Increasing Australia’s edge through Asian value chains

Australia is facing increasingly stiff competition from developed economies all vying for a share of the growth pie in the East and South Asian region, where Australia has integrated its value chain activities.

Such external pressure is further compounded by increasing internal competition among the Asian countries, and by an ageing labour force in Australia – which means potentially lesser number of people to do the heavy lifting.

We are well placed to compete in this race, but we must act fast. There is a pressing need to develop an Australian workforce that can think differently, innovate and rapidly identify avenues by which the country can move up the value chain. Governments and businesses have a particular role to play by identifying avenues by which Australian small and medium enterprises can be integrated into global value chains.

Labour force

Today, Australia’s labour force stands at 11.5 million, with an unemployment rate of 5.5%. Compare this with India’s labour force of 472 million (unemployment 9%), Indonesia’s labour force of 117 million (unemployment 6%), Germany’s labour force of 42 million (unemployment 5.4%) or France’s labour force of 29 million (unemployment 11%). What’s common to all of these countries is that they are all vying for higher living standards and growth. What differs is the scale.

Where India and Indonesia have massive challenges lifting people out of poverty, up-skilling a massive youth population and creating jobs for them, the West’s developed economies are better placed – but not for too long.

Just as no sporting team ever rose to the top by being complacent and sitting idle, the state of national economies is the same. They have to keep competing fiercely to arrive at the top and stay there.

If we look at this challenge from a scale perspective, Australia is best placed to compete in this race. The challenge is how fast we act. We have to go beyond traditional thinking of preparing our workforce for the so called jobs of the future towards becoming the creators of new jobs. With a small labour force, we can be nimble and flexible in adapting to changing externalities.

Brains and brawn

Australia is still predominantly an economy of “goods” – things we make by virtue of process. We only need to compare the labour force proportions with the Industry Value Added (IVA) from the mining ($126 billion) and manufacturing sectors ($102 billion) to make this point (See Table 1 below).

Table 1: State of the Industrial Sectors in Australia and Germany (Destatis.de 2013); Author’s calculations adapted from ABS data & Parham, D. 2012;

For instance, with 8.4% of the labour force in manufacturing the sector’s production is worth $102 billion. Let’s call this the product of our “hands”.

On the other end, sectors such as information, media and telecommunications, and financial and insurance services contribute $35 billion and $20 billion respectively, taking up relatively smaller shares of the labour force. Let’s call this the product of our “brains”. The difference, measured by the IVA, between the products of our hands and brains is stark.

Compare these figures to that of Germany – a country Australia often likes to benchmark itself against, especially when making the case that Australia can sustain itself as a high-cost country.

There is clear message here. As a crude comparison between the two economies, the IVA generated from the proportion of Australia’s workforce in specific industry sectors seems comparable. In some sectors, such as the professional, scientific and technical sector, Australia even fares better than Germany.

The challenge over the next decade will be to maintain or increase this IVA in the face of an ageing population and projected slow-down in Western economies. What becomes important is the advancement of economies through their integration into global value chains and especially with countries in the growth regions of the world – Asia, predominantly.

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