Almost ninety years ago, Joseph Schumpeter made a distinction between economic development and economic growth. Development, he said, involves ‘only such changes in economic life as are not forced upon it from without but arise by its own initiative, from within’. But if an economy is ‘dragged along by the changes in the surrounding world’ and adapts itself to them, then there is economic growth without economic development.1
Modern economics captures this distinction with the concept of economic complexity. Complexity increases with diversification (the number of products a country exports). It decreases with ubiquity (the number of countries exporting the same product). An economically complex country can ‘combine new capabilities with a wide set of existing capabilities, resulting in new products of higher complexity than those of countries with few capabilities’.2 A more complex economy means a more developed country.
Australia has the lowest complexity of all the OECD countries, and our performance over the last forty years leaves considerable room for improvement. In 1980, we were ranked as the 51st most complex economy in the world; in 2017, we were 59th. The lowest point was in 2014, when we fell to 89th.3 According to Australia’s chief economist, we are ‘an anomaly among advanced economies, with the economic complexity closer to that of a developing country’. Australia is ‘comparable to the economies of Kazakhstan, Cambodia, Kenya and Saudi Arabia’.4 Our exports remain highly specialised in a few products, such as iron ore, coal briquettes, gold, petroleum, gas and wheat—all products that are typically produced by many other countries.
Our position reflects the dependency inherited from our British roots: Britain’s investment in its Australian colonies fostered vertical economic ties with London more than horizontal economic ties integrating the colonial economies. Our postwar economic reconstruction (covered elsewhere in this book) was a departure from this dependent relationship. United States economic planners wanted Australia to focus on agricultural and mineral exports instead of industrialisation. They complained that we were engaging in ‘poorly conceived programs of industrial expansion’ whose ‘principal aim has been to create protected high-cost industries rather than to expand industrial production’. They wanted a global system of production and a global division of labour: the highest-value manufacturing should be performed in the United States and sold to Western Europe, which should be reconstructed so that incomes were high enough to buy them. Meanwhile, former colonies should produce raw materials for Western industries and buy finished goods from them. But Australian government policies were ‘the principal cause of lagging agricultural production’.5
To diversify our industrial landscape today, it will be necessary to foster horizontal linkages that generate a ‘spread effect’, such that mining operations enable new domestic industries and workers who are trained for more highly skilled tasks.6 Once again, however, it will have to be done over the objections of the United States, whose investors dominate the equity ownership of key Australian corporations. Table 1 shows the high concentration of foreign, principally US-based, ownership in Australian corporate equity. The top twenty companies on the Australian Securities Exchange make up close to half its market capitalisation; fifteen of them are majority-owned by US-based investors.7
Table 1: Percentage of ownership in Australian corporate equity, 2019
| Company name | USA ownership | Australian ownership |
| BHP Group Ltd | 72.91 | 9.2 |
| Woolworths Group Ltd | 66.08 | 17.01 |
| Westpac Banking Corp | 63.85 | 17.2 |
| Rio Tinto Ltd | 65.34 | 12.35 |
| National Australia Bank Ltd | 61.8 | 19.7 |
| Commonwealth Bank of Australia | 60.89 | 22.45 |
| Scentre Group | 57.73 | 23.66 |
| Woodside Petroleum Ltd | 57.3 | 18.83 |
| CSL Ltd | 56.95 | 13.25 |
| Wesfarmers Ltd | 56.34 | 21.74 |
| Goodman Group | 56.04 | 12.28 |
| Newcrest Mining Ltd | 55.76 | 14.58 |
| Macquarie Group Ltd | 54.41 | 26.52 |
| Australia & New Zealand Banking Group Ltd | 53.42 | 21.93 |
| Unibail-Rodamco-Westfield | 50.51 | 30.56 |
| Brambles Ltd | 45.69 | 21.45 |
| Fortescue Metals Group Ltd | 15.22 | 60.58 |
| Transurban Group | 34.59 | 48.06 |
| Telstra Corp Ltd | 25.04 | 46.78 |
| ResMed Inc | 4.09 | 44.37 |
The owners of a corporation’s equity determine its policies, practices and objectives. Although these corporations are listed on the ASX, in practice they operate in a world of global value chains (GVCs) in which the headquarters and design and engineering departments are established in one country, the manufacturing facilities in another country or countries, and the finance and sales departments in yet another country.8 They have no inherent motive to improve Australia’s economic complexity. To the contrary, the status quo suits them because GVCs are the dominant international corporate pattern. An estimated 80 per cent of all international trade is simply the movement of intermediate goods and services between different arms of the same company but across international borders.9 Australia’s automobile exports to South Korea, for example, are ‘largely intra-General Motors trade to Hyundai’.10 Our aircraft manufacturing and repair services exports to the United States are largely for internal components of Boeing 787 Dreamliner planes.11 That’s why Boeing’s largest workforce outside the United States is in Australia.
Australia’s policy objective for the past forty years has been to integrate its economy into the world of GVCs, focusing on economic growth rather than economic development. A major feature of our behaviour in international trade negotiations has been the enthusiastic embrace of intellectual property rights, a highly protectionist device that features in most so-called ‘free trade agreements’. Australia became a founding member of the Friends of Intellectual Property group during the World Trade Organization negotiations. It did so against the recommendation of the only economist on the Industrial Property Advisory Committee (IPAC), which studied patents, innovation and competition in Australia. IPAC admitted that it saw no clear cost-benefit advantage to Australia’s patent system, which ‘contributed little to widening the range of, improving, or cheapening the goods available, improving productive capacity or stimulating export market development’.12 But five of the committee’s seven members were people whose income depended on the patent system.13 IPAC’s report therefore said Australia should participate in the international patent system for fear of punitive treatment from overseas if we stayed out.
The only economist, Professor Donald Lamberton, issued a dissenting statement that dismissed the report’s economic pretensions. He said:
This report does not live up to its claim to have adopted an economic perspective and to have applied economic criteria. It has not consistently applied economic criteria; it has not made full use of available empirical evidence … The underlying idea of the process of innovation is little more than faith that more patent protection will ensure more innovation.14
How does the intellectual property rights regime foster Australia’s economic dependency and low level of complexity? A good example comes from United States embassy cables released by WikiLeaks in 2010. We learn that in 2009 the Labor government rejected a proposal by generic pharmaceuticals companies to produce generic drugs in Australia for export. The embassy reported that the decision occurred ‘in light of Australia’s international commitments on intellectual property and trade’. It said Australia ‘may have preferred to tread lightly on this issue’ because its negotiations on intellectual property during the Australia-United States Free Trade Agreement (AUSFTA) ‘were particularly difficult’.15 The decision meant Australian manufacturers would miss a share of an export market worth US$150 billion over the next six years.
Australia’s economic development would be enhanced by rejecting ever-greater patent monopolies such as those contained in AUSFTA. They expand the definition of patentable inventions to include ‘any new uses or methods of using a known product’. That overturns a long-held view in Australia that ‘the discovery of an unknown property in a known material is not patentable, primarily because no manufacture in the sense of a physical thing is disclosed’, as the commissioner of patents said at a major scientific conference in 1952.16 AUSFTA permits the ‘evergreening’ of drugs, allowing patents for modifications with a very low level of inventiveness, such as new dosages and new methods of using already-known compounds. This costs Australian taxpayers—and greatly increases the profits of foreign pharmaceutical companies—while delaying the entry of generic competition into the market.
Australia might have developed a world-class generic-medicines industry had it learned from China’s express exclusions from patentability in order to develop a local chemical industry.17 The status quo also imposes a large cost on Australian consumers. In 2019-20, pharmaceutical product imports are expected to total $13.8 billion, more than double the amount of exports ($6 billion). Furthermore, ‘the contribution made by exports is considerably less in net terms, once the high costs of imported ingredients used in local manufacturing processes are taken into account’.18 Reflecting our lower level of economic development, much of these exports are based on complementary healthcare manufacturers selling vitamins and dietary supplements to nearby Asian markets, not intellectual-property-rich conventional drugs.
Although contained within a ‘free trade agreement’, intellectual property rights are protectionist measures, because a patent is a prohibition on other inventors from exploiting their independent inventions. Almost 400 years ago, England’s Statute of Monopolies 1623 said patents should not be ‘mischievous to the state, by raising prices of commodities at home, or hurt of trade, or generally inconvenient’.19 In a similar vein, the state of Massachusetts code of laws in 1641 limited monopolies to ‘such new inventions as are profitable to the country’, and even those should be ‘for a short time’ only.20 Today, by contrast, Australia’s High Court places a very low threshold on novelty, stipulating only that ‘an inventor would be directly led as a matter of course to the invention in the expectation of success’.21 This judicial activism should be terminated by legislation.
The policy objectives of Australia’s patent system should be to confer an economic benefit on society as a whole by allowing patents only where the inventions would not have occurred without the patent incentive and that provide sufficient social benefit to offset the losses from granting the monopoly. A new use of an existing product is just everyday experimentation and is part of normal life. Market mechanisms ought to ensure a good return on investment. After all, the product has already been developed and the only significant additional cost is marketing.22 Australia’s patent standards have long been set at lower levels than those of our major trading partners—patents are broader in scope and require the disclosure of less information than overseas. Our interests are better aligned with the interests of most countries except the United States, which enjoys a massive intellectual-property trade surplus.23 Two decades after joining the WTO, the Australian public continues to bear the costs of complying with higher intellectual-property protectionism. Australia earned only $1.37 billion in royalties for IP exports but paid $4.9 billion in IP imports in 2018-19.24 We should secure our own interests by eliminating such innovation-stifling protectionism.
Another key aspect in Australia’s economic dependency is our embrace of investor-state dispute settlement (ISDS) provisions. The United States Government has systematically pushed ISDS in its trade deals with other nations, giving American investors unprecedented rights in foreign markets. ISDS allows a foreign investor to sue the local government for compensation in a private international tribunal if the government makes certain changes in law or policy that harms an investment. This is something no Australian citizen can do. Notoriously, Philip Morris Asia used ISDS provisions in the Hong Kong-Australia investment treaty to challenge the Gillard Government’s Tobacco Plain Packaging Act 2011, which banned logos, symbols and other images on cigarette packets. The litigation was dismissed as an abuse of process, and the government said it would not be party to ISDS provisions in future investment treaties. However, a new government reversed this position after the September 2013 election.
Australia should withdraw from all treaties that have ISDS provisions. They give foreign corporations rights that no human being enjoys: there is no requirement to exhaust local remedies in Australia before beginning arbitration, for example. More ominously, countries are repeat players in disputes and therefore have an incentive not to advance legal arguments that may backfire on them down the track. But corporations—which means the investors who control them—can advance more adventurous legal arguments because countries cannot commence arbitrations against them. Investors only have ‘offensive’ interests in investment treaty arbitration.25 Unlike a court, an ISDS lacks standardised rules of procedure. The parties choose the location, time, confidentiality, witness list and document production. Predictability of outcomes is much lower. ISDS proceedings are private, not public. Only the final arbitral award is routinely available, and only if the parties agree.26 Furthermore, an ISDS may be more expensive than the usual court process because the high costs encourage third-party funding—investors who have no prior interest in the litigation offer to finance it on a contingency basis, taking a percentage of the win.
Australia’s pro-ISDS stance sees it working with like-minded states to replicate investment treaties so widely that they take on the status of customary international law. This, in turn, requires evidence of widespread state practice as well as the belief that such practice is required by international law. If ISDS became customary international law, then all countries, including those that hadn’t signed investment treaties, would be coerced into accepting them as part of a rules-based international trading order. Australia marches in lock step with countries whose economic interests are very different from ours, and does so in ways that make it impossible to develop a complex economy. It is time to reverse course.
Economic complexity is desirable and achievable for Australia. Great opportunities await us in 5G networks, artificial intelligence, data flows, robotics, autonomous vehicles, gene editing and much more. Policy should be designed so that we participate in the highest-value manufacturing, design and engineering, to the benefit of the wider public.