What does queensland's economy depend on?

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Queensland's Economic Strategy

Outline

Queensland has a history of adopting economic strategies which have been (and continue to be) ineffectual in developing a productive modern economy - as evidenced by continued low community incomes by national standards, relatively low per capita state product and the problems which many regions suffer.

Queensland's 'traditional' strategy (ie that of the 1980s) involved: facilitating major foreign investments; low taxation; and minor amounts of 'assistance' to fill market gaps. Unfortunately it produced poor quality growth, eg tourism and capital intensive resource operations - which have their productivity limited by competition from low wage economies. Moreover an emphasis on 'growth' (without concern for development) can result in activities with large and rapidly increasing revenues and expenditures but where the difference between these (which contributes to economic product in the form of profits / wages / taxes) is small. And government 'assistance' to individual firms is the opposite of, and a major obstacle to, development of the economy.

Queensland missed an opportunity to significantly improve its 'traditional' strategy in the 1990s - partly because an ineffectual process of public sector 'reform' eliminated the capabilities to do so which had been emerging in the 1980s.

By the start of the 21st century, Queensland's strategy was aimed at higher goals (eg developing a more productive economy, and an innovation capability so as to profit from, rather than be the victim of, economic change). However to achieve this, populist rather than realistic policies have been adopted. Government has foolishly tried to force the pace and direction of economic change (eg under the Smart State agenda, and by trying to 'bribe' external firms to locate in Queensland - a tactic which had lost credibility elsewhere many years earlier because of competition from low wage economies for the location of 'footloose' firms). In particular, the Department of State Development seemed to see itself as having a hands-on responsibility for developing the 'state' - rather than developing the 'economy' so that business and the community could effectively develop the state.

There is increasing pressure for improved performance (eg because of currency revaluation; the need for a stronger tax base to fund public services and infrastructure expectations; the increasing importance of exports after bursting of housing bubble in the face of a deteriorating international trading environment and worsening export performance; infrastructure and skills deficiencies that limit growth; the changing economic environment and greater uncertainty associated with Asia's increased economic significance; environmental risks; the probable need to 'reinvent' resource related industries; escalating social dysfunctions which have economic dimensions; and international instabilities). Simultaneously stronger competition is emerging to challenge traditional activities (eg because of rapid development of medium technology capabilities in Asia; global outsourcing; and a potential US Free Trade Agreement).

Queensland's main problem in responding is the lack of adequate machinery to cope with economic change - especially in relation to the mutual support required between complementary elements of industry clusters. A more effective economic strategy might involve: development of civil institutions able to accelerate 'learning' by whole industry clusters; emphasis on creating competitive advantages, rather than reliance on the given comparative advantages of regional economies; public stimulus to adjustment by economic 'losers'; increased taxation partly to slow the ongoing shift to a less economically productive population through migration; increased concern for effective international economic and political environments; and renewal of Queensland's Public Service on a professional basis.

Evidence -

Click here for Evidence of a problem

Evidence

The primary evidence of substandard economic strategies lies in outcomes, such as a Queensland per-capita gross state product (GSP) that seems to be perpetually about 15% below Australia's national average despite the fact that: (a) Queensland has traditionally accounted for a large share of inward investment into Australia; and (b) Australia's gross domestic product per capita was in long term decline by international standards. And in 2001-02, Queensland's per-capita GSP apparently declined again relative to national averages (see About Queensland's Budget).

In 2003 useful gains in improving the productivity of Queensland's economy through the effect of successful economic strategy were claimed [1], with similar claims subsequently made regarding Australia's national economic performance (eg that there has been a turn-around in Australia's long term decline in relative incomes) [1].

However there are many complexities which render these analyses uncertain (see Does Productivity Growth Confirm Smart State?, Note 3, and Impact of Economic Liberalism in Australia). For example, the effect over several years of substantial devaluation of the $A on commodity exports would be to create the impression of rapid economic and productivity growth (which would be more significant in Queensland's more export oriented economy) - but this factor (and many others that complicate the assessment) do not seem to have been considered.

Moreover other evidence suggests that claims of superior performance should be treated with caution. In particular:

* there are numerous indicators of the traditional under-development of Queensland's economy (eg see Section 5.2 of a 1994 paper, SEQ-2001: A Plan for an Underdeveloped Economy, and a detailed segment on Queensland as an Under-developed Economy);

* in the early 1990s Australia was seen to be diversifying into capital intensive operations (rather than knowledge intensive functions) (Access Economics and Allen Consulting, Developing Australia's National Competitiveness, for Business Council Summit on 'Our Competitive Future' - 1991). Moreover encouraging such investment (ie in 'projects') remained the focus of unsophisticated state economic strategies in the 1990s. The problem is that capital intensive functions now tend to face constrained productivity (due to competition from lower wage global regions). In particular this problem beset resource-based industries in the 1990s (see Note 9), a sector that remains of major economic significance;

* many marginal (rural, coastal and metropolitan) regions simply fell behind the necessary rate of economic change in the 1990s - resulting in serious social symptoms and political instability (See Assessing the Implications of Pauline Hanson's One Nation). Moreover various marginal (metropolitan, rural and coastal) regions face continuing difficulties. For example:

o many regions have been identified as lacking features required for future prosperity; and local authorities concerned about such problems believe that the state government provides little support - because the Department of State Development was primarily concerned with 'big ticket' items [1];

* under-employment has been widespread (due to the availability of mainly poor quality jobs) [1] and unemployment has been persistently high [1]. The availability of mainly poor quality jobs has been seen as a major factor in the emergence of poverty as an intractable problem in Australia [1]. Some observers claim that a permanent under-class has emerged [1, 2]:

* social equity was only maintained by large compensating social transfers [1];

* Queensland in particular has had a poor performance in terms of job quality (see Employment; Tourism) and job numbers at times (eg see 'Budget fails grade on job creation', editorial, Courier Mail, 20/6/01);

*

Australia's international ranking in innovation (a major factor in the productivity of leading economies) has been in constant decline [1], and a separation typically exists in firms between those concerned about intellectual property and those concerned with creating competitive advantage [1] - perhaps for reasons like those suggested in The Economic Futility of Backing Australia's Ability 2, and Commentary on Smart State program. Australia's status in this respect is not only poor with respect to OECD economies, but is rapidly being surpassed by developments in India, China and SE Asia [1];

* export performance has been deteriorating [see below];

* the sophistication of economic policy concepts emerging either from governments or from independent research institutions appears [to the author] either not to have improved (where it was traditionally weak) or to have declined (where it used to be strong). Misguided and mismanaged attempts to reform public administration (see Decay of Australian Public Administration) and to commercialize universities may have contributed to this syndrome;

* businesses generally have been seen to lack the management ability to conceive or implement the strategic initiatives required to create competitive advantages or new export markets [1]

A very telling indicator about the under-development of Australia's economy generally is the difficulty which expatriate Australians, with skills gained through international experience, reportedly have in gaining employment here - because their abilities are seen as a threat by their potential bosses [1]

Traditional Strategy

Queensland's Traditional Economic Strategy

The history of Queensland's economic strategy (eg a touch of socialism in the 1920s; a strong agrarian / state corporatism tradition until 1957) will not be considered here.

However what is now seen as Queensland's 'traditional' economic strategy (ie that of the 1980s) involved:

* trying to attract investment (especially that linked to natural resources) by government support for major investors;

* encouraging population and business growth through relatively low taxes; and

* provision of minor amounts of government 'assistance' to fill market gaps.

Queensland's population and economy grew relatively rapidly under this formula. What was not considered was the poor quality (ie low value-added) of the industries which it encouraged, eg:

* primarily capital intensive mining and mineral processing which produced very poor rates of return to investors in the 1990s probably for structural rather than cyclical reasons (See Note 9 on Queensland's Challenge); and

* tourism (see Section 5 of SEQ 2001: A Plan for an Under-developed Economy - noting specifically links to references related to tourism in SE Queensland has an Underdeveloped Economy and in Notes on SEQ 2001 methods)

Problems with this formula were that:

* attracting investment, which had been seen as a key economic development tactic in the industrial era, had lost credibility in Europe and North America since the 1970s as a path to a high productivity economy because of competition from low wage economies (see Comments on Buying Industry). Developing existing capabilities appeared to be the preferred option;

* the priority given to 'major' projects was inappropriate, as project size is no guarantee of high economic benefit, and there is more to be gained by developing economic and administrative systems as a whole than by central government engagement with isolated 'projects';

* the resource sectors in which growth was being encouraged were seen to have limited prospects because of low global demand growth and poor terms of trade. And as noted above, primarily capital intensive production also appeared to encounter structural obstacles because of low wage competition from less developed countries

[Note: the latter comments should not be seen as indicating a view that industries linked to natural resources are inappropriate for Queensland - merely that naive commercial and economic strategies are inappropriate. Managing Australian Mineral Wealth for Sustainable Economic Development (if combined with competent business and economic strategy) would appear to point towards very relevant opportunities)

* direct government 'assistance' to firms to fill market gaps tends to be the opposite of, and economically inferior to, developing the economy (ie of enhancing the ability of business and the community to provide the support firms require).

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Click here for What's wrong with government assistance to firms to fill market gaps

The problem with direct government 'assistance' to firms is that:

* high quality of advice and assistance about enterprise development or innovation requires 'market conscious' organizations with relevant experience and skills. Government agencies have to be more politically than market conscious, and thus tend to provide support of poor technical quality (or else to be under-resourced);

* public accountability requirements attached to assistance programs will tend to distort firms' priorities and needs (or, if accountability constraints are limited, rorts will be likely);

* the budgetary cost of assistance directly reduces the economic value-added (and contribution to overall economic productivity) of any resulting activities;

* a well developed economy could provide support for (say) 20 firms for each one that can be supported from limited public funding, yet the latter tends to prevent non-governmental support from initially emerging - because it appears to be free. In other words, while 'assistance' to firms may be provided because market gaps exist (as they always will in a changing economy) the risk is that government 'assistance' programs will lock-in those market gaps, and prevent the economy from developing;

* while creating what appear to be business successes under 'hothouse' conditions can provide political gains for government, those 'successes' will tend to fail, or be taken over, when serious competition is encountered because they will not have equally serious support from their business environment;

* it is impossible for authorities to know what type of assistance will actually improve economic performance;

* government is subjected to political pressures from various interest groups, and what may have been envisaged as positive support for economic adjustment risks turning into costly 'business welfare' supported by entrenched lobby groups.

A better alternative involves stimulating attention to the opportunities that are available from providing services to fill market gaps - but though this is not a role which politically accountable organizations can be relied upon to fulfill adequately, because political understanding and acceptance of the need will often tend to be 10-15 years too late.

Furthermore traditionally emphasis was only being given to economic growth ('more' activity) but not to economic development ('better' activity).

The difference between 'growth' and 'development' is suggested in Section 5.1 of SEQ 2001: A Plan for an Under-developed Economy (1994). In over-simplified terms an emphasis on 'growth' can yield industries with large receipts and large expenditure - but where the difference between these (ie the value-added which is counted as economic 'product' and finances return on investment, wages and salaries and net payments to government) may be small. An emphasis on 'development' can increase that difference (by creating competitive advantages for firms) and so increase community incomes, as well as increasing attractiveness for investment and growth.

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Click here for How institutional weaknesses led to this naive strategy

This naive strategy probably arose because:

* natural resource strengths created motives and opportunities for unsophisticated political and business interests to gain advantages by announcing (and supporting) 'projects' irrespective of their impact on community welfare (see Resource Curse Hypothesis);

* competent institutions in civil society to develop policy concepts were virtually non-existent due to the lack of high level strategic capabilities in Queensland's small business / branch office economy, to a high level of reliance on foreign investment (see Queensland's Weak Parliament) and to a tendency by governments to monopolize information they received (which has been seen as a general obstacle to economic development) . Indications of this problem include:

o the 15 year lag which often occurred in introducing advantageous changes to economic systems and policies, eg

+ industrial estates used to receive strong support because this was believed to be critical the location decisions of manufacturers. In the absence of serious economic research capabilities it took some 15 years before anyone realized that industrial estates did not really influence the location decisions of manufacturers (Berryman J., `Survey of Business on Queensland's Industrial Estates', Planner, V21, N2 June 1981), and about another decade before the program was reviewed;

+ agribusiness models were standard practice in Europe and north America by 1980, but not accepted politically in Australia until the early 1990s;

o numerous forums in which the author has participated which were led by persons with the operational concerns of junior managers and a desire to lobby government for help, and limited understanding of policy issues (eg of what government should best do in the public interest);

o the author's experience in the 1990s of being invited to attend one discussion with several leading citizens in relation to developing an economic strategy - where none of those attending seemed to have much real understanding of how a developed economy works (and thus had little chance of finding a strategy to create one). The major thrust of their expectations appeared to revolve around facilitating external investors' projects;

o the tendency to define value-adding as being equivalent to downstream processing (eg of agricultural and mineral production) - though whether economic value is added by such processing is a much more complex question (see Section 3 of Queensland's Challenge).

* Australia's unbalanced federal financial arrangements spared Queensland Governments from the financial consequences of their economic strategies (see About the Review of the Grants Commission Arrangements). Key points are that:

o states have most spending responsibilities while the federal government gains most tax revenues. Horizontal fiscal equalization arrangements made under the Grants Commission allowed Queensland to prosper financially despite the weak tax base which its economic strategies created. Because of this arrangement, Queensland has simply had no financial incentive to take the development of its economy seriously;

o state taxation largely applied to areas dependent on economic turnover (eg stamp duty, mineral royalties), rather than to economic value added (eg income taxes);

o in the 1980s, public finance was defined as the key indicator of whether Queensland had a 'strong' economy - and this goal dominated over options that might have yielded greater benefits.

In this environment, there has been little raw material publicly available for debates about policy issues; and that which is available is of poor quality - eg favouring operational economic programs (typified by support for foreign investors, or government programs to 'assist' firms which corresponds to the operational concerns of small business / branch office managers) rather than developmental actions which enable business and the community to better assist one another (corresponding to the more strategic concerns of corporate CEOs).

1990's Strategy

Strategies in the 1990s

An opportunity was available from the late 1980s to adopt a more sophisticated strategy.

Unfortunately this chance was missed, and four general state economic strategies from 1987 to 1997 did little but slightly increase (ineffectual) government 'assistance' to fill market gaps.

The reason that economic strategies in the late 1980s and early 1990s, such as Quality Queensland and Leading State, did not result in effective machinery for development of Queensland's economy is suggested in a 1992 summary of a review of the Leading State strategy.

The missed opportunity and what went wrong are outlined in Defects in Economic Tactics, Strategy and Outcomes and summarized in Queensland's Challenge (see Section 1).

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The latter referred to:

* public recognition of the need for economic change - but not of the fact that the economic goal posts had been raised by changes in the economies that Queensland / Australia were seeking to emulate;

* the lack of any substantive change in practice to what was naively seen as Queensland's 'winning' economic formula;

* the fact that increasing competition (through market liberalization) is also insufficient to ensure the (often systemic and institutional) capabilities required for firms and individuals to compete successfully;

* the role which government 'assistance' to firms has in locking in market failures and creating bottlenecks that prevent the economy from developing - see also comments above

A major factor in missing this opportunity was the further weakening of the institutional capacity which Queensland needs to develop its economy because 'reform' was undertaken to build a political power base rather than to improve performance and this damaged the technical competence of the Public Service (see Towards a Professional Public Service for Queensland). Efforts to develop a productive modern economy, that were frustrated by the priority given to inappropriate (eg distorted financial) goals in the 1980s, were often frustrated in the 1990s by the ignorance and inexperience of those politically favoured to mis-manage more progressive goals. This is illustrated by the comments on Smart State below which refer to methods which might allow its virtuous goals to be achieved that were developed through experience in the 1980s but then lost through politicisation and de-skilling.

21st Century Populism

Populism in the Early 21st century

Strategy developed under the present state government has been well meant. Section 2 of Queensland's Challenge argued that:

* current strategy in 2001 (like the 1997 strategy of the previous government) had apparently recognized the vital importance of developing a more productive economy;

* the emphasis given to innovation was vital if Queensland was to benefit from, rather than be the victim of, economic change.

But unfortunately the practical competencies required to have any real prospect of developing a more productive economy in Queensland were not demonstrated.

[d] By: Guest
Date: Thu-Jan-29-2009
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