Melbourne: a Parasite city?
Birrell, Bob ; Healy, Ernest
Melbourne appears to be booming. Job growth is far more rapid than
in Sydney. This article shows that Melbourne's economy is being
driven by population growth and that most job growth is in the
city-building and people-servicing industries. The city's apparent
boom is obscuring its poor performance in exports to international
markets. When export and imports are taken into account, the growth in
per capita gross state product in Victoria is the slowest of all
Australian states and territories since 2000-01. Melbourne is becoming
increasingly dependent on external support.
**********
The 2010 federal election produced a sharp divide in voting
patterns. Victoria moved strongly to Labor (along with Tasmania) while
Western Australia and Queensland (the mining states) swung equally
decisively towards the Coalition.
One interpretation of this is that Victoria's recent robust
economic performance had left Victorian voters happy with the incumbent
federal government. In the year to August 2010, 32 per cent of job
growth in Australia occurred in Victoria, yet as Table 1 below shows,
only 25 per cent of Australia's population resides in Victoria. By
contrast, just 22.5 per cent of job growth occurred in New South Wales
(NSW), yet 32.5 percent of Australia's population lives in NSW.
Table 1: Population growth in Australia by state and capital city, 2001
to 2009
2001 2003 2005 2007
New South Wales 6,575,217 6,672,577 6,756,457 6,904,942
Victoria 4,804,726 4,923,485 5,048,602 5,221,310
Queensland 3,628,946 3,809,214 3,994,858 4,195,981
South Australia 1,511,728 1,531,278 1,552,514 1,585,794
Western Australia 1,901,1159 1,953,070 2,017,088 2,112,967
Tasmania 471,795 477,646 486,327 493,204
Northern Territory 197,768 200,046 206,373 214,804
ACT 319,317 325,661 330,164 341,054
Australia 19,410,656 19,892,977 20,392,383 21,070,056
Capital city statistical divisions
Sydney 4,128,272 4,190,874 4,245,045 4,344,675
Melbourne 3,471,625 3,577,411 3,680,609 3,817,806
Brisbane 1,663,120 1,744,111 1,822,074 1,902,235
Adelaide 1,107,986 1,121,742 1,134,513 1,159.131
Perth 1,393,002 1,435,907 1,485,823 1,559,178
Greater Hobart 197,282 199,853 203,467 207,330
Darwin 106,842 107,440 111,258 117,333
Canberra 318,939 325,340 329,865 340,766
2009 Change Change as State share
2001 per cent of total change
to 2009 of 2001
New South Wales 7,134,421 559,204 8.5 22.0
Victoria 5,443,228 638,502 13.3 25.1
Queensland 4,425,103 796,157 21.9 31.3
South Australia 1,623,590 111,862 7.4 4.4
Western Australia 2,245,057 343,898 18.1 13.5
Tasmania 503,292 31,497 6.7 1.2
Northern Territory 225,938 28,170 14.2 1.1
ACT 352,189 32,872 10.3 1.3
Australia 21,952,818 2,542,162 13.1 100.0
Capital city statistical divisions
Sydney 4,504,469 376,197 9.1
Melbourne 3,995,537 523,912 15.1
Brisbane 2,004,262 341,142 20.5
Adelaide 1,187,466 79,480 7.2
Perth 1,658,992 265,990 19.1
Greater Hobart 212,019 14,737 7.5
Darwin 124,760 17,918 16.8
Canberra 351,868 32.929 10.3
Source: Australian Bureau of Statistics (ABS). Regional Population
Growth: Estimated Residential Population. Catalogue no. 3218.0
It is no wonder The Australian's George Megalogenis could
describe Victoria as the 'Goldilocks economy' (1) or that
prominent economist, Saul Eslake, was recently quoted as saying that
Victoria is emerging as our strongest economy. (2) The advice from
Megologenis is that 'Gillard should look to her home state of
Victoria for inspiration'. He thinks that Victoria's economic
performance is attributable to its recent leaders' willingness to
take tough decisions on economic reform and the relative absence of
corruption in the state. (3)
For some others, the election result has generated a distinctly
sour interpretation of Victoria's circumstances. According to
Michael Stutchbury (also from The Australian), the election result
highlights the need to redouble structural change and reform in
Australia. Stutchbury's concern is that Labor will indulge the
regions and the states left behind by the mining boom, when it should be
managing the economy to ensure that resources flow to where they will be
most productively used--the mining states. This requires policy
discipline and a flexible economy that allows the mining boom to draw
workers and capital from the squeezed industries and regions'. (4)
This argument is an extension of the two-speed economy thesis. It
has long been predicted that a mineral boom will drag capital and labour
to the mining states where rates of return to capital and wages are
high. This, plus a likely strengthening of the Australian dollar, will
disadvantage growth in the non-mining states. Stutchbury is concerned
that the Labor Party, dependent on voters in the disadvantaged states,
including Victoria and Tasmania, will impede this process by subsidising
the people and industries remaining in these states.
We are moving rapidly out of the realm of theory here because the
Governor of the Reserve Bank has suggested that the rapid anticipated
growth in mining investment and the inflationary forces thereby
generated may prompt the bank to increase interest rates--which will, of
course, impact on the second-speed components of the economy as well.
Governor Stevens, however, questions the extent of the two-speed process
on the grounds that mineral activity also boosts economic activity
elsewhere in Australia. He cites the case of extra employment in the
headquarters of mining companies located in Melbourne. (5)
There is an obvious conflict between the Megalogenis and Stutchbury
perspectives. The mineral boom has been running through most of the last
decade. How is it then that, despite this boom, Victoria can be dubbed a
'Goldilocks economy', with strong employment growth and a
healthy state budget? In 2009-10, the state recorded a surplus of $644
million despite increasing expenditure on services by $5 billion or 12.5
per cent. (6) Perhaps Stevens is right: Victoria has shared in the
fruits of the mineral boom.
To answer these questions requires a closer look at the Victorian
economy. The state has done well in the creation of new jobs over the
last decade by comparison with NSW. But, on other indicators explored
below, including overseas trade and growth in per capita gross state
product, Victoria has fallen below NSW and all other states. Perhaps
Victoria's economic vigour is not due to the mining boom, but to
factors distinctive to Victoria.
Victoria has experienced very rapid population growth relative to
NSW. Could it be that population growth is driving Victoria's
economy? Commentators are familiar with this idea when it comes to
explaining the dynamism of the South East Queensland (SEQ) economy. It
is obvious that economic activity deriving from accommodating and
servicing the flood of people settling in that region is central to its
rapid economic growth (at least until recently). The people-servicing
aspect of the hypothesis derives from our previous work which shows that
most employment growth in Australia is occurring in industries providing
services to people where the demand for these services is closely
related to population growth. These industries include the public health
sector, education and community service industries and sections of the
private sector professional services industries. (7)
We pursue the implications of this hypothesis after exploring the
evidence available.
THE VICTORIAN RESPONSE TO THE TWO-SPEED ECONOMY PREDICAMENT
Victorian political leaders have been well aware of the potential
dangers of a two-speed economy. Indeed, in 2006, the Victorian
Department of Treasury and Finance published a discussion paper on the
subject which concluded that the Victorian economy is vulnerable to
competition from northern and western Australia for capital and people.
(8) As we have argued in an earlier publication on the two-speed economy
issue, Victoria is especially vulnerable because of its residual
reservoir of manufacturing industries which evolved in the protectionist
post-World War II era. (9) The capacity of these industries to export
and to compete against imports falls as the dollar rises in value,
especially given the low-tariff regime now in place. Remarkably, since
coming to power in 1999, the two Labor premiers, Steve Bracks and then
John Brumby, have not sought to restore a protectionist regime (with the
exception of huge handouts to the car industry). Quite to the contrary,
they have embraced the challenges of an open international marketplace
and the associated need for continued economic reform, so as to
encourage the most efficient use of resources. As stated in a 2005 paper
summarising the Victorian Government's proposals for continued
economic reform:
Australia must continue to expand its influence in sectors where it
has global opportunities. These sectors, which include the
traditional strengths of resources and agriculture ... and,
increasingly, emerging manufacturing and service industries are
likely to help drive Australia's future prosperity. (10)
The Victorian Labor government thinks the state's most
promising future lies in participating in the new innovative economy,
through which it can build on Victoria's intellectual capital. To
this end, it has sought to make Melbourne an exciting location for new
enterprise, including the international student industry, by promoting
the capacity of the city's educational and research institutions
and by enhancing its cultural and physical attractions so as to entice
smart, globally-mobile people to locate in the city. The attraction of
international events like the Grand Prix is part of this strategy.
Is the Victorian government succeeding? Perhaps the city is
attracting talented people and new industries. Alternatively, perhaps
the city's apparent economic dynamism has more to do with
city-building and people-servicing activities.
We start by analysing the scale of population growth, city-building
and employment growth in Melbourne and Sydney. The differences between
the two cities on these indicators are sharp and apparently to
Melbourne's advantage.
VICTORIA'S POPULATION GROWTH
Victoria's population growth is extraordinary given that the
mining boom might have been expected to attract people to the mining
states. Yet, Victoria's share has not changed since 2001. Some 24.8
per cent of Australia's population lived in Victoria in 2009
compared with 24.7 per cent in 2001. Melbourne dominated the Victorian
scene, with 82 per cent of the net growth in the stale's residents
locating in Melbourne. By 2009, some 18.1 per cent of all Australian
residents were living in Melbourne, compared with 17.8 per cent in 2001.
It was a different story in NSW. The state's population grew by
just 8.5 per cent over the period 2001 to 2009, compared with 13.3 per
cent in Victoria. Sydney also increased its share of the NSW population
over this period. However, whereas Melbourne grew by 15.1 per cent,
Sydney grew by just 9.1 per cent.
Melbourne has been growing strongly throughout the past decade. As
Table 1 shows, Melbourne grew at around 50,000 a year between 2001 and
2006, which was well above 20,000 30,000 per annum figure for Sydney at
the same time. The main reason for Melbourne's more rapid overall
population growth than Sydney was that there was very little net loss
from interstate migration, including to Western Australia. By contrast,
Sydney has been losing some 15,000-20,000 residents each year through
interstate migration, though not to mining areas. The primary
destination has been South East Queensland.
There was an acceleration of population growth after 2006 in both
cities. The main reason was a sharp increase in net overseas migration
(NOM). NOM to Australia jumped in the second half of the past decade,
from 156.780 in 2005 to 315,690 in 2008. Table 2, which is drawn from
unpublished data prepared by the Australian Bureau of Statistics (ABS)
for the Centre for Population and Urban Research, indicates the state
share of this NOM. (11) As is evident, at 106.8 per cent,
Victoria's growth in NOM over the three years exceeded the growth
for Australia as a whole (101.4 per cent). But, NSW too received a major
boost with an increase of 89.8 per cent over the same period. Almost all
of the migrants arriving in NSW and Victoria during this time domiciled
in Sydney and Melbourne respectively.
Table 2: Total net overseas migration (NOM) to Australia, New South
Wales, Victoria and Western Australia plus growth in NOM due to
overseas students, between 2005 and 2008
Total NOM
2005 2008 Change 2005 Per cent change
to 2008
Australia 156,780 315,690 158,910 101.4
NSW 50,690 96,190 45,500 89.8
Victoria 40,200 83,150 42,950 106.8
Western Australia 22,750 48,240 25,490 112.0
Overseas student component of NOM
2005 2008 Change Per cent Overseas student
2005 to change share of
2008 increase in NOM
Australia 42,800 121,690 78,890 184.3 49.6
NSW 16,610 44,070 27,460 165.3 60.4
Victoria 13,880 41,370 27,490 198.1 64.0
Western Australia 3,040 10,020 6,980 229.6 27.4
Source: Australian Bureau of Statistics (ABS). customised database held
by CPUR.
The consequence was a further increment in the annual growth in
Melbourne and Sydney to around 90,000 and 80,000 a year, respectively.
This has led to delusions of endless growth on this scale within the
Victorian state government and the Victorian business community. Both
have visions of Melbourne overtaking Sydney in population size. Property
investors seem to believe that demand for housing will forever exceed
supply and that they need not worry about any downturn. All this has
helped feed Melbourne's city-building boom.
Is Victoria attracting the talented people that the Brumby
government hopes will energise the innovative economy? There may well be
some high-flyers among the very large number of migrants arriving to
Sydney and Melbourne. But, in recent years, most are being drawn from
just one source, international students. Table 2 shows that, in the case
of Victoria, 64 per cent of the growth in NOM between 2005 and 2008 was
due to the increased numbers of overseas students and that, in the case
of NSW, it was 60.4 per cent. Other temporary visa holders, including
those on 457 visas (not shown in Table 2) also contributed to the growth
in NOM. There was only modest growth in the number of migrants arriving
with permanent entry visas deriving from the skilled migration program.
However, both Sydney and Melbourne remain attractive destinations for
Asian migrants because of family and ethnic lies to the large Asian
ethnic communities in these two cities. As long as jobs are plentiful in
the two cities these attractions will ensure that they continue to
receive at least half of Australia's migrant intake.
DWELLING APPROVALS
The best direct indicator of city-building (defined to include
housing, shopping centres, public facilities and the required
infrastructure to support the additional population) is dwelling
construction. To describe this we use dwelling approvals data. Table 3
provides these data (for both houses and units) for Melbourne and Sydney
and Victoria and NSW for the period 2003-04 to 2009-10.
Table 3: Building approvals by selected capital city and states,
2003-04 to 2009-10
Melbourne Sydney Victoria NSW QLD
2003-04 33,373 29,653 46,415 49,499 45,233
2004-05 30,225 22,234 42,547 39,943 39,316
2005-06 25,368 17,966 36,529 34,160 38,033
2006 07 27,289 17,453 37,942 31,402 41,516
2007-08 32,397 18,375 42,908 31,302 45,052
2008 09 31,881 14,013 41,762 23,934 28,954
2009 10 41,324 19,588 55,916 33,056 32,588
Australia Melbourne share of Sydney share of Australia
Australia
2003-04 184,476 18.1 16.1
2004-05 163,627 18.5 13.6
2005-06 152,214 16.7 11.8
2006 07 153,415 17.8 11.4
2007-08 162,732 19.9 11.3
2008 09 133,088 24.0 10.5
2009 10 168,400 24.5 11.6
Source: ABS, Building Approvals, Catalogue no. 8731.0. July 2010
As might be expected, given that Melbourne's population has
grown by a greater number than in Sydney, the pace of growth of dwelling
approvals in Melbourne has exceeded that of Sydney. In the 1990s, there
were more dwelling approvals in Sydney than Melbourne. Since that lime,
the pattern has reversed. By 2009-10, 24.5 per cent of all dwelling
approvals within Australia were in Melbourne, yet only 18.2 per cent of
Australia's population was resident in Melbourne.
We acknowledge that, notwithstanding the importance of population
growth in producing this striking contrast, other factors are involved.
In the case of Sydney, the low level of dwelling approvals undoubtedly
reflects the costs of new housing. New houses and land on Sydney's
suburban frontier, in particular, have been priced well above the means
of most first-home buyers. This is not the case in Melbourne. The
explanation is partly to do with geography. There are limits to the
expansion of the suburban frontier in Sydney because of the constraints
of the Nepean-Hawkesbury river system and the Blue Mountains. In
Melbourne, there is no serious geographical barrier to the outward
spread of the city to the south-east and north-west.
The respective state government policies on urban expansion are
also important. The NSW government has taken a tough line on releasing
new suburban land and has imposed steep up-front infrastructure loadings
on developers. By contrast, the Victorian government has been anxious to
maintain Melbourne's comparative advantage in the price of
dwellings relative to NSW and Queensland, precisely because it puts a
high priority on the health of the building industry and, in turn, on
Melbourne's continued rapid population growth. Reflecting this
policy, infrastructure charges in Melbourne are a small fraction of
those in Sydney and well below those payable in South East Queensland.
Despite the existence of an urban growth boundary, the Victorian
government continues to release whatever suburban frontier land is
needed to maintain a high level of outer-suburban development.
This background helps explain the continuing boom in dwelling
approvals in Melbourne over the last couple of years, and why such
approvals have exceeded the number for all of Queensland. Population
growth and dwelling construction are interconnected phenomena. Just as
relatively low housing costs have contributed to Melbourne's
population boom by attracting or keeping prospective home owners, so
Queensland's recent decline in the net number of interstate
residents moving to the state reflects the parallel increase in housing
costs in south-east Queensland. (12)
EMPLOYMENT GROWTH
For this section we draw on a customised ABS Labour Force Survey
dataset for the period 2000 to 2009, which provides information by
occupation and industry by capital city and rest of state. Comparisons
over this period are difficult given the changes in occupation and
industry definitions introduced by the ABS during this period. The
dataset was defined according to the most recent occupational and
industry definitions. Thus, the information below is comparable over the
years 2000 to 2009. The industry data is relatively fine-grained or
three-digit level. The detailed industry numbers cited in the text come
from this source.
Table 4 shows a comparison of employment by industry for Melbourne
and Sydney over the period 2000 to 2009 at the broadest or one-digit
level of classification. The figures for Australia as a whole are also
provided. The contrast between Melbourne and Sydney is remarkable.
Employment grew by 21.1 per cent in Melbourne- almost the same as for
Australia as a whole--but by only 12.3 per cent for Sydney. State
comparisons (not shown in the table) tell a similar story, with job
growth over the period in Victoria being 20.4 per cent and 13.5 per cent
for NSW.
Table 4: Change in employed persons by industry (numbers and per cent)
and share of change, Australia, Melbourne and Sydney, 2000 to 2009
Melbourne
Change Per cent Share of
2000 to change change
2009 per cent
('000)
Agriculture, forestry and fishing -2.6 -15.5 -0.7
Mining 3.8 79.1 1.1
Manufacturing -45.9 -16.7 -13.1
Electricity, gas. water and waste 8.3 76.2 2.4
services
Construction 56.2 50.2 16.0
Wholesale 16.1 20.9 4.6
Retail 35.1 19.6 10.0
Accommodation and food 33.1 33.5 9.4
Transport, postal and warehousing 26.6 30.2 7.6
Information media and 6.1 11.6 1.7
telecommunications
Financial and insurance services 15.2 19.6 4.3
Rental, hiring and realestate services 7.4 31.0 2.1
Professional scientific and technical 44.8 32.5 12.7
services
Administrative and support services -2.3 -3.1 -0.6
Public administration and safely 15.6 20.9 4.5
Education and training 42.3 37.1 12.0
Health and social assistance 61.7 42.2 17.6
Arts and recreation services 16.2 50.9 4.6
Other services 13.5 19.0 3.9
Grand Total 351.2 21.1 100.0
Sydney
Change Per cent Share of
2000 to change change
2009 per cent
('000)
Agriculture, forestry and fishing 2.8 27.3 1.1
Mining 2.6 61.0 1.0
Manufacturing -22.4 -9.6 -9.1
Electricity, gas. water and waste 6.9 40.5 2.8
services
Construction 19.4 11.6 7.9
Wholesale -5.2 -4.8 -2.1
Retail 28.7 14.4 11.7
Accommodation and food 22.7 17.4 9.3
Transport, postal and warehousing 17.0 14.5 6.9
Information media and -2.9 -3.9 -1.2
telecommunications
Financial and insurance services 13.9 10.9 5.7
Rental, hiring and realestate services 8.8 25.3 3.6
Professional scientific and technical 43.7 24.6 17.9
services
Administrative and support services -10.2 -11.6 -4.2
Public administration and safely 28.3 31.7 11.6
Education and training 25.4 19.7 10.4
Health and social assistance 53.8 30.5 21.9
Arts and recreation services 8.3 26.5 3.4
Other services 3.4 4.0 1.4
Grand Total 245.0 12.3 100.0
Australia
Change Per cent Share of
2000 to change change
2009 per cent
('000)
Agriculture, forestry and fishing -67.7 -14.9 -3.4
Mining 85.1 95.7 4.3
Manufacturing -34.3 -3.1 -1.7
Electricity, gas. water and waste 65.4 80.3 3.3
services
Construction 291.9 42.1 14.8
Wholesale 33.5 8.6 1.7
Retail 198.3 19.7 10.1
Accommodation and food 98.9 15.8 5.0
Transport, postal and warehousing 139.6 30.1 7.1
Information media and 5.1 2.3 0.3
telecommunications
Financial and insurance services 60.7 17.8 3.1
Rental, hiring and realestate services 44.3 31.2 2.2
Professional scientific and technical 198.1 33.5 10.1
services
Administrative and support services 22.8 6.8 1.2
Public administration and safely 188.0 38.6 9.5
Education and training 175.6 27.7 8.9
Health and social assistance 351.3 41.8 17.8
Arts and recreation services 65.1 45.3 3.3
Other services 48.1 12.1 2.4
Grand Total 1969.7 21.8 100.0
Source: ABS, Labour Force Survey 2000 to 2009 (unpublished data)
Basically, the table shows that the metropolitan economy of
Melbourne has scaled up relative to Sydney. With a few notable
exceptions, the numbers employed in each industry grouping in Melbourne
grew at a considerably faster rate than for their counterparts in
Sydney. The most rapid growth for Melbourne occurred within the
industries directly engaged in accommodating the city's burgeoning
population and in the provision of health, education, retail and other
people services.
There is no indication of especially rapid growth in employment in
industries whose product entered the global market place, except for
education and training where, as detailed below, there has been an
expansion in the international student industry. On the other hand,
employment in manufacturing in Melbourne contracted by 45,900 between
2000 and 2009. This translates into a decline of 16.7 per cent over
these years. Manufacturing employment also fell in Sydney, though by 9.6
per cent, and in Australia as a whole, by just 3.1 per cent. A major
casualty was the automobile and parts manufacturing industry. This
occurred despite the heavy investment of capital in the automobile
industry by the Victorian Labor government. Employment in the automobile
and parts manufacturing industry in Melbourne was 26,000 in 2000. It
subsequently peaked at 33,500 in 2003, but fell to 22,500 in 2009.
There was some expansion in employment in the pharmaceutical
industry in Melbourne. However, this bright spot is offset by declines
in employment across most of the advanced manufacturing sectors, like
computing and electronic equipment, electrical equipment and specialist
machinery and equipment manufacturing. By contrast, employment has
expanded in the food industry, especially in the manufacture of bakery
products. By 2009, there were 13,500 employed in bakery product
manufacturing (up by 2,800 on 2001). By 2009, employment in this
industry exceeded all other manufacturing categories except motor
vehicle parts manufacturing. Unlike most other manufacturing industries,
the bakery industry is largely insulated from external competition and
is thus in a strong position to benefit from Melbourne's population
expansion.
One would expect a close link between population growth,
city-building and the construction industry. This is evident. Employment
in the industry in Melbourne increased by 50.2 per cent compared with
just 11.6 per cent in Sydney.
The strong growth in retail employment in Melbourne relative to
Sydney implies a link between people-servicing and population growth.
Elsewhere, the pattern of adjustment to a larger population is more
muted, but still evident as with the rapid growth in employment in
education and training, and health and social assistance. These two
industries contributed 29.6 per cent to the growth of employment in
Melbourne between 2000 and 2009.
Employment in the education and training industry in Melbourne
increased by 37.1 per cent, which is well above the 27.7 per cent level
for Australia. Though it is not possible to identity employment in the
international student industry in the data, there is no doubt that it
has grown sharply as overseas student enrolments in Melbourne have
escalated. In this case, the industry-has had a double impact. It has
contributed to Melbourne's sharp surge in population and to growth
in employment servicing the extra residents.
The financial and insurance and professional scientific and
technical services industries are of special interest as indicators of
the international competitiveness of the two cities. Table 4 shows that
employment growth in the finance and insurance industry has been modest
in both cities. On the other hand, the rate of employment growth in the
professional, scientific and technical services industry, which includes
legal and accounting services, was well above the overall rate of
employment growth for each city.
In the case of Melbourne, the standout performer within this
industry sector was legal and accounting services, where employment
increased from 38,749 in 2000 to 56.991 in 2009 (or by 46.8 per cent).
Perhaps this sector benefited from the minerals boom as suggested by
Governor Stevens. As Table 4 shows, employment in mining also increased
sharply in Melbourne, mainly in the oil and gas extraction and
exploration industries. This implies some spinoff from the interstate
minerals industry. However, this increase in employment was off a tiny
base and thus contributed very little to the massive overall employment
growth in Melbourne during the period 2000 to 2009.
Some of the data in Table 4 defy the connection with
people-servicing, particularly the sharp increase in employment in
public administration and safety in Sydney relative to Melbourne. In
both cities, most of this increase was in state and local government
administration. Other things being equal, the lower rate of population
growth in Sydney should have required fewer extra public servants, not
more.
INTERNATIONAL TRADE
On the evidence so far, Melbourne is a 'Goldilocks
economy'. However, whether it is sustainable is another matter. If
the city's booming economic activity is just about city-building
and people-servicing, it may not be sustainable. If, on the other hand,
there is parallel growth in exports to interstate and overseas markets
then the outlook is more positive.
In order to explore this issue, we use information drawn from the
state accounts prepared as part of the Australian National Accounts by
the ABS. These accounts provide estimates of economic activity by state
over the period 2000-01 to 2008-09. Unfortunately, there is no
city-based information. Because of this gap. the analysis switches to
the state level. Our focus is on the expenditure-based estimates. State
final demand is defined as the final consumption expenditure of
governments and households in each state as well as public and private
capital expenditure. This estimate is shown on the first line in Table
5. which compares state final demand for Victoria and NSW and for
Australia as a whole. On this indicator, Victoria is doing well with
overall growth of 68.9 per cent between 2000-01 and 2008-09 compared
with 58.8 per cent for NSW.
Table 5: Gross state product in Victoria, NSW and Australia, 2000-01 to
2008-09, at current prices, AS billion
Victoria New South Wales
2000-01 2008-09 Per cent 2000-01 2008-09 Per cent
increase increase
Suite final 178.1 300.8 68.9 246.1 390.0 58.5
demand
Gross state 185.8 291.6 56.9 238.3 402.3 68.8
product
Gross state 38,944 54,361 39.6 36,518 57,138 56.4
product
per capita ($)
Australia
2000-01 2008-09 Per cent
increase
Suite final demand 705.9 1270.0 79.9
Gross state product 708.9 1253.1 76.8
Gross state product per capita ($) 36,787 57,903 57.4
Sources: ABS. Australian National Accounts State Accounts. 2008-09,
Catalogue no. 5220.0
The positive picture changes when the impact of trade between
states and overseas trade is taken into account. This adjustment is
necessary to obtain estimates for gross state product, since the latter
only includes goods and services produced within the state. Exports are
added to state final demand and imports are subtracted. The result is
shown in line two of Table 5 showing gross state product. For both
states, net interstate trade adds to gross state product, though more
for NSW than for Victoria. The opposite is the case for international
trade, as both states showed large deficits on international trade,
which substantially exceed their gains from interstate trade (see Table
6). As Table 6 below shows, Victoria's deficit on international
trade has expanded particularly rapidly.
Table 6: International trade, Victoria, New South Wales and Australia
at current prices (A$ billions)
Goods 2000-2001 Total Goods 2008-2009 Total per cent
Services Services increase
in total
goods and
services
Victoria
Exports 23.7 6.4 30.1 21.7 12.8 34.5 14.6
Imports 36.5 8.9 45.4 56.8 13.4 70.2 54.5
Net -15.3 -35.7 133.3
NSW
Exports 25.4 16.8 42.2 43.3 21.7 65.0 54.0
Imports 52.5 15.1 67.6 80.5 22.0 102.0 50.1
Net -25.4 -37.0 45.7
Australia
Exports 119.5 35.7 155.2 230.5 53.3 283.8 82.8
Imports 118.3 34.0 152.3 218.4 56.9 275.3 80.8
Net 2.9 8.5 193.1
Source: ABS. Australian National Accounts State Accounts, 2008-09,
Catalogue no. 5220.0
Much depends on the reliability of these state-based trade
estimates. The ABS has indicated that the data for its estimates of
interstate trade are less robust than for international trade. The
Department of Foreign Affairs and Trade, whose description of the main
items of this trade by state for 2004-05 to 2008-09 that we rely on
below, warns that 'caution needs to be exercised in interpreting
these statistics'. (13) This is primarily because, with Victoria
and NSW being national distribution centres for imports, some of these
imports may be incorrectly classified by the Customs authorities as the
final destination when in fact they are sent to other states. Thus, the
data may overstate the level of imports to these two states.
However, exports may be overstated where products of other states
are finally exported from Victoria or NSW. As an example, the Department
says that. 'it would be possible for some goods originating from
Tasmania and exported from the Victorian Port of Melbourne to be
inadvertently recorded in Customs' documentation as being exported
from Victoria, rather than Tasmania'. (14) Since we draw attention
to Victoria's poor export performance it is comforting to know that
if anything the ABS data for Victoria are likely to overstate the export
figures reported in the state accounts.
The impact of Victoria's foreign trade deficit
It is because of Victoria's relatively high international
deficit that the state falls behind NSW on the gross state product
measure (line two of Table 5). Over the period 2000-01 to 2008 09, gross
state product in NSW grew by 68.8 per cent compared to 56.9 per cent For
Victoria.
When population size is taken into account, NSW performs even
better. Gross state product per capita (line three of Table 5) grew
substantially faster in NSW than in Victoria between 2000-01 and 2008-09
(by 56.4 per cent compared with 39.6 per cent in Victoria).
Table 6 details the international trade data for the years 2000-01
and 2008-09 for Victoria, NSW and Australia. The table shows that total
exports grew by just 14.6 per cent in Victoria compared with 54 per cent
for NSW. Both states had a strong appetite for imports with the result
that both showed a net deficit of around $35 billion by 2008-09. The key
difference is that the size of Victoria's deficit, which increased
from $15.3 billion to $35.7 billion, grew at a much faster rate of 133.7
per cent than was the case for NSW, where the deficit grew by 45.7 per
cent.
A major reason for the difference between the two states was that
the value of goods exported from Victoria actually declined during the
period. All the state's export growth occurred among services. This
in turn, was largely attributable to education-related travel, which
includes the fees and expenses paid by overseas students who attend
Australian-based courses in schools, English colleges, vocational
education and training (VET) colleges, and universities. The ABS
estimates that this expenditure in Victoria grew from $1.3 billion in
2000-01 to $5.4 billion in 2008-09. (15) This means that almost all of
the total growth in exports of goods and services from Victoria between
2000-01 and 2008-09 of $4.4 billion (sec-Table 6) was attributable to
this one industry. The export of financial, intellectual property,
telecommunication and other business services (including legal,
accounting, architectural and engineering services) amounted to $2.7
billion or just half that of education-related travel services.
There is no sign of any upsurge in the export of elaborately
transformed manufactures (ETMs) or other high value-added industries
from Victoria. The export of ETMs was $7.2 billion in 2004-05 and $7.7
billion in 2008-09.
Table 7 shows the top 10 goods and services imported to and
exported from the Victorian economy in 2008-09. The categories used in
the table do not necessarily match the categories used above. However
they are useful as a guide to Victoria's trade position. Relatively
low-value added agricultural products still figure strongly among
exports. In the case of personal travel (excluding education-related
travel), passenger motor vehicles and passenger transportation, imports
to Victoria greatly exceed exports.
Table 7: Victoria's major exports and imports in goods and services,
2008-09
Major exports 2008 09: A$m
Education-related travel 5,408
Personal travel (excl. education) 2,065
Passenger motor vehicles 1,667
Aluminium 1,523
Milk and cream 1,360
Medicaments (incl. veterinary) 985
Meat (excl. beel) 742
Beef 734
Passenger transportation (agency fees.etc.) 697
Cheese and curd 617
Other 17,286
Total 33,084
Personal travel (excl. education) 4,404
Crude petroleum 3,679
Passenger motor vehicles 3,559
Freight transportation 2,684
Refined petroleum 1,602
Passenger transportation (agency fees, etc.) 1,334
Vehicle parts and accessories 1,341
Prams, toys, games and sporting goods 1,248
Telecom equipment and parts 1,217
Goods vehicles 1,172
Other 47,473
Total 69,713
Source: Department of Trade and Foreign Affairs, Australia's Trade by
State and Territory 2008-09
The story is completely different for NSW. Goods exports have
increased sharply in value, mainly because of the recent escalation in
the value of coal exports. The export of services has also grown, though
from a much higher base than in Victoria. In NSW. the export of
financial, intellectual property, telecommunication and other business
services (including legal, accounting, architectural and engineering
services) was $7.0 billion in 2008-09, which is 2.8 times higher than
the respective $2.7 billion figure cited above for Victoria.
Education-related travel is big in NSW too, with total exports
reaching $6.4 billion in 2008-09. But. according to the Department of
Foreign Affairs and Trade analysis, this represented a somewhat lower
29.5 per cent of total exports of services than the 42.6 per cent in
Victoria. (16)
Implications for Melbourne
The Victorian Government is basking in the approval of national
commentators about its strong economy and budget position. By contrast,
the NSW Government has been in the firing line as a relative laggard. A
good example is David Uren and Imre Salusinszky's recent piece in
The Australian entitled 'Premier state left in the shade'.
(17)
On our account, this comparison is misleading. Victoria's
buoyant level of economic activity depends on the continuation of rapid
population growth and the impetus this gives to the city-building and
people-servicing industries. The boom is built on unstable foundations.
It is occurring despite the state's poor competitive record in the
international marketplace. It is not Victorians' fault that the
state does not possess an abundance of the iron ore, black coal or other
mineral commodities now in demand overseas. In this sense, the state is
already a victim of the second-speed economy syndrome. It is falling
behind on the gross state product indicator when this is measured in
current prices, which reflect the recent mineral export price boom.
This shows up starkly in a comparison of per capita gross state
product between the states and territories. As Table 8 indicates,
Victoria has experienced the lowest rate of growth over the period
2000-01 to 2008-09 on this indicator--even lower than South Australia
and well below NSW.
Table 8: Per capita gross state product (in current prices A$) by
state, 2000-2001 to 2008-2009
State 2000-2001 2008-2009 Increase 2000-01 to
2008-09 per cent
NSW 36,518 57,138 56.5
Victoria 38,944 54,361 39.6
Queensland 33,718 56,075 66.3
South Australia 33,793 48,999 44.9
Western Australia 39,713 77,108 94.1
Tasmania 28,915 46,326 60.2
Northern Territory 48,749 77,444 58.8
ACT 47,029 74,658 58.7
Australia 36,787 57,903 57.4
Source: Australian National Accounts, Stale Accounts, Catalogue no.
5220.0. ABS 2008 09 (Reissue)
On other measures. Victoria does much better. When the per capita
gross state product indicator is expressed in chain volume terms (which
estimate state product in volume terms, thus removing the price factor).
Victoria does well. On this measure, per capita gross state product in
Victoria over the period 2000-01 to 2008-09 increases by 15.4 percent,
slightly higher than for Australia as a whole (14.5 per cent) and well
above NSW (6.3 per cent). (18) There is lots of economic activity in
Victoria, as might be expected in an economy dominated by city-building
and people-servicing. But, this activity has not been in areas that have
led to any increase in exports of goods (in chain volume terms) or
indeed to any significant export items which have benefited from the
mineral commodity price boom. There has been an increase in volume terms
in the export of services, but again this increase is almost entirely
due to the education-related travel industry.
The state's deteriorating international economic position (in
current prices) has not yet led to any significant relative decline in
the household income of Victorians, such as might alarm voters or
commentators. This is partly because the state's housing and
infrastructure boom is being largely financed by the big banks via
overseas borrowings, thus delivering a major external boost in funds to
the state economy (and high household debt levels). Likewise, Victoria
is a major beneficiary of Commonwealth funds, since these are largely
based on per capita payments. But, is this situation sustainable? There
are serious risks in this approach.
The national context
Australia has a huge net external debt which, as the Commonwealth
Treasury acknowledges, is largely in the form of short-term debt
intermediated through the banking system. (19) The Treasury, in its
briefing to the incoming Gillard government, raised this as a matter of
some urgency. The Treasury also admits that there are serious
infrastructure backlogs as states struggle to accommodate their rapidly
increasing populations. (20) Melbourne is a major culprit on both
grounds. Its booming dwelling construction and city-building is
dependent on overseas borrowing through the big banks. On the
infrastructure front, Victoria's road and public transport networks
are chronically congested and in need of massive new investment. The
Victorian government is desperately entreating the Commonwealth for
infrastructure assistance. A Labor government, heavily dependent on
Victorian electoral support, may be tempted to respond positively. This
is precisely the concern of the Treasury and of commentators like
Stutchbury who want to see resources flow to the mining-industry states.
This issue is gathering a political edge as the mining states
contemplate their new role in subsidising the eastern states. In the
case of the goods and services tax (GST) distribution, after the latest
Commonwealth Grants Commission 2009 update, Western Australia (WA) and
Queensland will receive 0.78 and 0.91 in the dollar, respectively, for
every dollar of the national GST collection. Victoria is not yet a net
beneficiary, though its allocation has increased from 0.87 in 2000-01 to
0.91 after the 2009 update. By contrast, WA received 0.98 and Queensland
1.02 back in 2000-01. (21) However, Victoria is on track to become a net
beneficiary from the GST pool (with South Australia and Tasmania)
because, as the mining boom proceeds, the mining states' capacity
to raise revenue for their respective states increases. This capacity is
the main factor underpinning the Commonwealth Grants Commission
determination of the GST redistribution. When Victoria does become a net
beneficiary it is likely that the complaints from the mining states,
which are already evident, will escalate, and that they will start
asking questions. They will want to know why they are helping to support
a state like Victoria which contributes so little to the national export
effort, but requires increasing levels of Commonwealth support to
maintain its burgeoning people-servicing economy. For example, the
Premier of Western Australia, Colin Barnett, recently stated: 'I
know we have a greater advantage through natural resources, but some of
the lagging states need to lift their game'. (22)
There will also surely be questions about the justification for
current overseas migration policy. This is ostensibly being maintained
at a very high level because of shortages of skills in the minerals
industry. In reality, however, most migrants end up in Sydney and
Melbourne. Very few migrants work in the mining industry either directly
or indirectly (as in construction of mining related projects). (23) The
main impact of current immigration is the impetus it is giving to
capital city building in the eastern states and thus in generating
demands for scarce capital and skills which compete with the needs of
the minerals industry. The tiny net movement of Australian residents to
Western Australia over recent years is a good indicator of this process;
(24) because population growth is boosting demand for labour in the
East, workers have very little incentive to move to the West.
Economic sustainability in Victoria
At present, there seems to be little awareness or acknowledgement
of Victoria's lack of progress in creating a high value-added
economy with industries able to compete successfully in the global
marketplace. For example, in a message accompanying the announcement of
the 2010 Governor of Victoria Export Awards in October, the Victorian
Minister for Industry and Trade, Jacinta Allan, staled that
'Victorian exports of goods and services have gone from strength to
strength'. (25) The boom associated with city-building and
people-servicing has shrouded the state's economic decline,
relative to other states.
There is no guarantee that the economic impetus gained from
city-building and people-servicing will continue at its recent pace. The
housing industry is vulnerable should interest rates increase. It may
also lose some of the impetus from migration. Whether the Commonwealth
government acts to reduce the immigration program or not, the recent
decisions to decouple immigration selection from the onshore education
of overseas students has reduced the attraction of overseas study in
Australia. Education providers for international students face a
contraction in enrolments because a qualification earned here will no
longer provide a sure pathway to a permanent residence visa. The
industry will have to consolidate around courses which can provide a
qualification that will be of value in the student's home country.
These impacts are already evident. The number of student visas
issued offshore decreased from 227,924 in 2008-09 to 158,240 in 2009-10,
or by 30.6 per cent. It is likely that this decline has contributed to
the (provisional) fall in NOM at the national level to 241,000 in the
year to March 2010 (from 313,414 in 2008-09). If so, Victoria will be
affected given that most of Victoria's recent growth in NOM has
derived from international students.
THE WAY FORWARD
The Victorian government's stated commitment to fostering a
genuinely innovative economy is the right way forward. But, the state
government has been distracted in implementing this vision by its
preoccupation with accommodating a rapidly-growing population. Its
attention is focused on trying to patch up an overloaded public
transport and roadway system. Vast amounts of capital are being lavished
on this and other infrastructure needs.
The record we have traced suggests that the city-building effort
has done little to strengthen the state's competitive capacity. The
money being directed to this effort would be better spent on deepening
the state's skill base and in contributing to the establishment of
long-term, internationally-competitive industries.
Maybe it is only fair that Victorians receive some of the mineral
boom cake from Western Australia and Queensland. But this claim should
not obscure the need for a fundamental realignment of Melbourne's
eonomy from dependence on population growth.
References
(1) G. Megalogenis, 'Tug of war', The Australian:
Inquirer section. 11-12 September 2010. p. 1
(2) C. Kerr, 'Liberals' preferential dilemma', The
Australian, 5 October 2010. p. 11
(3) G. Megalogenis. 'Divided we stand'. The Australian:
Inquirer section. 28-29 August 2010, p. 5
(4.) M. Stutchbury 'Reserve will put end to fairness all
around'. The Australian, 11-12 September 2010, p. 11
(5.) G. Stevens, 'Monetary policy and the regions'.
Reserve Bank of Australia, 22 September 2010. p. 5
(6.) T. Colebatch, 'Sweet but free ride is over', The
Age, 16 September 2010, p. 8
(7.) B. Birrell. E. Healy and T. F. Smith, 'Labor's
education and training strategy: building on false assumptions'.
People and Place, vol. 16. no. 1. 2008. pp. 40-54
(8) Department of Finance and Treasury, A tale of two economies:
the regional impact of Australia's resources boom, May 2006
(9) B. Birrell, E. Healy and T. F. Smith. Melbourne's Second
Speed Economy, Centre for Population and Urban Research, Monash
University, 2006
(10) Victorian Government, A Third Wave of National Reform: A New
National Reform Initiative for COAG, the proposals of the Victorian
Premier, August 2005, p. 17
(11) As indicated, the data shown in Table 2 are drawn from a
customised ABS dataset that distributes NOM according to the major visa
categories (as well as Australian and New Zealand citizens). The latest
final data is for the calendar year 2008. This is because the ABS bases
its counts on the actual travel movements of people entering and leaving
Australia. To be counted as an addition to NOM a person entering
Australia must stay here for 12 months out of the 16 months following
his her arrival. To be counted as a departure a person must stay
overseas for at least 12 out of 16 months after leaving Australia.
(12) In 2009, the estimated net interstate movement to Queensland
fell to 13,519, from 21,228 in 2008. Australian Demographic Statistics.
Catalogue no. 3101.0, March 2010, ABS, September 2010. p. 10
(13) Department of Foreign Affairs and Trade, Australia's
Trade by State and Territory. 2008-09. January 2009. p. iv.
(14) ibid.
(15) International Trade in Services, by State and Detailed
Services Category, Financial Year 200S 09. Credits. Catalogue no.
5368.0.55.003, ABS, November 2009
(16) Department of Foreign Affairs and Trade, op cit. For the
Victorian estimate see p. 34 and for NSW p. 14.
(17) D. Uren and I. Salusinszky. "Premier slate left in the
shade". The Australian: Inquirer section. 25 26 September 2010, p.
1
(18) 2008-09 Australian National Accounts. State Accounts. Table 2.
Catalogue no. 5220.0, ABS
(19) Treasury, Priorities for an Incoming Government: Opportunities
and Challenges, 2010. p. 5
(20) ibid., p. 9
(21) Commonwealth Government, Commonwealth Grants Commission.
Report on State Revenue sharing Relativities. 2009 Update, 2009, p. 75
(22) A. Hepworth and T Barrass. "WA hits back in battle over
carve-up of GST', The Australian. 22 September 2010. p. 4
(23) B. Birrell and E. Healy. 'The mineral boom and
immigration policy: Skills Australia debunks the myths'. People and
Place, vol. 18, no. 2, 2010. pp. 39-50
(24) Australian Demographic Statistics, March 2010. op. cit. The
ABS estimates net interstate migration to Western Australia was just
2,274 in 2009, down from 6,265 in 2008 and 4674 in 2007.
(25) The Age, 5 October 2010 (advertising feature, p. 11)
