T O O LITTLE, TOO LATE: AUSTRALIA'S FUTURE IN THE PACIFIC ECONOMY':'

HELEN HUGHES

Australian National University

I. INTRODUCTION

To a Martian economist engaged on an introductory survey of the Pacific region, Australia's location at the southern periphery of East Asia, balancing Japan, might suggest that Australia would have intensive economic relations with the region, not only supplying it with agricultural and mineral raw materials but also with capital and technology intensive manufactured goods and services. Australia would also be a supplier of capital and technology to East Asia. In return, Australia would import most of its consumer goods and a substantial share of standard industrial inputs from East Asia. The share of exports in G D P would be 50 to 60 per cent, reflecting a vigorous trade environment and enabling Australian enterprises to specialize, and to take advantage of economies of scale. Australian efficiency and productivity would be a byword in the region. Considerable flows of people would accompany the exchange of goods and services, capital and technology. While English remained the principal language of commerce, our Martian economist would expect economic interaction with Asian countries to be reflected in Australians' mastery of Asian languages. Linked commercially to the fastest growing countries in the world, Australia would have one of the world's highest per capita incomes. It would not be growing as rapidly as the East Asian countries because it had a high per capita income level, but its wealth would enable its citizens to live expansive lives of great comfort and interest as well as eliminating all traces of poverty in their midst. Our Martian economist would have a great deal of work to d o to adjust her hypotheses to reality.

The Australian economy has, of course, developed on different lines. Standards of living are high, particularly if leisure is counted as part of income and if climatic advantages and access to the countryside are taken into account. But in material standard of living terms Australia is no longer leading the world. From being the wealthiest country at the turn of the last century, and third highest a t the end of World War 11, it is now fifteenth or so. The economic policies which sought to distribute agricultural and mineral rents among the bulk of the population from the 1850s succeeded in their objectives a t the cost of economic efficiency. Despite the reforms of the last five years, signs of economic weakness still abound. It is not possible to overcome the legacy of one hundred years of protection and regulation in five years. Australia's export to G D P rate is not 50 but 15 per cent. Many manufacturing and service sectors are still highly protected by tariffs, non-tariff barriers, Commonwealth and State regulations, and through the industrial relations system. Instead of balancing capital imports by capital exports, Australia has a high and growing external

':'Revised version of Founda t ion Lecture given at t h e University of Adelaide o n 5 August, 1988

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debt. Capital utilization is extremely low. Capital lies idle for longer periods than it is being utilized. Incremental capital output ratios are accordingly very high, and the productivity of savings and investment is low. Poverty has emerged as a major social problem in several areas. Australians think of themselves as notably egalitarian, but the distribution of income before tax has the same characteristics in Australia as in Hong Kong: the lowest 20 per cent of the population earns 5 per cent of national income and the highest 20 per cent earn 47 per cent (World Developmerit Report, 1987).

Depressing though these observations are, they are not new. If Martian economic missions had come to Australia at any time since the post World War I 1 protectionist boom of the 1950s, they would have found the same distress signals, particularly in times of low commodity prices. A number of inquiries starting with the Vernon Committee and a few external commentators have pointed to weaknesses in the economy. Unfortunately cyclical commodity price peaks temporarily set the balance of payments to rights from time to time, discouraging serious attention to restructuring the economy until the worldwide recession of 1981-82.

Australia a t the end of the 1980s remains - across the board - one of the most protectionist industrial economies It is still relatively heavily regulated, its industrial relations record is among the worst among industrial countries, and its workforce is poorly trained. Much of the publicly owned ‘public goods’ sector is inefficient. Some of the leading protected domestic suppliers plague production with poor quality goods and lagging delivery times. Others are so tied to outdated technology that their costs are inordinately high. Both groups accuse Asian competitors of ‘dumping’ their goods in Australia. Only primary product exporters under the pressure of periodic primary price troughs, have managed to remain efficient and internationally competitive. Although Australia has the most rapidly growing markets in the world on its doorstep, it has not been able to take advantage of them.

11. TRADE WITH EAST ASIA

Once the decision to trade with Japan was taken, Australia was able to expand its food and raw material exports to Japan rapidly and Japan became a leading supplier of manufactures to Australia. This change was not difficult. Japan was at the peak of its post World War I1 growth. The expansion of trade was managed by the Japanese and it was backed by Japanese investment in Australia. Australian business was largely passive and learnt little. A heavy bureaucratic involvement of the Commonwealth and State governments had little positive impact. In bilateral monopoly trading situations, such as existed in iron ore and coal, Australian firms acted as individuals while Japanese buyers joined together in cartels. Government intervention was ineffectual.

As other East Asian countries began to increase their purchases of agricultural and mineral products from Australia, the trading pattern was repeated (Table I). Other exports to East Asia have not grown on a significant scale. Australia is not able to supply the goods and services that the East Asian countries want to purchase. While East Asia’s trade with the rest of the world is growing very rapidly, Australia’s manufactured and service exports to East Asia are lagging behind other industrial countries. Our share of East Asian markets is not only negligible, but i n manufacturing and services we have developed very few significant niches from which to expand.

1988 TOO LITTLE. TOO LATE: AUSTRALIA’S FUTURE IN T H E PACIFIC E C O N O M Y 189

TAI~LE I The weight of (merchandise) trade with developing East Asia‘ in tolal Australian trade

Average

per cent 1985-1987

Imports from East Asia as a share of total imports

Exports to East Asia as a share of total exports

12

20

a. ASEAN, Kepublic of Korea, People’s Republic of China. Hong Kong

Source: International Monetary Fund, Direction of Trade Statistics: Yearbook 1988, Washington.

East Asian exports to Australia inevitably represent a very small proportion of total East Asian exports. Australia’s population is small, and heavily protected markets for manufactures limit access in areas in which the East Asian countries have the greatest comparative advantage, that is in labour intensive manufactures. Sometimes the intricacies of Australian formal and particularly informal protection are too Byzantine to make it worthwhile for large East Asian exporters to concern themsclvcs with Australian markets. The sanitation ware industry for example, has a cosy domestic arrangement by which State inspectors work in Australian factories. The rejection of one unit in a container of imports sent the whole shipment back to the producer in the Philippines.

Direct foreign investment closely follows trade. Australia does invest abroad although it is a large net capital importer, but Australian direct foreign investment is mainly in New Zealand, North America and Europe. Just as those Australian firms that are looking for external markets have found it easier to export to the United States and European markets because they are similar to Australia, and ‘want what we produce’ Australian investors feel more comfortable in North American and European markets than in East Asia.

Australian firms find it difficult to operate in Asian markets for several reasons. Language difficulties are greater than in North America and Europe although English is the commercial language. Products would have to be specially designed if they were to have mass markets in Asia. Most Australian manufacturers are small by world standards, they cannot individually afford the high development costs of entry into Asian markets, and they are not used to working together in export consortiunis. From a commercial point of view an Australian firm has to have a long time horizon to sell to East Asia. Directors managing limited resources are naturally attracted to less risky and quicker profits.

There have been some export successes. The expansion of high quality marine product sales to Japan, new markets for fruit and vegetables in Singapore and Hong Kong, high design content textiles, motor vehicles and machinery have all found niche markets. For the most part, however, markets are being snapped up by North American, European, Japanese and East Asian suppliers who have established themselves in developing East Asian markets with a competitive intensity that is alien to the Australian culture.

A U ST I< A L I A N E C 0 N 0 M I C PA PE HS DECEMBER 190

111. REASONS FOR AUSTIMI,IA,S LAGGING COMPI I V E N I S S I N ASIAN MARKETS

Businessmen from all quarters of the globe arrive in East Asian airports every day. Often they are met by local counterparts. They not only come from the major trading nations, but also from Switzerland, the Netherlands and the Nordic countries. The distances that they and their goods have to travel are enormous, and so are the cultural and climatic differences.

Australian business lags because Australia is still a largely inward looking country. This has not developed overnight. For almost all of the two hundred years of European settlement Australia luxuriated in high resource rents. The need for change that faces the Australian economy relates to the erosion of those rents. Australia retains its comparative advantage in primary products, but they must now be produced and sold at internationally competitive prices. New technologies have reduced costs of production worldwide. Australia can only maintain its competitive position in agriculture and minerals if it stays ahead in the technological race. New producers from developing countries are among leading competitors. The ‘green revolution’ has increased productivity in grains, increasing output to the point a t which except in severe droughts, most Asian countries are self sufficient. Agricultural protectionism in Japan, the Republic of Korea and Taiwan as in the United States and Europe, has added to the difficulties Australia faces in agricultural markets, but productivity increases are the basic cause of long-term falling price trends. These trends must be welcomed because in a competitive situation they mean higher returns to farmers as well as lower prices to consumers throughout East Asia, freeing up markets for a wide range of agricultural goods.

Australian mineral producers tend t o blame export subsidies in competing developing countries for their problems. Again, these are not the key factors in declining real price trends for minerals. New technologies are making the use of minerals more efficient and processing less costly while mineral production has also become more efficient. The feather bedding that characterized mineral exploitation in Australia in the 1960s and 1970s in the form of overmanning, low productivity work practices, high State freight charges and slack management is n o longer viable.

To the credit of Australia’s political leaders, the need for fundamental economic redirection has been recognized since 1983. The Labor Government has taken the high ground by stressing productivity and international competitiveness. Significant moves have been made toward the reform of the Australian economy. Balance of payments deficits, rising debt and the devaluation of the Australian dollar have focussed attention on economic analysis, bringing all political parties to a recognition of the need for new economic directions.

The Labor Government’s philosophy has favoured a relatively slow, tripartite (government, business and trade union) led pace of change. The Economic Planning Advisory Council and other tripartite bodies have sought to educate and reconcile the principal interests groups to new, economic objectives and hence to changes in the economic rules of the game. The strength of the tripartite system is its emphasis on consensus and the resulting political viability of the decisions taken. Its weakness lies in being ticd to the lowest common denominator and the resulting slow pace of change. Moreover, several initiativies have had to be abandoned because a n analytically sound basis was not provided for policy change either by government or academic economists.

1988 TOO LITTLE. TOO LATE: A U S T R A L I A ’ S FUTURE I N T H E P A C I F I C E C O N O M Y 191

The attempt to reform the taxation system in 1987 is a key example. While Australia now recognizes the urgency of policy change, the analytical capacity to identify the costs and benefits of alternative approaches to policy reform is still limited.

The economic policy changes required to enable Australia to participate in East Asia’s rapid growth are the same as those that will enable Australia to be more competitive generally. In some policy areas an acceleration of processes already in place is the issue. In others a start has yet to be made.

IV. H U M A N RESOUKCF. DEVELOPMENT

Education is a key area for reform where cultural factors meet productivity. Australia needs to move faster and more purposefully if reform is not to bog down in the mire of opposition of vested interests that do not want to change the status quo. It does not augur well for Australia’s future when TAFE tcachers strike when faced with a rise from 18 to 22 class room hours a week in a 40 week year. Tertiary institutions do not appear to be seized with the importance of taking advantage of the opportunities for change as they consider the difficulties and threats to established conditions. But a poor education base lies at the heart of many of Australia’s economic problems. A fragmented post-secondary and tertiary system does not permit a lifetime approach to training and career development. A narrow craft oriented sltill industrial award system prevents the recognition and promotion of multi-skilling that is commensurate with the rapid application of new technologies. Education is probably the most highly protected sector in the economy. Relatively high expenditures are not producing efficient outcomes for individuals or society. Only 50 per cent of students complete high school. Less than one per cent of apprentices (other than in hairdressing and other ‘soft’ trades) arc women. Not surprisingly, youth unemployment is high. I f the education system is not reformed quickly and effectively, technology transfers are likely to be from, not to, East Asia.

Language teaching is clearly critical to Australia’s performance in East Asia. It could be developed as a source of comparative advantage given our proximity to Asia. Yet after 20 years of talk, very little has been achieved. When a significant number of primary schools introduce a national priority language into their first grade curriculum, a national language policy will be on the way.

Australia’s migration program holds out a promise of business contacts, skills and language acquisition that could overcome some short term bottlenecks in doing business with Asia. Yet it has been impossible to debate the subject in broad national terms without running into the narrow self interest of various ethnic communities representing past immigrations. The cost of cultural isolation, evident in our language policy, is very high indeed. Every time racial bigotry surfaces in debate, we make headlines in East Asia, reinforcing widely held views that the White Australia policy is far from dead. Recent threats of discrimination against Asian migrants cost Australia billions of dollars in commercial opportunities foregone. Senior government officials who are insulted by Australian poltical and educational leaders are not likely to short list Australian tenderers for major public works contracts. Cultural incompatibility would be a fair reason for marking Australian tenders down.

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Trade policies are the key to competitiveness because they expose the domestic economy to international prices through imports and in export markets. I f tariffs, non-tariff barriers and subsidies protect domestic manufactures (and their employees) against imports, then there will be excessive entry into production and low efficiency and exports will be handicapped by high domestic prices. Trade policies have accordingly been responsible for a major share of Australian uncompetitivcness. Tariffs and non-tariff barriers are being reduced. Manufacturers have been put on notice of declining protection in highly protected industries. Simultaneously an effort i s being made to reduce agricultural protection in rural industries, notably in dairying, in which it exists.

It is widely agreed that manufacturing can only continue to be a significant component of the economy if it turns to external markets. The principal issues now facing the government concern the means and timing of bringing protection down from the Australian average of about 15 per cent to the post-Tokyo round average levels of 4-8 per cent for most other industrial countries. Unfortunately when the debate focuses on a particular industry, vested intersts still contest the reduction of protection, malting the process painfully slow.

Australian society has a particularly strong ‘conservative welfare function’. Voters want to protect existing jobs even if it is at the expense of future job expansion. Thus although we Itnow that rapid across the board reduction of tariffs would be efficient, the slower path of reducing protection through industry plans is being pursued because it is judged that the costs of a likely backlash against a rapid economy-wide reduction of protection would be even higher.

VI. FISCAL POLICY

In keeping with worldwide trends the Commonwealth Government has succeeded in substantially reducing budget deficits since 1983, mainly by lteeping the growth in expenditure below the growth in revenue. Inflation has been reduced to about seven per cent but it is still running at more than twice the level of other industrial and leading East Asian countries.

There has been little change in the distribution of overall government expenditure among public sectors such as education and health and social welafare. The efficiency of the State public sectors and of highly controlled service industries, notably transportation and telecommunications, is being seriously questioned. High costs and poor quality service in these areas place a heavy burden on Australian exporters. Attention to public sector issues is only now beginning. On past experience it might take a decade to achieve results

VII. MANPOWER POLICIES

Manpower and industrial relations policies remain a hard core of difficulty for Australian competitiveness. An incomes accord and tripartite consultations have substantially reduced industrial disputes since the late 1970s, but industrial disputes have been reduced in most industrial countries. Australia remains among the countries with the highest average annual number of days lost per employee (Table 11). The inability to guarantee export deliveries, for example in coal, is a major cuase of uncompetitiveness in East Asia. A number of manufacturing firms have retreated from the exploration of East

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Asian markets because they could not guarantee delivery times, not necessarily by thcir own firm, but of their suppliers. The ACTU leadership has made dramatic strides in its understanding of productivity requirements, but middle level union leaders and managers are by and large still living in the era of mineral booms.

T4iw: I1

Average aniiual days lost per employee

Country 1964-70 1971-82 1983-85

Australia Canada France

Norway Spain Sweden USA West Germany

Japan

,286 ,704 ,140 .112 ,012 ,049 .029 ,583 ,006

,638 ,809 .191 .098 ,055 .803 ,134 .318 ,045

,262 ,390 ,070 ,010 ,034 ,640 ,009 .119 ,088

Source: ]ohn J. Beggs and Bruce J . Chapman, ‘Australian Strike Activity in International Context: 1964-1985’, Discussion Paper No. 159, March 1987, Centre for Economic Policy Research. Canberra.

Australian manpower policies are unpredictable and uncertain because they are not carried out directly by the Federal and State governments (both of which have powers in this area) but by a club of employers, employees and quasi judicial government employees who compose the system of arbitration and conciliation The primary objective of policy is neither growth nor equity but the reconciliation of divergent interests to avoid industrial disputes. The ‘public interest’ has small representation. The unemployed are not in court although a significant proportion of the unemployment problem is the result of labour market distortions. The economic consequences of the decisions taken are not analysed. The effects of wage policy thus tend to be highly arbitrary and uncertain. A wage cost inflationary push with all its attendant difficulties for competitiveness has been damped down but not eliminated.

By focusing on the avoidance of disputes the arbitration and conciliation system has tended to raise the relative wages of unskilled and semi-sltilled workers, reducing the margin between their skilled and professional workers’ wages and salaries. This means that workers with low sl<ills are not encouraged to make the personal investment that is a prime necessity for improving productivity. At the other end of the spectrum work force skills are lost because skilled workers leave their trades to become small entrepreneurs such as taxi drivers, builders, building subcontractors and shopkeepers to take advantage of higher incomes and lower taxes than tradesmen earn and pay. Skill formation can never catch up to demand while this labour market distortion persists.

Australian middle management remuneration has also been squeezed, encouraging the outflow of capable managers. Although management practices have tightened in recent

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years, managerial sltills, on which productivity ultimately depends, are underdeveloped in Australia.

Demarcation disputes are an important cause of low productivity Actual demarcation disputes only represent about ten per cent of hours lost in industrial disputes, but their prevention is an incessant concern for management, involving gross inefficiency on the job as separate teams of men have to be called up to d o various aspects of what is essentially one job, The consolidation of craft unions into fewer, larger industrial unions and the multi- sldling approach now being introduced into industrial awards could substantially reduce demaraction disputes. But the current pace of change is painfully slow.

Inefficient work practices remain a major cause of uncompetitiveness. Condoned as a price of peace when economic rents were high, inefficient work practices now undermine competitiveness, particularly in service industries. Railways, wharves and telecommuni- cations are providing a new source of folklore anecdotes of inefficiency. The amusing side cannot, unfortunately, offset the intrinsic costs to the economy.

Australia’s future is likely to depend in large measure on the degree to which labour markets can be freed so that employees can be paid for the work they do. When awards were introduced, the balance between employer and employee was in the former’s favour. Low productivity meant low wages so that some sharing out of the social product in the form of a transfer ofrents to employees was justified although it was at the cost of growth. In the more than 80 years that have passed since the Harvester Award guaranteed a man, his wife and three children a ‘living wage’, the situation has changed dramatically The ‘living wage’ of 1907 would be regarded as dire poverty today. A social welfare system supports today’s poor people a t much higher standards of living than wages did at the turn of the century. Australia’s long service leave provisions are unique. But to be able to afford such high standards of living, Australia must be highly efficient in the allocation and utilization of resources.

A confrontational approach is unliltely to lead to other than industrial disputes and inflationary wage increases as weak employers give in to strong unions and vice versa. If Australia is to achieve the high productivity levels that are now seen to be essential to competitiveness, the community will have to recognize that the system of arbitration and conciliation with its cumbersome and slow machinery and awards will have to be replaced by industrial relations arrangements that stimulate market flexibility and mobility as well as industrial peace so that productivity, wages and employment can be increased.

VIII. DIRECT GOVERNMENT INTERVENTION

Like most industrial countries Australia is highly regulated. Commonwealth, State and local government structures for a mere 16 million people make Australia one of the inore highly regulated industrial economies with 30 per cent of the work force in the public sector. No regulation was ever devised to harm the economy. Australian public servants, like those of other countries, are well meaning people who have devoted their lives to regulations and their administration. But regulation and direct intervention in the economy are major sources of employment and power for public servants; the pressure to perform is pressure to regulate to the point of markedly reducing productivity. Public servants tend to attend to the regulation of easy areas and leave difficult areas alone. For

1988 T O O LITTLE, T O O LATE: AUSTRALIA’S FUTURE IN T H E PACIFIC E C O N O M Y 195

example while transport is highly regulated in Australia road congestion has not been tackled. Regulation tends t o be inversely related to the professionalism of the public service: as Australian public services are still largely clerical rather than professional. the propensity to regulate is high. Professionalism is also inversely related to coordination: Commonwealth, State and local health, building, labelling and other regulations arc largely uncoordinated.

The net effect on the Australian economy is a vast array of regulation that serves littlc purpose, involves costly armies of administrators that police the regulations imperfectly (otherwise the cost would be even higher), a fragmentation of production by states as businesses respond t o state incentives and preferences. Just as the States wastefully compete in representing Australia in the Strand in London, State organizations are now attempting to enter export promotion. The number of public servants involved is rising, but the effects of inter-state competition on Australian markets is likely to be negative. Successful exporting countries, such as Japan and the Federal Republic of Germany, havc highly focused government export efforts. Others, such as Hong Kong, have none. Australian inter-state competitiveness is already regarded with great amusement in East Asia because of the benefits it brings the purchasers of Australian goods. It does not build national Australian sales. At best government organizations can only improve the information base for trade. Businesses, their managers and their work force sell products.

IX. CONCLUSION

There is n o quick and easy way for Australia t o become competitive in East Asian markets. No one or two changes in economic policy will overcome present weaknesses and difficulties. Underlying social philosophies will have to be rethought.

One of Australia’s greatest barriers to exports and to sustained growth more generally lies in periodic primary commodity price booms. High commodity prices create rents that undermine efficiency in production for the economy as a whole and raise the value of the Australian dollar to levels a t which industries without rents can not compete interna- tionally. Low commodity prices, contrary to widely held beliefs, are not harmful to thc Australian economy. Australia has not been able t o insulate itself from ‘booming sector’ effects, so that it is probably better positioned for long-term growth with low, than high, commodity prices.

The billion and three quarters people living in East Asian countries will go on developing no matter what Australia does. Australia has a choice; it can either continue to be a raw material mine at the periphery of East Asian development or it can take part in East Asian economic growth and thus accelerate its own development. It seems inconceivable that Australians will continue to squabble about peripheral issues of European versus Asian multiculturalism, go on strike because the peanut butter has run out in the canteen or an electrician has driven a truck to a job, oppose multi-sl<illing and a nationwide trade effort. To d o so would be to slip out of the real world into a make believe one like South Africa’s It may be easier to wait another ten years to make the effort to trade with the rapidly growing countries of Asia, but by the year 2000 others will have become entrenched in Asian markets. It may be too late for Australia.