Wednesday, October 31, 2012

Australian services in the Asian century

Yesterday's post, Abu Dhabi, Australia and the Asian century, wasn't especially profound, although I hope that you enjoyed the photos! One point that I was trying to make is that there is life outside Asia, a second that we cannot automatically assume that somehow the rise of Asia guarantees anything. We live in a new world, and there are no guarantees. As it happened, I choose Qantas as an example. Today, Virgin announced that it had effectively taken over Tiger Australia and wanted to buy Skywest! And so the world goes back to the past duopoly under the influence of the present.

In this next brief post I want to look at some of the arguments about services, but just because I can I am going to include some more Abu Dhabi shots. This next photo is down town Abu Dhabi. The city's population is perhaps 600,000, yet there is probably more construction going on than in down town Sydney. I am just trying to give a sense of perspective!

The holy grail of services is seen as part of Australia's future, and yet I struggle to see that in the way so often presented. The services sector is remarkably complex, making analysis difficult. But I will try to present my cautions as best I can.

The central problem with services is that they are labour dependent. Some services are capital intensive, cloud services are an example, but labour and labour costs are generally still important.

Traditionally, services have been regarded as non-traded because they had to be delivered in close proximity to the customer. Even in the traditional model, there were trade exposed sectors. In some cases such as engineering services, professionals might travel to reach customers. In others such as tourism or more recently education services, customers might travel to the service.

In the trade exposed sectors, key variables affecting trade included the presence of non-tariff barriers such as restrictions on professional practice; travel and on-ground support costs; and relative skill levels and concentrations in particular areas. Thus Australia has done quite well in areas such as engineering or agricultural services where barriers to entry in other markets were lower, while Australian professionals had particular professional skills.    

In the 1980s, the growing importance and falling cost of communications and computing technology introduced the concept of footloose industries. These were newly trade exposed services whose location could switch because they could be delivered from elsewhere.  Now, subject to skills, labour costs became dominant. The switch of call centres, IT support or certain legal services to India are examples of the response. Initially, this switching process was quite slow, but then accelerated as a consequence of continued changes in technology, the development of infrastructure elsewhere and the spread of education. 

Australia is a high cost country and will remain so. One result has been growing job losses as particular activities move off-shore. This will continue. We have also seen growing price based competition in some of our traditional service areas because of the huge expansion in the supply of skilled professionals in places such as China. Again, this will continue.   

Two things seem to stand out from this analysis. The first is that our imports of traded services will continue to rise, while our exports will come under pressure. Add a further factor, that our young professional base is increasingly mobile and increasingly Asian focused. The young business oriented professionals from Asian backgrounds, and this has been an increasing proportion of the graduate cohort, may call Australia home, but its not necessarily a place to work. 

My feeling is that in all the discussion, the question that hasn't been properly posed nor addressed, is just what service activities Australia might actually make a quid from? What are their particular attributes?

This is where I have my problem. I simply don't know. Just as Qantas has found, our location at the end of Asia remains a problem. Just improving productivity is not enough.    

Note to readers:

This post is part of an irregular series that began with Economic threads & the need for a new view. I am listing all the posts there.


Evan said...

Hi Jim, so much of these discussions seem to be a kind of naff racism.

Remember when the West was going to maintain its advantage through 'design' - non-white people certainly couldn't be clever enough to design as well as white people.

Now it's services. Somehow people believe we will be better at services than people in their own countries.

I don't know the answer either. I'm pretty sure that it means 'picking winners' in some way. I don't think any country these days is big enough to do everything - not even China.

Jim Belshaw said...

I think that the view about the automatic superiority of developed countries was true fifty years ago. I don't thin that it is now. On picking winners, will try to post tomorrow.

Rummuser said...

Places like Abu Dhabi and Dubai still have a local market for their non citizen populace. Places like India and China have the advantage of population which gives opportunity for domestic consumption for all economic activity. Should Australia consciously decide to increase the population?

Jim Belshaw said...

The Australian population is increasing quite fast, Ramana, as a consequence of migration. But our starting population is relatively small. Probably time for a population post.