I recently had the pleasure of presenting at the WA Council of Social Services on the Changing Economic Context for both Australia and WA in particular.
The presentation can be found on this link: WACOSS presentation.
The message of the presentation was:
“Australia as a whole and Western Australia in particular have almost never had it as good as I has been. Unfortunately the bloom is coming off the economic rose and the sweet economic spot is ending. This means future prosperity will be more difficult to attain. A condition that is likely to continue in the longer term as international competitiveness makes Australian jobs more vulnerable to change and competition.
(The terms of trade reached an all-time peak in 2011. Indexed values , 1870-2912, year ended June (1901-200 average = 100). The source is the RBA.
What cannot be understated is how incredible the economic expansion has been. The last time Australia experienced anything like the last two decades economic growth was when gold was first discovered in Victoria. That discovery triggered a three decade expansion but from a very low base
In contrast, while Australia is part of the third world economy, it is fully developed. As a consequence, the economic expansion has resulted in much higher levels of prosperity.
According to CEDA’s research, Australia’s two decades expansion is likely to continue for another ten years. No doubt there will be financial crises and recessions in various parts of the world economy over the decade, but Australia’s two decade expansion has so far survived a depression in South East Asia and Korea, the Russian and Long Term Capital Management crises, the 2001 tech wreck and advanced economy recession, the quintupling of oil prices, several wars in the Middle East, the global financial crisis and subsequent advanced economy recession, and now the Euro crisis. It is not easy to contend that bad news in the global economy will necessarily terminate Australia’s economic expansion.
The economic growth that has occurred in Western Australia cannot be understated. It has occurred over a relatively short time, causing significant challenges for the WA community, with many winners and some distinct losers. You have lived and breathed the challenges this has created for the community and know them better than I.
But the challenges economic growth creates are set to rapidly change. The sweet spot for economic growth is effectively over.
This is because the mining boom is changing. It is shifting into its third phase, which will be a sustained improvement in national incomes from exporting minerals, particularly as the mining investment comes on stream.
What it will mean though is the period of a high Australian dollar will continue, just as the boost to employment and wages fades. Meanwhile, business investment will change focus, from income producing ventures to cost saving ones.
When business was rapidly expanding to take advantage of the economic opportunity presented by the terms of trade, it made sense to throw money at problems until they went away. Now, the likelihood is that the focus will shift to cutting costs and improving efficiencies in all areas of business.
Economic consequences: the bargaining position of workers, particularly unskilled workers, is rapidly eroding under their feet. Now the economic challenges will be that people who have known nothing but economic prosperity, who have no habits of savings, who live from pay check to ridiculously large pay check, are likely to find themselves in less favourable conditions.
This is not to suggest this change will happen today or tomorrow. But it will happen. In particular, we are hitting peak construction this year and the drop off could well be more pronounced than we’d have thought.
The longer term challenge for Australia is: where do we fit into the global economy? Our economy fits into the supply side of the developing world, evidenced by the strong economic growth and high rates of investment in the Australian economy.
The big challenge is our non-commodity based sources of historical comparative advantage (economist speak for where we make the most money) are rapidly eroding.
The economic development of much of the third world, which has fuelled our current economic expansion, will also increase the level of competition the rest of the economy faces in the longer term. For example, when South Korea developed its modern educational system:
“the very vocabulary to talk about modern science and mathematics hardly existed in the Korean language and had to be invented before textbooks could even be written.”[i]
Concerted efforts to improve scientific and technical education underpinned South Korea’s emergence into a modern developed economy. A similar transformation is underway in China and India. In 2002, the total number of STEM field [ii] first university degrees awarded in Asia was just over one million, with almost half a million in China alone and a further 176,036 in India. By 2010 the total STEM degrees awarded in China had risen to 2.6 million, with the figure anticipated to rise to 3.5 million by 2015.[iii] China alone will produce more STEM degrees in 2015 than all of Asia did as first degrees in 2002. India is experiencing similar growth trajectories.
This shift is reflected in this chart: how Australia’s education system compares internationally. Are we in danger of becoming a nation of dunderheads? (Where we ever not?)
What this change will do is undermine the return to skill labour that Australia has enjoyed. As more and more skilled people enter the global workforce, and technological developments make it more and more capable of outsourcing, there will be ongoing downward pressure on skilled workers like there has been on areas of the unskilled workforce.
Think credit analysis at the National Australia Bank being outsourced. The capacity to do it (without it being exercised) will diminish wages.
We will look back on this time as being among the best of times. National prosperity has never been this good before and, unless we take significant action to ensure it continues, it is likely it will never be again.
[i] Sorensen, C. W., Success and Education in South Korea. Comparative Education Review, Vol 38: 10-35, 1994.
[ii] National Science Foundation, Science and Engineering Indicators, 2006, Volume 1, Arlington, VA, NSB 06-01, January 2006, Table 2-37, cited in the Office of the Chief Scientist report Mathematics, Engineering and Science in the national interest.
[iii] Craig, E., Thomas, R. J., Hou, C., and Mathur, S, 2011, No Shortage of Talent, Accenture Institute for High Performance, page 6. This figure includes Masters and PhDs awarded in STEM subjects.