‘Two speed economy’ nothing new

A recent Op Ed originally published in the business pages of the Melbourne Age, 15th December 2010.

The re-emergence of the mining boom, temporarily de-railed by the global financial crisis, as a key driver of Australia’s economic prospects has been accompanied by a revival of the talk about a ‘two-speed’ economy that became commonplace during the first phase of the boom. This talk holds that the mining sector is booming while the rest of the economy is “struggling”; and similarly that the north and west of the country are powering ahead while the south-east (where the bulk of the population lives) is stagnating – and, inevitably, that the Government ought to do something about it.

This talk was simplistic then, and it is simplistic now.

Significant divergences in the economic fortunes of different regions or sectors of an economy as large and diverse as Australia’s are by no means unusual.

In the last two decades there has never been a gap of less than 2 percentage points between the annual growth rates of the fastest- and slowest-growing States or Territories. And that gap has actually been smaller in recent years than it used to be. Over the past five years, the margin between the growth rates of real gross State product of the fastest- and slowest-growing States or Territories has averaged 3.7 percentage points – 1.5 percentage points less than this margin averaged during the 1990s, and again during the first half of the past decade.

More formally, the standard deviation of the annual growth rates of the eight States and Territories has declined by about half of one percentage point over the past decade. That is, there is substantially less divergence among the growth rates of Australia’s States and Territories than there used to be.

Likewise, although the spread between the highest and lowest unemployment rates among the States and Territories is now a little wider than it was during the financial crisis, at 2.8 percentage points it is well below the averages of 3.6 percentage points during the first half of the 2000s and 4.5 percentage points during the 1990s.

There’s also much less divergence in economic performance across Australia than there is in comparable federations. The standard deviation of the growth rates of Australia’s States and Territories over the past four years has been half that of American States, and a little over one-third that of Canadian Provinces and Territories, over the same period.

Similarly, the divergence in economic growth rates across the different sectors of the Australian economy has actually lessened in recent years. Abstracting from the farm sector (whose economic fortunes are heavily influenced by the vicissitudes of the weather), the standard deviation of the growth rates of the 18 other sectors of the economy has been lower over the past five years than during any other five-year period since at least the first half of the 1990s.

So if the ‘two-speed’ (or, more accurately, ‘multi-speed’) economy is not new, and indeed its intensity is in fact lessening, why is it such a feature of the contemporary Australian economic debate?

One reason may be that it is the more populous south-eastern States which have been in the ‘slow lanes’ in recent years.

New South Wales, which used to style itself as ‘the Premier State’ and still expects others to see it as such, has ranked between 6th and 8th in terms of economic growth in all but the most recent of the past nine years. Victoria’s ranking has also slipped since 2005-06 (although it, like New South Wales, had a relatively good 2009-10).

Queensland has had a fairly spectacular fall from grace: having only twice ranked below third in terms of economic growth between the early 1990s and 2006-07, it has ranked 4th or 5th in each of the last three years: although it’s usually regarded as a ‘mining State’, its mining sector is a lot smaller than Western Australia, and it has also been hit hard by the downturn in two of its other mainstays, tourism and property development. It’s also discovering that it can’t provide the services expected by the increasing proportion of its population who grew up in the southern states whilst keeping State taxes as low as those who have lived in Queensland much longer have come to expect.

And while Western Australia has been at or near the top of the growth pile in the last two years, and looks like remaining there for some years yet to come, a decade ago it was among the nation’s cellar-dwellers, its pleas that monetary policy was being set according to the needs of the then-booming Eastern States being ignored not only by the Reserve Bank (and properly so) but also by the eastern media.

There is also a significant element of ‘swings and roundabouts’ in the divergent experience of different sectors of the economy. The retail sector, for example, grew at a faster rate than the economy as a whole in all but one of the eight years between 2001-02 and 2007-08. It hasn’t done so since, and it’s unlikely to do so in the current financial year either; but retailers have had, in Kevin Rudd’s memorable rendering of the Australian vernacular, “a fair suck of the sauce bottle” over the past decade, and there’s no compelling reason why monetary or fiscal policy should be especially influenced by the fact that retailing is currently growing at a slower rate than the economy as a whole. Some other sectors, such as manufacturing and tourism, are confronting structural as well as cyclical challenges, and there is perhaps more of an argument for specific policies to assist in dealing with those; but once again there is no reason why they should be given disproportionate weight in calibrating overall macro-economic policies.

The simple fact is that the economies of the Australian states, and the sectors of the Australian economy, can’t be like the children of Garrison Keillor’s Lake Wobegon, all above average. Partly thanks to Australia’s fiscal transfer machinery (including the much-derided Commonwealth Grants Commission), the divergences which do exist across our vast and varied continent are less than they could be, less than they used to be, and less than they are in most other comparable countries.

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David Walker
10 years ago

Saul, I think this is spot-on.

One reason for the fascination with the two-speed economy idea may be that it’s easy to think about a simple model of an economy composed of mining, manufacturing and services – and then to assume that mining is going up, manufacturing is going down and services is going sideways. For some years in the 1990s and 2000s forecasters used to predict that Victoria would grow more slowly than the rest of the country, and then be surprised when it didn’t.

Like you, I’m sometimes struck by the mystery of how small are the differences in variations between states. Then I remind myself that their economic patterns are all pretty similar: one big services-intensive city, surrounded by a lightly-populated commodity-producing hinterland.

I suspect the differences in growth rates are even smaller on a per-capita basis.