Commentary on Political Economy

Monday 7 October 2019

Tourism as modern servitude

We have argued repeatedly in this Blog that not all industries are equal in terms of projecting politico-economic power. Specifically,  reliance on primary and secondary resources exports and, most heinous of all, on Han Chinese tourism,  is the speediest way for a country like Australia to become "the white trash of Asia". This piece from the AFR corroborates our thesis.

Bangladesh, Cuba, Iran, Mali and Turkmenistan share an unexpected connection to Australia, and it isn't membership of a tourist destination hot list.
All are among the economies that are so lacking in complexity, and have such limited natural opportunities to develop new products, that Harvard University recommends they adopt industrial policy straight out of the post-colonial developing world: the "strategic bets" approach.
The advice comes from the Harvard Kennedy School's Center for International Development, which two weeks ago launched a online database of 133 economies that combines remarkably rich data with beautiful presentation.
Designed to map, literally, the economic progress and opportunities of the industrial and non-industrial world, the Atlas of Economic Complexity exposes an under-appreciated truth about Australia.
The enormous wealth generated by iron ore, coal, oil and gas masks, and probably contributes to, an economy that has failed to develop the industries needed to sustain its position among the top ranks of the developed world.
Put simply, Australia is rich and dumb, and getting dumber.
On the primary metric used in the database, an index of economic complexity, Australia fell from 57th to 93rd from 1995 to 2017, a decline that is accelerating. Australia's top trading partner, China, rose from 51st to 19th over the same timeframe.

The Australian paradox

The index measures the diversity and sophistication of national exports, based on research by Harvard economist Ricardo Hausmann that finds trade in a globalised world is the path to riches.
Harvard economist Ricardo Hausmann finds Australia is part of a group of simple economies that should adopt policies that single out specific industries for support. 
The Harvard data exposes the paradox of the Australian economy: the eighth-richest nation in the study has the export profile of Angola.
About 70 per cent of products sold to foreign buyers, on a net basis, are minerals and energy. Add in food, alcohol, wool, tourism and metal products, and the figure rises to around 99 per cent.
Notwithstanding the success of CSL, Atlassian and corporate pioneers, Australia sells the world almost nothing, relative to total exports, that requires a degree to make.
"Australia⁩ is ⁨less complex than expected⁩ for its income level," the study says. "As a result, its economy is projected to grow ⁨slowly.⁩"
As a consequence, the economy will growth 2.2 per cent a year over the coming decade, ranking in the ⁨bottom half⁩ of countries globally, according to the Harvard projections.
Countries can do very well selling a narrow range of simple products. But to become richer - and end the wage-growth malaise that is a frequent political complaint - they need to develop new products. More sophisticated products support higher wages, according to Harvard's Center for International Development.

Innovation deficit

Lulled into inaction by the resources boom, Australia has been appalling at innovation.
In the 15 years to 2017, Singapore - a nation with no natural resources apart from human capital and proximity to big markets - expanded into 19 new global industries that generated $US14.4 billion ($21.3 billion), or $US2560 per resident. They include gas turbines, x-ray machines, synthetic rubber and imitation jewellery.
Over the same period, Australia broke into seven new products in a meaningful way, according to the Harvard database: precious metal ores, ammonia, rare earths, activated carbon, hydrochloric acid, scrap rubber and wax residues.
The value per Australian: $US33.
The most remarkable, and damning, conclusion of the research is that Australia is part of a group of simple economies that should adopt policies that single out specific industries for support.
Countries that many Australians would regard as economic peers, including Japan, Israel and the US, are on the frontier of technology and should be developing products that don't currently exist, it says.

Product proposals

For Australia, the study proposes a couple of dozen exports based on research that suggests, logically, leaps are easier when you manufacture similar products, such as moving from woollen socks to business suits.
The suggestions include serums and vaccines, laboratory reagents, vehicle bodies, butter, frozen vegetables, pig fat, chemical wood pulp and linseed.
So much for innovation nation.
Even if the suggestions are overly pessimistic, they point to Australia's struggle to break into international markets beyond resources and agriculture.
Despite being a preoccupation of both main political parties, industry policy has done little to improve the economy's sophistication.
As the government manages the current downturn, it might muster the courage to remove barriers that make it harder for business to thrive.
After all, surely an advanced economy such as Australia can do better than Senegal, which is one rank higher on Harvard's list?

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