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Is Australia’s Economy In Trouble?

15 May

Australia seems to have emerged from the Global Financial Crisis relatively unscathed. However, I recently read something that made me wonder – are we really in good shape at all?

In the New York Times, there’s an article outlining a new approach to the age-old question “How can a poor country become rich?” Until the mid-20th centuries, there were only a few examples – the developed countries. Then, suddenly, Japan sprung up. Then South Korea and Taiwan. Then a half-dozen other Asian countries. Now the Chinese dragon is shooting up like a Spring Festival rocket.

Why?

The Australian Economy, 2009, Visualised

The Australian Economy, 2009, Visualised

The author of the article says that answers like “countries should produce more” and “people need to be more productive” are somewhat vague. And simplistic – not all productivity is equal. Now, some researchers at MIT have tracked exactly what each country in the world produces – hundreds of different products –  and created stunning graphs of them. I show here a picture of Australia’s economy in 2009, but you really should hop over to the website of the original research group, where you can generate this image yourself for any country you like, and hover over each bubble to see what it represents.

Some notes

  • Different colours represent different industries. The orange-red bubbles you see represent Australia’s strength in mining and extraction.
  • The brightly coloured bubbles show the areas Australia excels in. The greyed-out bubbles represent areas that are not significant for Australia.
  • Bubbles that are connected – this is the important bit – represent products that are related in terms of the skills they need. For example, the strong blue bubble near the top is Australia’s leather industry. The small greyed-out bubble near it represents “calf leather”, of which Australia exports USD$1.68 million per year, or 0.00% of the world market.

The connections are important for several reasons.

  • It is far easier for a country to develop export products related to products it is already strong in. Australia could develop its calf leather business relatively easily – we already have the expertise. However, it would be much more difficult if we didn’t have such a strong leather business to begin with.
  • Connections provide a buffer against unemployment. If an industry declines, it’s relatively easy for workers to move to other industries which match their skills. For some industries, no such match industry exists. Workers laid off will need expensive retraining, or remain unemployed for a long, long time.

Therefore, if a country is good at doing well-connected things, it can be expected to be economically strong. First of all, it is flexible, and can ride the waves of global commodity fads. Secondly, when an industry does decline, there’s far less deadweight loss on the economy, since unemployed workers take much less time and expense to find a job in a different industry.

Canadian Economy, 2009

Canadian Economy, 2009

Malaysian Economy, 2009

Malaysian Economy, 2009

So, having understood all this, I looked at Australia’s graph. I was shocked to see what I saw – and what I show in the picture above. The Australian economy consists, mainly, of little isolated bubbles. It’s a fragile, inflexible economy that will not respond well to commodity shocks and changes in global demand. If we were a poor country, we would likely stay poor for decades more. The graphs for Malaysia and Canada (two countries with similar populations) look much better. Each has strong clusters that are interlinked, and linked with other industries the countries have not yet developed. What’s more, these two economies seem a lot more diverse, which, surely, is a good thing?

Some caveats are in order. First of all, it seems as if the graphs only show goods exports – I couldn’t find any bubbles representing services. Secondly, the website that produced these graphs is not officially launched yet – no doubt they’ll add new features before their official launch later this year. Clearly, the graphs don’t show industries that don’t exist yet but will be important in the future (mobile augmented reality games? household anthropomorphic robots?)

Perhaps Australia’s economy would look a lot better with the service sector included. Still, a big chunk of our economic “strength” is in mining and extraction. The skills involved in these industries can’t be easily transferred to other products. What’s more, I’m forced to wonder how sensible it is to say “we’re growing” when what we’re actually doing is selling non-renewable assets. After all, an unemployed graduate can only hold so many garage sales before they need to go out and get a real job.

 
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  1. Dr. Geld Schnell

    May 26, 2011 at 3:59 am

    Who goeth a borrowing