Market failure in Australia – what is happening to structural change?

Market failure in Australia – what is happening to structural change?

Adam Fforde

Two things are important, one is obvious, the other is not.

What is obvious is that the Australian economy is undergoing structural change.

During the 20 year boom, when export prices were high, we learnt to cope with rapid increases in tax revenue, a high exchange rate and an economy oriented structurally towards commodity exports. 

Before the 1990s, after the ALP reforms, we were using market signals to re-orient towards sustainable ways of earning our living internationally such as exports of high-value added manufactures, services and high unit value foods. With the boom, our markets told us, partly through a high exchange rate but also because of the income effects of the divvy-up of exports revenues, to shift towards retail, domestic non-traded services and construction. Construction did not keep up with demand, but money was made, employment created and profits earned.

The boom started to end with the Global Financial Crisis, but had an Indian Summer due to Chinese nation-building economic stimulus, which kept our mineral export prices high until they started to fall sharply, hammering our tax receipts and causing Australians to prepare for what has happened so many times before, ‘no Boom’. We know that tax receipts are down, we know that the dollar has fallen to the 70-80 cent range, and most people think the economic weather will continue in this direction. Australians are very good at living ‘off the sheep’s back’ which means boom and no boom. 

It is obvious that the Australian economy is changing as this happens. Factors of production: our business capital and entrepreneurial skills, our labour and its capacity to apply and learn skills, and our land – must all be reorienting to the new economic conditions. This is obvious.

But it is 2015, already (the Global Financial Crisis started in 2007), and what is not obvious is, concretely, where this is heading. Despite having good economists, journalists and out own brains it is not obvious to us where to put our money, what to encourage out children to study, and what and where land prices will change. Our markets are not telling us what the central aspects of the structural change are. You can find predictions, encouraging tales, stories that dishearten and the rest of it, but these are not market signals. Our markets are failing us.

A very good example of this is the non-University tertiary sector.  Labor campaigned promising improvements, to ‘re-open Greensborough TAFE’. After the introduction of ‘contestability’ it is not yet clear, in the market, whether and how the balance between the public and private sectors will be struck. But it is clear that our labour market is not telling us what is changing, with the structural reorientation, what, now, we should train in what, now, we should avoid. It used to be IT, where strong market signals pointed to opportunities. What now? It is not clear.

Labour needs capital and investment decisions drive structural change, though employers will factor in expected labour costs and labour quality. Entrepreneurial decisions are fundamental; public support, ideally, targets spending on public goods production partly to improve welfare directly and also to leverage by supporting good private investment decisions. Trying to lead the market, for governments, is risky: entrepreneurs are paid in part to bear risk. So, where is the money going and does this tell us what we need to know about the nature of the ongoing structural reorientation of our economy? If we know, we can adapt, as suppliers of land, labour and capital.

I don’t think we do know. The stories we hear and read about investment in Victoria are largely about real estate (Fisherman’s Bend) and infrastructure (railway crossings, the East-West link). These are not guides to how we exploit the shift away from high value commodities exports and a high $: if you like from being the quarry of Asia to being Asia’s deli.

Why?

I think there are two reasons.

The first is that, whilst we can know if we want to, it takes rather a lot of effort to find out where the money is going and why. And part of the shift away from the commodity export boom years is to enjoy that effort, to like reading  about export successes that are real and authentic, and to value such studies (and give time to them). Finnish papers are different from ours – they make their living differently.

The second is that our capital markets are not working well. A friend of mine used to be a bank manager, 30 years ago, and at that time lending decisions were decentralised and he was paid to know about the branch’s commercial client base and take decisions about the banks’ business with them. He left as decision-making was moved upwards and information became standardised, reducing bank transaction costs but destroying much information. A good banker has in their head much accumulated knowledge about their clients, and, if you asked them to write it all down, it would cover a lot of paper. Judgement of risk is then an art, and that does not suit centralisation of power and reliance on statistics that summarise and so ignore detail. What I hear from our banks is a push to large state support for infrastructural investments to tide us over. This does not generate a narrative where it is clear what the structural reorientation that, obviously, is happening, and which, equally obvious (at least to me) is unclear.

Our markets should tell us what to do, and it is clear that they are failing to do so.

Adam Fforde