1. THE FLINDERS UNIVERSITY OF SOUTH AUSTRALIA
FACULTY OF SOCIAL SCIENCES
SCHOOL OF POLITICAL AND INTERNATIONAL STUDIES
HONOURS PROGRAMME IN INTERNATIONAL RELATIONS
HAS REGIONAL TRADE HELPED OR HINDERED
AUSTRALIA’S ECONOMIC DEVELOPMENT?
KARL COTLEANU
28 FEBRUARY 2002
THIS THESIS IS SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENTS OF THE DEGREE OF
BACHELOR OF ARTS (HONOURS)

2. TABLE OF CONTENTS
Synopsis iii
Acknowledgements iv
Abbreviations v
Introduction 1
Chapter
1 Early Influences Shaping Current Regional Trade Relationships 7
2 Liberalisation and the Consequences of International Exposure 19
3 The Importance of Regional Trade to Australia’s Future
Growth
38
4 The Regional Financial Crisis, Consequences for Australia’s
Economic Development
47
5
6
APEC and the Development of New Regional Trade Regimes
The Forces Driving Australia into the New Millennium
55
70
Appendix
Bibliography
75
78
ii

3. iii
Synopsis
Australia’s economic development has been largely determined by its early
international trade relationships. While the importance of the US as a trading partner with
Australia is not in question, the relationship with the UK and Japan offers a significant
contrast. The thesis will explore both the differences and the similarities in their trading
relationship with Australia and the extent to which these relationships have determined the
distinctive commodity based focus of Australia’s regional trade.
Regional trade has seen the dominance of Australia’s primary resources in its
exports, marginalising secondary industry and reducing demands for research and
development that thrive on technical innovation and change derived from predominantly
manufacturing based industries.
The core argument of the thesis suggests that while regional trade has helped
Australia’s economic development, the region’s appetite for commodities in its own
industrial expansion has hindered this growth somewhat. This is particularly so in more
advanced, technological and innovative industries, which are now the leading growth
sectors in developed economies.
The Treasurer and later Australian Prime Minister Paul Keating advanced that
unless Australia reforms its industries it is in danger of becoming a banana republic. This
theme is addressed throughout the paper though the reforms suggested demand both
domestic structural changes, and the rethinking of trading modalities amidst the decline of
APEC as new regional trading forums emerge in the aftermath of the Asian financial crisis.

4. iv
Acknowledgments
I would like to thank Richard Leaver for his early direction and although my efforts
were not always forthcoming, his kind offers of assistance were always there. I would also
like to thank my dear friend William Mackay whose own tenacity became one of my
greatest strengths.

5. v
Abbreviations
AFTA ASEAN Free Trade Area
ANZUS Australia, New Zealand and United States Treaty
APEC Asia Pacific Economic Cooperation
ASEAN Association of South East Asian Nations
ASEAN + 3 ASEAN + China, Japan & South Korea
ASEAN 4 ASEAN + Indonesia, Malaysia, Thailand, Philippines
CER Closer Economic Relationship
EAEC East Asian Economic Caucus
EEC European Economic Community
ETM Elaborately Transformed Manufacture
EU European Union
FDI Foreign Direct Investment
FIRB Foreign Investment Review Board
FTA Free Trade Agreement
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
IMF International Monetary Fund
NAFTA North Atlantic Free Trade Agreement
OECD Organisation for Economic Co-operation and Development
OPEC Organisation of Petroleum Exporting Countries
R & D Research and Development
ROK Republic of Korea
RTA Regional Trade Arrangement
TCF Textiles, Clothing and Footwear
UK United Kingdom
UN United Nations
US United States
WB World Bank
WTO World Trade Organisation
WWI World War One
WWII World War Two

6. Introduction
Over the last decade Australia has been riding on a wave of economic success.
While global economic indicators have shown the world’s largest economies are
languishing, Australia has continued to reap the rewards from a booming economy. It has
grown to become one of the top-performing Organisations for Economic Co-operation and
Development (OECD) countries of the decade. Yet what is the driving force behind this
wave of growth, and what signposts (if any) did Australia use to direct the economy toward
its current path? What, also of the future should this wave of success lose its current
momentum?
These questions are particularly relevant now that the economic malaise in Japan
(brought to bear by the pressures of economic liberalisation), and the slowing in the
economies of the United States (US) and the European Union (EU) may well see a slowing
of the Australian economy. This situation demands the asking of fundamental questions
about the directions the economy took to reach its current stage of development, and where
this course is guiding Australia’s economy now. In keeping with the theme of this research,
the thesis sets out to establish the extent to which regional trade has helped or hindered
Australia’s economic development. Essentially, Australia’s relationship with the region
has, and will continue to have, a substantial influence over the extent to which this
economic development progresses.
However, before Australia’s current level of economic development can be
understood in its regional context, some consideration of certain historical points of
reference are needed, which to some extent have signposted the way Australia’s economy
has advanced. It is for these reason, chapter one of the thesis engages the idea that
Australia’s regional relationships are predicated by contrasting themes. These begin with
1

7. 2
Australia’s relationship to the United Kingdom (UK) as a former colony, and the effects
this has had on Australia’s relationship with its subsequent major trading partner, Japan.
The change in the direction of Australia’s trade and the subsequent recomposition
of exports towards the region was brought about, as much by the UK’s hegemonic decline
as it was by changes in the global trading environment itself. This had to a considerable
extent set in train the way Australia perceives both itself, its place in the international
capitalist market, and the way it continues to conduct its regional trade relationships today.
Furthermore, chapter one addresses Australia’s overall bias towards commodity-
based export industries which, it is asserted, continues to undermine the general thrust of
economic development, retarding growth in the manufacturing sector of the economy. The
decline in manufacturing would be much worse, save for the fact that research and
development (R & D) in manufacturing accounts for a considerable amount of technical
innovation and change. This in turn has a considerable flow on effect to other sectors of the
domestic economy (see table 8).
Moreover, the real problems in Australia’s economic development are highlighted
by the gross domestic product (GDP), which has declined against many of Australia’s
regional competitors since the mid 1960’s. Australia’s population is considerably smaller
than that of Japan’s and some of its other trading partners in the region. While relative
output was comparable to these nations, for the size of the population, there has been a
continual decline of Australia’s GDP with its trading partners to the present day.
The thesis further asserts that industrial decline in Australia was largely the result
of sectoral disequilibrium, rather than, the simpler explanation of Japan’s dominance in the
nations commodities sector. Though, it was assisted considerably, by the insular inward-
looking industrial policies inherited from the UK.

8. 3
In chapter two, the thesis acknowledges that Australia’s inwardness and the levels
of protection it maintained in response to the General Agreement on Tariffs and Trade
(GATT) bear the hallmarks of its relationship with the UK. In fact, the over emphasis on
commodity exports rather than an overall diversification of the economy also bears witness
to this imperial relationship. Thus was hailed in the Labor Party’s strategy in 1983 for the
liberalisation of the Australian economy to the full force of international competition as a
countermeasure to this somewhat isolationist, inward looking economy. In some quarters,
liberalisation was seen as essential to economic survival, while in others the consequences
of international exposure were considered more costly, especially in light of the uneven
nature of regional liberalisation. There was, however, a tendency for Australia’s economy
to revert to the pre-GATT protectionist measures of the inter-war years. This is to some
extent reflected in the automotive industries’ continual thrust for protection, which
indicates a decided lack of emphasis by the parent firms for expenditure on R & D in the
Australian economy.
While liberalisation of the Australian economy had freed up the financial sectors,
this offered a considerable contrast to industries still highly protected from international
competition, such as the textiles, clothing and footwear (TCF) industries. These industries
represent the continued protection of inefficient producers in changing market conditions,
which insulated the economy from international competition.
These issues hark back to chapter one and the stifling of manufacturing in
Australia’s domestic economy as the nation continued an over-reliance on commodity
exports at the expense of technological innovation and change. This underpins the
structural problems in Australia’s economic development, which Paul Keating had not
fully addressed in his banana republic statements concerning the need for the Australian

9. 4
economy to change. In many ways, this points to a lack of investment in education as a
precursor to Australia’s current problems.
Chapters one and two have been interwoven by a common thread linking
Australia’s over-emphasis on commodity exports and a subsequent decline in
manufacturing with falls in the level of technical innovation and change. Yet, what
relationship does this have to the importance of regional trade to Australia’s future growth?
Chapter three attempts to draw the argument out of aspects of the past, focusing on
those, which are more relevant to Australia’s current trading environment. Here the
emphasis is upon the many differences that Australia faces in its relationship with the
region, as the demands of its geography determine an intrinsic requirement to be included
in regional trade arrangements (RTAs). This chapter highlights the difficulties of such
ventures not just in the differences between Australia and the region, but also the nature of
competing capitalisms and competing ethnic rivalries occurring between, and within, the
regional economies themselves.
While such tensions are of paramount concern for transnational capital, which
searches for more stable environments for investment, the fact remains that the region is
still very important for Australia’s future growth. With this in mind, the chapter concludes
on aspects of increasing trade Australia is conducting with the region. There is much cause
to be wary here owing to the extent to which foreign direct investment (FDI), in terms of
both equity and levels of ownership, may well undermine new export industries for
Australia. This is primarily because much of Australia’s production is geared for domestic
consumption rather than export which require minimal input in terms of R & D
expenditure. Consequently, Australia’s economy is perceived as a commodity based, low

10. 5
technology, branch economy in international money markets, with this perception leading,
in some part, to the nation’s insulation against the regional financial crisis of 1997.
In chapter four, the thesis qualifies why to some extent Australia may be considered
somewhat removed from the region, with many of these economies increasingly engaged
in technology related industries. These industries no longer require vast amounts of raw
materials in the manufacturing process as heavy industry did when the region began its
industrial expansion. This suggests that Australia’s trade diversion from the region to the
US and the EU during the Asian financial crisis was done with a view of trading with more
stable markets outside the region. This was evidenced by, growing strategic and economic
uncertainty in East Asia at the time. The argument further asserts that the ensuing currency
devaluation of Australia’s dollar as a direct result of the crisis was more favourable to extra
regional rather than intra regional trade. Combined with growing demands for regional
caucuses such as ASEAN + 3 which excluded nations such as Australia and the US, the
full impact of the crisis may yet unfold.
With this in mind, the chapter concludes on a more positive note assessing
Australia’s currency devaluation, financial market stability and openness as positive signs
for future investment. Much of this investment is tailored to the needs of large corporations
such as Holden and Ford, which already have a seemingly nationalised and established
brand name in Australia. Therefore, the opportunity of relocating to attractive markets,
where the consideration is not only cost competitiveness but also stable governments and
the availability of skilled workforces adds to the above considerations as worthy
inclusions.
In chapter five, the thesis raises concerns over APEC and the apparent failure of the
multilateral process, as regional economies rush to stamp their name on RTAs. The fact

11. 6
that Australia has only been able to sign its name to one is disconcerting enough. Given
this consideration, there is some weight for an increasing bilateral relationship between the
US and Australia at a time when both western economies are feeling excluded from rising
regional caucuses. Whereas, the distant possibility of such a relationship is considered for
its merits and weaknesses, the ramifications for regional trade relationships suggest both
positive and negative effects for a small economy like Australia’s. By virtue of its linkages
with the world’s largest international economy, such a relationship could go some way in
according Australia recognition. Nonetheless, the possibility of inclusion in extra-regional
and intra-regional policy initiatives (not too distinct from arrangements under APEC), is no
guarantee of inclusion and could go the other way and see Australia excluded from these
very same arrangements.

12. 7
CHAPTER 1
Early Influences Shaping Current Regional Trade Relationships
Traditionally, Australia’s export markets were dominated by the United Kingdom
and Europe (Figure 1).1
Australia’s colonial ties with the British Empire were the major
tenet for this trading relationship. As a relatively strong Imperial power, the UK had the
resources to service relationships with distant colonial outposts such as Australia, helping
to keeping this empire intact. Combined with a depressed Europe racked by two world
wars, this trading relationship saw Australia as a major producer of rural commodities
surge in demand.
Figure 1: Australia’s traditional export markets as a percentage of total trade
Source: Goldsworthy, D., Facing North, Vol. 1, Melbourne University Press, 2001, pp. 422-427.
1
Goldsworthy, D., Facing North, A Century of Australian Engagement with Asia, Vol. 1, Melbourne
University Press, 2001, pp. 46-51.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
UK EUROPE USA JAPAN EAST ASIA
1932-1936
1951-1955
1968-1972
1978-1982

13. 8
By the 1950’s, rural exports composed 80 per cent of total export income, with
wool, wheat, and bovine products being the main export commodities, while
manufacturing and mining accounted for only 13 per cent of exports at this time.2
However, with the ever-increasing economic wellbeing of Europe, and the growing
unpopularity of Imperial powers (not to mention the cost of maintaining colonial outposts),
the UK began to offload its colonies in quick succession.
Moreover, severe protective measures adopted by the European Economic
Community (EEC) in 1958 and the UK’s subsequent entry in 1973 impacted harshly on
Australia’s total exports3
. These factors, along with improvements in worldwide production
technology and the ensuing introduction of synthetics, saw the demand for Australia’s
primary resources, particularly wool, decline significantly.
By all accounts, this period represented a timely juncture in Australia’s economic
history. The increasing economic development of East Asia was owed mostly to US
expansion into the region. Furthermore, because of Australia’s diminishing continental
markets, the opening up of more lucrative markets closer to home have, initially bid well
for this fledgling nation.
This expansion took the form of economic assistance through US sponsored
organizations such as the International Monetary Fund (IMF) and the World Bank (WB) in
an effort to rebuild a shattered Japanese economy following its demise in World War Two
(WWII). Thus, a US economy flushed with funds in its war chest following its success in
WWII, and a Japan eager for economic superiority in light of its military demise, oversaw
what was to be the expansive development of East and South East Asia.
2
Howlett, M., 1990, Simplifying Senior Economics, Bernard Publishing, Pt Norlunga, p. 213.
3
Howlett, p. 214.

14. 9
It has been perceived that, owing to its geographical proximity to Asia and the
makeup of its already developed economy, Australia was in a prime position to take
advantage of regional expansion. Asia’s development saw a considerable demand for
Australia’s primary resources, particularly fuel and mineral exports, which were only 7 per
cent of total export income in 1953 and accounted for over 47 per cent of export income by
1989.4
These figures are impressive and so is much of the corresponding literature on
Australia’s trade with the region. However, what these figures fail to indicate are the terms
under which this trade was conducted.
Certainly, with the benefit of hindsight, it is much easier to be critical of
government and business initiatives, though the call to change the general dynamic of
Australia’s economic development has been a long-standing one. No more had this been
vindicated than by Australia’s former Treasurer (and later Prime Minister) Paul Keating.
When, in May of 1986 he boldly stated that unless Australia underwent some fundamental
changes in its economic structure it was in danger of becoming a “banana republic.”5
This is a pivotal focus for the research conducted in this paper, for the initiatives in
the economic development of Australia’s regional trade were congruent with keeping
Australia as very much a price taker in international markets.6
Instead of burgeoning
industries being developed and markets being established or a variety of productive
capacities being encouraged, the export of raw as opposed to processed materials has seen
this price taker attitude remain up until very recent times.
Moreover, the relative ease with which Australia traded its raw resources with the
region did little to help its economic development and did little to make it a regional
4
Howlett, p. 213.
5
Broomhill, R. The Banana Republic? Left Book Club Co-op, NSW, 1991, p. 1.
6
In economic theory the term price taker refers to competitors who cannot control the price in the market
place. For more on this see Fischer, S. & Dornbusch, R. Economics, International Student Edition, McGraw-
Hill Book Co-Singapore, 1983, pp. 220-224.

15. 10
competitor. As can be seen in figure 2, the spikes and troughs indicate the volatile nature of
Australia’s exports that have occurred outside the boom-bust cycles experienced by the
world’s major economies. This highlights the impacts of an ongoing price taker attitude as
the Australian economy rises and falls at the apparent whim of international market forces.
The evolving price taker attitude has its roots in the mid 1960’s when American
global expansion into the region under Pax Americana had done much to fuel the region’s
demand for Australia’s raw mineral exports. As a result there has been a continual fall in
Australia’s commodity prices ever since. By the mid 1970’s the resultant worldwide price
inflation had seen a fourfold increase in the Organisation of Petroleum Exporting Countries
(OPEC) oil prices.7
While this resulted in higher prices for Australia’s fuel and commodity
exports, the inflationary effects generated eventually slowed demand and ended in a rapid
fall in commodity prices by 1979. The economic shocks this rapid expansion had initially
generated saw the global downturn bottom by 1984 with commodity prices left standing on
increasingly shaky ground.
A prima facie example of this is Australia’s coal industry, which had ridden the
fluctuating commodity wave since its inception in 1960. Having been kick-started by the
7
Calleo, D., The Atlantic Alliance and the World Economy, in Beyond American Hegemony, New York,
Basic Books, 1987, p 93.
Source: AusStats, International Accounts & Trade, YearBook 1999. p. 2.
Figure 2: Ratio of exports to GDP

16. 11
Japanese steel industry, the OPEC oil crisis itself generated huge demand for low quality
thermal coal, as nations heavily reliant on oil imports were forced to switch to less costly
equivalents. This pushed the price of low quality coal to new levels due to its significantly
increased demand by the 1970’s.8
However, excess capacity eventually saw these huge
price increases for coal eroded as oversupply generated a decline in demand, resulting in
changing price expectations.
In a bullish international market, the net gains for a commodity-based economy
such as Australia’s can be very high, and conversely when the market falls the erosion of
these net gains can occur rapidly. This highlights the volatility of commodities on world
markets, indicating how susceptible Australian production has been to these ever-
fluctuating market forces. Commodity prices have not stabilised in recent years either,
warranting at least some moves away from, or an overall diversification of, the national
industrial base.
Furthermore, it would appear that the composition of Australia’s trade has changed
markedly within a few short decades. Having gone from a strong primary base in rural and
agricultural production in the 1930’s, to a net exporter of fuel and mineral resources by the
mid 1950’s. Nonetheless, while these exports may seem to be a diversification of overall
commodities traded, what they represented was more of a horizontal shift in the base of
primary production itself.
Horizontal shift refers to the side stepping or sideways movement, in this context,
of Australia’s primary industries. For a long time in both the private and particularly the
government sector there has been a great deal of celebration over the diversified content of
Australia’s exports. However, upon closer inspection this overall diversification is derived,
in fact, from a very narrow base of production in the primary sector.
8
Journal of Australian Political Economy, Number 44, December 1999, p. 92.

17. 12
This overall bias towards primary industry had impacted quite dramatically on
other sectors of the Australian economy. The resulting marginalisation of secondary
industry had not seen manufacturing feature prominently in Australia’s export earnings
owing to a decided lack of comparative advantage, particularly with the region in terms of
the costs of labour and subsequently high production costs.
There have been recent improvements in this area due to the ongoing
implementation of tariff reductions (see table 5). However, this begs the question as to why
had Australia not taken advantage of its comparative advantage in many areas of
production sooner. The most significant reason for this may well have been the hollowing
out of manufacturing industry in Australia by external forces.9
This hollowing out process
is also referred to as the ‘Dutch Disease’, which was first coined after the discovery of
natural gas in the Netherlands.10
The discovery of these natural resources had artificially
increased the Dutch exchange rate, resulting in export industries being squeezed or
hollowed out which was followed by a decline in Dutch manufacturing industries.
One example of these external forces at work in an Australian context concerns the
vigorous pursuit by Japan of Australia’s raw materials, which were cheap by comparison to
those in other world markets. The aftermath of WWII had robbed the Japanese of the
mineral rich coal reserves in Manchuria and the burgeoning trade with the US went
asunder during the Suez Canal crisis of 1956. This had seen US coal shipments to Japan
stilted, resulting in the purchase of Australia’s cheaper coal, which fitted in with Japanese
plans to shop locally.11
Thus was hailed in the expansive development of raw material
9
Byrnes, M., Australia and the Asia Game, Allen and Unwin, NSW, 1994, pp. 50-51.
10
Corden, W.M., ‘Booming Sector Dutch Disease Economics: A Survey’, Working Paper in Economics and
Econometrics, No. 079, Research School of Social Sciences, ANU, November, 1982, p. 2.
11
Byrnes, p. 68.

18. 13
exports from Australia, which became a substitute for the possible development of more
lucrative manufacturing industries in this otherwise developed economy.
Many of the benefits of manufacturing are often derived by technological
innovation and changes in production and their associated techniques. These practises can
lead to the establishment of complimentary industries, not to mention the adding of
significant infrastructure and ongoing wealth and job creation within the domestic
economy.12
However, in light of this process of hollowing out, many of the above practices
were circumvented. This is because the short-term benefits of extracting and selling raw
materials in their cheapest form without significant, if any, value adding whatsoever were
not weighed up against the longer-term costs to local industry and the economy as a whole.
By longer-term costs the thesis is not simply referring to the way in which the economic or
financial gains are spent, but to the ‘equilibrium consequences’ occurring in other vital
sectors of the economy.13
This is an important distinction to make because as some
industries may decline in the face of new or significant growth industries others will
expand.14
Examples of this have occurred in Australia’s wool and agricultural industries
that declined as mining exports grew in the boom years of the 1960’s and 1970’s.
Moreover, the expansion of the services and financial industries in the 1990’s in the face of
a declining mining sector has seen a similar situation occur.
One means of measuring the longer-term costs of this shortsightedness is in GDP
growth trends. These measure an economy’s output over time, and can establish levels of
growth, particularly when measured next to regional economies with which trade has been
conducted over a comparable length of time. Indeed, by 1960 Australia was perhaps the
12
Byrnes, p. 68.
13
Corden, p. 2.
14
Corden, p. 2.

19. 14
most developed regional economy in terms of its GDP when output was compared with the
relatively small size of its population. Meanwhile, many of the regional economies were
coming from an agrarian base, only beginning their entry into basic forms of
manufacturing such as textiles, footwear, and clothing industries. At this time, Australia
was already well advanced in more complex manufacturing techniques, however, the
exponential increase in the output of regional economies-particularly Japan, China, and
South Korea-very quickly accelerated beyond Australia’s output (Table 1).
Table 1 Gross Domestic Product, regional comparisons ($US billions).
Region 1960 1970 1980 1990 2000
Japan 44,439 203,301 1058,911 2964,055 4752,900
China N/A 80,864 298,418 362,656 1099,800
Australia 16,809 37,270 149,892 295,701 398,100
South Korea N/A 11,744 62,627 239,773 457,000
Singapore 0,707 1,870 11,947 35,430 91,000
Hong Kong N/A 3,753 27,551 70,414 163,200
Taiwan N/A 6,214 41,401 157,775 310,100
Thailand 2,554 6,441 32,159 81,250 121,900
Malaysia 2,178 4,200 24,464 42,544 89,300
Indonesia 8,671 10,417 82,235 103,783 153,300
Philippines 6,436 6,166 34,829 43,454 75,000
Source: M. Byrnes. Australia and the Asia Game, p. 49. DFAT country/economy fact sheets 2001.

20. 15
Not only did the relationship with Japan incur this hollowing out process. To a
lesser extent, the relationship with the UK had a similar effect. In the 1940’s and 1950’s
Australia was said to have been “riding on the sheep’s back”, which is a euphemism for the
nation’s dependence on agricultural production. Again, this raw material export
represented a low value added product, as had later been the case with Japan in the export
of coal and later iron ore. Yet, this decline was not merely a symptom of Japan’s
expansion, so much as, colonial submission in the first instance under the banner of the
UK.
This is not to imply that Australia was merely an extractive colony as was Malaya
or Burma; clearly the penal colony gave way to free settler colonies and a considerable
degree of autonomy developed. However, what the argument suggests is that Australia’s
dependence on primary production, be it in the agricultural or mineral sector, resulted in
the stalling of manufacturing development, by curtailing investment in technological
innovation and change. Furthermore, this had come about, not as a deliberate attempt to
undermine these industries, but as a direct result of sectoral disequilibrium, which saw
mining overshadow the development of these other sectors in Australia’s economy.
It has often been suggested that Australia’s manufacturing industry was in better
condition than Japan’s when the Japanese started to nurture their interests in Australia’s
primary resources.15
This was owed largely to the fact that Australia was somewhat
insulated from Asia by virtue of its preferential trading relationship with the UK at the
time. By all appearances, this relationship gave the impression of Australia as largely self
sufficient in terms of its manufacturing and industrial capacities, as a result of this
preferential trade arrangement.16
15
Byrnes, p. 68.
16
Byrnes, p. 68.

21. 16
This had seen the development of manufacturing in Australia propelled along by
the exigencies of WWII, which had nurtured a thriving aircraft and automobile
manufacturing industry.17
The benefits of this had seen the establishment of
complementary industries in Australia supporting larger manufacturers. There was also a
burgeoning steel industry, of which the provision for Australia’s extensive coal reserves to
fuel the steel furnaces had established a potentially readymade domestic market.
However, the end of the war had seen many manufacturing industries fall into a
general state of decline. Instead of taking advantage of already existing technology and
infrastructure, and possibly developing them for domestic production and export, many of
these industries, particularly the aircraft industry, had practically collapsed by the end of
the 1960’s.18
This saw an extensive brain drain as local expertise either faded into oblivion
or went overseas to countries such as Canada or Brazil, whose governments supported the
development of domestic aircraft industries. Subsequently these countries are now ranked
among the biggest aircraft manufacturers in the world.19
This decline in manufacturing brought about from sectoral disequilibrium was,
perhaps largely assisted by Australia’s insular inward-looking industrial policies inherited
from the UK, where a government culture of “hands-off” relations with industry had seen
manufacturing develop along more pragmatic lines. Government support for potential
leading industries was decidedly lacking, and left manufacturing to fend largely for itself,
in a market dominated by, and largely catering to primary industry needs.20
The impacts of
maintaining these vibrant and innovative industries meant that Australia would have to
unleash itself onto the open trading system, which it was not inclined to do.
17
Aviation red tape just plane crazy, The Australian, Friday, 19 Oct 2001, p. 26.
18
Aviation red tape, p. 26.
19
Aviation red tape, p. 26.
20
Journal of Australian Political Economy. Special Issue, Australia Reconstructed: Ten Years On, No. 39,
June, 1997, pp. 17-18.

22. 17
The establishment of an open trading system was a deliberate attempt by GATT to
reverse the protectionist stance derived during the inter–war years.21
In this way, it was
assumed that interdependence through trade would establish more harmonious relations
between states. Australia’s opposition to this stance was reflected in the high levels of tariff
protection it maintained in response to GATT, reflecting a need for insularity and certainty
in an increasingly destabilised world, or for that matter, the region.
Australia’s decline in manufacturing also coincided with Japan’s dominance as
Australia’s number one export market by the early 1970s. The UK was clearly Australia’s
key export market in 1960, and within a decade, Japan had overridden the UK as the
principal market for Australia’s exports (Table 2).
Table 2 Australian exports and imports ($Am)
1950-51 1960-61 1970-71 1980-81 1990-91 2000-01
Exports
Japan 123.1 323.0 1,190.9 5,227.6 15,894.0 23,502.6
UK 641.2 400.1 493.8 715.3 1,963.0 4,645.6
US 297.7 144.9 519.4 2,147.0 6,136.0 11,675.3
Imports
Japan 31.2 130.9 573.6 3,629.3 9,526.0 15,370.6
UK 713.8 681.1 887.2 1,584.5 3,532.0 6,321.3
US 121.8 434.1 1,041.7 4,169.0 12,586.0 22,355.4
Source: M. Byrnes, Australia and the Asia Game, p. 51 & DFAT country/economy fact sheets 2001.
By 1980 this export share increased to a ratio of 7 to 1, although the Japanese
economy has been in a deep and prolonged recession since the early 1990’s. Moreover, its
share of Australia’s exports has still been a staggering ratio of 5 to 1, when compared to
the substantially reduced export share of the UK at this time.
21
Economic Papers, Economic Society of Australia, Vol 14, No. 1, March 1995, p. 1.

23. 18
Therefore, it can be said that Australia’s exports to the UK had rapidly diminished
as international markets reprioritised their trading needs. This had seen Japan focus on
Australia’s extensive mineral reserves for its own, and the region’s, continued industrial
expansion. These events occurred at the expense of Australia’s manufacturing industries,
which continued to decline against a backdrop of easier profits gained in the resources
sector.

24. 19
CHAPTER 2
Liberalisation and the Consequences of International Exposure
Australia has continued to reap the economic benefits of extracting its mineral
resources and exporting much of the raw materials to long established markets. While this
bade well for commodity industries undergoing rapid periods of growth owed by and large
to Japanese industrial requirements, when commodity prices began to fall in the mid
1970’s it distorted problems in Australia’s manufacturing industries. This made Australia’s
long-term inability to be an exporter of manufactured goods all the more obvious by
highlighting the distortions between local industry and the changing requirements of
international capital.22
Australia’s place in the international capital market was undermined
by its dependence on commodities for economic development. Initially this dependence
was underpinned by Australia’s relationship with the UK as a supplier of agricultural
produce, and then it switched over to Japan as a major supplier of mineral resources.
These factors, combined with the global downturn of the mid 1970’s, saw
Australia’s declining terms of trade and a rising current account deficit resulting in
significant balance of payment problems for the economy (Table 3). International money
markets responded to these concerns by displaying a loss of confidence in the Australian
economy, which were seen as being racked by ever increasing levels of foreign debt.23
All this came on top of substantial economic reform instigated by the Labor
government of the day, which began to open the Australian economy to the full force of
international competition in 1983. This liberalisation of the economy began with the
floating of the Australian dollar on the international market, and a wide range of
microeconomic reforms, particularly in the banking and financial sectors of the economy.
22
Broomhill, p. 2.
23
Broomhill, p. 3.

25. 20
Practices in these sectors were considered outmoded, inefficient and very much anti-
competitive.
Thus, liberalisation saw a rapid influx of foreign capital into Australia, making
access to funds, and therefore borrowing’s, much easier. The problem, of course, was that
much of these funds, instead of going into productive investments in the domestic
economy, went offshore (to pay for imports) and into the growth of unproductive and more
speculative investments.24
The economy overheated with increasing levels of both public
and private sector foreign debts leading to higher interest rates, a measure introduced to
curb spending.
Table 3 Australia’s Balance of Payments ($ A million)
Figures for the current account 1979-1988
Calendar year 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988
Exports, fob
Imports, fob
Trade balance
Invisibles, net
Current balance
16635
14375
2260
-4528
-2268
18930
17700
1230
-4830
-3600
18462
20489
-2027
-5267
-7294
20471
22992
-2521
-5735
-8256
21644
21618
26
-6557
-6531
25965
27016
-1051
-8798
-9849
31953
33835
-1882
-10887
-12769
33159
36289
-3130
-11388
-14518
37461
38145
-684
-11443
-12118
41823
43088
-1265
-12326
-13591
Source: OECD Economic Surveys Australia 1989/1990, OECD France, February 1990, p. 114.
Moreover, it was the inefficient use of these borrowings and a seemingly scant
regard for Australia’s economic development that saw Paul Keating retort with scathing
sentiments in May of 1986. He said that unless Australia underwent some fundamental
changes, and “we started living within our means,” we were in danger of becoming a third
world country, or as the popularised phrase has been quoted, a “banana republic.”
Furthermore, Keating’s bombastic comments were directed at Australia’s
entrepreneurs and corporations who failed to capitalise on the increased availability of
capital, which by all accounts was seen as a means for increasing domestic investment,
24
Broomhill, p. 5.

26. 21
furthering capital accumulation, and enhancing national wealth, and savings. It was not
intended as a free for all for corporate raiders such as Alan Bond, nor was it intended for
gambling on speculative investments, or investments offshore, which did little if anything
to enhance the national economy.
Having said this, Paul Keating’s entreaty had not taken into account that the
economy’s problems were essentially structural in origin, rather than the inability of the
polity to live within its means. Essentially, this is because in a country like Australia,
exports are primarily commodities and imports are mostly manufactured goods. The large
divergence in exports and imports results in greater terms of trade volatility than in
countries where exports and imports are similar.25
The global downturn in commodities
had peaked in Australia by 1986, with the current account deficit at $A3.13 billion, which
was down from its previous peak in 1982 of $A2.52 billion.26
Because of this, imports of
elaborately transformed manufactures (ETMs) and other manufactured goods required in
the restructuring of Australia’s economy left a significant shortfall. This occurred between
the prices generated from these falling commodity exports and the costs of importing
ETMs, resulting in the ever-escalating current account deficit. Evidence of this is clearly
indicated in OECD economic surveys, which state;
“… Slower aggregate labour productivity growth may have
reflected the combined effect of a decline in real labour costs and a rise in
the cost of capital as real interest rates rose…This factor may have lowered
labour productivity growth by half of a percentage point per year (by one-
third) during the period 1980 to 1988.”27
The tailing off of the overheated Australian economy came from the recessionary
impacts of this flurry of capital expenditure between 1983 and 1986, and culminated in
“the recession we had to have” (Paul Keating’s other famous comment from the period).
25
OECD Economic Surveys Australia 1989/1990, OECD France, February 1990, p. 46.
26
OECD Australia, 1989/1990, p. 114.
27
OECD Australia, 1989/1990, p. 55.

27. 22
While this subsequent recession affected the domestic economy as monetary policy was
tightened, it had little impact on inward-bound foreign investment, which continued to
thrive with access to finance available from abroad.
The extent of this foreign investment is an important consideration when talking
about Australia’s economic development. Inflows of FDI after WWII impacted
significantly on patterns of ownership and the overall structure of firms themselves, which
in turn had a severe impact on Australia’s economic development. In 2001 foreign
investors owned more than one-quarter of the equity, and a controlling representation of
some 15 per cent in Australian firms. However, the level of foreign ownership has
remained steady at 28 per cent over the last three years.28
Australia’s federal government under its arm of the Foreign Investment Review
Board (FIRB) established in 1976 had regulated FDI in Australia. One substantial method
of control was the requirement for at least 50 per cent equity participation by Australian
firms in any national FDI. However, perhaps owing to large infrastructural costs in the
mining sector, this requirement was waived if the investment was not deemed detrimental
to national interests.29
Therefore, Australia had simply to reap the harvest while foreign
investors had to worry about the more complicated and costly tasks of infrastructural
expenditure and the conversion of primary goods into finished products.
In this way, Australia has become dependent on foreign capital for manufacturing
investment. This had hindered Australia’s economic development by retarding R&D in
crucial areas of production that may otherwise have taken place, if value adding were high
on the agenda for the parent companies. Essentially, this strategy had the appearance of an
act of faith in the ability of foreign firms to deliver financial rewards to successive
28
Henderson, I. Foreign investors cooling their heels, The Australian, Monday, January 14, 2002, p. 5.
29
Howlett, pp. 251-252.

28. 23
Australian governments, rather than a seasoned plan for Australia’s future economic
development. This is particularly so in terms of research conducted on the level of
technological input for both Australian and Foreign firms in 1993-94. It was established, to
some extent, that there was more interest by Australian firms in exports and R & D
expenditures than there was by foreign owned firms (Table 4).
Table 4 Foreign and Australian firms/manufacturing, by ownership
and technology intensity. Sales, exports & R & D 1993 –94.
R & D
Intensity
Foreign
Share of
Sales
Exports/Sales
(%)
R & D/Sales
(%)
Average Sales
($Am)
Australia Foreign Australia Foreign Australia Foreign
High
53.0 24.4 11.6 6.2 4.9 8.9 87.8
Medium
High 65.4 12.6 12.7 2.5 1.6 7.4 119.3
Medium
Low 26.3 26.0 20.8 1.7 0.9 7.4 34.0
Low 25.6 16.4 14.0 1.0 0.6 12.0 69.6
Total
Manufac 36.7 18.7 14.3 1.6 1.4
Source: Sheehan, & Grewal., The Global Knowledge Economy & Regional Concentration of Manufacturing
in Australia, CCSES, Victorian University of Technology, Working Paper No. 19. July 2000, p. 11.
The propensity for Australia’s firms to be involved in research was more so, in high
technology and R & D intensity areas. Here Australia’s share of exports/sales was more
than double that of foreign firms, while R & D commitment itself was also somewhat
larger. Average sales for these foreign firms were significantly greater than Australian
firms, and it is quite clear that much of the production was geared for the domestic
Australian market. As such this was seen to warrant little by way of R & D input. Judging
by the very high level of foreign share of sales (being well over fifty percent in the high
and medium high technology categories), this could significantly undermine the much

29. 24
smaller Australian firms. This could affect the demands for production and ongoing
commitments to R & D itself.
Regardless of the arguments for and against foreign investment in Australia, it is
quite clear from these figures that significant levels of foreign ownership in Australian
firms invariably translates into significant influence by the parent company over its local
operations. Nowhere is this more clearly observed than in Australia’s automotive industry,
where handouts by the federal government in the form of industry grants do little to make
the industry more globally efficient or cost competitive.
Moreover, the pervasive threat by the foreign parent companies to bring about the
loss of thousands of jobs in the industry if assistance is not received has seen the doubling
of government handouts to the auto industry in the last two years alone. This has resulted
in a 2 billion-dollar industry pool funded directly by a freeze on car tariffs at 10 per cent
from 2000 to 2005.30
Conversely, these subsidies have won the parent a place in global trade and have
secured jobs in Australia. Yet, what will the long-term costs be if these industries cannot
remain competitive without industry assistance, while workers are not prepared for smarter
and more competitive jobs and industries themselves?
Mitsubishi in Adelaide has stated that it could only guarantee its plants remaining
open for production until 2004 - 5 provided they were profitable.31
This profitability comes
at the expense of higher import costs for motor vehicles, of which Mitsubishi itself is an
importer of small and medium-sized four wheel drives. This profitability also comes at the
expense of continued capital outflow to the parent company in the form of profits and
30
Marris, S., Handouts to car industry near double in two years. The Australian, Friday, December 21, 2001,
p 2.
31
Howard must just say no to Mitsubishi, Editorial et.al, The Australian, Thurs, December 13, 2001, p. 10.

30. 25
dividends, resulting in the retarding of domestic industry, which maintains these inefficient
and anti-competitive practises.
Moreover, owing to the considerable distance to markets, and the overall size of the
economy, the fact remains that Australian auto firms are comparatively small by
international standards. For these reasons firms in Australia tend to be seen, and function
as branch offices with little scope, need or demand for R&D. 32
Clearly, this has proven to
be a hindrance to Australia’s economic development. While such attitudes may well be the
preserve of the foreign parent company, it is an attitude that can ill afford to prevail among
domestic industry elites and the federal government. Else, regional trade may not be in a
position to help drive Australia’s economic development.
It has long been the case that Australia has had an enormous comparative advantage
in terms of its natural resources, be they agricultural or mineral. While Asia conceded the
advantage of engagement with Australia to fuel its regional expansion in the 1960’s, this
comparative advantage went very much in reverse in the face of Asia’s subsequent cheap
manufacturing imports. Australia’s inability to compete with this flood of manufactured
goods saw the implementation of tariffs and other extensive barriers to protect home
industries.33
These tariffs, along with substantial levels of FDI, have impeded economic
development in Australia and threaten the development of future leading industries.
Moreover, these imperatives highlighted conflicting notions within the Australian
government bureaucracy, with the old guard clinging onto Cold War notions that the
region still posed a considerable threat to Australia. Ever since 1938, Australia had banned
the exports of iron ore, fearing these products may well come back as planes bombs and
32
Sheehan, P. & Grewal., B. The Global Knowledge Economy and Regional Concentration of Manufacturing
in Australia. Centre for Strategic Economic Studies (CCSES), Victorian University of Technology, Working
Paper No. 19. July 2000. pp. 9-10.
33
Switzer, T. Economic Nationalism: it’s Back to the Future, The Institute of Public Affairs Review, Vol 53,
No 2, June 2001, p 7.

31. 26
torpedoes.34
Indeed, with Japan importing iron ore from China and captured mines in
Manchuria, this fear may well have been founded at the time. This seeming foresight came
to pass after the shelling by the Japanese of Darwin, as they advanced to dominate the
region during WWII.
This threat was a consequence of strategic rather than economic considerations,
though the latter had been the original basis for the bans. In 1938 Australian Prime
Minister J.A. Lyons told the Japanese Consul-General that the embargo was not aimed at
them, but was in the interests of conserving Australia’s (then much smaller) reserves of
iron ore for domestic blast furnaces.35
With Japan’s production of iron ore hitting 20
million tonnes by 1960 and its appetite for the ore set to double within the next few years,
Australia eventually lifted its ban in December 1960.36
Perhaps the embargo would have
remained, if not for the fact, that between 1940 and 1959 Australia’s known reserves of
iron ore increased from around 260 million tons to some 370 million tons.37
The eventual
lifting of the ban may have been considered a step in the right direction for Australia’s
regional trade. Though the continuation of the White Australia Policy in the 1960’s was
still an ongoing reminder of apprehensions about an unknown quantity in the form of
Australia’s near neighbours, and unfounded fears of the regions links to communism.
However, these ongoing fears were encapsulated in the form of import protection
from the region’s cheaper imports, and did not come into play when selling Australia’s
exports to Asia. 38
The economic threat only came once exports had gone full circle to
become cheap imports, which threatened to undermine domestic manufacturing industries,
the assumed impact of which was to harm national wealth and jobs.
34
Byrnes. p. 89.
35
Blainey, G., ‘The Cargo Cult in Mineral Policy’, Economic Record, Vol. 44, No. 108, 1968, p. 471.
36
Byrnes, p. 89.
37
Blainey, pp. 476-477.
38
Switzer, p. 7.

32. 27
It is a prevailing fallacy, which has influenced both public and private debate for
many decades, and does little except harm economic relations between Australia and the
region, as many of these issues are reported widely in regional media. The fact remains that
Hollowing Out and the Dutch Disease (in particular) offer a more accepted view of factors
which influence the B of P and structural change. Such influences are derived more from
the rapid growth in mineral exports than they are, from even very large tariff changes.39
This is primarily because the introduction of a tariff reduces the quantity of imports
purchased, moving the B of P into surplus, which then places downward pressure on the
price of traded goods. In other words the manufacturing sector, which must compete
strongly with imports, is forced into an equivalent position of a devaluation of the
exchange rate to restore equilibrium as a result the sector itself is not affected by the
changes. However, what is affected by the tariff change is income distribution, which is
effectively redistributed from the export sector towards the government sector receiving
the revenue from the tariff.
There is no better case in point for highlighting the negative effects on Australia’s
productivity than tariffs established in TCF Industries, which suffered the greatest impacts
from large tariff changes. Between 1968 and 1993 increasing tariffs were implemented,
which peaked in 1991. These gave TCF‘s the highest level of protection over all
manufactures in Australia; “… the levels in 1991/92 were 46% for textiles, 84% for
clothing and 91% for footwear, compared to 13% for all manufacturing.”40
While TCF
assistance has now almost halved from what it was in 1991/92, it is still comparatively
39
Gregory, R. G., ‘Some implications of the growth of the minerals sector’, Australian Journal of
Agricultural Economics, 20(2), 1976, pp. 71-73.
40
Economic Papers, Economic Society of Australia, Vol 20, No. 2, June 2001, p 2.

33. 28
high when compared with all manufacturing assistance, which is lower than 5% in 2001
(Table 5).41
Table 5 TCF & Manufacturing levels of assistance, per industry,
(in percent). Effective Rates of Assistance (ERA).
1960 1970 1980 1990 2000-01
All Manufactures N/A 34 24 13 5.0
Textiles N/A 50 55 46 17
Clothing N/A 96 135 84 25
Footwear N/A 107 161 91 25
Motor Vehicles & Parts N/A 50 96 60 19
Source: Australian Parliamentary Library Research Paper 71999-2000.
These ongoing tariffs are the result of government intervention, which has
protected inefficient producers in changing international market conditions, leaving
domestic industry unresponsive to the changing climate. The resultant effects insulated the
economy in such a way that it:
“… Inhibited adaptation to changing circumstances arising from
rapid advances in technology and increased globalisation. For example,
government protection policy encouraged the Australian manufacturers to
focus on import replacement, leaving a continued reliance on agriculture and
minerals for export earnings.”42
In other words, Australia simply developed an over-reliance on commodity exports
and used any surpluses to acquire new technology from abroad rather than develop
technology locally to meet Australia’s own industrial requirements.
This seeming indolence or complacency shows a considerable weakness in
Australia’s fundamental policy initiatives. Instead of selling raw materials in the form of
coal and iron ore to Asia, Australia might have been better off building up competitiveness
in its domestic industries. In hindsight, this may have saved Australia from its current level
41
OECD Economic Surveys Australia, No. 14. August 2001, p. 83.
42
The Australian Economic Review, Vol. 34, No. 2, June 2001, p. 126.

34. 29
of exclusion, which the government seems to be facing, particularly in its trade
negotiations with ASEAN and other regional forums.
Moreover, Australia with a considerably more diversified economy, could have
enhanced its regional bargaining power and seen a much more fruitful and dynamic
relationship with its regional trading partners. Certainly, (as Blainey postulates) if
Australian governments had held the reigns and taken control (of the core) an earlier
development of mining industries may have heralded in better deals with the Japanese. The
likelihood of greater earnings in the 1950’s, an era of ‘brooding pessimism’ over
Australia’s B of P problems may have lifted economic attitudes and policies as a stimulus
to growth.43
Therefore, Australia’s inability to be more competitive with the region highlights
more a sense of insularity from externalities developed from its relationship with the UK.
This translates into apprehension of the Asian way of doing business, and a desire for
commercial linkages with those that have similar cultural affiliations such as the EU and
the US. Though Australia may be left wanting if it assumes such preferences will create the
pretence of a more even playing field. The imbalance or unevenness in the so-called
playing field is reflected in Australia’s technology needs, which are increasingly met
through imports from the US that are active in all of Australia’s major technology import
categories (Table 6).
Over the last decade, these imports have continued to grow substantially
contributing to the nation’s trade deficits. Imports of computer parts and accessories were
$A2.5 billion in 2000, up 91 per cent from 1991, with automatic data processing machine
imports (including personal computers, disk drives, and monitors) worth $A5.5 billion in
43
Blainey, p. 476.

35. 30
the same year.44
Telecommunications equipment worth $A6.4 billion was imported, and
was also one of the major commodities contributing to import growth in 2000.45
Table 6 Australia’s major source of technology imports 2000-2001
Main
Import
source
Technology Import Category (A$m)
Computer
parts &
accessories
Automatic
data
processing
machines
Telecommunic
ations
equipment
Aircraft
parts &
accessories.
US
Japan
China
UK
Other
715
429
169
544
636
901
635
359
3,345
1,400
622
554
3,473
1,700
687
513
Total 2,493 5,240 6,049 2,900
Source: DFAT country/economy fact sheets 2001 & Composition of trade 2000-01.
The $A17 billion combined for these technology imports represents some 15.6 per
cent of the commodity share of total Australian imports that year.46
Australia’s major
source of technology imports and the major exports highlight the differences in the types of
trade Australia is engaged in (Table 7). This divergence in trade illustrates the
predominantly primary base for exports and the overall dependence of the Australian
economy on technology imports to meet domestic industry needs.
Table 7 Major Australian exports and imports, 2000-2001 (A$m).
44
. Department of Foreign Affairs and Trade, 2000: Major Export Markets in 2000, (Main Features) in
Composition of Trade 2000. <http://www.dfat.gov.au/publications/stats-pubs/cot.pdf>, accessed August
2001.
45
Major Export Markets in 2000.
46
Department of Foreign Affairs and Trade, Feature article: Major commodities traded by Australia, 1991 to
2000, http//www.dfat.gov.au accessed July 2001.

36. 31
Exports Imports
Coal
Crude petroleum
Non-monetary gold
Iron ore
Aluminium
10,818.5
7,607.1
5,110.2
4,911.2
4,734.4
Passenger motor vehicles
Crude petroleum
Telecommunications
Computers
Medicaments (inc. veterinary)
8,578.9
8,205.8
6,049.1
5,240.1
3,508.8
TOTAL 33,181.5 TOTAL 31,582.7
Source: DFAT country/economy fact sheets-Australia 2001.
These examples set the stage for the way in which the international community
views Australia today. Consequently, Australia continues to be seen as a bulk producer of
commodities, foreshadowing a lack of demand for full-scale manufacturing, let alone the
development of technology related industries here. Such a narrow export base may well be
viewed with scepticism by economies endowed with a greater diversification of national
production. This is no more so than in the telecommunications, computer and commercial
aircraft industries, which require a higher level of local expertise and ongoing technical
innovation and change to manufacture.
Current Australian government published trade statistics indicate little more than a
hint of any such marginalisation of secondary industry. Accordingly it is shown that
manufactures now account for over 30 per cent of Australia’s merchandise exports at $A31
billion, up 23 per cent from 1990.47
At first glance this appears to be an impressive figure,
though it is diminished by the fact that growth in manufacturing has declined from its peak
in the early 1990’s (Table 8).
Table 8. Sector contributions to market sector multifactor productivity48
growth
47
Feature article: Major commodities traded by Australia, 1991 to 2000.
48
The term multifactor productivity… ‘is defined as the productivity of the main primary factors of
production – labour and capital – in generating value added.’ The market sector excludes those market
activities which are not value added such as… ‘property and business services; government administration

37. 32
Percent per year and percent
1981-1982
to
1988-1989
1988-1989
to
1993-1994
1993-1994
to
1999-2000
Multifactor Productivity
Growth Contribution Growth Contribution Growth Contribution
Agriculture 1.1 10.7 4.3 25.8 2.5 9.0
Mining 3.9 30.9 1.9 13.7 0.8 3.5
Manufacturing 1.6 78.2 1.8 53.9 0.5 7.0
Electricity, gas and water 3.0 16.4 4.0 16.4 1.0 2.3
Construction -0.8 -13.5 -0.4 -4.2 1.3 7.2
Wholesale trade -0.9 -15.5 -2.1 -23.1 5.6 30.1
Retail trade -0.7 -11.3 0.5 5.3 0.9 5.2
Accommodation, cafes,
And restaurants -2.7 -16.5 -2.0 -8.0 0.5 1.0
Transport and storage 1.0 16.1 0.6 6.9 2.1 12.8
Communication 4.1 14.0 6.3 19.4 3.3 7.8
Finance and insurance 0.2 2.9 0.0 -0.3 3.7 21.9
Cultural and recreational
services -2.6 -12.4 -1.7 -5.9 -4.1 -8.0
Market sector 0.6 100.0 0.6 100.0 1.7 100.0
This is in part due to the prosperity of regional economies engaged in the
Competitive pressures from the liberalisation of manufacturing imports had initially
seen improvements in the sector. Although secondary industry exports have contributed to
Australia’s trade deficits in the last decade, while “… many of the positive effects of earlier
trade liberalisation on productivity growth had run their course.” 49
Astonishingly the
mainstay of Australia’s initial exporting foray into the region via the mining sector is now
one of the poorest performers. This highlights the ineffectiveness of raw resource
extraction and the decided lack of value adding associated with these industries.
This is in part due to the prosperity of regional economies engaged in the
manufacture of semi conductors and other components for technology related industries,
and defence; education; health and community services; and personal and other services, including ownership
of dwellings.’
49
OECD Economic Surveys, No. 14, August 2001, pp. 82-83.
Source: OECD Economic Surveys, Australia, August 2001, p. 82.

38. 33
which no longer use coal in the manufacturing process. Conversely service industries such
as those in finance and insurance, transportation and storage, wholesale trade and
communications are the new engines of productivity growth in the Australian economy
(Table 8).
When compared with other sectors of the Australian economy manufacturing,
mining and agriculture have come down from, what were very high levels of productivity
growth. Manufacturing itself now contributes, only about 7 percent to productivity growth,
down from previous high levels of 54 and 78 percent respectively. Yet, what is not overly
apparent is the extent to which manufacturing contributes to R & D in Australia.
Manufacturing industry contributions have a direct spin-off to other sectors within the
Australian economy. This contributes a great deal indirectly to the overall multifactor
productivity gains in these new growth sectors (Table 9).
Table 9 Australia’s R & D expenditures x industry, 1996-97.
Industry Expenditure
($A millions)
Percentage of
Total
Mining
Manufacturing
Wholesale & retail
Finance & insurance
Property, business services
Scientific research
Other
546
2434
201
94
514
152
183
13.2
59.0
4.9
2.3
12.5
3.7
4.4
TOTAL ALL INDUSTRIES 4124 100.0
Source: Journal of Australian Political Economy, No. 45, June 2000, p. 23.
Moreover, although R & D expenditure in manufacturing contributes positively to
the development of other industries in the Australian economy, the fact remains that
Australia is still viewed as a bulk producer of commodities. Previously high levels of FDI
and ownership in Australian equity and the decided lack of R & D input by these same

39. 34
firms, is countenanced by the relatively small R & D input of Australian firms. Though,
this is not enough to counter-balance negative sentiments about Australia’s global
economic position.
Clearly, this is evident in Australia’s dollar value on overseas markets where the
currency is considered greatly under valued, falling as low as $US 0.49 cents in recent
months. The consensus of Australia as a commodity-based economy is reflected in this low
price and could see it fall even further.50
The need to meet the challenges of moving
Australia’s industries into more technology related areas echoes Paul Keating’s call that
the nation may very well succumb to the vicissitudes of a banana republic if it fails to
advance.
While Keating’s concerns led to structural reform in Australia’s industries, this had
to some extent seen education put on the backburner. Moreover, this had been the case ever
since Barry Jones was minister for Science and Technology in the mid 1980’s, and now
more recently, as the Knowledge nation Taskforce Chair in 2001. Jones continues to
stipulate the importance of gearing the nation towards more value added, and innovative
industries, of which education is very much the precursor.51
While Keating’s statement had
become a central issue in political and economic debate of the times, Jones’s call to arms
was considered more academic than an immediate requirement.
Nonetheless, one of the main items on the agenda for Australia’s recently held
federal election, which coincidentally the opposition party had pinned its election hopes
upon, was “Knowledge Nation”. Alternatively, to use the incumbent government’s terms
of reference this also became known as “Backing Australia’s Ability”, which was launched
50
Australian Broadcasting Commission, 2001, Cortis, K. Goldman-Sachs Asia. Interview, Compare Tony
Jones, ABC’s Lateline, <http://www.abc.net.au/lateline/s323755.htm>, accessed September 2001.
51
National Australian Labor Party, Home Page, Barry Jones – Launch of the report of the ‘Knowledge
Nation’ taskforce, < http: www.alp.org.au/kn/kn_report_ 020701.html> accessed July 2001.

40. 35
in January 2001.52
The urgency with which both major Australian political parties
addressed this agenda and labelled it their own initiative highlights the necessity for such a
strategy and its implementation.
Moreover, the main agenda it underscored was the need for the reallocation of
resources to meet changing national interests, which among other needs, included
encouraging educational investment in information technology and associated industries.
With growth in these imports significantly outpacing those of Australia’s major exports in
recent years, enhancement of national wealth and job creation has proven a considerable
incentive for advocating this investment strategy, albeit better later than never. As an
election promise, such a proposal is commendable, though it may be difficult to rise above
the rhetoric and achieve any noteworthy outcome.
Barry Jones, in his role as Science and Technology minister some 15 years ago,
insisted on the need for such a program; however 15 years on, his fears have not been
allayed. This is primarily because federal politics in Australia has a tendency towards
pragmatism rather than vision. Government policies that have no immediate impact
therefore go largely unnoticed by the Australian public.
Allbeit the case, Australia’s dilemma of inefficient, uncompetitive industries,
overall market decline in manufacturing as a share of GDP, and increasing levels of
technology imports, attests to the requirements established by Barry Jones and others that
the nation must change its emphasis to enhance Australia’s economic development. This
view is further reinforced by OECD statistics, which show Australia’s R & D to GDP ratio
at 1.5 per cent, having slipped significantly below the OECD average of 2.2 per cent.53
52
OECD Economic Surveys, No. 14, August 2001, p. 184.
53
OECD Economic Surveys, No. 14, p. 107.

41. 36
Australia’s historical origins and past relationships have shaped and moulded the
economy into its current position. For many commentators it was Keating’s influence over
the economy as Federal Treasurer in 1983 and the subsequent opening up of the economy
to international competition that heralded in the watershed years. These years had seen
Australia basking in the success of its resources boom with Asia until the price, food, and
fuel shocks of the mid 1970’s. As a consequence of this, changes were needed to revamp
the nation’s structural malaise, which had exposed a weak manufacturing sector.
Yet, while Australia’s problems were inherently structural they were also
institutional in origin, with the weaknesses in the manufacturing sector resulting from a
poorly developed entrepreneurial class. In Australia, the dominant capitalist class had
always existed more or less in the shape of those who owned the primary resources, rather
than as an indigenous crop of local capitalists who were manufacturers.54
This has
influenced the extent to which Australian industry has been involved in R & D and the
ongoing level of participation in technical innovation and change.
This presents significant ramifications for regional trade, with which Australia must
compete in order to extend its global reach. If Australia is to advance within regional
trading arrangements and fortify complementarity within these groups, it must address
these structural, and in particular the institutional problems, or else it may well see itself
largely excluded from inter-regional trade.
Therefore, the outcomes of Australia’s early trade relationships have consequences,
not just affecting past relationships, but also affecting those in the future. Not the least of
which concerns the extent of Australia’s ongoing interaction with the region, and the
overall importance of regional trade to Australia’s future growth.
54
Broomhill, P. 41.

42. 37
CHAPTER 3
The Importance of Regional Trade to Australia’s Future Growth
An important consideration in any argument about economic development concerns
the nature and type of development that is taking place. The neo-classical, and more
recently, liberal models of economic development predicate Australia’s relationship with
the EU and the US, which are characterised by predominantly western societies. However,
if we are talking about Australia’s relationship with East Asia (particularly Southeast Asia)
then we are talking about economic development that has occurred along somewhat
dissimilar lines. Here, ostensibly authoritarian regimes headed by military dictators have
attempted to obtain legitimacy by shrugging off their military uniforms and entering the
public arena, while maintaining close links with the military.
In many ways, what managed to sustain dynamic regional growth had been the
complicity of foreign capital, transnational corporations, and foreign governments with the
ruling elites of the region who acted in cooperation with powerful domestic cartels.55
Such
relationships provided regional stability because the ruling elites also controlled, or in large
part acted in cooperation with, the defence establishments and their leaders. Australia’s
relationship to foreign capital has been predicated by stability incurred through “… stable
institutions and sound conventions within a tried and tested constitutional system.“ 56
For these reasons, the Australian economy may be perceived as a somewhat safer
haven for investment than that of its regional neighbours. Moreover, Australia and the
region differ in terms of the origins of internal stability, and as such their attractiveness to
foreign capital and investment. There are also considerable differences in terms of their
orientation towards R & D and the varying levels of technical innovation and change that
55
Jayasuriya, K. The crisis of open regionalism and the new political economy of the Asia-Pacific, in Policy,
Organisation & Society, Vol. 20, No. 1, 2001, p. 90.
56
Flint, D. Opinion, The Australian, Wednesday January 9, 2002, p. 11.

43. 38
have taken place. As discussed in the previous chapter, the input of foreign investment into
R & D is significantly less than that of domestic industry. This has caused some concern
because of the high levels of foreign ownership, particularly in the resources sector of the
Australian economy. However, in the region, particularly Southeast Asia, much of the
technical innovation and change has occurred through technical transfer (often called the
flying geese model of development). This has come from Japanese industries outsourcing
technology to take advantage of cheaper labour and infrastructural costs in the region. In
effect, this created a situation where the region did not have an indigenous crop of local
capitalists who were manufacturers, and neither did Australia for that matter. Moreover
like Australia, the region may well suffer from a drought in technical innovation and
change by virtue of the R & D sector not containing an indigenous crop of capitalists
motivated by any economic need to develop leading domestic industries. Again, the
outsourcing of R & D by foreign organizations with little input from the host economies
has seen this situation prevail in Australia and the region.
However, what many fail to consider in an argument such as this is the variety of
competing capitalisms in the region. Take for example the Diaspora of Chinese capitalism
throughout Southeast Asia; it has been argued that their relative successes have not simply
been the result of imitation or copying of the west, but may be considered a desirable
alternative model.57
However, this Diaspora, while quite large, occurs throughout the
region in small units when compared to the extensive corporations of the Japanese
overseas. This often meets with hostility from host nations as the Chinese concentration of
economic power is much maligned by indigenous populations.
57
Tracy, C.L. & Tracy, N. The Dragon and the Rising Sun: Market Integration and Economic Rivalry in East
and Southeast Asia, Flinders University, 1994, pp. 3-7.

44. 39
With competing capitalisms, differing models of economic development and
strategic instability the region may be considered highly volatile. This in itself creates a
somewhat uncertain investment environment for Australian firms, who would be more
inclined to trade outside the region (with the EU and the US) because of confusion over the
regional environment. Therefore, the idea that regional trade has enhanced Australia’s
economic development and the overall importance of the region to Australia’s future
economic growth is counterbalanced by considerations, not only of economic performance
but also of political and strategic concerns. It is these considerations that have seen
organizations such as the World Trade Organisation (WTO) and the IMF encourage trade
linkages between developing and developed economies and the broadening and deepening
of relationships through regional RTAs (Figure 3).
Figure 3: The number of RTAs notified each year 1948-1999
Source: World Trade Organisation – Regionalism: Facts and Figures www.wto.org
Inactive Dec 1999 Active Dec 1999

45. 40
The recessionary period of the late 1970’s and 80’s had seen a tapering off in
membership of RTAs. This was the result of a propensity for nations to retreat into more
protectionist frameworks in recessions, in order to protect their markets from outside
interference. Likewise, in periods of economic growth such as the long boom of the 1960’s
and 70’s there has been a propensity for RTA creation and in the 1990’s this trend for RTA
membership has continued. While figure 3 refers ostensibly to the global context, the
region is highly integrated into this format, with 13 Asia Pacific regional nations engaged
in talks on bilateral and sub-regional FTAs, and a further 43 RTAs having been ratified.
These constitute almost half of the 130 FTAs in force, with the US having just two RTAs
and Australia involved in just one with New Zealand.58
Regional trade may have considerable importance to Australia’s future growth, not
just in terms of regional demand or market access, but also in terms of regional stability as
a foundation for drawing in large players such as the EU and the US. Many of the benefits
of trading with near neighbours are derived from reduced transportation costs and the
facilitation of shipping movements. Perhaps more importantly, such arrangements help to
create and maintain harmonious relations between trading nations. After all, if nations are
involved in some form of regional trade arrangement, it may help to reduce the likelihood
of any tensions or frictions from either developing or escalating into more volatile forms of
conflict, for fear of jeopardising mutually beneficial trade arrangements.
Arrangements, which allow for an exchange of ideas and culture, often facilitate the
movement of people, such as company representatives, and can help to promote fruitful
political exchanges. Essentially, what this represents is the opening up of borders and the
lifting of barriers to trade and investment. Indeed, this is very similar to the rationale for
58
Leaver, R., Is Australia Being Economically Excluded from Asia? Policy, Organization & Society, Vol. 20,
No. 1, Special Edition, An American – Australian Free Trade Treaty, Flinders University, 2001, pp. 141-142.

46. 41
the establishment of GATT that was predicated by fears of protectionism and trade
tensions during the inter-war years.
This philosophy has been paramount in the fast tracking of China’s entry into the
WTO, and allowing China to have the Olympic Games even in the face of recent massive
human rights abuses by the ruling political regime. It is perceived that an isolationist China
with nuclear weapons and an ever-growing economic clout not just in the region but the
world would be more receptive to the United Nations (UN), World Bank and IMF concerns
if it were a part of the open trading system than if it were not.
Australia owes much of its current economic success to its relationship with the
region, in particular Japan, which was a major source for Australia’s exports from the
1960’s onwards. With Australia’s reduced access to the EU and restricted access to North
Atlantic Free Trade Agreement (NAFTA), the opening up of the region was perhaps
Australia’s saving grace in terms of economic survival.59
Japan is still Australia’s number
one trading partner today and while Australia is not as important as a source of imports for
Japan as it was in the 1960’s, Japan is still Australia’s most important destination for
exports. 60
This is perhaps no better exemplified than in a report drafted by the Australian
Bureau of Statistics to highlight the necessity of bilateral trade between the two countries.
61
To add to the veneer this report gives a glowing picture of Australia’s trade with the
region. It also clearly shows that Australia’s interests lie with the region in terms of the
significant growth in trade with Japan and ASEAN (Figure 4).
59
Is Australia being economically excluded from Asia, p. 152.
60
De Brouwer, G. & Warren, T.,, Strengthening Australia – Japan Economic Relations, Department of
Foreign Affairs and Trade, April, 2001. <http://www.dfat.gov.au/geo/japan/aus_relations/ser_report.pdf>,
accessed May 2001.
61
Brouwer, & Warren.
Figure 4: Australian exports of goods and services.
By destination, 1990 and 2000

47. 42
Source: Australian Bureau of Statistics (www.abs.com.au)
China as an export destination appears significantly less important than the other
nations and regions represented. However, its overall percentage growth in terms of initial
trade from 1990 to 2000 is substantially greater than all the rest, which makes it appear
quite noteworthy. Moreover, to say that Australia’s exports to the EU outweigh those of
the US, while it may be true, fails to indicate that the EU is a trading region in much the
same way as ASEAN. Thus, it fails to differentiate between trading nation and trading
region, leaving out much of this important criterion as the basis of its overall modelling.
Merchandise/goods exports are the largest sector of Australia’s overall export trade
at $A119.5 billion in 2000, and when services are added to these, they represent an
impressive export base.62
Services are becoming one of the fastest growing sectors in the
Australian economy. As a share of total exports, services stand at 36 per cent or $A32.8
billion in 2000. Therefore, the addition of service exports to the level of
62
Department of Foreign Affairs and Trade: Composition of Merchandise Trade in Composition of Trade
Australia 2000-01. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed September 2001.
1990
2000
30
25
20
15
Australiandollars,billions
1990
2000
JAPAN ASEAN EU USA CHINA
10
5
0

48. 43
merchandise/goods trade has a substantial impact on released government statistics.63
Yet
the overall chemistry between goods and services is different, in terms of manufactured
goods compared to the intellectual property rights and the fewer tangible assets that
comprises of services generally. Any divergence in terms of their calibration pales when
we consider that there is a great deal of complementarity between them. Moreover, much
of the service industries rely heavily on manufacturing for their continued development.
While computers, telecommunications, transportation, servicing of equipment, and R & D
enhance the efficiency of many of the service industries they still owe a significant amount
of their growth to their manufacturing origins.
Why then, is it that manufacturing as a percentage of GDP is declining in most
OECD countries? If manufacturing is the basis of the service industry requirements/initial
inputs, then why does it not grow concurrently?
Again, as in subsequent chapters, these questions formulate the basis of the
hollowing out process or the contrast between the booming sector and its resultant Dutch
Disease sector affected industries. The primary reason for this occurring in Australia (and
other OECD countries) is widely accepted to be the result of inefficiencies within domestic
manufacturing industries themselves. Their declining share of GDP is most certainly the
result of decreased income elasticity of demand for manufactures due to rising income
levels.64
This effectively leads to reduced demand for domestic manufactures, though it
does not necessarily translate into a reduced demand for manufactured goods per se’.
Again, what this gets down to is competitiveness, with imported manufactures dominating
the market, because of far better elasticity of demand among Australia’s regional
63
Department of Foreign Affairs and Trade, 2000: Australia’s trade in services in Composition of Trade
2000. < http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed August 2001.
64
Toner, P., Manufacturing Industry in the Australian Economy, in Journal of Australian Political Economy,
No 45. June 2000, p. 21.

49. 44
competitors. Thus, prices for imported goods are cheaper than those of domestic
manufacturers, which are unable to compete on a price per unit basis with these smaller
income, higher output economies.
Therefore, to suggest that manufacturing is in a fatal decline would be erroneous,
since considerable service industry growth requires domestic manufacturing input. This
input is needed particularly in R & D expenditure and accounts for the concern over
foreign investment and the lack of R & D spending in manufacturing industries dominated
by this sector. Moreover, owing to the considerable weight of the services sector in export
growth during recent years, manufacturing growth particularly in R & D cannot be
overstated as a complimentary adjunct to the development of the services sector.
From the perspective of the Dutch Disease, this argument has considerable merit, as
the core model suggests that the lagging sector may decompose into other industries.65
In
other words, these non-boom industries can still expand, as manufacturing has done via the
growing requirements of the services sector for manufacturing input, in terms of
maintenance, and technical expertise, and many aspects of technical innovation and
development. All this can occur even though the sector overall, may, in fact be
contracting.66
Therefore, emphasis on the role of manufacturing in service industries, through R
& D, has particular relevance here, as it highlights many important contradictions in the
issue of whether or not regional trade could help or hinder Australia’s economic
development. This is primarily due to the dramatic increase in Australian service exports to
the region as a response to increasing demand for Australia’s technical expertise and
professional services. This is evidenced by Australia’s services trade with APEC which has
65
Corden, pp. 12-13.
66
Corden, p. 12.

50. 45
increased from $ A 6,306 million in 1989-1990 to $ A 17,550 million in 1999-2000,
an increase of some 64 percent within the decade.67
However, R & D restrictions incurred by foreign ownership pressures for a more
extractive economy could very well undermine Australia’s regional involvement. While
this possible undermining of the Australian economy is not entirely caused by these
factors, its origins are embedded in the perception of Australia as an extractive,
consumption based, low technology economy. These continuing perceptions could very
well see future regional trading relationships degraded and see Australia retreat from
ongoing trade liberalisation. Such a situation has already occurred in the automotive, and
TCF industries, with foreign owner perceptions as well as those of the domestic industry
itself being more concerned with continuing production, and saving jobs. This has occurred
at the expense of technical innovation and change, resulting in further assistance and
ongoing tariff barriers.
Therefore, while regional trade has been and will continue to be important to
Australia’s future growth there are a number of internal contradictions in the scope and
likely improvement of trade relationships with the region. While stable government and a
skilled workforce go in Australia’s favour attitudes towards R & D do not. The downward
pressure on manufacturing makes this all the more difficult as inelasticity of demand
makes for a poor bedfellow with the high costs of R & D expenditure. This is made all the
more acute by foreign investment, which would rather produce existing technology
cheaply here and develop it more advantageously elsewhere.
67
The APEC Region Trade and Investment 2001, DFAT, Australia, October 2001, p. 196.

51. 46
CHAPTER 4
The Regional Financial Crisis and its Impact on Australia’s Economic
Development
The Australian federal government’s often-projected view that the regional
financial crisis had little impact on Australia’s economic development is not entirely
sound. In fact, the crisis had significant long-term consequences for the economy, some of
which may be difficult to quantify or measure in terms of economic indicators, as they are
yet to unfold, though the trends are now becoming apparent. This is no more so than in the
ongoing reinforcement of international opinion that depicts Australia’s economy as a
commodity based, branch economy.
Since the onset of the Asian financial crisis in 1997, there have been substantial
changes occurring in both the nature and patterns of regional trade that have emerged.
Australia has seen a considerable shift in trade away from the region toward that of the US
and the UK. An apparent transfer in trading allegiances is not all that surprising in light of
the fact that in 1998 Australia had its first trade deficit with APEC in a decade, and its first
trade deficit with ASEAN since the 1970’s.68
Immunity to some aspects of the regional crisis highlighted how removed Australia
was from the region. While complementarity was important as Asia expanded in as far as
Australia’s resources helped develop regional economies, they now highlighted how
Australia’s regional integration is made all the more problematic as these economies are
now increasingly engaged in technology-related industries. This leaves Australia’s bulk
commodity based export economy with few options but the distant possibility of the
opening up of the Americas to its trade.
68
Department of Foreign Affairs and Trade, 1999, Composition of Trade Australia 1998.
< http://www.dfat.gov.au/publications/stats-pubs/cot.pdf > accessed July 2001.

52. 47
Moreover, with the insolvency of many banks and businesses in the region after
1997, demand for Australia’s commodities had been substantially reduced. This reduction
in demand was the result of massive capital flight out of Asian economies, which saw
Australian exports to the region fall by more than 7 per cent in 1998-99. Compared to the
previous year, exports outside the region had risen by over 3 per cent in the same period
(Table 10).69
Table 10 Australia’s exports to the region and outside the region,
1995-96 to 1998-99 - selected countries ($A millions)
Australia’s
Export
Destinations.
1995-1996 1996-1997 1997-1998 1998-1999
Intra-Regional
(selected countries)
ROK
Singapore
Taiwan
Hong Kong
Indonesia
Malaysia
Thailand
6,615
3,556
3,452
3,052
2,716
2,289
1,779
7,134
3,410
3,620
3,105
3,305
2,332
1,693
6,397
3,697
4,180
4,138
2,751
2,097
1,390
6,320
3,417
4,203
3,071
2,119
1,859
1,306
Extra-Regional
(trading group + selected countries)
APEC
ASEAN
EU
UK
US
57,925
11,739
8,464
2,829
4,619
59,678
12,273
8,171
2,357
5,526
64,210
11,514
10,236
3,040
7,794
61,355
10,416
11,629
4,473
7,984
Source: AusStats: Feature Article – Australia’s export markets, 1991-92 to 2000-01. Cat No. 5422.0
Moreover, there were substantial increases in Australia’s exports to the EU, the UK
and the US between the periods 1995 –1999. To some extent this trade diversion indicated
that Australia was turning away from the region by trading with preferred markets,
69
McDougall, D., Australia and Asia – Pacific Security Regionalism. Contemporary South East Asia, Vol 23,
No 1, April 2001, p. 91.

53. 48
predicated by the customs and beliefs which tie Australia’s largely western orientated
culture to value systems outside the region.
However, while this may in some part be the case, significant falls in the value of
the Australian dollar because of the crisis made Australia’s exports more attractive to new
markets outside the region. This provided a significant boost for exporters and greatly
assisted in the positive terms of trade outlook. If not for these factors the economy may
well have taken a severe battering as the depreciation of the currency at the time took some
25 per cent off its value with the dollar, dropping as low as 55 cents. This was lower than
its all time low in 1986 of 57.5 cents, alluding to Paul Keating’s concerns that Australia
takes heed of his banana republic characterisations.
While the overall economy itself appeared largely unaffected by the crisis, this was
not just a result of openness, or liberalisation. It was due, perhaps, more to Australia’s
dependence on commodities and its low technology manufacturing base, which made
Australia much less vulnerable to the economic shocks, which shook the region in 1997.
To elaborate further, it is certainly true that Australia lacks any comparative
advantage with the region in terms of high technology fields. Japanese FDI gave rise to a
regional division of labour, which was efficient and cheap when compared to labour costs
here, and had seen large increases in technological capabilities, particularly in Thailand,
Malaysia and the Philippines.70
Certainly, this over-dependence on FDI from an
extensively depressed Japanese economy had left these and other regional economies
highly vulnerable. With a slowing US market ASEAN in particular, was left with an
oversupply of goods.71
70
The Far Eastern Region, The Journal of East Asian Affairs, Vol XIV, No 2, Winter 2000, p. 347.
71
Peng, D., The Changing Nature of East Asia, Pacific Affairs, Vol 73, No 2, 2000, p. 171.

54. 49
This was further compounded by the nature of regional economies, which were
geared to production (export orientated) rather than consumption (domestic demand). The
subsequent increases in the current accounts deficits of these countries saw cracks
appearing in the very institutions that supported industry with its capital requirements, and
saw fundamental weaknesses in terms of accountability and transparency of these same
institutions.
While it is not the purpose of this thesis to articulate the causes of the 1997 crash,
some understanding of the factors involved bear directly upon differences in capital flows
and types of trade between Australia and the region. They can also determine the likely
future direction of these trade flows and ultimately the extent to which they will influence
Australia’s economic development.
It was inevitable that Australia’s commodity markets in the region would be
affected by the crisis. By 1999 coal exports had fallen some 12 percent to $US 5,414
million down from $US 6,179 million in 1998 as regional economies slowed in the wake
of the crash of 1997.72
This accelerated into a crisis of structural proportions for the
economies concerned, inflicting reduced demand for manufacturing, particularly, in
technology sectors and automobile industries, and saw the collapse of the construction
sectors that were fuelled largely by hot money.
The crisis resulted in substantial capital flight from the affected economies, with
some fundamental distinctions between Australia’s economy and those of the region
underlying why the impact of the crisis on Australia saw this nation substantially
unaffected by these events. This is an important distinction when talking about Australia’s
relationship with the region, especially when we consider trade outcomes in the aftermath
of the crisis.
72
The APEC Region Trade and Investment 1999, DFAT, Australia, October 2000, p. 13.

55. 50
Australia’s economy is substantially larger than many of the regional economies
affected by the financial crisis, therefore any downturn in the international market will tend
to have a larger impact on these smaller economies. In Australia, exports had comprised
around 16 to 20 percent of GDP leaving some 80 percent of GDP for domestic demand and
consumption (Table 11). However, owing to the export-orientated nature of regional
economies, domestic demand is substantially low, while exports comprise close to, or more
than 50 per cent of GDP. Therefore, any downturn in export demand will significantly
affect GDP allowing a higher likelihood for the domestic sector to be undermined, and an
increasing chance of capital flight, as had been seen during the crisis. Australia has a
decided comparative advantage in its primary sector, which the region does not have, and
with the crisis affecting mainly technology stocks, Australia’s economy largely escaped the
havoc created by regional events.
Table 11 Regional comparisons between exports as a percentage of GDP
Exporting country 1996 1997 1998 1999 2000
Australia 14.8 15.5 15.3 14.2 16.6
Japan 8.9 10.0 10.2 9.6 10.1
US 8.0 8.3 7.7 7.4 7.7
ROK 25.2 28.6 41.9 35.4 36.4
Indonesia 21.9 24.8 51.2 34.4 40.5
Malaysia 77.6 78.7 101.4 107.2 109.9
Thailand 30.6 38.1 48.7 50.6 53.4
Source: Australian Bureau of Statistics (www.abs.com.au)
By comparison, the regional crisis had little impact on China’s economy apart from
some downward pressure on the domestic currency. Again, owing to China’s status as the
new powerhouse of the region, and given the comparatively larger size of its economy to

56. 51
that of the region, the international shocks caused by the crisis left this economy relatively
unscathed as well.
Demands for stability that to some extent allowed China’s economy to weather the
regional financial crisis are currently being sought by regional economies. This belies a
concerted push by these economies for their own trading zone not unlike that of the EU or
NAFTA. There is considerable evidence of a shying away by the region from regional
forums such as APEC by virtue of the establishment of the ASEAN + 3 forum. This forum
evolved from an economic courtship between ASEAN and the largest economies in the
region (Japan, China, and South Korea) in the aftermath of the Asian regional economic
crisis. The emphasis for this forum has been on mechanisms to help counteract the impact
of any future regional crisis by the proposed introduction of a region-wide system of
currency swaps and talk of a common currency itself. It is assumed that such a mechanism
could alleviate some of the problems caused by the US dollar pegs and the subsequent free-
floating currencies that had previously wreaked so much havoc.73
An essential aspect to this forum was its restricted membership to East Asian
participants only. Since Australia is the only non-Asian nation in the region, it clearly
apparant that this gathering was very much to Australia’s exclusion. The Australian
government rejects this notion and prefers to see this as an alternative mechanism for
regional dialogue and cooperation to APEC, as East Asia’s own distinctive way of dealing
with economic issues in lieu of the crisis.74
However reassuring this statement may be, a
dialogue between North East Asia’s biggest economies and their ASEAN counterparts
would almost certainly suggest cause for much greater concern on Australia’s behalf. In
73
Bergsten, F. Tigers throw off shackles, The Australian, Monday, July 17, 2000, p. 44.
74
Calvert, A. 2000, `Australia’s Foreign and Trade Policy Agenda. ` National Press Club Speeches by the
Department of Foreign Affairs & Trade Secretary, Canberra, <http://www.defat.gov.au>, accessed June
2001.

57. 52
light of the constraints placed on Australia’s economy by trading blocks in Europe and
America, a tight regional trading block would have devastating consequences for
Australia’s terms of trade, thus impacting harshly on Australia’s economic development.
However, since mid 1999 commodity exports have boomed as oil prices have risen,
creating demand for cheaper alternatives such as Australia’s extensive coal reserves. The
price of commodities has continued to fall increasing to levels better than those of the pre-
crisis period, with gains of 27.1 per cent over 2000-01.75
These increased levels of
productivity combined with Australia’s weak currency have reined in a prevailing mineral
boom. With the currency losing some 25 per cent after the regional crisis, this has since
leveled at about 14 per cent between 1999-2000 and 2000-01. This has added some 15 per
cent to the commodity price index making for very cost competitive commodity exports
from Australia.76
Australia is also shaping up to be a good place to invest for automobile
manufacturers. This is increasingly due to the uncertainty of the Asian market owing to
recent bankruptcies such as Korea’s second largest conglomerate (Daewoo in 1999), and
ongoing concerns about corporate governance and continuing levels of corruption.
Moreover, corruption, collusion, and nepotism are endemic to the point where their grip is
still relatively tight in regional economies. Such is the case that corporations like Holden’s
US parent are considering increases to its share in the Australian automotive market to
some 25 per cent within five years.77
Also, Detroit based motor company Ford, while
slashing some 35,000 jobs and closing several factories across the US, has not only
maintained a presence in Australia, but is expanding operations here. Ford has a $A500
million investment in a new vehicle line in Australia, and is planning to increase the
75
Phaceas, J. Dollar at coalface of recovery, The Australian, Wednesday, December 19, 2001, p. 30.
76
Wilson, N. Mineral boom on dud dollar, The Australian, Wednesday, December 12, 2001, p. 38.
77
Wilson, R. Holden’s right turn, The Australian, Thursday, January 10, 2002, p. 24.