfolds already have a strong market presence in China.  Added to this were $66 million in wheat exports, $64 million in wool exports and significant exports of barley.  All of this combines to give South Australia a reputation for excellence and quality as a food, wine and agricultural producer.

South Australia is working hard in China to build its reputation as a diverse and pristine destination for tourists, and as a centre for educational excellence.  Indeed, these are both key aspects of the South Australian Government’s China Strategy.  In 2011, there were over 28,000 Chinese tourists who visited South Australia, and more than 15,000 Chinese students enrolled in South Australian institutions.  This is a strong base for further growth.

South Australia is well known and well regarded in Shandong Province on China’s East Coast, where it enjoys a long-standing sister State relationship.  When I meet Chinese who have visited South Australia, their faces light up with enthusiasm when discussing the State’s many attributes.  But China is a country of 1.3 billion people and there are many Chinese who, while they have heard of Australia, are not aware of the identities of our individual States.  On State branding there is certainly a role for State promotion, but in a country like China there are benefits to the States and the Federal Government working together to promote our interests in China.  This is very much the approach of the Embassy.  We helped support the visit to China in July by Premier Weatherill and by other State Ministers and delegations, including regular visits from South Australian universities.  The Embassy also meets with businesspeople from South Australia to provide advice on business conditions in China and Austrade stands ready to assist with specialist services.

TH: Should South Australia worry about the ‘brain drain’ to London and Asia etc…or see the “Generation Expat” network as an advantage?

FA: In this era of globalisation, South Australia is very well served by South Australians at home and abroad, whether they be temporarily overseas or more permanently based there as expatriates.  During my postings in London, Hong Kong and Beijing, I have always found South Australians to be loyal and enthusiastic in their support of the State and willing to share their knowledge with fellow South Australians who may be venturing overseas for the first time.

TH: The Asian Century report talks about a new wave of commercial ties in education, professional services and other sectors. What are Australia’s and SA’s prospects?

FA: The White Paper gives considerable weight to promoting stronger ties in the region through education and other services sectors. It notes that an increasingly wealthy and mobile middle class is emerging in the region, creating new opportunities in a diverse range of goods and services, from health and aged care to education.  Demand for high-quality services, like education, outstrips supply in many areas of China. In recognition of this increased opportunity for greater trade in services, the Minister for Trade and Competitiveness, Dr Craig Emerson, co-chaired an inaugural Ministerial dialogue with his Chinese counterpart in Beijing earlier this year. The dialogue brought together representatives from both countries’ services sectors, including professional and financial services, to look at practical ways to promote greater services trade. 

Australia has a well-established reputation in the international education market, and has built deep and broad relationships within the region.  Education is already Australia’s fourth-largest export earner, and our biggest services export. One of the 25 national objectives in the White Paper was for every Australian student to have significant exposure to studies of Asia across the curriculum. In addition, all Australian schools would engage with at least one school in Asia to support the teaching of a priority Asian language, which includes Mandarin. In this context, I see tremendous potential for continuing to engage with China.

The White Paper will help shape South Australia’s push to further promote already strong education links with China. Last year there were over 13 000 Chinese students enrolled in SA universities, schools, vocational institutions and English-language colleges – accounting for 40 per cent of all international students enrolled in South Australia. South Australia is also home to a Confucius Institute, at Adelaide University, which will promote the learning of Chinese language and culture within South Australia. Tourism is another key sector that South Australia is working hard to promote in China – last year South Australia welcomed 28 000  visitors from China. With some of Australia’s most attractive destinations, I think South Australia will increasingly attract the rapidly growing number of Chinese tourists to Australia, including an increasing number of independent travellers

*Frances Adamson is  Australia’s Ambassador to China, Tim Harcourt is the JW Nevile Fellow in Economics at the Australian School of Business, UNSW and the inaugural Adviser- International Engagement to the Hon. Jay Weatherill, Premier of South Australia.

This interview is courtesy of The Advertiser.

When you are punting on this year’s Melbourne Cup, have a bit of sympathy for Australian export businesses who have to make their big bets on international markets in the Asian region. Like a good punter Australian exporters have to look at the horse, the jockey, the state of the track, and of course, the odds. And it is not just a flutter for them but a major business decision that will affect their livelihood as well as the well being of those whom are dependent on their business as well.

To help the average race goer understand the nuances of exporting, the following export ‘form guide’ has been produced. 

Horse number one is Great Samurai, representing the Japanese market. It’s a long standing champion, has been written off by some, but still very capable and strong and has helped others develop in the East Asian stable yards through outward investment.

Secondly, there’s New Dynasty, representing China. This dynamic new colt has surprised seasoned punters with his ability to maintain a fast pace, year after year.

Thirdly, Passionate Tradition, representing Korea. This little known but powerful galloper with an industrious approach has revealed new appeal to punters in recent years.

Fourthly, there’s Fragrant Harbour, representing Hong Kong. Known for slipstreaming the colt from China but also an attractive performer in her own right.

Fifthly, there’s Little Dragon, representing Taiwan. She is occasionally overshadowed by her new high profile cousin, New Dynasty, but she’s a tidy performer who has rewarded loyal supporters well over many seasons.

Next is The ASEAN Emissary, representing Vietnam. This is the dark horse of the East Asian field that has put together a string of good seasons in recent years and seems set for even better days ahead.

Next is Taj Mahal, representing India. An up and comer who is twinned sometime unfairly with New Dynasty, but is coming into his own thanks to ongoing reform of stable practices.

Finally there’s Archipelago, representing Indonesia. Had question marks a while ago but had now start challenging the field and becomes am up and coming favourite amongst Aussie punters.

Racegoers should also consider a few newcomers amongst the emerging markets including Arabian Nights from Abu Dhabi in the United Arab Emirates, Samba Fever from Brazil and even a roughy like Genghis Khan from Mongolia, Burmese Days from Myanmar or Boratnomics from Kazakhstan might be good for a place.

So there you have it, your own export form guide for Asia. Fortunately, back in the real world, exporting is clearly not all about luck as much as skill and strategy. It requires good research, innovation, flexibility and good knowledge of your prospective market. And most importantly, the evidence shows that it does pay off. According to economic research, exporters are, on average, faster growing, more profitable and more productive than non-exporters. Exporters also pay better wages; provide better employment conditions and higher quality jobs than non-exporters. In short, exporting is a good bet for both large and small players in the international trade game but you’ve got to be a stayer in the Asian Century.

*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

The Power of Proximity – Australia’s next wave of global engagement in the Asian Century

Tim Harcourt*

Nearly half a century ago, Geoffrey Blainey’s The Tyranny of Distance argued that Australia’s geographic position shaped our psychological attitudes. The long distance between Australia and our colonial forebears in Europe, and also the United States, made us unsure of our future economic prosperity. At about the time Blainey was writing, Donald Horne’s The Lucky Country described a resource-rich Australia that lacked intellectual confidence and the capacity to make the most of its natural endowments. Horne said too that a reluctance to engage with Asia would harm Australia politically, socially and eventually economically. Noting this reluctance, Singapore’s long-standing Prime Minister Lee Kuan Yew famously warned that Australia risked becoming the ‘poor white trash of Asia’ and advised that vast natural mineral wealth was neither necessary nor sufficient for long-term prosperity.

In these years, however, Japan had already succeeded the United Kingdom as Australia’s major trading partner: the Australian economy had begun its long journey toward greater engagement with the Asia-Pacific. This essay examines Australia’s post-World War Two economic relationship with Asia in terms of four ‘waves’ – concluding that the rise of trade in services will define the most recent wave. This is a story of how, through incremental steps marked by some crucial breakthroughs, Australia has replaced the tyranny of distance with the power of proximity.

The first wave – Black Jack’s beachhead: 1957-1972

In 1957, just twelve years after the end of World War II, Australian Trade Minister John McEwen signed a commercial agreement with Japan. This agreement gave Australia a ‘beachhead’ in Asia, and launched the Australian tradition of bipartisan support for increased trade engagement with the region. There followed a flurry of trade and, later, investment between Japan and Australia. By 1966 Japan had surpassed the UK in our trading partner ranks  – and Japan was transforming itself from a nation devastated by war into a huge and affluent economy.

The second wave – Sino-the-times: 1972-82

As Japan re-entered the world economy, followed closely by South Korea and the other ‘Asian Tigers’, China remained closed to the world with little economic engagement outside its borders. Australian relations with China, however, warmed dramatically after Gough Whitlam visited Beijing (then Peking) as Leader of the Opposition in 1971 and formally established diplomatic relations when elected Prime Minister in 1972. Whether because of this early recognition, or of our support for China’s entry into the World Trade Organisation, China regards Australia as a key economic partner – and China has now overtaken Japan as Australia’s number one trading partner.

The third wave – Breaking down the tariff wall: 1983-2008

Lee Kuan Yew’s admonitions came back to haunt Australia in the recession of 1982-3 when, despite a resources boom, the economy was stagnating beneath double digit unemployment and inflation. In response, government reforms opened up the Australian economy and oriented it even more toward Asia – and did so while maintaining social harmony through a Prices and Incomes Accord with the Australian Council of Trade Unions (ACTU). The exchange rate was floated, financial markets were reformed, and universal health care and superannuation were introduced alongside education reforms aimed at boosting skills and productivity. Many of these reforms – particularly in finance and superannuation – underpinned the strength of Australian financial services exports in the region.

As for trade, the tariff wall that had kept Australia isolated and uncompetitive for a century was taken down brick by brick. Australia supported trade liberalisation through the GATT/WTO and the creation of APEC, and via other Asia-focused regional economic institutions. The first free trade agreements (FTAs) were mainly Asian in orientation and, in the case of Singapore and Thailand, bolstered Australian professional services opportunities in architecture, accounting, legal and other business and professional services areas.

The fourth wave – Global engagement in the Asian Century

Now Australia is entering its fourth wave of engagement with Asia.

In terms of trading partners, just as China superseded Japan – which had previously taken over from the UK – so further realignment of the global economic order will again alter Australia’s trading patterns. The emergence of several ASEAN states, in addition to the new Asian giants – China and India – will take us through this new phase of engagement.

As to the nature of our relations with Asian partners, this wave will look very different. First, we are now well situated within established Asia and are able to expand into emerging Asia. We have formed beachheads in ASEAN, China and India as well as Japan, and now some of the frontier markets – including Laos, Cambodia and Myanmar in the Mekong Delta and Mongolia and Kazakhstan in Central Asia – are opening up.

Secondly, whilst our larger corporates have already formed strong relationships in Asia, the nature of global supply chains and open regionalism means that Australian small and medium-sized enterprises (SMEs) will become increasingly enmeshed. These SMEs are already joining global supply chains, engaging in strategic alliances and joint ventures, and setting up franchises across the region. New research from Sensis shows that of those Australian SMEs that export, 27 per cent now export to ASEAN and Asia provides seven out of ten of our top SME export destinations.

Thirdly, whilst the first three waves of our engagement with Asia have been focused on ‘rocks and crops’ (mining and agriculture), steel and iron ore, and pumping LNG offshore to the region, services will now play a more important role, despite facing some significant competitive challenges. ‘Rocks and crops’ will continue to provide the lion’s share of our export revenue to Asia – but our ‘points of engagement’ with Asia will expand as services trade promotes broader and deeper people-to-people relationships.

Services complement the role that ‘rocks and crops’ and advanced manufactures play in our trade; they are not a substitute for (or alternative to) them. Goods exports build a platform that enables services trade to grow throughout the region and bring with it opportunities for investment, niches for SMEs, and richer global and regional integration.

There are numerous significant external factors that will affect the fourth wave of Australia’s engagement with Asia. For example, demographics will matter a great deal, in the region and at home. As younger Australians engage with Asia through education and exchange, technological advance and social media, the nature of their relationship with Asia will be different from that of previous generations. Demographic change in Asia will mean more opportunities for Australian services providers in the traditional areas of education and tourism but also in areas focused on wellbeing.

China’s one-child policy is generating lucrative opportunities for early childhood educational businesses, with small families and high disposable income. Not surprisingly, Australian childcare centres are doing great business – and Asian-language versions of ‘The Wiggles’ are hugely popular. In India, youth culture and a growing middle class is generating opportunities for retail franchises in massive shopping malls. Demographic change in Asia will also affect savings levels and opportunities for Australia’s growing financial services sector; the ageing populations of Japan, China and South Korea will increase the size of the savings pool to be managed and the young populations of India, Vietnam and Indonesia will require student loan facilities.

Of course, there will be challenges as we pursue the fourth wave of Asian engagement, particularly given the ongoing risk and potential for external shocks within the global economy after the GFC. Climate change poses a serious threat, though it also represents an opportunity for Australian environmental services exporters. Those engaged in sectors like green building and environmental transport and infrastructure are well-equipped to assist China, India and Indonesia in reducing carbon emissions – and doing so as they grow their economies and pull their disadvantaged out of poverty.

Australia’s economic relationship with Asia has taken many twists and turns, as we have grappled with the tyranny of distance and the changing economic landscape of the region. From our post-War engagement with Japan and recognition of China in 1972 – and then the transformation of our own domestic structure in the 80s and 90s to become one of the world’s most open and successful economies – Australia now embarks with cautious optimism on a new phase. As this report shows, there are some positive early signs from this fourth wave of Australia’s engagement with the region – signs that we are really starting to benefit from the power of proximity in the Asian Century.

*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

*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 

 This article first appeared as an essay in the 2012 PwC Melbourne Institute Asialink Index: ANZ Services Report. Access the free report at www.asialink.unimelb.edu.au.’