As a developed economy Australia can shed light on the South American economies. In the present post a comparison between Australia and a sample of South American countries, including Mexico, is made in order to know some traits that make these resource-rich economies different.
While the South American countries are developing economies, Australia is a developed and one of the richest worldwide economies. Nevertheless, Australia is a country whose exports are based on natural resources like the South American countries. In accordance with The Observatory of Economic Complexity, the exports of the latter in 2019 were mostly iron ore, coal briquettes, petroleum, and gold. All these goods made up more than half of total exports, although it changes depending on the year and the source one observes, for instance, in 2015 the Australian exports looked more diversify, while still concentrated on resources.
Latin American countries such as Chile, Colombia, Peru, Uruguay, Brazil, and Argentina produced copper ore, petroleum, corn, soybeans, and bananas, among other commodities as the biggest share of their total exports.
Mexico is included in the sample given its big size as a Latin American economy. It is a particular case of a resource-rich country that has switched its economic structure from natural resources- to manufacturing-based exports.
Some differences related to technology
It is known thanks to theory and empirical evidence that capital accumulation during the industrialization process accounts for gains in labor productivity and economic growth (Harrod, 1939; Domar, 1946; Murphy, Shleifer & Vishny,1989; De long & Summers, 1991; De long & Summers, 1992). As resource-rich economies, it is not expected they to produce a larger fraction of their machinery and equipment (or other manufactured capital good). In the production of Machinery and Transport Equipment as a share of the manufacturing output these economies did not reach even one quarter: Australia with 15% ranks number three after Mexico (21%), and Brazil (20%).
Figure 1. Machinery and Transport Equipment (% of value-added in the industry)
In the exports of high-tech manufactures, Australia is above all the South American countries only overcome by Mexico. It is noteworthy to say that these figures do not distingue between production activities and ensemble ones.
Figure 2. Export of high-tech products (% of the exports of manufactured goods)
Some long-term economic growth variables
Until this point, the figures of Australia do not seem to be astonishing considering that it is a developed economy.
Here is when some differences onset. Australia allocates by far much more resources in research and development activities with respect to its GDP holding a figure of 2%, followed relatively closely just by Brazil with 1.1%. However, in this respect, Australia is not a leading country in the OCDE.
Figure 3. Spending in Research and Development (% of GDP)
The figures above show that Australia is more focused on R&D activities than the South American countries, but the huge difference lies in their investment rates.
Australia has kept relatively high investment rates throughout the time ranging from 1950 to 2017 compared to the rest of the countries. Austria was overcome just by Venezuela, nevertheless from 1980 to 2017 Australia was the country with the highest investment rate on average.
Table 1. Investment rates as percentage of GDP
Source: own calculations with data from Feenstra, Inklaar and Timmer (2015).
Investment matters. This is the key variable that accounts for the future capacity and production levels. On one hand, as a resource-rich country Australian investment rates around 30% as a share of the GDP match with the East Asian experiences which kept investment rates equals to or above 30% during their industrialization and updating process. On the other hand, despite Australia is known for its reliance on natural resources instead of its manufactures (manufacturing accounted for less than 6% of its GDP since 2017), it does not seem to have dealt with an external hurdle such as unbalance in the balance of payments or lack of foreign exchange that had impeded it to keep relatively high rates of investment over the time analyzed.
In order to grow faster over time, the South American economies’ investment rates will have to be raised above 30% sustained over time, however, to be able to do so, these countries have to cope with the external restrictions imposed by the unbalances in the balance of payments which comes up with the speed up of their investment rates by virtue of their dependency on imports, mainly capital goods which developing countries are not able to produce (take a look at the post The South American economies’ external constraints: a comparison with Australia and East Asian countries).
The unbalances of the balance of payments in the developing country is a matter that has been studied as one of the challenges these countries must cope with (Prebisch, 2012). If the problem lies in the lack of foreign exchange to invest in, it can be solved ultimately through a strong exporting sector that brings about enough foreign exchange to keep high investments rates throughout the time. Although it is true that these countries can rely on external debt to get foreign exchange, at the end of the day they will have to export more to repay the debt and keep the inflow of capital.
Takeaways
On one hand, Australia stands out in comparison to the sample of the South American countries (Mexico added) in regards to how much the country spends (rather say invest) on R&D activities relative to the size of its economy (GDP). On the other hand, despite it relies on natural resources its investment rates were much higher and sustained over time than the rest of the countries of the sample. This last feature is the one that stands out the most.
References
Domar, E. (1946). Capital expansion, rate of Growth, and Employment. Econometrica,14(2):137-147.
Feenstra, Robert C., Robert Inklaar and Marcel P. Timmer (2015), «The Next Generation of the Penn World Table» American Economic Review, 105(10), 3150-3182.
Harrod, R. F. (1939). An essay in dynamic theory. The economic journal, 49(193):14-33
De Long, J. Bradford & Summers, Lawrence H. Equipment Investment and Economic Growth. The Quarterly Journal of Economics, Vol. 106, No. 2 (May, 1991), 445-502.
De Long, J. Bradford & Summers, Lawrence H. World Bank and Harvard University Equipment Investment and Economic Growth: How Strong Is the Nexus? (Oct, 1992), 157-211
Kevin M. Murphy, Andrei Shleifer, Robert W. Vishny. Industrialization and the Big Push. The Journal of Political Economy, Volume 97, Issue 5 (Oct., 1989), 1003-1026.
Prebisch, Raul. (2012). El Desarrollo Económico de la América Latina y Alguno de sus Principales Problemas. CEPAL. 64p.
