Why the ‘Pacific peso’ will probably return
Australia has built the best, nicest petro-state in the world, says Geoff Thomas, but what we really need is economic complexity.
Those of us of more mature years remember the days when the Aussie dollar (or “Pacific peso” as it was unaffectionately known) was around US 50c, and, as the Barmy Army sang at the cricket, “three dollars to the pound”.
Since those dark days, Australia has ridden a resource boom based on selling iron ore and coal to China.
This boom has earned us a lot of money, and we currently have a very high standard of living. But it has also cost us a lot, as people flocked to the mining sector for high-paying jobs, crowding out jobs in other sectors, like technology or manufacturing. The end of the car industry is just one example of this crowding out.
But resources are cyclical, and China is no longer growing at an outsized pace, and never will again, as its population ages.
AI and technology solutions are growing like gangbusters. Of the top eight companies globally, only Saudi Aramco is not a tech company and we all know the Saudis are sitting on an enormous lake of oil.
The device you’re reading this on results in you paying money to most of these companies or having your data sold to someone else.
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At the current run-rate of AUD-USD decline (77c to 62c since January 2021), the dollar will be down to 50c again in just three years.
This won’t just make Disneyland more expensive, it also makes iPhones, laptops, laboratory equipment, cars, trucks and everything else we import more expensive. That also adds to inflation, so interest rates will stay higher longer.
I’m sure you’re saying, “Well, we’re small, we can’t compete.”
Sweden and Denmark are smaller than us. They managed to produce Novo Nordisk (they make the Ozempic that took your weight off), Ericsson and Spotify.
The reality is that we have built the best, nicest petro-state in the world. But we are still a minerals-dominated, single-product country.
According to Harvard’s Atlas of Economic Complexity, we have the same economic complexity (#102 in the world out of #145) as Yemen and Senegal. We are well below the actual petro-states of Saudi Arabia (#44) and the UAE (#62) because they have done something about being mono-economies.
Economic complexity is about building a greater variety of more complex industries.
Countries that sell music software, 5G networks and furniture stores (like Sweden) rank higher than Australia. They are generally price setters, whereas if you sell a commodity, you are a price taker.
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A greater spread of industries means that if there’s a downturn in, say, DIY furniture & meatballs, maybe that’s because everyone’s streaming more.
Harvard researchers have shown the degree of economic complexity is a predictor of economic growth. It forecasts that because of a lack of economic complexity Australia will be in the bottom 15 per cent of all countries in growth within the next five years.
That’s not just against the United States and Switzerland, it’s the bottom 15 per cent of everyone.
But be assured, in the coming election, both parties will talk about everyday Australians and their living conditions – but almost nothing about doing anything that will make a difference, such as encouraging solid investment in R&D and product development by companies that replace imports and build exports.
They’ll talk about cash-back bonuses for “cost of living” and blame each other for the price of electricity, but they won’t actually fix the cost of living (or explain to you how it happened).
But both sides have been in power since 1996 when we were #57 for economic complexity. We have consistently become worse as a nation – the second-worst fall in the world. (Russia’s only last because of sanctions).
So what am I doing? Trying to build awareness.
Let’s make innovation (by business, not more university research) an issue that we are concerned about.
In this election, pollies will talk about “Australia’s future” but let’s call it out for what it is: a short-term view of being elected, not a profound shift in this country’s economy that is needed.
If we make it an issue, the policies will come – there are plenty of good examples.
Places like South Korea and Singapore are always high on the Harvard list, yet two generations ago they were fundamentally poor countries. Singapore was effectively a mud flat with a port and Korea was war-ravaged. Countries like Norway and Finland were largely based on forestry.
These countries all invested heavily in education and their industrial base, building complex exporters and the people to staff them.
We have an enormous head-start on where these countries began, and they have implemented proven policies to transition the economy.
We must do the same.
Geoff Thomas is Principal at Axant, an Adelaide-based corporate advisory firm.
