1370.0 - Measuring Australia's Progress, 2002

ARCHIVED ISSUE Released at 11:30 AM (CANBERRA TIME) 19/06/2002

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Contents >> The supplementary commentaries >> Openness

Openness - the interaction of Australia's economy with other economies - can provide benefits to Australians. An increased openness to imports means that Australians have a wider range of goods and services to choose from, often at more competitive prices. And international trade and investment flows may give Australian businesses access to newer and more nnovative technologies, which can in turn lead to productivity improvements. Competition with overseas suppliers may also prompt greater efficiencies or nnovation in Australia.

This commentary considers two aspects of Australia's openness: Australia's imports of goods and services, and foreign investment flows into Australia.

Openness can be assessed from the relative significance of overseas trade and investment flows to the national economy. Or it can be assessed from the barriers that a country places on trade and investment flows across its borders (for example, tariffs and quotas on imports or restrictions on foreign ownership of land or other assets). Ideally, indicators of openness would encapsulate both the size of and the barriers to flows of trade and investment.

Measures of effective rates of assistance to industry (including border protection) are available, but only cover barriers to trade.(SEE FOOTNOTE 1) Barriers to investment are more difficult to encapsulate in a single indicator. Moreover, even if such an indicator were available, a somewhat arbitrary decision would have to be made about the importance, or weights, that should be assigned to the various restrictions.(SEE FOOTNOTE 2)

The goods and services that international trade makes available to Australian residents are an important aspect of progress. Some analysts base indicators of openness on both exports and imports. But this section focuses on how Australia's openness to imports provides Australians with wider choices of goods and services. Therefore, one of our indicators of openness is the ratio of imports to total sales in the economy.

Investment flows into and out of Australia are another important aspect of openness. Outward investment builds up Australia's income-generating assets abroad. Inward investment can provide opportunities for local businesses to access new technologies and management skills, as well as funds for capital formation.(SEE FOOTNOTE 3) To measure this aspect of progress in openness, we look at the ratio of foreign investment in Australia to Australia's gross domestic product.

Ratio of imports to GDP
Graph - Ratio of imports to GDP

AUSTRALIAN IMPORTS OF GOODS AND SERVICES

Imports can be separated into goods and services. Imported goods can in turn be classified according to their end use; for example household items and non-industrial transport are classed as consumption goods, whereas machinery and industrial transport are classed as capital goods.

Over the last decade, one of the fastest growing areas of capital imports was telecommunications equipment. The nominal value of imports of these goods increased more than fivefold between 1990-91 and 2000-01 despite general falls in prices.

Imported services also increased throughout the decade. Expenditure on transportation and travel services in particular, which includes spending by Australians on travel abroad as well as their purchases overseas, increased relatively quickly between 1990-91 and 2000-01.

TRENDS IN OPENESS

The first graph shows the ratio of imports to GDP, from 1990-91 to 2000-01. During this period, the ratio increased from just over 17% to a little under 23%. The second graph shows the ratio of foreign investment in Australia to GDP. The value of incoming foreign investment transactions has generally risen over the period 1990-91 to 2000-01.

FACTORS INFLUENCING CHANGE

The increased openness of Australia's economy has been brought about by a combination of factors. For some years now, Australia has been lowering the level of barriers to the imports of goods and services and capital inflows. This is shown in part by the decrease in the average tariff rates applied by Australia, which fell from 15.6% in 1988 to around 5% a decade later.(SEE FOOTNOTE 6) World trade negotiations have played an important part in this gradual dismantling of border protection.

Another way in which economic policy has led to an increase in openness in Australia is through the liberalisation of capital flows. Since the deregulation of the financial system in the mid-1980s, capital transactions, including foreign investment in Australia, have greatly increased in volume.

Various other factors have contributed to increased openness. These include changes in the composition of the economy and in the rate of technological change in different industries.

Capital imports tended to increase at a much slower rate than consumption imports over the decade. For example, the nominal value of machinery and industrial equipment imports increased by only 98% between 1990-91 and 2000-01, compared with a 172% increase in the value of imported household electrical items and a 290% increase in the value of motor vehicle imports.

Other factors influencing the size and importance of Australia's imports include changes in the relative prices of imports and exports brought about by fluctuations in the exchange rate (see the commentary Competitiveness), and changes in the tastes of domestic consumers.

Ratio of foreign investment inflow into Australia to GDP
Graph - Ratio of foreign investment inflow into Australia to GDP

TYPES OF FOREIGN INVESTMENT IN AUSTRALIA

There are various ways in which foreign residents and companies can invest funds in the Australian economy:

direct investment - when a foreign investor has an equity interest of 10% or more in an Australian enterprise, and so has some control over its operations;

portfolio investment - refers to equity and debt transactions which, unlike direct investment, do not offer the investor any control over the operation of the enterprise; and

other investment - transactions not included as direct or portfolio investment, such as trade credits.(SEE FOOTNOTE 5)

In June 2001, portfolio investment accounted for 56% of total foreign investment levels in Australia. Direct investment made up another 26%.

The industries recording the highest levels of foreign liability at the end of June 2001 were Finance and insurance, and Manufacturing.(SEE FOOTNOTE 4)

LINKS TO OTHER DIMENSIONS OF PROGRESS

Increased openness to imports can be linked with greater competitiveness, and can affect the consumption patterns of Australians. Improvements in productivity can also be associated with greater openness to foreign investment.

FOOTNOTES

1 Productivity Commission 2001, Trade and Assistance Review 2000-01, Annual Report Series 2000-01, AusInfo, Canberra.

2 Lloyd, P.J. and MacLaren, D. 1998, Measures of Trade Openness Using CGE Analysis, Research Paper No. 659, The University of Melbourne, Melbourne.

3 Australian Department of Foreign Affairs and Trade 2001, Exploding the Myths - Facts about Trade and International Investment, Canberra URL: www.dfat.gov.au/publications/exploding_myths/index.html last viewed 13 March 2002.

4 Australian Bureau of Statistics, various issues, Balance of Payments and International Investment Position 1999-2000, Cat. no. 5363.0, ABS, Canberra.

5 Australian Bureau of Statistics 1998, Balance of Payments and International Investment Position: Concepts, Sources and Methods, Cat. no. 5331.0, ABS, Canberra.

6 Australian Department of Foreign Affairs and Trade 1999, Regional trends in tariffs, Canberra URL: www.dfat.gov.au/events/apec99/regional_trends.html last viewed 13 March 2002.