Bridging the Divide: How reform consensus can unite Australia’s three economies

October 21, 2012

Progressive Economics

By Daniel Mookhey

The notion of a multitrack economy in Australia has become cliched: “two-speed”, “patchwork” – there’s no end to the labels bandied around. But what do any of these economies actually look like? Let’s borrow a taxonomy from Melbourne University’s Max Corden. Corden describes three economies in Australia: the Booming Tradable Sector, the Lagging Tradable Sector and the Non-Tradable Sector. The Tradable Sector produces goods and services that can be produced or consumed anywhere. Think of Apple’s iPad: it is designed in Cupertino, California; manufactured in Guangdong, China; but used everywhere. In contrast, the Non-Tradable Sector produces goods or services that must be both produced and consumed domestically. Think of your local hospital: its services can only be produced and consumed on site.

Using this taxonomy, we’ve set out to analyse who works in which sector, and how fast each is growing – measured in aggregate, by employment numbers, and by wages. We have found that over the ten years to 2011, output and wages grew faster in most parts of the Tradable Sector, but employment grew faster in the Non-Tradable Sector. This means that an already unbalanced economy became even more unbalanced: the Booming Tradable Sector created more wealth but split it amongst fewer people, while the Non-Tradable Sector produced comparatively less new wealth but shared it amongst many more people. This partially explains why Australians read about record profits in some sectors, but job losses in others; record investments in production, but parsimonious spending on consumption; fast economic growth in the mining states, but slower economic growth in the other states. They are reading about three different economies.

Participants in the three sectors disagree over how to manage these different economies. The Lagging sector blames its declining profits and stagnant wages on the same factors that drive the success of the Booming sector: global markets. Absent intervention, these market forces are hollowing out the Australian economy, leaving it totally dependent on few “booming” industries like mining. Predictably, the Booming sector disagrees: industries lacking comparative advantage must shrink so they can expand. Economic restructuring, job losses and capital withdrawal are the price of expanding internationally competitive industries. The Booming sector argues that Australia should adapt to these pressures, letting the Lagging sector contract, which will be made much less painful by strong growth in the other two sectors. Meanwhile, the Non-Tradable Sector is caught between the two positions – fearful of the forces of globalisation, but dependent on the Booming sector’s success for its own demand.

If these fault-lines are to be prevented from deepening further, Australians will need to choose a new economic strategy. I argue that instead of pitting the three economies against each other, it is better to orientate all three sectors toward recognising their shared interest: a symbiosis that sees productivity gains in the Non-Tradable Sector lift the international competitiveness of the Booming Tradable Sector, while easing the adjustment of the Lagging Tradable Sector – releasing the state from the responsibility of compensating those left behind.

This is a complex economic rebalancing task. It requires a reform model that channels all three sectors’ market interactions into higher overall living standards. In this paper I discuss two models: model one, The ‘Consensus model’, is the reform model of the 1980s and 1990s, the model that relied upon agreement among economic actors to redesign markets and boost productivity growth and living standards. Model Two is what I dub the ‘Entitlement model’ – the reform model of the 2000s – the model that freed markets from responsibility for equitable rises in living standards, instead using the Federal Budget to subsidise middle class living standards. This paper argues that the Consensus Model is the reform approach most able to undertake a necessary rebalancing of the three sectors, while smoothing the overall distribution of wealth. This is because it replaces a conflict culture with a political environment centred on sharing risks, sacrifices and benefits.

The paper is organised as follows. Section One details the current gaps between the three sectors: the Booming Tradable Sector is enjoying faster GDP and wage growth, but slower employment growth than the Non-Tradable Sector. Unsurprisingly, the Lagging sector lags on all three indicators. Section Two shows how this disjuncture is enriching capital over labour, and managers and professionals over the other occupational groups. Governments have responded by converting tax receipts into lifestyle subsidies for favoured social groups, perceived to be “middle class” and “aspirational”. Section Three explains why this is harmful for economic reform: it encourages actors to fight over the division of spoils, not cooperate for their mutual benefit. The final section sets out how this conflict culture can be replaced by a consensus culture centred on the principles of a shared fate, shared risk and shared sacrifice for shared benefits.