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The competitiveness of a country's goods and services can depend on a variety of factors, but relative price has a major effect, and most statistical indicators of international competitiveness are derived from price measures. Two important influences are a nation's unit labour costs (the pace of wage rises compared to the pace of productivity improvement) and the value of its currency relative to the currencies of its trading partners.
Australia's real unit labour costs changed only marginally between 1992-93 and 2002-03 and consequently did not have a significant impact on the international competitiveness of Australia.1
In recent years, there have been fairly wide fluctuations in the value of the Australian dollar relative to the currencies of our major trading partners. In 2002-03, the Australian dollar was stronger against the currencies of most of our major trading partners than it had been at any time during the previous ten years, and nearly 14% stronger than it had been in 2001-02. The recent strength of the Australian dollar has reduced the competitiveness of Australia's exports.
Real unit labour costs and the trade-weighted exchange rate
During the decade 1992-93 to 2002-03, there was a slight fall against the US dollar (down 0.7%) but the fall relative to the United Kingdom pound was more significant (down 9%). The Australian dollar appreciated against most of our other major trading partners; in the case of Japanese yen by almost 12%.
Factors influencing change
Changes in a nation's competitiveness are the outcome of many interconnecting influences. Most fundamental in the long run are such factors as technological advance and productivity improvement.
Three factors have an important influence, all of which would ideally be measured.
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.3 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 weight, that should be assigned to the various restrictions.4
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. The first graph shows the ratio of imports to GDP, from 1992-93 to 2002-03. During this period, the ratio increased from 18.6% to a little over 22%.
This indicator is affected by a range of factors aside from the openness of the economy. For instance, fluctuations in the exchange rate of the Australian dollar and changes in the tastes of domestic consumers can also result in changes in the relative prices of Australia's exports and imports. These movements can significantly affect the volume and change the relative importance of different imports, which in turn can have an impact on the indicator. Capital imports tended to increase at a much slower rate than consumption imports over the decade. The nominal value of machinery and industrial equipment imports increased by about 102% between 1992-93 and 2002-03, for example compared with a 165% increase in the value of imported household electrical items and a 225% increase in the value of motor vehicle imports.
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.6 To measure this aspect of progress in openness, we look at the ratio of foreign investment in Australia to gross domestic product, shown in the graph. The value of incoming foreign investment transactions generally rose over the period 1992-93 to 2000-01 but appears to have peaked and has fallen since.
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.7 Multilateral and bilateral 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 mid-1980s and the deregulation of the financial system, capital transactions, including foreign investment in Australia, have greatly increased.
Various other factors have contributed to increased openness in Australia. These include changes in the composition of the economy and the rate of technological improvement in different industries within the economy.
Links to other dimensions of progress
Enhanced international competitiveness in both foreign and domestic markets tends to improve Australia's international trade balance and increase national income.
Reduced rates of inflation (including wage inflation) relative to Australia's trading partners and productivity improvements tend to enhance Australia's international competitiveness.
Increased openness to imports can be linked with greater competitiveness, and can affect consumption patterns here. Improvements in productivity can also be associated with greater openness to foreign investment.
See also the commentaries National income, Productivity and Inflation.