The deindustrialisation of the Australian economy

However, Australia does not enjoy these characteristics; the economy is neither fully integrated in the sense of having developed linkages within and between sectors, nor does it exhibit a large domestic market. On the contrary, most industries are highly integrated into the world economy, while most capital and intermediate goods are imported. The Australian economy is therefore quite vulnerable to external shocks that are transmitted through the balance of payments.

II. Trade In Manufacturing

In the 16 leading OECD countries, manufactured exports account for 56 per cent of total exports on average. In stark contrast, manufactured goods in Australia only account for 18 per cent of total exports.

Almost two thirds of Australia’s merchandise trade still consists of primary products; a ratio comparable with middle income developing economies like Argentina, Brazil and Mexico. Indeed, over 70 per cent of what is officially classified as manufactured exports, constitutes semi-processed raw materials.

In terms of exports and research and development (R & D) intensity, the following general conclusions can be drawn in the recent Australian experience:

1.    The high concentration of R & D activity is in the manufacturing sector. However, Australia has experienced a very sharp “hollowing out” of the manufacturing base over the past 30 years. As the manufacturing     trade deficit increases, Australia could encounter quite serious structural problems, since the high-tech sectors within manufacturing are knowledge intensive and represent the fastest growing segment of world merchandise trade;

2.    R & D activity tends to be highly concentrated in the largest domestic firms and foreign subsidiaries; and

3.    Within manufacturing, the industries, which are in the medium to high R & D categories exhibit very large trade deficits.

Australia continues to be highly dependent on commodity exports. As a result, the terms of trade will not be favourable in the long term. Commodity exports adjust more to changes in world income than to prices, and are relatively price inelastic. As an international price-taker, Australia is quite vulnerable to the cyclical fluctuations of commodity prices that have played a determinant role in the balance of payments and the behaviour of the exchange rate.

Since the onset of recurrent mining booms during the past decade, there has emerged a direct relationship between the exchange rate and commodity prices. After the floating of the dollar in the early 1980s, the exchange rate has been determined largely by commodity prices, most notably in the key energy exports. The Australian dollar itself has become a tradeable commodity in foreign exchange markets and has been inextricably linked to international commodity prices.

This relationship between international commodity prices and the behaviour of the exchange rate has been enshrined in the “Dutch disease.” Its central proposition is that the emergence of a mining export boom causes an appreciation of the nominal exchange rate. This has had an adverse effect on the competitiveness of Australia’s manufacturing exports during the mining boom of the past decade.

Similarly, with the liberalisation of the Australian economy, the manufacturing sector has encountered quite savage competition from cheap imports. This process of industrial restructuring has been evident in the decline of local investment in manufacturing and the gradual run-down of capital stocks (as a percentage of GDP).