Monday, October 25, 2010

Services won't save us

Two pieces today give you the bitter flavour of what is ahead for Australian exports.

The first is a spot-on diatribe by Martin Feil at The Age.
ACCORDING to many pundits and politicians, expanding the Australian services sector is the correct (if not the only) long-term strategic direction for the Australian economy. We have completely given up on manufacturing. Agriculture is a useful source of income but doesn't create many jobs by adding value to primary production. Finally, mining is booming but all mining booms end. Sooner or later we will have nothing left.

Treasury secretary Ken Henry nominated the services sector as our strategic way forward. Estimates of employment are that more than 80 per cent of Australian workers are employed in this sector. About 73 per cent of Australian gross domestic product is derived from the sector.

This view contradicts global history and the present experience of virtually every developed country. It is simply an excuse for the poverty and hubris of our national planning and the dominance of public servants, consultancies and academics in our thinking about the future development of our nation.

Anthony Byrne is the member for Holt and was parliamentary secretary to both the prime minister and the trade minister in the first Gillard ministry. This year he addressed the Australian Services Roundtable. His topic was the challenge posed by the globalisation of services exports.

Mr Byrne spoke about the paradox of the dominance of the services sector in the Australian economy and its sharp contrast to services' share of Australian exports (21 per cent). Only 6500 services exporters were present in the total number of 45,000 exporters. The first excuse offered by the former parliamentary secretary was that the Australian Bureau of Statistics may have got the numbers wrong. The second criticism was that a lot of our services are highly protected.

Feil then takes aim at policy:
The government's economic strategy is to commit to the Doha global trade liberalisation round, Australia's six free-trade agreements and seven further deals under negotiation, and to the Brand Australia program.

It is also committed to further micro-economic reform and a major infrastructure investment to improve the profitability of our logistics companies, which are busy at ports and on roads bringing in the merchandise that we have to have. Most container ports and container yards are clogged with empty containers awaiting repositioning overseas.

Absolutely none of this is new and most of it has already failed. Brand Australia will compete with Buy Australia, which has struggled along for years without any real government interest. I wonder how much the new campaign will cost.

The simple truth is that if we employ 80 per cent of the population in activities that contribute 21 per cent of our exports, we are going to go broke.

This blogger is a supporter of globalisation strategies and of sensible liberalisation of service sectors. For instance, Coles and Woolies have higher revenues than Macdonalds but comfort with a local duopoly is one reason they've done nothing elsewhere.

Nonetheless, Feil is right that this is no solution to Dutch Disease.

Services exports of the type described are not terrestrial industries. These are people-to-people businesses that require presence on the ground. They are therefore, a story about outward flowing foreign investment, not goods. That is, Australian businesses will need to open operations in the export target country.

This has several implications. First, it means the jobs are elsewhere. Like the US corporate model of employing Chinese to make stuff to sell everyone else, this leads to an ongoing shift toward a meta or post-modern economy. Such delivers high corporate profits for a financially literate elite but does bugger all for anyone further down the food chain.

Second, although the profits from such ventures are recycled on the capital account, they tend to be minimised by the various and many manipulations available in the transfer process. Moreover, that means lower tax revenue.

Third, Australian government support is, virtually by definition, unable to do anything to support such a process. It is politically impossible to sell export subsidies that result in outgoing investment and jobs elsewhere. The only agency that will provide support for such things is EFIC, which operates as a semi-independent corporation. It has been trying to push through legislation to help in this process for years without success.

Fourth, and this is the biggest issue, Australian business is a history of failure when it comes to offshore investment. The tale of one corporate titan, Don Argus, is indicative. Compare the Homeside debacle, in which NAB bought a rust-belt based mortgage bank which became ground zero in the GFC, with his record at BHP where he exported raw materials at a rate that would make a pillaging Mongol blush.

There was some hope in the last cycle that Macquarie Bank and the listed property and infrastructure trusts had cracked it. However, that model has collapsed spectacularly and now sports such names of business infamy as ABC Learning, Centro Properties and Babcock&Brown. For a history of that try The Diplomat.

Which brings us to our second bitter pill. With the Australian dollar stronger for longer you would expect a surge in outgoing M&A investment. Not according to Bloomberg:
Australia’s corporate chiefs are spurning overseas acquisitions as concerns about the health of the global economy overshadow the record buying power of the local currency.

Australian companies have made or announced $53.7 billion of purchases abroad this year as the currency reached parity with the U.S. dollar, according to data compiled by Bloomberg. Stripping out BHP Billiton Ltd.’s $40 billion hostile bid for Canada’s Potash Corp. of Saskatchewan Inc., the amount would be the lowest since 2003.

“Now is a great time to make an acquisition offshore, but it also happens to be a time when boards generally are quite cautious about making offshore acquisitions,” said Andrew Pridham, head of Australian investment banking at Moelis & Co. in Sydney. “The appetite is not there.”

The International Monetary Fund this month said the global recovery is fragile, predicting slower economic growth worldwide in 2011. Ralph Norris, chief executive officer of Commonwealth Bank of Australia, the nation’s biggest lender, echoed that view on Oct. 20 when he called the world’s recovery “weak and uneven” and pledged a conservative approach to risk.

The fallout from failed takeovers in past years is adding to executives’ reluctance to pursue deals, said Pridham, a former member of UBS AG’s global investment banking management committee.


The Lorax said...

Dear oh dear Mr DLS. Don't you know the solution is simple? All we have to do is price our exports -- goods and services -- in the currency of our customers, as Joshua Gans suggests.

FFS, just how stupid are these people? You'd think Josh would have some idea earning his salary in USD at Harvard and (presumably) paying his Melbourne mortgage in AUD. Perhaps when he moves back to Melbourne the university can offer to price his salary in USD as well as the degrees it offers.

When the revolution comes, academic economists will be the first against the wall.

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