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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.(SEE FOOTNOTE 1) 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 weights, that should be assigned to the various restrictions.(SEE FOOTNOTE 2)
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.
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.(SEE FOOTNOTE 3) To measure this aspect of progress in openness, we look at the ratio of foreign investment in Australia to Australia's gross domestic product.
Ratio of imports to GDP
TRENDS IN OPENESS
The first graph shows the ratio of imports to GDP, from 1990-91 to 2000-01. During this period, the ratio increased from just over 17% to a little under 23%. The second graph shows the ratio of foreign investment in Australia to GDP. The value of incoming foreign investment transactions has generally risen over the period 1990-91 to 2000-01.
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.(SEE FOOTNOTE 6) World 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 deregulation of the financial system in the mid-1980s, capital transactions, including foreign investment in Australia, have greatly increased in volume.
Various other factors have contributed to increased openness. These include changes in the composition of the economy and in the rate of technological change in different industries.
Capital imports tended to increase at a much slower rate than consumption imports over the decade. For example, the nominal value of machinery and industrial equipment imports increased by only 98% between 1990-91 and 2000-01, compared with a 172% increase in the value of imported household electrical items and a 290% increase in the value of motor vehicle imports.
Other factors influencing the size and importance of Australia's imports include changes in the relative prices of imports and exports brought about by fluctuations in the exchange rate (see the commentary Competitiveness), and changes in the tastes of domestic consumers.
Ratio of foreign investment inflow into Australia to GDP
LINKS TO OTHER DIMENSIONS OF PROGRESS
Increased openness to imports can be linked with greater competitiveness, and can affect the consumption patterns of Australians. Improvements in productivity can also be associated with greater openness to foreign investment.
1 Productivity Commission 2001, Trade and Assistance Review 2000-01, Annual Report Series 2000-01, AusInfo, Canberra.
2 Lloyd, P.J. and MacLaren, D. 1998, Measures of Trade Openness Using CGE Analysis, Research Paper No. 659, The University of Melbourne, Melbourne.
3 Australian Department of Foreign Affairs and Trade 2001, Exploding the Myths - Facts about Trade and International Investment, Canberra URL: www.dfat.gov.au/publications/exploding_myths/index.html last viewed 13 March 2002.
4 Australian Bureau of Statistics, various issues, Balance of Payments and International Investment Position 1999-2000, Cat. no. 5363.0, ABS, Canberra.
5 Australian Bureau of Statistics 1998, Balance of Payments and International Investment Position: Concepts, Sources and Methods, Cat. no. 5331.0, ABS, Canberra.
6 Australian Department of Foreign Affairs and Trade 1999, Regional trends in tariffs, Canberra URL: www.dfat.gov.au/events/apec99/regional_trends.html last viewed 13 March 2002.