Facts count, because what's mined is yours

By far the biggest development in the economy in recent years is the mining boom, and it's likely to roll on for at least the rest of this decade. But Australians are having a lot of trouble getting their minds around the boom's implications. The area abounds with worries and misperceptions.

Economists keep banging on about the mining boom because it's the biggest factor driving the economy's growth. We've had a surge in export income because the world is paying such high prices for our coal and iron ore. And we're also getting huge spending on the construction of new mines and natural gas facilities.

The other reason economists get so excited about the topic is that this is hardly the first commodities boom Australia has experienced (the first was the gold rush) and most of our previous booms have ended in tears. We've quickly spent all the extra money coming our way, but that's led to rapidly rising prices. The authorities' efforts to stamp out inflation have ended up causing a recession and rising unemployment.

The present managers of the economy are determined to ensure that doesn't happen this time by keeping spending and inflation under control. This explains why, until recently, the Reserve Bank was always thinking about putting up interest rates, and why the Gillard government has been so keen to get its budget back into surplus.

But all the fuss people like me have been making about the boom has left many Australians with a quite exaggerated impression of the size of our mining sector. According to a poll conducted by the Australia Institute, on average people imagine mining accounts for 35 per cent of the goods and services the nation produces (gross domestic product).

But while mining's share of national production has increased significantly in recent years, it's still up to only 10 per cent.

Many of us see the main pay-off from an expanding industry as all the jobs it generates. So what proportion of the workforce is employed in mining? According to the Australia Institute's polling, our average answer is 16 per cent.

The truth? Even after all that expansion, less than 2 per cent. How could an industry responsible for 10 per cent of our production account for just 2 per cent of employment? By being intensely ''capital-intensive'' - by using a lot of machines and not many workers.

So, does that mean mining isn't really worth all the fuss? A lot of its industrial rivals will tell you so, but it ain't true. The true test of the worth of an industry is not how many people it employs but how much income it generates. And, particularly at present, mining is generating huge income. Do you realise it accounts for more than half the nation's export income?

The reason income trumps employment is that as income is spent it generates jobs. When you spend a dollar it percolates through the economy, supporting and creating jobs as it goes. So if mining creates 10 per cent of national income but only 2 per cent of national employment directly, that just means it supports another 8 per cent of national employment indirectly, in other (labour-intensive) industries.

Which other industries? For the most part, service industries. How can I be sure? Because after you allow for the 2 per cent of Australians employed in mining, the 3 per cent in agriculture and the 9 per cent in manufacturing, the remaining 86 per cent are employed in the many service industries: wholesaling and retailing (15 per cent), healthcare (11 per cent), construction (9 per cent), education and training (8 per cent), the professions (8 per cent), hospitality (7 per cent), public administration (6 per cent), financial and business services (6 per cent), transport (5 per cent) and many more.

Another reason I can be sure most of the jobs created indirectly by mining are in the services sector is that, for at least the past 40 years, all the net increase in national employment has come from the services sector.
Am I touching a nerve here? A lot of people are uncomfortable about the mining boom because they see it as temporary and they see digging stuff out of the ground as a pretty unsophisticated way to make a living. What do we do when it's over and what else do we do to make a buck?

It's true the sky-high prices we're getting at present won't last, but nor will they crash back to what we used to get. And we'll have a much bigger mining industry selling a lot more of the stuff than we used to. They may be non-renewable resources, but we've got a mighty lot of 'em.

What else can we do? What most of us have always done: sell services to one another and to foreigners. In these days of the information and communication revolution, most of the highly skilled, highly paid jobs are in the services sector. Those who find this intangibility discomforting are hankering after a bygone century.

It is true, however, that we must ensure we end up with something to show for this boom and that too much of the huge profit being made doesn't just end up in the hands of the mining industry's owners (about 80 per cent of whom are foreign). After all, the minerals they're mining are owned by all Australians, not the miners.

That's why it's good to see Julia Gillard's profit-based mining tax finally being passed by the House of Representatives, even though Tony Abbott's mindless opposition to it allowed the three big foreign mining companies to butcher the tax.

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Internet commerce will foster price competition

The critics of economists often accuse them of trying to change the world to make it more like their textbooks. But now the mountain is coming to Muhammad. The internet, and the electronic commerce it promotes, is making real-life markets work more the way economists assume they do.

As the retailers - particularly the department stores - have sought to explain the weak growth in their sales, their gaze has fallen on the internet. The high dollar has made it more attractive for people to buy stuff on the net from overseas sites. And people who buy from foreign sites don't have to pay goods and services tax on purchases of less than $1000.

As an explanation for their weak sales, it's not persuasive. The share of consumer spending accounted for by internet purchases is still quite small. The more likely explanation is simply a shift in consumer preferences from goods to services.

But internet purchases will become a significant competitive challenge to retailers as people get more experienced at and relaxed about internet shopping. (And as Australia Post gets better at delivering parcels to households without a stay-at-home spouse.)

It's a mistake, however, to imagine it's primarily the high dollar that will drive this trend (or that the presence or absence of a 10 per cent GST makes much difference). No, the primary source of internet bargains is the existence of what economists call ''price discrimination'': the longstanding practice of international suppliers charging higher prices in some markets than others.

Global firms selling books, music, DVDs, software, sneakers and much else know the punters' ''willingness to pay'' varies greatly between countries. Why? Because, for instance, Aussies are simply used to paying higher prices than Americans are.

Such price discrimination is a great way to maximise profits - provided you can keep the various markets separate and stop people in high-price markets switching their purchases to low-price markets.

Various global industries have long used legislated restrictions on ''parallel imports'' to protect their price discrimination arrangements - against which economic rationalists have long fought mainly losing battles. But all that legal protection is being swept away as the internet provides us with direct and easy access to cheaper American goods. This will put a lot of pressure on Australian retailers (and their foreign suppliers and landlords) to lower their prices.

Cyberspace breaks down the natural protection provided by oceans and geographic distance (although, of course, this becomes less true as the bulkiness of the goods in question increases, making transportation over long distances uneconomic).

So it breaks down barriers between certain geographic markets and also breaks down barriers to firms entering a particular market. If you're a big, established player in a physical market, it's very hard for me to start up in competition with you and get myself noticed. In cyberspace, however, a web browser that finds your huge site will list my bedroom operation beside it. It takes the punter only a few clicks to check me out after he's checked you out. Since I don't have the brand recognition you have, my price may well be 5 or 10 per cent lower. I can't charge a premium for my established reputation for quality and reliability.

In its basic form, the economists' model assumes there's no cost in money or time to gather all the information you need to be a fully informed buyer or seller in a market. In reality, there's often a lot of cost involved.

So much so that the possession of information is often ''asymmetric'' - the seller knows a lot more about what's what than the buyer does. This asymmetry tends to favour (professional) business over (amateur) punters (except in the labour market, where a worker knows far more about their personal strengths and weaknesses than a potential employer does).

Clearly, the internet greatly reduces the cost of gathering information so as to make better-informed decisions. This should reduce the asymmetry of information, thus shifting reality closer to the model.

The economists' model focuses on price - the price of the item in question relative to other prices - as the key to how markets work. It assumes relative prices (''incentives'') are the only motivator and that all competition is price competition.

In reality, oligopolies much prefer non-price competition via advertising, marketing (such as the nature of the packaging) and merchandising (where and how you display items in your store).

On the internet, many of these non-price devices are a lot less ''salient'' (prominent), thus making prices more salient. And the internet is a lot better at gathering and comparing price information than information about qualitative considerations.

According to a psychology experiment, when people face a choice between an interesting job paying $80,000 a year and a boring job paying $90,000, most choose the boring one. That's not because they're money-hungry, but because of the limits to our neural processing power: we focus on the numerical comparison because it's a lot easier than the qualitative comparison.

Information technology makes it a lot easier and less costly for firms to adjust their prices (while allowing them to collect better information about the right direction and size of those adjustments).

So it's likely the more commerce we do on the net, the more importance will be attached to price - just as the economists have always assumed.

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The dots linking us to Europe's woes don't join

Humans are story-telling animals. We seek to understand developments in the world around us by turning them into ''narratives''.

When several things happen in the same field, people - including journalists - have a tendency to turn them into a coherent story by stringing them together.

For instance, the biggest economic news story for months has been the trouble the Europeans are having with their currency and high levels of sovereign debt, which are causing huge financial instability.

 

So, when, in the midst of this, our Reserve Bank cut the official interest rate and revised down its forecasts for the economy's growth, journalists and others joined the dots: clearly, and as might have been expected, the problems in Europe have caused a marked slowing in our economy.

There's just one problem: when you examine the facts, they don't fit the sense-making narrative people have woven them into.

The first point is that, despite the downward revisions to the Reserve's forecasts - which are unlikely to be very different from Treasury's revised forecasts when we see them in the next week or two - the economy isn't expected to slow down.

The truth is we've already had our slowdown when real gross domestic product contracted by 0.9 per cent in the March quarter of this year, mainly because of the effect of the Queensland floods. The economy has been recovering since that setback - but more slowly than expected because it is taking the Queensland coalminers so long to fix their flooded pits.

Over the year to last December, GDP grew by 2.7 per cent. Over the year to March, the growth rate dropped to 1 per cent and, over the year to June, it recovered to 1.4 per cent. The Reserve's latest forecast is for growth of 2.75 per cent over the year to December. Sound like a slowdown to you?

It's forecasting growth of 3 per cent to 3.5 per cent in 2012 and 2013. Is that weak growth? No, it's about ''trend'' - the economy's actual medium-term average rate of growth in the past and also the maximum rate at which it can grow over the coming medium term without worsening inflation, given the economy is already close to full capacity.

But, if the economy isn't slowing at present and isn't expected to slow, why has the Reserve had to revise down its forecasts? Because the economy isn't taking off the way the Reserve had earlier expected it would.

Admittedly, the main reason the economy now seems unlikely to really speed up is the dampening effect of Europe. The continuing saga has hit the sharemarket and made a lot of people feel poorer, as well as sapping the confidence of consumers and, more particularly, business people.

The Reserve cut the official interest rate a click - by 0.25 percentage points to 4.5 per cent - not because it feared disaster was on its way from Europe but because it now realised it wouldn't have as much trouble as it earlier expected keeping inflation within the 2 per cent to 3 per cent range over the next year or two.

A year earlier, it had tightened the ''stance'' of monetary (interest-rate) policy to ''slightly restrictive'' - one click above ''neutral'' (normal) - because it expected the economy to take off and push inflation above the top of the range. But now that was unlikely to happen.

As well, the Bureau of Statistics' move to a new series for the consumer price index had effectively revised history, showing underlying inflation in the June quarter wasn't quite as high as first thought and, for technical reasons, wouldn't rise as much in future.

There's plenty of evidence the economy isn't slowing and isn't likely to slow. For one thing, it's clear all the talk of ''the cautious consumer'' has been overdone. The weakness in retail sales (which in any case have been growing more strongly in recent months) isn't reflected in overall consumer spending, which is growing at about trend.

It turns out consumers have been changing their pattern of consumption rather than slowing the growth in it, buying less from department stores but more from service providers, including the providers of overseas holidays.

The acid test of whether consumers have become cautious is whether their spending is growing at a slower rate than their disposable income, thus causing their rate of saving to rise. The household saving rate seems to have stabilised at 10 per cent of disposable income.

The Reserve's revised forecasts imply it will rise a fraction in the short term, but be stable at 10 per cent over the next two years. If so, the laws of arithmetic say consumer spending will rise in lock-step with disposable income.

As for the index of consumer sentiment, although it fell heavily earlier this year, it's risen for three months in a row.

The economy is still receiving - and is expected to continue receiving - huge stimulus from the rest of the world, in the form of the resources boom. It's coming from the high prices we're getting for our mineral exports, from the growing volume of those exports and from hugely increasing investment spending on the development of new mines and natural gas facilities.

Although the Reserve believes our terms of trade - export prices relative to import prices - probably reached their peak in the September quarter and will now fall back, they're likely to stay better than we're used to. Iron ore prices fell heavily, but more recently are recovering.

It's true the labour market isn't as strong as it was last year. The unemployment rate has edged up from 4.9 per cent to 5.2 per cent. It may rise a little further, but then fall back. Overall, it seems about enough jobs are being created to cover the growth in the labour force.

And remember, with economists believing the lowest unemployment can go without causing inflation is about 4.75 per cent, we aren't travelling too badly.

The new forecasts are built on the assumption that sovereign debt problems in Europe don't cause a marked further deterioration in financial and economic conditions there. ''Fears of a major [global] downturn have not been borne out so far,'' the Reserve says.

There's a fair chance it could still happen, of course. But it's in no one's interests to jump to the conclusion it will.

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Change is workers' only certainty

The shape of our economy is always changing, but lately the pace of change seems to have got a lot faster. Some industries are expanding, while others contract. Particular industries are having to change the way they operate - or the range of products they produce - in response to many pressures.

These changes almost always leave us better off materially. ''Structural change'', as economists call it, has been central to the process by which people in the developed world have become ever more affluent over the past 200 years.

The greatest force driving structural change is technological advance: the invention of better ways of doing things, new things to do and countless labour-saving machines. Globalisation has been driven partly by government policy, but mainly by the information and communications technology revolution, which has hugely increased the speed and reduced the cost at which information, money and people move around the world.

 

This has given us the global financial markets, but also the rise of the developing economies, particularly in Asia. Those countries' growing demand for our minerals and energy is bringing us great wealth but is also bringing intense pressure for change in the shape of our economy. Mining and the services sector are expanding, whereas manufacturing, the tourism industry and education exporters are being forced to adjust.

Then there are all the industries under pressure from the internet and the emergence of ''new media'': newspapers, free-to-air television, book publishing and book selling, and retailers whose customers have discovered how much more cheaply they can buy some things on the net.

The trouble with structural change, of course, is that the benefits go to the customers - new products, wider choice, lower prices - while all the problems go to the people working in the disrupted industries.

Managers have to find a new plan for their firm's survival. Meanwhile, workers go through considerable uncertainty and anxiety. At best, they have to shift to doing something completely different. They may be required to do a lot more for the same money. Perks may be cut. Or their prospects of advancement curtailed.

They may lose their status as permanents. At worst they get shown the door and take a long time to find another job. That job may well involve doing the same work for less money and poorer conditions - perhaps for the business to which their work was outsourced.

Managers have no choice but to face up to the business's changed conditions and cut their cloth accordingly. When they resist change or pretend it isn't happening they just make things worse. Non-unionised employees have to cop whatever solutions managers impose on them. But well-unionised employees have more power to resist, or at least have their viewpoint taken into account.

No firm fits this frame better than Qantas. It has lost its protected status as the nation's flag-carrier and must find a strategy for competing with myriad competitors, many of them low-cost. It can no longer afford the high salaries and cushy conditions its pilots, engineers and other employees have become accustomed to.

The problem at Qantas was not that workers wanted too much in pay rises - that's the standard stuff of such bargaining - but that they wanted to use their industrial muscle to force management to agree never to change the business in ways that disadvantaged their employees.

Sorry, but that's not possible. Here you see the grounds for business's latest complaint against Julia Gillard's Fair Work changes to industrial relations. Gillard has removed the list of ''prohibited content'' restricting the matters over which management and unions may bargain. This has permitted the unions to range far beyond claims about wages and conditions to issues that concern ''managerial prerogative'' and thus challenge ''management's right to manage''.

It's important to remember we're still engaged in the difficult transition from almost a century of compulsory arbitration - where, as soon as a strike began the umpire would step in to impose a settlement on both sides - to a new world of collective bargaining.

A central goal in making this transition - one expressed many times by the now-bellicose Peter Reith - is to encourage the two sides to bargain without external intervention. The goal was a new era of reduced industrial disruption as the parties recognised the great extent of their common interests and put less emphasis on their (undoubted) conflicting interests.

Right on. So I don't think banning debate about management decisions is the smart way to go. That would mean the law advantaging one side, giving managers permission to ride roughshod over the interests and even the opinions of their employees.

Half the trouble at Qantas is the employees' failure to recognise how the game has changed for their company, robbing them of their former bargaining power. The other half is the arrogance of management in their resort to ''managerial prerogative'', in their failure to explain and debate the new realities with their staff.

It's painfully clear management-employee relations within Qantas are utterly poisonous. The blame for that should be shared equally. The fate of Qantas is important in its own right, but it's more important as a case study in how big, unionised companies cope with structural change.

The industrial parties need to reach an accommodation, not rush to the ref. But I agree with Professor Paul Gollan, of Macquarie University, that Fair Work needs to provide a better mechanism to help the parties argue through their differences in cases where belligerence on either side threatens to impose unnecessary hardship on the parties and the public.

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Shouting slogans will not further Fair Work debate

It's a compelling narrative: in the 1980s we deregulated the financial markets, slashed import protection and deregulated many markets for particular products. But then it dawned on us that deregulated, highly competitive product markets could hardly co-exist with a centralised, highly regulated labour market.

So Paul Keating started to deregulate the labour market, ending centralised wage-fixing and moving to collective bargaining at the enterprise level. The Liberals' Peter Reith introduced a formal system of individual contracts, Australian workplace agreements, then John Howard completed the process of deregulation by introducing Work Choices.

But then Labor used Julia Gillard's Fair Work Act to re-regulate the labour market. So we've reverted to our original problem of having a regulated labour market that simply doesn't fit with deregulated, trade-exposed product markets.

Just one problem with this neat analysis: it adds up only if you don't actually know much about how the labour market is regulated. The notion that Work Choices deregulated the market and Fair Work re-regulated it is simple, but makes no sense.

Consider this: the Work Choices legislation was much longer, more complex and more intrusive than the law it replaced. Does that sound like deregulation? The Fair Work legislation is considerably shorter and more straightforward. Does that sound like re-regulation?

One of the main complaints against Fair Work is that it has removed the list of ''prohibited content'' about which employers were prevented from agreeing with their unions. Inserting prohibitions in the law is deregulation? Removing prohibitions is re-regulation?

One thing Work Choices did was greatly bureaucratise the right to take industrial action, with the intention of discouraging it. Unions have to hold a postal ballot of their members and achieve a certain proportion of votes to commence a bargaining period after the expiry of their last enterprise agreement.

Then they have to hold another postal ballot before they can undertake protected industrial action during the bargaining period. Then they have to give 72 hours' notice of any action they actually intend to take.

By contrast, employers don't have to jump through any hoops or give any notice when they decide to retaliate by locking out their staff during a bargaining period.

These provisions of Work Choices were carried over largely unchanged in Fair Work. Do they sound terribly pro-union? Do they sound like deregulation? Does continuing them in Fair Work constitute re-regulation?

Confused yet? The simple truth is that ''deregulation'' isn't a sensible description of what Work Choices did and, in consequence, ''re-regulation'' isn't a sensible description of what Fair Work does.

Here's the point: the labour market has always been highly regulated. It remained highly regulated under Work Choices and it's still highly regulated under Fair Work. It's always likely to stay highly regulated for a simple reason: unlike all other markets, the labour market deals with human beings rather than the exchange of inanimate objects.

As a matter of politics, common humanity and common sense, the treatment of people in the labour market will always be carefully regulated. We are, after all, running the economy for the benefit of people.

What changes from time to time is not so much the degree of regulation as the objectives of that regulation. There's a fundamental imbalance of bargaining power between an individual worker and even the smallest employer.

So the main issue the regulation deals with is what should be done about that imbalance. The usual answer - the world over - is to permit workers to bargain collectively.

What Work Choices did - in its original form, at least, before Howard realised he'd gone further than the public would cop - was make individual bargaining far more attractive to employers by removing the ''no-disadvantage test'' which had limited the extent to which workers' wages and conditions could be reduced. A lot of the regulation it added to the system was to constrain the freedom of those employers who chose to continue bargaining collectively with their employees. And it further tightened restrictions on what unions could do.

Howard shifted the balance heavily in favour of employers and tried to delegitimise the (already declining) union movement. It's hardly surprising Labor used its first opportunity to shift the balance back the other way. What is surprising is how many of Work Choices' anti-union provisions it left intact.

All systems of collective bargaining permit unions to take ''protected'' industrial action, subject to certain tight conditions. Why do they need protection? What are they protected from? From being sued by employers in the civil courts because of the economic damage that action has done to the employers' businesses.

See what this means? It means that even if we really did attempt to deregulate the labour market by abolishing the industrial relations act, it would still be regulated by ordinary commercial law and common law. In that imaginary world, it would not be illegal to strike or take other industrial action, but any damage unions inflicted on employers - which, after all, is the very object of industrial action - would leave the unions open to being sued.

So, for all practical purposes, collective bargaining would be impossible - would be prevented by (ordinary civil law) regulation - unless governments regulated to specify the circumstances in which it would be permitted by being protected from actions for civil damages.

Still think it makes sense to talk about deregulating or re-regulating the labour market? There's always legitimate ground for us to debate whether the balance our industrial relations regulation strikes - between protecting workers on the one hand and achieving an efficient-functioning economy on the other - should be shifted in one direction or the other.

But shouting slogans at each other - it's deregulation if I like the latest changes; it's re-regulation if I don't - won't advance the debate one jot.

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Storm clouds over Europe, but sun is shining elsewhere

If you're confused about what's happening in the European economies, why it's happening and what it means for the world economy, don't feel you're alone.

The media's great strength is the speed with which they can bring us myriad details about the latest happening in Greece, Italy or anywhere else. Unfortunately, their great weakness is their inability to digest all that information and summarise what it means. The closest they go is in relaying the opinions of 101 supposed experts from Greece, Britain, America or anywhere else. Listen to more than one or two and you're soon none the wiser.

But this week our own secretary to the Treasury, Dr Martin Parkinson, gave us his tight summary of what and why and what next.

He began by warning that ''the global economy is heading down a winding road, with twists and turns ahead that we can't predict''. Following the global financial crisis, it was expected that the global economy would recover at a modest pace as the financial excesses were worked out of national, business and household balance sheets.

Instead, we've seen events occur that threaten to derail this recovery. ''The unfolding saga of the European sovereign debt crisis sees events change on a daily (if not hourly) basis,'' Parkinson says.

''It's not just events in Europe either, with the unprecedented downgrade by Standard and Poor's of their US sovereign credit rating in August providing yet another twist.''

He says there are four ''proximate'' (immediate) causes of the present situation in Europe. The first is the unsustainable sovereign (government) debts of some economies in the euro area, which reflect a period of weak economic growth and big budget deficits. This suggests a need for microeconomic reforms to enhance the country's international price competitiveness (because membership of the euro prevents the country from gaining competitiveness by devaluing its currency) and for more competitive taxation and social welfare policies.

The second cause of Europe's problem is policy responses from governments that are inadequate considering the size of government debt. This raises the fear of ''contagion'' (spreading disease) throughout the European banking system.

Third, the markets' continuing fear that political institutions are incapable of implementing concrete and credible responses to the problem.

And finally, a growing recognition by markets that the economic recoveries in both the US and Europe will be weaker than previously expected, making it even harder to work down their already excessive levels of government debt.

Financial markets around the world have been gripped by uncertainty and aversion to risk because of the prospect of weak global growth and the European sovereign debt crisis. Volatility has become the new norm.

The euro-area leaders' summit late last month finally made some much-needed announcements, but though markets initially reacted positively to these measures - despite the absence of detail - this was very short-lived.

Political developments in Greece and Italy in the past fortnight have further undermined confidence in the commitment of governments to deal with the underlying problems. Europe will remain a source of market volatility until governments' commitments are seen as clear and credible.

Market participants have become very reluctant to hold the bonds of certain governments, which is reflected in the market yields (effective interest rates) participants require to hold the bonds of particular governments.

The yield required on Spanish and Italian bonds, for instance, is about 5 percentage points higher than that for German government bonds. For Irish bonds this ''spread'' got as high as 12 percentage points, but has since fallen to about 7 points. For Portuguese bonds it's 10 percentage points and for Greek bonds it's about 30 percentage points.

Across the Atlantic, growth in the US weakened significantly in the first half of this year. Though it's strengthened a bit since then, the recovery remains vulnerable to external shocks such as a re-intensification of the European debt crisis.

''In the longer term we can have confidence that the US economic system will drive the innovation and investment needed to spur competitiveness and growth,'' Parkinson says. ''The question is whether the US political system can mobilise itself to address its medium-term fiscal challenges.''

But while both Europe and the US face budgetary challenges, there are some crucial differences, he says. Critically, the US has its own currency and monetary policy and a fiscal (budgetary) union between its 50 states.

And with the yield on 10-year US Treasury bonds at about a 60-year low, there's zero pressure from the market to force political action - and a political compromise - on a substantial medium-term reduction in the US budget deficit.

But until such a plan is agreed and legislated, the US will remain at risk of a sudden shift in market sentiment, as Italy has discovered in recent months.

Parkinson remarks that, with economic commentary focused on the short term and the North Atlantic, it's easy to overlook the bigger picture. We are in the midst of a once-in-a-century global economic transformation as the world's centre of economic gravity shifts from the advanced economies to the emerging market economies.

We focus on the rapid growth of China and, to a lesser extent, India. But we shouldn't overlook the strong growth of Indonesia and Vietnam. With a population of almost 240 million, Indonesia is the world's fourth most populous country. If we measure it using purchasing-power parity (as we should), Indonesia's economy overtook Australia in size in 2005.

Parkinson also points out that the rise of the developing countries isn't limited to Asia. ''We see a similar story developing in other emerging economies,'' he says.

''For example, a young population and improvements in human capital will likely contribute to an expected doubling in South Africa's gross domestic product in the next 20 years and Nigeria is expected to increase three-fold to displace South Africa as the continent's largest economy by the late 2020s.

''Latin America also continues to surge forward, with Brazil and Chile leading the way - with both expected to double in size by 2030.''

Returning to Asia, despite rapid growth in living standards, China and India remain at the early stages of their economic development. Assuming broad trends continue, China and India's cities will be populated by an increasing wealthy and mobile middle class in the decades ahead. ''On some projections, there will be 1.7 billion middle-class consumers in the Asia-Pacific region by 2020 - more than the rest of the world combined.''

Remember, however, all these projections rest on the economists' de rigueur assumption that there's no way shortages of natural resources or environmental pressures could prevent the global economy from continuing to grow forever.

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We may be two-speed, but we are all sharing dividends

Forgive my absence at such an anxious time but I've been away on holiday in Western Australia, walking bits of the Bibbulmun Track, which runs from Perth to Albany. The wildflowers were unbelievable. And so was the affluence in Perth, where the mining companies' skyscrapers are so tall they can be seen from Rottnest Island, 19 kilometres away.

How'd you like to be living in Perth, in the winners' circle where everything is on the up, not doing it tough in Sydney or Melbourne, on the wrong side of the two-speed economy?

Actually, things in Perth aren't as wonderful as it suits envious easterners to imagine. Know what they complain about in the West? The two-speed economy. Most of them think they're missing out. Some people may be raking it in, but not me. I'm not on some fabulous salary, just paying the exorbitant house prices the well-to-do have brought about.

Now where have I heard that before? What is it about Australians at present - on both sides of the continent - that makes them so convinced they're missing out and battling to get by?

According to polling by Labor, 68 per cent of respondents believe average Australians aren't benefiting from the mining boom. Is that how you feel? If so, you haven't thought about it. As someone said, there are more things in heaven and earth than are dreamt of in your philosophy.

After such a long plane trip, I was half expecting WA to be like another country. And it's true they have things we don't: magnificent tall trees - jarrah, karri and marri - and strange animals such as quokkas. But step into the bush and it's very much part of Australia: gum trees everywhere, kangaroos and kookaburras.

It's the same story economically. They may have huge reserves of natural gas and iron ore that we don't, but their economy is really just a corner of the greater Australian economy. As the locals are the first to tell you, a lot of the money they make soon finds its way into the pockets of people Over East.

For a start, there are no customs barriers between the states, so there's a lot of trade between them. Step into a WA supermarket and you see they're selling just the same stuff ours do. Which means most of what they're selling was manufactured on the east coast.

Their big mining companies have been making huge profits for the best part of a decade. Nothing to do with you? Every east-coaster with superannuation has a fair bit of their savings invested in the shares of those big companies. So you've been getting your cut.

Your super's been looking a bit sick in recent years? That's mainly because of problems in the rest of the world. Whatever you've got, it'd be looking a lot sicker without the resources boom.

Those mining companies are subject to the federal government's 30 per cent tax on company profits. And the feds' company tax collections have been massive since the resources boom started in the early noughties.

Do you realise that under Howard and Rudd we had cuts in income tax eight years in a row? Where do you think the money came from to finance those cuts?

In the economy, everything's connected to everything else. So if you're conscious of only the direct connections you're missing a lot of the story. And no connection is more indirect - or mysterious - than the way the governments of NSW and Victoria have been benefiting from the good fortune of the WA and Queensland governments.

This arises from our longstanding commitment to the principle of ''horizontal fiscal equalisation'' - which holds that all Australians, no matter where they live, are entitled to the same quality of government services.

That ain't easy, particularly because most government services - education, hospitals, law and order, roads - are delivered by the states. The cost per person of delivering services varies with how big and decentralised the states are. But another factor is the states' varying capacities to raise revenue. These days, states gaining royalty payments from their big mining industry have considerable ''taxable capacity''.

To bring horizontal fiscal equalisation about, the Commonwealth Grants Commission does many intricate calculations which determine how the $48 billion-a-year proceeds from the feds' goods and services tax are divided among the states. The commission works out the average amount of GST paid per person throughout Australia, then decides whether each state requires more or less than that, per person, to be able to deliver services of equal standard.

This equalisation process was introduced in the early 1930s to mollify the restive West Australians. Until just a few years ago, it meant Victoria and NSW got a lot less than the national average, while South Australia and Tasmania got a lot more than average and Queensland and WA got a bit more.

In 2004-05, NSW got just 83 per cent of the national average GST paid per person, while Victoria got 84 per cent. WA got 104 per cent and Queensland got 107 per cent (with SA getting 123 per cent and Tasmania 171 per cent).

But the huge increase in the resource states' taxable capacity thanks to booming mining royalties has changed all that. This financial year NSW's cut has risen to 96 per cent and Victoria's to 90 per cent, whereas Queensland's cut has fallen to 93 per cent and WA's to - get this - 72 per cent.

It works out that, in effect, Queensland's benefit from its mining royalties this year will be reduced by $1.2 billion and WA's by $2.5 billion. Of their combined loss of $3.7 billion, NSW gains $1.3 billion and Victoria $1.8 billion.

Still think you're getting nothing from the boom?

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Brave economist blows whistle on bosses' pay

You could be forgiven for not knowing it, but economists are meant to be tough on business. Their ideology holds that capitalism is good not because it's good for capitalists, but because it's good for consumers - and consumption is "the sole end and purpose of all production".

So said Adam Smith, who added that "the welfare of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer".

The economists' ideology holds that, when markets are working properly, most of the benefit flows to consumers in the form of lower prices and better service, with businesses making no more that "normal" profits (the lowest rate of profit needed to keep the firm's resources employed in its present industry).

Economists should also distinguish between the capitalists (the suppliers of capital - the shareholders) and the managers, who are supposed to be merely the agents of the shareholders who must at all times represent the true interests of the shareholders, never their own interests. Likewise, company directors are supposed to represent the shareholders' interests, not management's interests.

So economists are supposed to be pro-market, not pro-business and certainly not pro-management.

That's how it's supposed to be, but often not the way it is. In practice, economists who work for business aren't free to criticise it in public. The same goes for those who work for conservative governments (or Labor governments anxious to keep on side with business). And few academic economists take an interest in such mundane issues.

But another factor that helps explain the gap between principle and practice is that the economists' basic model recognises no role for collective action, including action by governments. So when things go wrong in markets, economists' first inclination is to defend the market and blame governments.

All this explains why economists have such a poor record in speaking out about excessive executive remuneration - as witness, the Productivity Commission's report on the subject of a few years back. That this is a case of market failure is as plain as a pikestaff, but the commission's economists searched under every rock without finding it.

One honourable exception to this glaring dereliction, however, is Diane Coyle, who tells it as it is in her latest book, The Economics of Enough. As her previous bestsellers attest, Dr Coyle - whose PhD is from Harvard - is a most orthodox economist.

Seeking to explain the origins of the explosion in executive pay, she attributes it to the deregulation of the financial markets in the US, Britain and elsewhere.

"Organised crime aside," she says, "the most ostentatious flaunting of wealth has emanated from the banking sector. As it turns out, these vast earnings and bonuses were undeserved. The bankers [in the US and Britain] ran up large losses, ruined their shareholders, and left taxpayers with the bill. It will be extraordinary if they turn out to have fooled, scared or bullied politicians around the world into stepping back from fundamental reform of the banking sector."

But the key point is the impact such high incomes in banking have had on the rest of society.

"The bonuses far in excess of salaries, and the spending on big houses, fast cars and designer clothes they funded, did create a climate of greed," she says.

"People in other professions who are in reality in the top 1 per cent or even 0.1 per cent of the income distribution were made to feel poor by the bankers.

"Banking bonus culture validated making a lot of money as a life and career goal. It made executives working in other jobs, including not only big corporations but the public sector too, believe that they deserved bonuses.

"Remuneration consultants, a small parasitic group providing a fig leaf justification for high salaries, helped ratchet up the pay and bonus levels throughout the economy.

"The whole merry-go-round of bonuses and performance-related pay is a sham. In almost every occupation and organisation it is almost impossible to identify the contribution made by any individual to profits and performance - complicated modern organisations all depend on teamwork and collective contributions."

So what can be done about it? In late 2009, the British government introduced a penal tax on bonuses above #25,000 in banking. The tax was criticised, not only by bankers but also by others who thought the measure impractical.

"But it was one of the few measures any government has so far taken that was absolutely right. The symbolism is vital even if by itself the measure doesn't bring to an end the corrosive culture of greed. Whatever the practical limitations on their actions, governments can still achieve a lot in symbolic terms, which should never be underestimated when it comes to impact."

And governments could do a lot more to change the social norms that helped destroy the Western financial system. For example, they could halt bonus payments in the public sector altogether, or introduce a general additional tax on non-fixed parts of people's pay packages.

"I am not opposed to people making more money if they studied hard or worked hard for it, or took the risk of setting up a successful new business - on the contrary, effort and entrepreneurship must be rewarded amply," Coyle says.

"Nevertheless, governments have to give a lead in restoring the sense of moral propriety and social connection between those people who are part of the extraordinarily wealthy global elite and the great majority of those with whom they share their own nation.

"Senior bankers should also contribute to this task of making greed and excess socially unacceptable once again." Amen to that.

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Understanding the Aussie dollar

Economic theory tells us the level of the exchange rate is an important factor in the health of the economy. Unfortunately, there's nothing in economic theory that can explain the Aussie dollar's strange behaviour in recent weeks. It's hard to know whether to cheer or boo.

We do know the Aussie has a strong and longstanding tendency to move in line with the prices we're getting for our commodity exports so, since during the past few years the prices of coal and iron ore have moved to record highs, it hasn't been surprising to see the Aussie rising to heights not seen since before it was floated in 1983.

It hit a peak of 110 US cents in early August, but seemed to settle at about 105 US cents. But in late September, during a bout of considerable anxiety on world markets about the state of the North Atlantic economies, it fell below parity, eventually getting down as low as 95 US cents.

But then this week it began going back up, reaching comfortably above parity, jumping 3 US cents in just 12 hours on Wednesday.

It's possible we've reverted to an earlier pattern where, when the global financial markets get particularly anxious about economic prospects, investors liquidate their short-term investments offshore and bring their money home to the safe haven of investment in government bonds. So the dollar appreciates (rises in value) and most other currencies depreciate (fall in value). Remarkably, this knee-jerk reaction can occur even when uncertainty about the fate of the economy is a major part of the anxiety.

That's step 1. Step 2 is for investors to calm down and start moving their money back overseas to destinations such as Australia in pursuit of higher returns than offered by bonds. If so, maybe that's what happened this week.

And if that's so, maybe step 2 has merely taken us back to square 1 - a dollar that settles well above parity. But who could be sure US cents Who knows what will happen the next time something really scary happens in Europe or the US cents Will the Aussie drop to, and stay at, a new level significantly below the 105 US cents it seemed to have settled at, or will it just go through a period of high volatility without actually changing its general level US cents

A point to note is that, though the media and markets' focus is always on our exchange rate with the greenback, economics teaches that what matters to the economy is our exchange rate with all our trading partners, not just the Americans.

Say you were taking a holiday in Britain. What would matter to you is our exchange rate with the pound. If you were going to Japan, it would be our exchange rate with the yen. In neither case would you regard our exchange rate against the greenback as particularly relevant.

It's the same story when Australian firms trade with Britain or Japan. Even if the price happens to be set in dollars - as it often is - the Aussie firm will translate that price into Aussie dollars, while the British or Japanese firm will translate it into their own currency.

Put the two together and what matters for the transaction is the Aussie-pound or Aussie-yen exchange rate. So we should be interested in our exchange rate with each of the countries with which we trade. And how much each bilateral exchange rate matters to us depends on how much trade we do with the particular country.

See where this is leading US cents The exchange rate that matters to the economy overall is the average exchange rate for all our trading partners, with each country's currency weighted according to its share of our two-way trade. Economists call this our ''effective'' exchange rate, which is represented by the trade-weighted index.

When you look at what's happened to our exchange rate against that index, you find the volatility in recent weeks is less. While we've depreciated against the greenback, we've appreciated against the euro and the Korean won.

There's always a lot of focus on what's happening to interest rates because we all know how important the rate of interest is to the strength of the economy. A rise in rates will slow economic growth by discouraging borrowing and spending; a fall in rates will hasten growth by encouraging borrowing and spending.

What's less well recognised is that the level of the exchange rate also affects the strength of the economy. So much so that the Reserve Bank brackets the two - interest rate and exchange rate - as ''monetary conditions''. When the exchange rate appreciates, this tends to slow the economy by reducing the price-competitiveness of exports and those domestically produced goods that compete against the now-cheaper imports in our domestic market.

It doesn't have much effect on domestic demand (our spending), but it does slow the growth of aggregate demand (our production - gross domestic product, in fact) by reducing exports and by diverting more of our spending into imports.

Conversely, when the exchange rate depreciates, this tends to speed the economy by improving the price-competitiveness of our export and import-competing industries. Domestic demand isn't much affected, but GDP improves because we export more, and more of our spending goes on domestically produced goods and services rather than imports.

This, of course, is why our manufacturers have been doing it tough under the high exchange rate. They've found it harder to export and to compete against imports. Though it's received far less public sympathy, our tourist industry has suffered in the same way, with fewer foreigners coming to Australia and more Aussies holidaying abroad rather than locally.

Our universities and other education exporters have been hit also.

So I'm quite sorry to see the dollar going back up this week after having fallen by up to 10 per cent from its heights. It would have been great to take a bit of the pressure off the manufacturers, tourist operators and education exporters.

The econocrats have a rule of thumb saying a sustained fall in the exchange rate of 10 per cent should lead to a rise in real GDP of about 0.75 percentage points over the following two years - say, 0.4 points in each year. (The rule also holds for a rise in the exchange rate causing slower GDP growth.)

So whereas a lasting fall in the Aussie might have been bad news for motorists (price of petrol) and people planning overseas trips, it would have helped make our multi-speed economy a little less uneven.

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Look within to pick up productivity

One of the tricks to success - in business, or in life - is to focus on the things that matter, not the things people (and hence, the media) are getting excited about this week. Of late we seem to be doing a lot of worrying about the wrong things.

For instance, our preference for bad news over good means we've been doing a lot of hand-wringing over the economic problems in Europe and the US. What's happening in China and the rest of developing Asia may be far less worrying - and hence, less interesting - but it's also far more important to the fate of our economy.

When we look at our economy, we give much more attention to the alleged two-speed economy - who's feeling hard done-by this week? - than to the truth that, with limited exceptions, the economy has been travelling well, is travelling well and is likely to continue travelling well.

As part of this, of late we've been devoting inordinate attention to the problems of the manufacturing sector (which accounts for 9 per cent of total employment), without any concern for the services sector (accounting for a mere 85 per cent of employment), even though two big service industries - tourism and education - have also been hard hit by the high dollar.

But even those of us happy to acknowledge how well our economy's travelling, thanks to high export prices and the mining construction boom, are less conscious of the sad truth that, underneath all that, the economy's productivity - output per unit of input - has stopped improving.

We're getting richer because the world is paying us a lot more for our exports and is engaged in a massive expansion of our mining industry, not because our businesses are getting more efficient at what they do.

That message is, however, getting through to big business and its various lobby groups. Only trouble is, in their search for a solution to the productivity problem they've been looking outside their firms, not inside. Perhaps if the government reformed the tax system, that would lift productivity. Or maybe going back to Work Choices would help.

It's possible that, while they come to our attention only when they're putting their oar into the public debate, most chief executives are busily engaged attending to their own, internal affairs. It's possible, but there doesn't seem much evidence of it.

That's why the most useful thing to come from last week's jobs forum in Canberra was the unveiling of a study on the leadership, culture and management practices of high-performing workplaces, sponsored by the Society for Knowledge Economics with funding from the federal government.

A team of academics from the University of NSW, the Australian National University, Macquarie University and the Copenhagen Business School examined 77 businesses in the services sector with more than 5600 employees. Most were medium size, and included law and accounting firms, advertising companies, consulting firms and employment agencies.

It's probably the most comprehensive study of workplace performance undertaken in Australia in the past 15 years. The performance of businesses was measured in six categories: profitability and productivity, innovation, employee emotions, fairness, leadership and customer orientation.

The study identified 12 high-performing workplaces and 13 low-performing workplaces, leaving most of the firms studied somewhere in the middle. So what are the characteristics of high-performing workplaces and how much better are they than the low-performing?

Well, not surprisingly, the best performers were more profitable and productive. According to the lead researcher, Dr Christina Boedker, high-performing workplaces are up to 12 per cent more productive and three times more profitable.

And it's not too surprising the best performers are better at innovation. They generate more new ideas and are better at capturing and assessing their employees' ideas. In consequence, they make more improvements to services and products, production processes, management structures and marketing methods.

But some treat-'em-mean-to-keep-'em-keen managers will be surprised that high-performing outfits do better on employee emotions. They have higher levels of job satisfaction, employee commitment and willingness to exert extra effort, and lower levels of anxiety, fear, depression and feelings of inadequacy. Part of the bottom-line consequence of this is lower rates of staff turnover.

The employees of high-performing firms tend to be more satisfied people, are being paid fairly and company policies are being implemented fairly.

High-performing firms rate better on customer experience. They try harder to understand customer needs, are better at acting on customer feedback and better at achieving their own goals for customer satisfaction.

But the study is particularly concerned with the performance and attitudes of managers, which business-types these days put under the heading of ''leadership''. In high-performing outfits, managers and supervisors devote more time to managing their people, have clear values and practise what they preach.

They welcome criticism as a learning opportunity. They foster involvement and co-operation among staff, give them opportunities to lead activities, encourage development and learning, give them recognition and acknowledgement and encourage them to think about problems in new ways.

The management practices that do best, according to the study, are being highly responsive to changes in customers' and suppliers' circumstances, encouraging high employee participation in decision-making, achieving on-the-job learning through mentoring and job rotation, making effective use of information and technology and attracting and retaining high quality people.

Of course, different managers have different cultures or styles. Some emphasise results, some their people and some coping with change. The study finds all three approaches can make a high-performance workplace. The one style that doesn't work is the ''control'' culture.

Wow. How'd you like to work for such a boss in such an enlightened business? Pity is, such firms accounted for only 15 per cent of the sample.

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