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Tim Harcourt
Chief Economist
Australian Trade Commission
Sydney
Email: tim.harcourt@austrade.gov.au
26 March 2008
Is it this boom that never ended? The coal and iron ore contracts being settled around the globe mean that Australia might see a windfall in our export account. Market commentators have been talking about 80 per cent plus increases in coal prices and the iron ore market has taken on a bullish turn with a contract by Brazilian iron ore giant Vale with Japan and Korea upping prices by 65 per cent (talk about going The Full Brazilian). If the Brazilian negotiations set a floor for Australian iron ore negotiations with China, we could see a further terms of trade boost to Australia boosting real incomes.
However, despite the price benefits of the commodities boom and the insatiable demand for our resources from China, India, the rest of Asia and the emerging economies, there is some concern about Australia’s export performance in the 2000s. And the data shows why there is concern around – particularly when export volumes are considerable (that is the price effects have been stripped away and we see real export growth). In short, despite favourable global conditions and record high export values, the average annual growth in Australian export volumes has been a disappointing 1.9 per cent compared to 7.7 per cent in the 1990s, 6.6 per cent in the 1980s and even 4.1 per cent in the 1970s (see graph below).
As Professor Sumner Miller used to say, why is this so? There are a few explanations.
The first one is the exchange rate. The high Aussie dollar affects manufacturing in particular as those exporters don’t benefit from high prices like the miners do.
The second one is the drought. Rural values and volumes have both been in negative territory in the 2000s.
The third one is the supply side. Australian exporters have been held back by ‘capacity constraints’ including infrastructure bottlenecks, capital constraints and most importantly skill shortages in the labour market. Demand is there – thanks to growth in Asia and the emerging economies – but supply is struggling to keep up.
The final one is perhaps a bit more nuanced. There is evidence that Australian businesses are increasingly looking ‘beyond exporting’ in terms of their global engagement in international markets. The top 100 Australian global businesses now earn over $180 billion in revenue which is approaching Australia’s total export earnings of just over $217 billion in 2007. Australian businesses that began exporting when the Hawke-Keating Government opened up the Australian economy are now becoming genuine global business players through additional means of global engagement such as foreign direct investment, strategic alliances, joint ventures, procurement, licensing, franchising and participation in global supply chains. This means there are global Australian business successes out there although they may not be picked up in the traditional export data.
So moving from Professor Sumner Miller to Vladimir Ilich, what is to be done?
Firstly, it’s all about productivity. Australia needs to lift its long term rate of productivity growth and the exporters play a crucial role in this process. In the 2000s, Australia’s productivity growth has average just less than 1.5 per cent per annum, compared to the OECD average of 1.8 per cent. Furthermore, as a proportion of US productivity – considered to be the world’s benchmark – Australia’s level was 79 per cent in 2005 which is the lowest it has been since 1990. According to Austrade research exporters play a crucial role in increasing productivity. For example, in the UK’s case, the evidence showed that 60 per cent of UK productivity growth during the 1996-2004 period was attributable to exporting businesses. And in Australia, The Melbourne Institute looked manufacturing firms in Australia between 1994 and 2000, and found that higher export intensity and a longer period of export exposure is associated with a higher level of productivity.
Secondly, we do need to take a walk on the supply side in terms of capacity constraints which are impeding exporters’ progress. Infrastructure issues matter as do education and training given the skill shortages facing exporters. On the supply-side, it makes sense to have an integrated approach to innovation, education and infrastructure to help reduce capacity constraints. The emphasis on investment in human capital (skills) and physical capital (infrastructure) is crucial to enhancing productivity. In short, we need an education revolution in order to have an export revolution.
Thirdly, it’s important to look at what exporters want in-market. Australian businesses are increasingly looking for services offshore to help them with in-country regulation, business culture, networking, set-up costs, attract capital and other in-market issues Notwithstanding the need for further trade liberalisation – particularly in agriculture – the trade agenda has moved beyond just tariffs and quotas to ‘behind the border’ issues. In fact, Austrade research shows that around one third of Australian exporters face no formal trade barriers at all, but want help off-shore with the residual behind the border issues that matter too.
Fourthly, as well as supply-side issues, Australian exporters are concerned about climate change and were concerned that the Australia lack of support for the Kyoto protocol was harming our national brand. This is ironic, given that Australian exporters do have impeccable credentials in environmental innovation and technology (just look at the environmental successes we have had in China symbolised by our architectural triumph the water cube at the Beijing Olympics site). Fortunately, exporters see the new strategy towards climate change as an opportunity.
Finally, demographics matter too. The generation who have run exporting businesses since the float of the Australian dollar in 1983 are now retiring. They account for 40 per cent of all exporting businesses. Accordingly, there will be a passing on of the export baton to generation X and generation Y too that requires some education and mentoring as Australia business widens and deepens its global commitment beyond traditional exporting.
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