Introducing the meaning (or otherwise) of the term picking winners

I have always struggled with the use and abuse of the term "picking winners" in economic and industry policy. It is one of a suite of terms used in policy discussion that carry connotations. They are in fact shorthand, code if you like, for a set of linked arguments and opinions.

To illustrate this, consider the most common us of the term, "Government's mustn't pick winners". Or, alternatively, "Governments should pick winners".

Now at the most general level, the use of the term in either way is pretty meaningless. All Government activities create a pattern of winners and losers. If we drill down further, we find that the term is generally used for the provision of direct support by Government for certain firms, sectors or activities expected to yield longer term economic gains. Again, the term is too broad. When Governments invest in infrastructure they obviously do so in the expectation of  longer term gains. Further, in choosing how much to spend, where to spend and how to finance that spend, they advantage some and disadvantage others. I don't think that most would deny that Governments should invest in infrastructure, so we have another definitional problem.

If we drill down further still, we find that the term is most commonly used in Australia to describe Government support for activities where the combination of the private sector with market forces might otherwise be expected to yield the best results. Those who use the term pejoratively argue  that Governments are bad at second guessing markets. Those who use the term in a positive way argue that market failure or market short termism leads to bad results so far as the country is concerned. In both cases, you can be reasonably certain of what those arguing are likely to argue in other economic or policy contexts.

Now before going on, to further illustrate the confusion the term creates, have a look at this short US example.

But why am I rattling on in this way? Well, it's partly because of my experience in trying to get new Government initiatives through that became partly mired in a pick winners debate. It also reflects my own review of my past thinking in the context of Australia's economic future, including assumptions about the role of services built into current discussions on Australia in the Asian Century. Finally Evan, one of my regular commenters, specifically asked my views about picking winners in the context  of my discussion on the international future of the Australian services sector. 

In my next post, I will try to explain my cynicism about the language and concepts surround the picking winners discussion and also outline the conceptual basis I use myself in discussion. 

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.

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.

What does "Asia" and the "Asian century" mean?

Waking up early this morning with no deadlines for the rest of the day, I enjoyed the luxury of a relaxed stroll around my part of the blogosphere. There were many things that I could write about as a consequence, some serious, others not so. In the end, my attention was caught by the on-going discussion on the Lowy Institute blog on Australia in the Asian Century. You will find the full series of posts here.

By way of background for international readers, the Australian Government has commissioned a White Paper (The Henry Review) on Australia in the Asian Century to consider the likely economic and strategic changes in the region and what more can be done to position Australia for the Asian Century. The Lowy Institute is attempting to encourage discussion on the issues raised.

In this brief comment, I want to look at just one issue, the importance of definitions.

Over the last few years, I have written a fair bit on the way our mental mud maps and the words we use to express those maps affect thinking.

The world is a complex place. To understand it, we have to simplify, to create patterns. We then attach labels to those patterns, each representing a bundle of thoughts and views. Those labels acquire a life of their own, conditioning subsequent thought and actions. Importantly, the labels act to exclude alternative ways of thinking.  

"Asia" is example of such a label, as is the idea of an "Asian century". You can see the influence at work in this quote from an interview with Bob Carr, Australia's new Foreign minister in The Phnom Penh Post.  

I think our engagement will grow. The Prime Minister of Cambodia, Hun Sen, has a very cordial view of Australia. I remember one minister saying that Australians may have white skin — but that’s less and less true, as our population has Asianised — but we think like Asians. That’s a very great compliment, because we are working hard to adapt to a century that will be dominated by Asia.

Now I have no idea what this quote actually means. We can see that Hun Sen has a view of Asia and Australia, Bob Carr has a view of Asia and Australia, but beyond that?

Take "we think like Asians". What do Asians actually think? Indeed, what are Asians?

Asia is a useful geographic descriptor, although the boundaries of Asia have varied.

Take, as an example, the use of term subcontinent to describe the Indian peninsular. This recognises that the peninsular is part of Asia, but is also distinct, almost a continent in its own right. Of course, the very idea of continents is an example of another label.

Now if we look at the subcontinent and immediate surrounds, is Afghanistan or Shri Lanka part of Asia? Or, for that matter, Tibet?

The old British centric label of the Far East, a label synonymous with Asia, excluded India. The Indian Empire adjoined, but was distinct from Asia. Japan or China were Asian, India was not. It was a world of its own.

Just at the moment my train reading is Geoffrey Blainey's A very short history of the world. The river civilisations that arose in what is now China and India were very distinct, although there was a flow of ideas. To lump the whole lot now with their very different histories under a single label, Asia, is to mislead.

Power is always expressed in geographic terms.

To Australia with its dependence on sea lanes, the critical geopolitical issues are in fact maritime. This country's world centres on the Pacific and Indian oceans and on the critical sea lanes. This coincides with main national groupings - India with its focus on the Indian ocean and its relationships with adjoining Pakistan and China; North Asia and especially China with their relationships to each other, the Pacific and the US; and the ASEAN countries and especially Indonesia that straddle key sea lanes and provide something of a natural buffer against developments further north.

This is a complex pattern, further complicated by our relationships with the US. Further, it is a pattern over which this country has very little control. Australia may, as our foreign ministers delight in telling us, be a mid range power. However, the words of themselves indicate the limits. We are important enough to be a player, but our role will always be a subsidiary one outside certain limited areas.

Much of the current discussion on Australia in the Asian century centres on economics. Even here we have to be careful about the application of the label Asian, for Asia is not an economic entity.

To amplify this, consider the Sydney Morning Herald piece: How corporate Australia found a niche in India. However Asia may be defined, each Asian country represents a different market place or indeed market places, each with its own complexities. You cannot speak in generalities.

The growing integration between Australia and various Asian countries will continue, bringing their own changes in this country.

Just as major Australian hotels and tour operators once focused on the Japanese market place, now China is the flavour of the month. From congee for breakfast to the inclusion of Chinese language TV stations in room offerings, Australia's hotels are attempting to meet the needs of the growing Chinese visitor marketplace. In doing so, they are not focusing on the generality Asia, but on the specifics of a defined group of customers.

I think that this really captures my point. Rather than focusing on Asia as such, Australia's approach has to be multi-level and nuanced, taking differences into account. This leads to me to doubt the value of the white paper itself beyond a very superficial level. To my mind, there is actually a real risk that it might mislead, translating into generalities that conceal the need to respond to difference.        

Saturday Morning Musings - why multicultural Australia cannot be part of Asia

This morning's Saturday Morning Musings looks at some of the threads in present Australian life and politics

Here in Australia dairy farmers have been complaining for some time about the milk wars between Australia's two main supermarket chains.

For the benefit of international readers, the two big chains have been selling milk for $A2 for two litres. They have also been selling discounted store brand bread for prices as low as $1.50 a loaf. This has actually been a godsend for the growing number of poor Australians. However, at the time the milk and bread wars began, farmers warned that the lower prices must flow on to farm gate prices. This appears to be happening.

In yesterday's very short post, Woolshed Foreglen, I said that I must write something on woolsheds. That comment was triggered by a conversation at work.

A work colleague emigrated to Australia from the UK about eight years ago. I used some phrases in conversation that led to him looking at me quite blankly. He literally had no idea what I was talking about, had no idea of the importance of wool in Australia's past. But then, why should he?

I am still learning how to make that past live, to explain in short and interesting form providing the minimum information required.

Over on the Lowy Institute blog, there has been discussion about the Government's White Paper on 'Australia in the Asian Century', due to be released in the middle of this year. For those who don't know this blog, it is very good indeed, one of the best in the world with a special focus on foreign policy.

The Henry White Paper is interesting, for it's very existence is another sign of social and cultural change in this country. The dominant frames used in this country focus on the emergence of a multicultural Australia. To many, the discussion on Australia in the Asian century is seen as a natural continuation of this. The reality is a little different.

Leave aside all the problems involved with the word "Asian". It actually doesn't exist.

Accepting that, Australia is less an Asian country today than it was forty years ago. Then there was great interest in Asia, a fascination, a desire to learn. All that has gone. The reason lies in the nature of multicultural Australia itself.

Australia is a multicultural society and that alone means that we cannot be Asian. This is not a comment on Asia or Asian countries. It is a very Australian specific comment.

In that past Australia on which I so often write, there was fear of Asia, of the risk that the relatively homogeneous Australian population would be swamped by Asian hordes. That gave us the White Australia policy. However, there was also fascination with Asia.

As Australia opened up in the fifties and sixties, the fascination grew. We discussed what it meant to be part of Asia. The young in particular interacted with Asian students, visited Asia, were attracted by Asian cultures. It's actually quite hard to explain just how strong this was, another thing that I have to learn how to do.

All that has gone.

Australia chose to be an open society that allowed migrants from anywhere. Today, we take pride in the fact that our migrants have come from every country on every continent in the world. But that, of itself, limits Australia's emotional engagement with Asia.

Each Australian migrant group retains some linkages with home. They interact with Australia on one side, with their culture and home country on the other. To a migrant from Greece, the Sudan, Chile, Iraq or Tajikistan, the old fascination with Asia has no relevance. How could it? There is no context. It's just not relevant.

You would think that the growing number of Australians coming from Asian countries might balance this. It doesn't work that way.

Asia is a polyglot place. No one really agrees on what it is or was. Chinese Australians may have a generalised concept of Asia, but they are are first and foremost Chinese on one side, Australian on the other. To the degree that they do think of "Asia", they certainly don't see Australia as part of it.

Trying to get my mind around this, I think of Australia as an open society perched on the edge of very different and relatively closed societies that span the world.

I am not being pejorative when I say this. I am trying to make an objective judgement.

I think of Australia a little like one of the Greek Islands that I was writing about in my Greece series.

They lived in a complicated world of conflicting groups. The most economically successful islands had to be open to all, to attract traders from everywhere in the ancient world. Their wealth was directly linked to their openness. Their bankers, their investors, their traders spanned widely. The products produced by their artisans and farmers were widely spread. But by their very nature, they could not be an exclusive part of anything except in broad geopolitical terms.

I think that that's what modern Australia is. We are less than two per cent of the global economy, and our share must shrink. Our global population ranking will decline. That is our weakness. Our strength lies in our openness. The price we pay is not belonging.       

The ghost towns of China

In a comment on one of my Express columns, Belshaw's World - euphoria to ill-informed economic future, Greg pointed to this article - The ghost towns of China: Amazing satellite images show cities meant to be home to millions lying deserted.

Have a look. It's quite fascinating.

ASEAN, Indonesia & Australia

I jotted down Gillard's refugee deal as a quick response to the Australian PM's announcement. Interesting to see the subsequent Australian political and media reaction. I won't comment at this point beyond noting that the commentary jammed the whole thing into past frames.

If the refugee issue achieved major national coverage, the same cannot be said for the 18th ASEAN Summit. There is zero coverage this morning in the on-line editions of both the Australian and the Sydney Morning Herald. If this an example of what I mentioned in India, Australia and Asia, the decline in Australia's interest in Asia or what Michael Wesley calls 'insular internationalists'?

ASEAN has declined in importance, I think, in a general sense. India and China are far more important than they were when Australian interest in ASEAN was at its peak, when Malaysian PM Mahathir kept Australia waiting in the lobbies, blocking increased involvement. Yet you would still think that ASEAN was of sufficient importance as this country's immediate neighbour to warrant some coverage.

In this case I got sufficiently frustrated that I actually went in search of coverage. You will find the official summit web site here.

Necessarily, things such as the present Thai/Cambodian conflict as well as problems with Burma (the generals want their chance to chair ASEAN) affect Summit discussions. However, these things pass. There is also an issue with diplomat speak, the way that discussion at all these international gatherings gets clouded in language that acts to conceal as much as reveal.

In opening the Summit, the Indonesian President suggested that there were three priorities from an Indonesian perspective:     

The three priorities are : to ensure the attainment of concrete progress in realizing the ASEAN Community; to ensure the maintenance of order and condition in the region favorable for the achievement of development objectives,through the East Asia Summit, while maintaining the centrality of ASEAN; and to ensure successful discussion on the urgent need for a "post 2015 ASEAN" vision, namely the role of the ASEAN Community in the  global community of nations."

In the full text of his speech, the Indonesian President referred to the increasingly complex international environment.

ASEAN is responsible to responding to dynamic conflict that may influence the image of ASEAN and sustainable peace in our region.  If conflict occurs, ASEAN must be capable of facilitating a forum for diplomacy and open dialogue with the intent of attaining common peace

He also referred to climate change, to global population growth and to the issues posed for ASEAN by the need for energy and food security. "The competition for energy, for food, and for clean water will become part of the global competition", the President noted.

We need not to forecast what would happen in ten or twenty years in the future, we are already facing food and energy price fluctuations that attend to continue rising globally....

We must give serious attention and take concrete measures to address the soaring of food prices and world energy, which in turn will negatively affect the prosperity of our people. History shows that the rise of food and energy prices usually cause has always caused the increase in the number of people living in poverty. Yet we know very well that decreasing the poverty level is not an easy task.

He went on:

We have just passed the period of global economic and financial crisis that has yet to recover. At the same time, we have to deal with the climate change problem that has been causing damages in littoral and island states, and other countries. We can no longer argue that human migration in large number continues to take place, irregularly and illegally, so that it creates many political, social, security problems, not only in countries of destination, but also in transit countries.

Other serious challenge is concerning disaster striking quite frequently in our region. We realize that our region is prone to disaster. An example of this is the the earthquake and tsunami that struck the eastern part of Japan just two months ago. Thousands of people perished and unaccounted loss of property and infrastructure. That reminds us of the tsunami that devastated Aceh seven years ago where thousands of people lost their lives and  huge material loss.

One of the difficulties I face in interpreting President Susilo Bambang Yudhoyono's remarks and the proposed solutions and actions lies in my own lack of knowledge of some of the structures involved, as well as the power dynamics.

In the midst of all the chaff created by international organisations and by bi- and multi-lateral relations between countries, it can be very hard to identify the wheat at any point in time. However, over time, there is a natural winnowing effect as the chaff drops away.

ASEAN was formed on 8 August 1967. At the time it was formed, there were actually very few real linkages between South East Asian countries. ASEAN gave those countries a voice and influence that they could not have achieved on their own. Further, even though attempts to create closer economic relations between ASEAN countries were initially ineffective, those links did grow with time.

In 1983 I came back to the Australian Department of Industry and Commerce after a period of post graduate study at the University of New England. Then Trade Minister and Deputy PM Doug Anthony had become interested in the question of an Asian Free Trade Area and asked the Bureau of Industry Economics to look at the issue. I was asked to carry out the task, supported by Noel Benjamin from the Bureau.

As we worked our way through the country by country detail of trade patterns and trade barriers including all the ASEAN countries, the difficulties became clear. However, and unexpectedly from my viewpoint, we concluded that such a free trade area would benefit Australia. This was the the dying days of the Fraser Administration, so nothing happened.

As an aside, prior to this I hadn't looked in detail at the economics of either free trade areas or customs unions. One side effect of the study was that it gave me a framework to interpret the economic distributional effects flowing from the creation of an Australian customs union as a consequence of federation. I still use that framework today.

Looking at ASEAN in 1983, the combination of trade flows and trade barriers meant that ASEAN was still a long way from becoming a meaningful economic unit. To some degree, that's still true in 2011. The creation of an ASEAN equivalent of the EU by 2015 remains a complicated task. Yet over the long period since ASEAN was formed in 1967, you can see the progress.

Looking forward, ASEAN, Australia and New Zealand actually share common and complicated problems. The rise first of China and then of India create complex geopolitical issues. The exact relationship of each ASEAN country to the new environment varies, creating new difficulties for ASEAN in achieving common purpose.

I have argued that the relationship between Australia and ASEAN is one of the most important determinants in delineating out future. ANZ plus ASEAN is still large enough to provide a balancing block in a way that neither can do on their own.

Within ASEAN, Indonesia is critical from an Australian perspective because of its size and proximity. We just don't know enough about Indonesia. To illustrate, in his speech, the Indonesian President said:

Of course, it does not end there. There remains a lot that we have to do and work on together. We must make sure that the Master Plan on ASEAN Connectivity can be implemented effectively. In this regard, Indonesia is in the process of finishing the Master Plan Percepatan dan Perluasan Pembangunan Ekonomi Indonesia (Master Plan for Acceleration and Expanded Economic Growth of Indonesia/MP3EI), in order to boost the development of six economic corridors in Indonesia. I believe that what Indonesia is planning to do will boost the national economy and intra-Indonesian connectivity, as well as awaken ASEAN’s economy and speed up the construction of ASEAN connectivity.

Do you know what Indonesia's six economic corridors are? I don't. Yet I suspect that's more important to Australia's future than the question of refugees.

Postscript

Like me, Winton Bates had not heard of either the six corridors or the master plan. In the end, I did a search.

• Visit by Indonesia’s State Minister for National Development Planning/Head of BAPPENAS, Professor Armida Alisjahbana
• World Bank, ADB Support Indonesia's Economic Corridor Scheme.

On trade policy more broadly, Winton referred me to this post by Peter Drysdale, Why Doha Round matters to Asia and the Pacific. There Peter said in part:

What leaders who have it in their power to do this deal must understand is that failure to conclude the Round now will put a stake in the heart of a multilateral system that is in retreat on all fronts, not solely for economic reasons at a critical stage of global recovery from financial and economic crisis, but for deep, geo-political reasons.

Europe is seriously weakened. The Middle East and Africa have brought the world to an intensely unstable moment. Far more importantly, the emergence of China in Asia and the Pacific challenges the established political order.

How does this all matter to the global trading system?

The multilateral trading system is the economic sinew that constrains the exercise of international political muscle in ways that damage global well being and inflicts national self-harm.

Should Doha fail now, there will be powerful momentum to doing other deals of some kind no matter what. In Washington, the Trans Pacific Partnership (TPP) is all the rage. Does it matter if we get yet another pseudo ‘free trade’ agreement, between the US and group of eight partners who in the total scheme of things are pretty insignificant?

Now I really hadn't focused on the Trans Pacific Partnership. I am not sure whether or not it's a good thing. But what I suddenly realised was the extent to which trade policy seems to have vanished from Australian national discussion. That's not a good thing.

The present mining boom is nice, but in the long term Australia's economic survival is best protected by freer trade at at a global level, and that is under threat.

Postscript 2

I hate not knowing things. Tomorrow I will bring up a summary of all of Australia's free trade agreements.

Postscript 3

Australia's Free Trade Agreements provides a list of current Australian free trade agreements.

Winton Bates' Has Australia's media dropped the ball in reporting on Asia and the Pacific? is a companion post to this one, providing Winton's perspective on the issues raised. 

India, Australia and Asia

On Radio National's Saturday Extra program, Geraldine Doogue has been presenting a series of special features on India. I have only caught snippets, but the bits I have heard have been interesting. Those who are interested can find the whole series here. 

Another interview with Professor Michael Wesley, head of the Lowy Institute, looks at Australia and the rise of Asia.I quote one excerpt:

In a new book called There Goes the Neighbourhood he explores a conundrum that fascinates him, that though Australia is enmeshed more than ever in the world, we seem to be less interested in the region around us. He calls us 'insular internationalists', and he's consulted the realm of psychology to try to probe some fresh answers.

I have commented before on what I see as a decline in Australian popular interest in Asia from a peak in the 1960s, a rise in Australian insularity.

Part of this is due simply, I think, to growing familiarity. At a time when most Australians are used to seeing a very mixed society around them, it is hard to envisage the fascination that Asia exercised at a time when it seemed so different; the differences fascinated.

In Travel, tubing and social change in Australia I spoke a little about the travel habits of young Australians. The things that motivated my daughters' generation in visiting Asia are very different from my reactions at the same age. Then among the growing number of younger Australians with Asian backgrounds, there were very few in the 1960s, the various Asian countries are simply part of their background life in somewhat the same way that Scotland is to me. Interesting and important, but more part of the furniture.

Mind you, there is one difference. I never saw England or Scotland as a place to go to make money! The return of younger Asian Australians to India and China in particular to take advantage of the new opportunities opening is a marked feature of modern Australian life.

It's all very interesting, at least to me!