25/05/2015 - 15:12

WA economy 'unsophisticated'

25/05/2015 - 15:12


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WA’s economy needs to become more sophisticated if it is to take advantage of emerging opportunities along the Indian Ocean rim.

DIG AND DELIVER: There's not much value-adding going on. Photo: Christian Sprogoe

The state's economy needs to become more sophisticated if it is to take advantage of emerging opportunities along the Indian Ocean rim. 

Here's some good news. A study by researchers at Harvard University in the US claims that countries facing the Indian Ocean will be world’s fastest growing in future decades, which means Western Australia could be a winner.

It’s not all good, however. WA might not be a significant beneficiary of what’s happening because the state’s economy lacks sophistication and ‘complexity’. It is over-reliant on mining.

Whether being in the right place at the right time cancels out the negative of having most of our eggs in the resources basket will be interesting to see, as well as being a challenge for government to try and join the rise of South Asia and East Africa.

The study by the Centre for International Development, Harvard’s leading research hub, is based on a proposition that it is ‘economic complexity’ of exports, not the volume of exports, which determine long-term success.

Resources are the equivalent of a sugar hit, with delivery providing a short-term benefit but becoming an economic drag over time – hence the expression ‘resources curse’.

The CID research team, led by Ricardo Hausmann, looked at export data in 2013 from 128 countries to produce a number of surprising results, including the rise of India over the next eight years to the point where it is growing at close to double the rate of China – 7.9 per cent a year versus 4.6 per cent.

Not far behind India several East African countries with strong growth annual rates, including Uganda at 7 per cent, Kenya at 6.7 per cent and Tanzania at 6.5 per cent.

Professor Hausmann, who is director the CID and professor of The Practice of Economic Development at the Harvard Kennedy School, said the economic complexity model captured the productive capabilities embedded in a country’s exports.

“Our economic complexity predictions find India’s disputed upper hand (over China) in growth will expand into a widening gap in the medium term,” he said.

The critical element in the Harvard study is the issue of whether a country is able to add value to its exports by increasing their complexity – which is not good news for WA with its ‘dig and deliver’ mining mentality.

“Countries accumulate productive knowledge by developing their respective capacity to both make more products and products of increasing complexity; this underpins economic growth,” Professor Hausmann said.

“Countries like India, Kenya and the Philippines have made important recent gains in diversifying their exports into more complex products. Historically, these gains in economic complexity have translated into higher incomes, which position them as the frontrunners globally for their growth prospects.”

Australia, unfortunately, is not see by the Harvard researchers as have the same potential for future growth, lumped in with a bunch of oil producing countries that are mono-dimensional and overly exposed to commodity exports.

The shallow structure of the Australian economy is shown in the diagram below, from the CID’s Atlas of Economic Complexity, while also adding to the current debate about the importance of the WA iron ore industry, which in 2013 accounted for 26 per cent of Australia’s exports.

The theory of economic complexity is based on an assumption that a country can be more successful if people with skills in one area can easily transfer those skills to another area – meaning it can ride out economic cycles by encouraging different facets of its economy.

Australia, according the Harvard analysis, has a primitive economy, with the latest edition of the Economic Complexity Atlas showing that Australia is in the bottom 10 of 128 countries, alongside oil-dependent economies such as Venezuela and Libya.

Like all exercises in measuring economic activity there are limits to the Harvard exercise, and one of those is the question of population.

South Asia and East Africa have large populations, which means an abundant supply of cheap labour to fill vacancies in manufacturing industries. WA’s thin, and highly paid population, is a disincentive to manufacturing.

However where WA could benefit in the future from its proximity to fast growing and more complex economies in South Asia and East Africa is from selling services to those countries, along with traditional raw material exports to feed their emerging manufacturing industries around the Indian Ocean rim.

The rise of South Asia and East Africa could potentially be joined by that another place with a long Indian Ocean frontage – WA.

Minerals maze

Waiting for a recovery in the iron ore price is likely to be a frustrating experience, with a recent assessment indicating that the world will not need any new iron ore mines for at least five years, and perhaps longer.

Macquarie Bank, in an attempt to predict the timing of future demand increases for leading minerals and metals, lumps iron ore with five other commodities that look likely to be well supplied for five years, or more.

Uranium, thermal coal, manganese, steel and aluminium are the other products on Macquarie’s list of materials that will not require any fresh capital investment before the year 2020.

Another six commodities are on a list of limited fresh demand over the next three-to-five years – metallurgical coal, tin, silver, gold, lead and ferrochrome.

Three commodities make the new supply list over the next 12 months to three years – zinc, platinum and copper – which could make them worth watching for investment opportunities.

The three products on the shortest timeframe, needing new supplies in the next six months, and therefore the products that ought to attract the closest investor attention are chrome, nickel and bauxite.

Chrome is a South African speciality but nickel and bauxite are very much on WA’s mineral production list.

Deduction disaster

Yield hunters, those investors desperate to get a better return on their funds by taking on extra risk, should have received a sobering wake-up call last week when a yield play from an earlier era entered its final days.

Timbercorp, once a tax-driven investment favourite, collapsed in 2009 after the Australian government changed the law covering what a taxpayer could claim as a legitimate deduction.

The net result was that investors who had borrowed money to invest in Timbercorp saw their own funds wiped out while being left with a bank debt.

The first wave of Timbercorp bankruptcy notices went out to 50 investors last week with a further 1,000 potentially in line for similar legal action.


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