Australia's five pillar economy: services

In his 2013 election campaign, Tony Abbott promised his government would build a world-class “five pillar economy”, encompassing manufacturing, agriculture, services, education and mining. Two years later, as his government prepares its second federal budget, just how are these sectors faring?

Australia’s advanced services - including legal and accounting services, engineering and architecture, financial services and management consulting - are growing rapidly. As the mining boom winds back and manufacturing continues to decline, they are the strongest growing sector of the economy and are seen by some as Australia’s great economic hope in the pivot away from mining.

Advanced services are very high value services characterised by their knowledge intensity and generally serving business and government, rather than households. Advanced services can be delivered remotely (for instance, by email or skype) and are therefore capable of being exported, as opposed to other professional services like hairdressing.

Employment in the professional services sector more broadly, which includes most of the advanced services, grew last year at 10.6% compared to 1.4% for the total economy.

While this growth was somewhat exceptional, the decadal growth rate of 4.1% per annum for professional services is the highest (except for mining) of the major industry sectors defined by the Australian Bureau of Statistics. Its share of total employment has increased from 7.3% to 9.4% over this period. (These figures are for hours worked to allow adjustment for the increasing proportion of part-time work).

However, this growth is largely domestic. There is little evidence of the growing participation of Australian services organisations in the rapidly growing global trade in advanced services. Although the data has its limitations, it indicates that our trade in business services is concentrated on the old world slow-growth markets of the United States and Europe and much less so on meeting the rapidly growing demand for such services in Asian countries, especially China.

China’s demand for business services increased by 7.5% per annum over the three years to 2012 in US dollar terms (the latest available) to exceed US$42 billion. Australian exports of these services to China totalled US $129 million - a 0.3% share - while the United States exported US$4 billion.

Our failure to penetrate these markets has been generally blamed on restrictive practices of these countries designed to protect their own firms. A major breakthrough achieved by the Abbott government is the signing of a series of free trade agreements (FTAs), not only with China, but also with South Korea and Japan, each of which reduces the barriers to export of Australian services to these countries.

These FTAs have been widely welcomed by industry and the Australian Services Roundtable, the peak industry body for the services sector.

But a report by the ANZ bank assessing the likely implications of the China FTA, suggests that exports in business services will receive less of a boost than other service areas directed largely at households, such as health care, motor car insurance and funds management.

Of these the ANZ identifies health care as one of the largest of the opportunities in the China FTA agreement and the government includes this in its definition of advanced services. China’s ageing population with increasing levels of chronic disease, and a currently dysfunctional health system certainly offers an opportunity for Australia’s increasingly internationally focused private health sector. China will need to spend a larger share of its budget on health care and its increasingly affluent middle class will demand better health care and be prepared to buy it from private providers.

However it seems that the opportunity provided for business services by the FTA will be modest and Australia’s burgeoning business services sector will remain largely domestic. The Asian opportunities will continue to elude it.

So despite the good intentions, the Abbott government’s free trade agreements (FTAs) are likely to provide only partial support for its Five Pillars strategy. If the Abbott government is really serious about an advanced services pillar it needs to have a better formulated policy development process to assist our professional services firms to significantly expand their exports to the Asian markets.

This would require greater understanding of the important role played by networks of professional services firms in driving the growth of global cities. These networks, often controlled by large services firms, such as Pricewaterhouse Coopers, KPMG and Boston Consulting Group, through offices in New York and London, integrate highly specialised services drawn from the most knowledgeable teams in the world.

Participation in these networks is both a product of specialised expertise and cultural knowledge. While the reasons for the current participation deficit are likely to be complex, they may be as much cultural as technical.

The depth, quality and relevance of our education system is critical to cultivating the skills necessary for a country to develop a globally competitive services portfolio. Given the strategic role of these services as engines of modern economic growth it would indeed be unfortunate to be left behind.

This is the fifth piece in the series. Read others here.

Bruce Rasmussen has previously undertaken work for the Victorian Government on the global services trade