STRUCTURAL CHANGE IN THE AUSTRALIAN ECONOMY

Structural change is continual. The advent of steamships and railways were as revolutionary in their day as satellite communications and microchips are today. The continued urbanisation of society, greater international integration and increased trade flows, more specialised means of production and an expanding array of new products are some of the more obvious features of structural change. One consequence of the collective effect of such change is continual adjustment in industry composition; for example, a common feature of economic development around the world has been a shift in the share of output from manufacturing to the services sector, a trend clearly evident in Australia in recent decades (Chart 1) [1] and, in industrial countries generally (Chart 2).

CHART 1: SECTORAL SHARES OF OUTPUT - AUSTRALIA(a)

(a) Current price data - six year average ending in the year shown.

(b) 'Other' includes electricity, gas & water and construction.

Source: Reserve Bank of Australia, Australian Economic Statistics: 1949-50 to 1994-95, 1996 and Treasury estimates.

The causes and consequences of structural change are complex and inter-related. Technological advances impact by changing the costs of production, by increasing international trade and by increasing the demand for skilled labour. Increased international integration encourages greater trade and international investment, helps to stimulate innovation and can affect consumption patterns; recent developments in East Asia have been of particular relevance to Australia. Demographic factors influence work preferences and labour force participation, and affect the types of goods and services purchased. And changes in one area of the economy can have wider effects by inducing the transfer of resources from other (less profitable) areas.
CHART 2: SECTORAL SHARES OF VALUE ADDED - INDUSTRIAL COUNTRIES(a)
MANUFACTURING SERVICES
(a) Current price data.

Source: IMF, World Economic Outlook, April 1997.

Technological Change

The impact of technological change is primarily felt through the development of new products and new methods of producing existing products or providing services. For example, expansion of Australia's mining industry in the mid-1960s partly reflected the development of new technology for extracting and transporting large volumes of minerals at world competitive prices. More generally, with the pace of technological change differing across industries both locally and overseas, there are likely to be constant changes in relative prices, inducing shifts in the structure of production, consumption and employment.

Advances in transport and communications have been important catalysts for change. Lower costs of international transactions (Chart 3) have helped to enhance the efficiency of international markets, reduce consumer prices and increase international competition. Increased exposure to goods of foreign origin has helped to stimulate greater innovation in order to meet that international competition and has served as a conduit for faster diffusion of technological progress and organisational change.

Changes in information technology have spawned the creation of computer hardware and software industries. Increases in computing power have allowed information to be processed in greater quantities and with more speed, increasing demand for information services and underpinning advances in communication which have assisted the process of increased international integration. Enhanced information processing has also assisted in accelerating the spread of knowledge, potentially advancing the rate of technological progress in a wide range of areas. These influences accelerate changes in the types of goods and services purchased and how and where they are produced.

CHART 3: INTERNATIONAL TRANSPORT AND COMMUNICATION COSTS(a)

(a) Real price index = 100 in the first year of data for each category.

Source: World Bank, World Development Report, 1995.

Increasing International Integration

Over recent decades, an increasing proportion of Australia's production has been exported and imports have increased as a share of spending. The overall trade share as a proportion of total domestic output has risen from an average of about 25 per cent in the 1960s to over 40 per cent in recent years. This increase in trade intensity is in keeping with international trends (Chart 4). Substantial changes have also been apparent in the composition of exports, with commodities becoming relatively less significant while manufactures and services have commensurately increased in importance.

Increased trade intensity is partly the result of technological advances in transport and communications. Also important are the reductions that have occurred in trade barriers around the world, flowing from a recognition of the inherent economic costs of such protection. Some of these reductions reflect GATT negotiations, but unilateral initiatives have also been important. More than 70 countries, including Australia, independently reduced their trade barriers between 1986 and 1993. [2]

Capital has also become increasingly mobile, with advances in computing and communications allowing capital markets to respond rapidly to developments throughout the world. Such technological developments have complemented financial deregulation and the easing of restrictions on foreign exchange transactions, often associated with more flexible exchange rate regimes.

CHART 4: EXPORTS PLUS IMPORTS AS A PROPORTION OF GDP(a)

(a) Constant price data (1989-90 prices for Australia, 1990 prices and exchange rates for the OECD).

Source: ABS Cat. Nos. 5302.0, 5206.0 and OECD, National Accounts: Main Aggregates, Vol. 1, 1997.

World capital flows have risen significantly in recent decades. Australia's capital flows have also increased considerably, particularly since the early 1980s. The stock of foreign investment in Australia has risen from around 32 per cent of GDP in the early 1980s to around 90 per cent by the end of 1995-96 (the bulk of this investment is in the form of debt rather than foreign ownership). This sharp rise in foreign investment in Australia has reflected: a shift down in domestic saving relative to overall investment; the breadth of investment opportunities; the stability of our economic and political framework; financial deregulation here and abroad; and the proximity of overseas markets with potential for rapid growth. There has also been a sharp increase in the stock of Australian investment abroad, from around 11 per cent of GDP in the early 1980s to 31 per cent at the end of 1995-96. An important component of this has been direct investment, reflecting a desire of Australian firms to invest in productive capacity in export markets in which they have established a presence and to become insiders in foreign markets by locating some functions abroad.

Overall, developments overseas create significant pressures for structural change in the Australian economy. Opportunities for expansion in trade provide the basis for greater specialisation in areas of relative economic strength - a prescription for higher living standards through the opportunity to make the best use of available resources.

The Growth of East Asia

Whereas historically Australia's main markets were distant and grew relatively slowly, the proximity of fast-growing East Asia, combined with lower transport and communication costs, has in recent decades offered opportunities for faster growth in Australia. Australian businesses have taken advantage of these opportunities, and exports to East Asia constitute a growing proportion of Australia's total exports (Chart 5). Not only is East Asia an important destination for Australia's traditional commodity exports, it is also an increasingly important source of demand for manufactures and such services as tourism and education. Changes in the direction, and composition, of exports will continue to have an impact on the composition of Australia's production.
CHART 5: DIRECTION OF AUSTRALIA'S EXPORTS
1975 1995
Source: Department of Foreign Affairs and Trade, Direction of Trade Time Series: 1975-1995, May 1996.

Changing Composition and Organisation of the Labour Force

Demographic influences are a factor in the responsiveness of an economy to change and are also a source of change. Changes in the size and location of industries have been associated with considerable mobility of the work force between industries, occupations and regions. On average over the past twenty years, around 16 per cent of workers changed jobs (employers) in the preceding year. With the addition of workers who did not work in the previous 12 months - reflecting inflows either from unemployment or from outside the labour force, such as school leavers - almost 23 per cent of workers on average over this period had been in their jobs for less than one year. This high turnover of labour provides the opportunity for expanding industries to more readily take up employment losses in declining industries.

Demographic factors and changes in social preferences have resulted in changes in the composition of the work force, particularly in relation to participation and hours worked. Increasing participation by married women in the labour force has underpinned an increase in the past 30 years in the proportion of the population either employed or looking for work (Chart 6). Over the same period, average weekly hours worked have declined from around 39 hours in the second half of the 1960s to around 36 hours in the first half of the 1990s. Notwithstanding that aggregate decline, the proportion of males working more than 49 hours rose from 20 per cent in 1981 to 29 per cent in 1996, while the proportion of employed females working such hours rose from 6 per cent to 9 per cent [3].

CHART 6: LABOUR FORCE PARTICIPATION

Source: ABS Cat. Nos. 6203.0 and 6204.0.
These changes have coincided with increased availability of part-time and casual work. The reasons lie both in increased supply and demand for such forms of work, including the increasing importance of the services sector. For example, many people seek flexibility in working hours to manage family or study commitments and deregulation of shopping hours has increased demand for workers outside traditional working hours. Greater flexibility in the terms and conditions of part-time and casual work has also meant employers have been more willing to take on such workers. The combined effect of longer working hours for some and increased part-time and casual work for others is that a smaller proportion of workers is now working a conventional working week compared to twenty years ago.

Changes in the composition of the work force have been accompanied by declining trade union membership. Membership fell from 51 per cent of employees in 1976 to 31 per cent in 1996. [4]

Skilled workers who are able to take advantage of new technology and are more adaptable to new work arrangements are becoming more highly valued. In both the 1970s and the 1980s employment growth was weakest for the generally less skilled occupations - labourers and related workers - and strongest for the more skilled occupations - professionals and para-professionals. This trend has continued in the 1990s, with the highest incidence of unemployment occurring among those with the lowest levels of educational attainment (Chart 7).

CHART 7: UNEMPLOYMENT RATE BY EDUCATIONAL ATTAINMENT (MAY 1996)

Source: ABS Cat. No. 6227.0.
An increase in education levels is apparent in all industries (Chart 8). The overall proportion of employees with post-secondary qualifications rose from 38 per cent in 1980 to 52 per cent in 1993. [5]

CHART 8: PROPORTION OF INDUSTRY EMPLOYEES WITH A DEGREE(a)

(a) Data are not available for communication sector in 1980.

Source: ABS Cat. No. 6235.0.

Changing Consumption Patterns

In the past thirty years or so there have been notable shifts in the composition of consumer spending. In particular, food, clothing and related items now account for almost one-third of consumer spending compared with almost one-half 35 years ago, while consumption of services has increased in relative importance (Chart 9).

Such changes in composition may reflect a response to changes in relative prices and incomes as well as changes in tastes. Changes in relative prices may occur because of, say, the development of new or cheaper products embodying new technology or because of reductions in protection or changes in rates of taxation applying to particular goods and services. Falling relative prices of particular items may result in a higher or lower proportion of income being spent on them, depending on the price and income elasticities of demand. In addition, increasing incomes influence consumption patterns as those on higher incomes tend to spend proportionately less of their incomes on food and more on recreation and entertainment. [6] Other demographic changes, such as increased female participation in the work force, may also result in changed spending patterns.

CHART 9: SHARES OF CONSUMPTION SPENDING AS A PROPORTION OF TOTAL CONSUMPTION(a)

(a) Total consumption excludes expenditure on dwelling rent. Current price data are used.

Source: ABS Cat. No. 5206.0.