Going for Gold in economic complexity

6 December 2021
From our ‘Thinking outside the box’ series
Australia should look to strengthen its economy via advanced manufacturing and diversification of exports, in order to develop greater sovereignty in the industrial space, writes Christopher Day.

At the conclusion of the 2020 Tokyo Olympic Games, Australia came in at an impressive sixth place with 46 medals, including 17 gold. For a nation of 25 million, Australia has punched far above its weight to achieve one of its best performances in the modern Olympics.

Such success came with years of planning and investment. The Australian Sports Commission (ASC) invested over $500 million to prepare athletes in the four years leading up to the Tokyo Games.

Whilst Olympic glory plays an important role in inspiring community engagement and generating a sense of national pride, Australia falls dangerously behind the mark on a critical reflector of long-term economic success – economic complexity. Economic complexity measures an economy’s productive capabilities and the sophistication of its exports. These are critical for productivity growth and global competitiveness.

In 2019, Australia ranked an eyewatering 79th in the world for economic complexity. For a country that perceives itself as an “advanced economy”, our ranking places us behind emerging economies such as Kazakhstan and Chile and only slightly ahead of Mauritius and Guatemala. In contrast, the top 10 nations for economic complexity are comprised of other wealthy countries such as Japan, Taiwan, Switzerland, Germany, South Korea, Singapore and the United States.

In contrast to most advanced economies, Australian exports lack both diversification and sophistication. Major exports include iron ore, coal and mineral fuels, which not only leave the economy vulnerable to shifts in commodity prices but forgo the opportunity for Australia to leverage its human and financial capital to add onshore value. Although the efficiency of Australian miners is unquestionable, the dig and ship model which underpins our prosperity deserves reconsideration if Australia is to prosper in the decades to come.

Limitations in Australia’s industrial capability have been acutely revealed throughout the COVID pandemic. Supply chain disruptions to critical protective equipment and face masks were prevalent throughout the early stages of the pandemic whilst the lack of onshore mRNA vaccine manufacturing competence has restricted Australia’s ability to vaccinate the population rapidly. In contrast, CSL’s manufacturing capability has been critical in maintaining a steady supply of vaccines in the face of export embargoes by other nations and demonstrates the importance of maintaining sovereign capability.

Other nations realise the value of sustaining and developing sovereign capability in a global economy increasingly driven by technological and scientific prowess. Through carefully formulated policies, South Korea has become a major producer and exporter of electrical machinery, circuit boards, computers, batteries and cars. This supports the prosperity of its citizens and balance of payments. On top of this, South Korea has invested approximately AUD $2.7 billion to become one of the world’s top 5 vaccine producers by 2025. This investment alone dwarfs the Commonwealth Government’s $1.5 billion Modern Manufacturing Plan. In contrast, Australian politicians have been far more interested in stimulating the economy through “flashy” infrastructure projects such as the $11 billion Western Sydney Airport metro.

If investment of this scale was redirected towards the promotion of advanced manufacturing, enormous possibilities would lie ahead. The transition to a low carbon global economy and Europe’s recent introduction of carbon border taxes places Australia in pole position to become a major exporter of clean hydrogen and energy intensive manufactured goods. Adding greater domestic value to exports such as rare earths and leveraging our research base through improved commercialisation of discoveries will create high value jobs, lift productivity and shore up our ability to export competitively for generations.

Australia is a nation with great potential. It is time to go for gold in economic complexity by leveraging, as opposed to exporting, our resource abundance in order to build world class industrial capability. Helping to fix the planet in the process would not do any harm!