The approach of the National Day of Australia, Australia Day, on 26 January is not a bad time to reflect on what Australia has done well and perhaps not so well in pursuing trade and investment liberalisation and to consider the impact this reform has had on economic prosperity.
Australia has undertaken a range of reforms over the years that have positioned us well to take advantage of 21st century Free Trade Agreements (FTAs) like the Regional Comprehensive Economic Part-nership and the Trans Pacific Partnership, which we are currently negotiating.
Over the last 40 years, successive Australian Governments have transformed the Australian economy. It is now outward-looking and looks to take advantage of all the opportunities trade and investment provide.
Before this reform, many Australia industries were over-regulated and not competitive; indeed our economic settings were quite accurately criticised as protectionist.
For a time, the problems associated with protectionism were hidden by the strong performance of our agricultural and mining industries.
Eventually, however, inefficient resource allocation, driven by inward-looking policies, began to have a substantial econo-mic impact.
In response, the Australian Government implemented a wide-ranging program of structural reforms. This was poli-tically courageous and done in the face of strong domestic op-position from affected groups. The reform agenda included floating the dollar, and liberalising financial markets, product markets and government business enterprises.
Reform began with a major shock in 1973 when, without warning, the Government implemented a 25 percent across-the-board tariff reduction. While this was a positive start and done with good intentions, the dramatic cut caused a major public backlash, which prevented further reforms for a decade.
However, by the early 1980s there was a renewed discussion about the benefits of opening the economy up to competition.
Over a 13-year-period, almost all Australian tariffs were reduced to five percent or less. These reforms were difficult, particularly for individual industries that had been insulated from foreign competition, but they yielded significant benefits for the rest of the economy.
A fall in expensive, labor-intensive manufacturing activities occurred and work practices, across all sectors, improved, supported by the adoption of new technologies. There was a marked increase in business research and development, which in turn led to greater innovation and higher productivity across the economy.
Trade liberalisation has opened the Australian economy to create greater volumes of trade, increasing productivity, accelerating economic growth and making our economy more flexible and dynamic. Australia’s economic strength, as we enter our 23rd year of uninterrupted GDP growth, has been driven by reform.
According to the Centre for International Economics (CIE) there has been an increase in real incomes of $3,999 (P155, 961) per year for the average Australian family due to trade liberalisation alone since 1988. While over 2 million jobs in Australia’s workforce are now related to trade.
But it is not just trade liberalisation driving Australian eco-nomic prosperity.
Foreign investment has allowed Australians to enjoy higher rates of economic growth, employment and living standards than could be achieved from domestic savings alone. This is because:
• Foreign investment supplements domestic savings by providing access to much needed capital that otherwise would not be available.
• Foreign Direct Investment allows access to new tech-nologies — foreign companies transfer technology to Australia when they invest, making us more internationally competitive.
• It provides revenues for the government — profits of foreign owned companies are taxed, spreading the benefits to all Australians.
• And finally FDI drives productivity growth — through the provision of new technologies and through increased competition in the market.
The stock of foreign investment in Australia as at 31 Dec-ember 2012 was $2.2 trillion, almost double the size of our economy. Access Economics suggests that a 10 percent increase in foreign investment would lead to a 1 percent increase in GDP in Australia by 2020.
Trade and investment liberalisation has played a significant role in unleashing Australia’s economic potential, creating jobs and driving prosperity. If the Philippines’ current economic growth is to have the same effect and be distributed more evenly, then Australia’s experience may provide some lessons.
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(Bill Tweddell is the ambassador of Australia.)