CONTINUING AUSTRALIA's INTEGRATION INTO the WORLD ECONOMY July 2004
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OFFSHORING, GLOBAL OUTSOURCING AND THE AUSTRALIAN ECONOMY CONTINUING AUSTRALIA'S INTEGRATION INTO THE WORLD ECONOMY July 2004 Offshoring, Global Outsourcing and the Australian economy - Continuing Australia’s integration into the world economy PAGE TABLE OF 1. Introduction 1 2. The Benefits of Globalisation 3 CONTENTS 3. The Role of Technology 5 4. Globalisation Challenges 6 5. The Australian Context 8 6. Offshoring 9 7. Drivers of Offshoring 10 8. Assessing the Impacts of Offshoring 11 9. Policy Implications 14 10. Specific Policy Agenda 15 11. Australian Experience Supports Optimism 16 1. Introduction Participating in the benefits of Australia’s Over the past century, the process of integration with the world economy has globalisation has manifested itself through a become an integral part of life for almost all number of distinct phases or episodes. Each Australians. We are now accustomed to being phase has brought its own challenges and able to choose from a wide range of imported uncertainties, as well as renewed public goods and services, from tinned tomatoes, to debate about the value of Australia’s televisions, computers, clothing, cars, wine, participation in the global marketplace and music and the like. People in other countries what it means for local industry and jobs. are also gaining from our integration with the Notwithstanding the benefits brought by freer world economy. With trade now accounting trade in products and capital, and Australia’s for more of our total economic activity than long-term integration with markets overseas, ever before, Australia is justly proud of our debate is still dominated by apprehension and export success stories such as wine sales in even outright hostility within some segments of France, cars exported to US consumers and the community which see themselves directly multi-billion dollar gas contracts with China, threatened by competing markets overseas. together with traditional export staples such as minerals, wheat and wool. These are understandable reactions given that globalisation often brings about rapid changes The public representation of this integration in the structures of firms and industries. with the world economy, often described as Increasingly, with the emergence of ‘globalisation’, and sometimes pejoratively so technologies that rapidly create new markets by its critics, is that it is a relatively new force and products as well as accelerate the rate or process, and one that Australia, as a of exchange of products and capital between relatively small economy on the world stage, economies, globalisation is, in some will struggle to manage. industries, creating change at a faster and The fact is that Australia’s integration with the faster pace. However, experience has shown world economy has been happening since the that over time this apprehension is reduced as time of white settlement. That much of our the benefits of globalisation become evident. economy is now tied to the flow of goods, There were strong fears about job losses services and investment to and from our borders when Australia’s very high tariffs were gradually underlines that globalisation has not emerged reduced through the 1970s and 1980s. Yet recently, and that Australia has largely benefited with time Australia’s stronger trading orientation from it. Australia’s status as a vibrant modern and employment strengths resulting from the nation was built nearly a century ago on the dismantling of protectionism have been a back of early forms of globalisation which major benefit. Similarly, there were fears when enabled us to make the most of our early Australia embarked on financial deregulation in competitive advantages, particularly in the the early 1980s that Japanese and American export of agriculture and commodities. firms would ‘buy up’ Australia when capital 1 controls came down. Yet as foreign companies As an organisation representing Australia’s have become increasingly integrated into our largest businesses, which collectively employ markets and seen as important employers and around 1 million people throughout the spurs for competition, Australia’s access to country and account for around 30 per cent of foreign capital has also been widely seen as Australia’s total exports, the Business Council a benefit. of Australia has a clear interest in contributing to a constructive debate about the role of The term “offshoring” is at the centre of technological progress and globalisation in the latest phase of globalisation. As with supporting economic and broader prosperity previous phases of globalisation, this latest in Australia. manifestation has generated widespread and sometimes heated debate. Offshoring is not However, in order to determine the appropriate an issue or process unique to Australia. It is responses for the country as a whole, there being increasingly used by service industries must be informed debate about the process across the world to remain cost competitive. of offshoring and its longer term costs and While offshoring may seem to be a new kind benefits. The aim of this paper is to help with of business practice, it combines established constructing a more informed debate. In practices of outsourcing with advances in particular, the paper: communications technology so real-time • outlines the largely positive relationship information and expertise is provided by between Australia’s economic development service providers in one country to customers and globalisation; in another. • defines offshoring as a further phase in the It could be argued that the concept of globalisation of Australia’s economy; and offshoring is in itself open to debate, given • outlines some public policy issues for both that it is simply the latest manifestation of the business and governments to consider as exchange of goods and services that has they manage the effects of offshoring. defined Australia as a participant in the global economy for many years. Indeed, the practices associated with ‘offshoring’ could just as easily be described as global outsourcing. 2 2. The Benefits of Globalistation High-profile anti-globalisation protests, stalled One of the fears associated with globalisation, World Trade Organisation talks, and headlines and in particular with Australian companies about job shedding as local companies lose competing with firms in developing countries, out to, or outsource activites, to lower cost is that we might find ourselves in a ‘race to the options overseas easily create an impression bottom’ in terms of jobs, wages and our that the net effects of the freer movement of standard of living. The statistics show goods and services, investment and people otherwise. While Australia has experienced are negative. rising imports, employment has also been rising as Chart 1 demonstrates.2 Despite these views, globalisation has given Australian consumers access to a far wider Critics of deregulation and trade liberalisation range of goods and services, often at lower cite a rise in income inequality as evidence prices, than would be available from domestic of the so-called race to the bottom. This is a producers alone. The availability of alternative gross misnomer. Earnings of low income goods and services has put competitive individuals have risen significantly in recent pressures on local firms to produce new, years. Over the period 1994-95 to 2000-01, the better, and cheaper, goods and services. At the average real equivalised disposable household same time, globalisation has provided income of people in the low income group Australian firms with a larger pool of capital increased by eight per cent, while it grew by from which to source investment aimed at 14 per cent for the high income.3 Furthermore, improving productivity and product quality, this increased income dispersion is not due while also providing greater access to to wage rates for high income groups technologies from overseas that improve their accelerating faster than low income groups. competitive performance. At an individual Instead, it is primarily the result of changes level, globalisation has also meant Australians to the employment structure of the economy. now have greater options in terms of travelling, living, studying and working overseas. CHART 1 EMPLOYMENT TO POPULATION RATIO For Australian companies, globalisation has AND IMPORTS also provided access to major new markets in 61 28 many overseas countries. This in turn has correlation +0.6 enabled them to increase sales, develop new products and services and deliver higher levels 60 of output, as well as source a much larger 24 pool of returns for investors, particularly 59 Australians who have direct investments through shares in publicly-listed companies, 58 20 including through superannuation funds. To quote the Productivity Commission: 57 “Reductions in barriers to trade and foreign 16 investment have encouraged Australians to 56 Employment / Population % (LHS) compete and learn from the world’s best”, and Imports Share GDP % (RHS) 55 12 “By a range of indicators Australian firms March March March March March have become much more productive and 1986 1990 1994 1998 2002 innovative, including through the adoption of new technologies”.1 3 1 PRODUCTIVITY COMMISSION (2000), ‘AUSTRALIA IN THE GLOBAL ECONOMY’, ANNUAL REPORT 1999-2000 2 CORRELATION COEFFICIENTS ARE CALCULATED ON THE BASIS OF QUARTERLY DATA SINCE THE MID-1980s 3 AUSTRALIAN SOCIAL TRENDS 2004; ABS 4102.0. Research4 has found that relative rates of pay As Australia has benefited from the process of for major occupation groups have not globalisation so too have other countries. significantly varied over the last 25 years, but Globalisation is not a ‘zero-sum’ game, in that that increased earnings inequality is due one economy benefits at the direct expense of largely to strong full-time employment growth others. It is an evolutionary process that in highly-skilled and paid occupation groups, enhances productivity and underpins stronger while full-time employment has fallen and part- economic and income growth and higher living time employment has risen in low-skilled, low- standards in the vast majority of countries that paid occupations.