This article was prepared for the George Hicks Foundation as part of a background paper for a meeting of philanthropists interested in work on the Mornington Peninsula. An evaluation of the costs and benefits of providing educational assistance to disadvantaged families living on the Peninsula is provided in a separate posting.
This article was prepared for the George Hicks Foundation as part of a background paper for a meeting of philanthropists interested in work on the Mornington Peninsula. A more detailed social geography of the Peninsula is provided in a separate posting.
During the decade to 1995 Australia reduced import tariffs on manufactured goods and, therefore, exposed many of its hitherto-protected manufacturing industries to overseas competition. At the same time, it implemented a series of targeted and highly cost-effective industry policies that assisted a wide range of Australian manufacturing businesses to become internationally cost-competitive, gaining export markets at the same time as they met import competition. With the obvious success of the previous government’s industry policies, the stated intentions of the Coalition government elected in 1996 were to leave the existing structure largely unaltered and continue with the general government–industry partnership model. However, the first national budget of the new government for 1996–1997 revealed a different intention. There was a significant change in philosophy away from targeting firms and industries and towards an neutral approach in line with the ideals of the Washington Consensus. The Commonwealth government moved from targeted to generalised industry assistance and, hence, moved from cost-effective to ineffective policies. During the mineral boom it was possible to pretend that this did not matter; Australian prosperity would be guaranteed by mineral exports. The time of reckoning now approaches. Mineral prices have slumped and manufacturing has been decimated. The Washington Consensus has already been discredited within the world economic development community; the time is long past that it should likewise have been discredited in Australia.
This paper considers the role of overseas debt in financial crises, including the Asian financial crisis, and the experience of other debt-afflicted countries since 1997. Recent trends in Australian overseas debt are compared with the equivalent trends in Asian countries in the years leading up to the Asian financial crisis, and the performance of economies recovering from debt-induced collapse is considered. Australia does not fare well in this comparison. Indonesia, for instance, with a fraction of the living standards of Australia, showed sustained discipline to hold growth in living standards in check for the benefit of debt reduction, whereas Australia chose to maximise growth in consumption expenditure, totally disregarding the growth in foreign debt that this produced. Australia currently has most of the symptoms of impending debt-induced collapse, and insists on pursuing policies that are likely to lead to collapse and maintains a mindset that will seriously hinder recovery from collapse.
Gas consumption due to short term weather variations is often removed prior to forecasting gas demand. This is partly achieved by developing weather standards that represent conditions under temperatures, for example, that are neither warmer nor cooler than expected.
Weather standards for Victorian gas forecasting are typically developed using the Effective Degree Day index.
The Australian Energy Market Operator (AEMO), and previously VENCorp, have reviewed the EDD index and EDD standards every two to three years since 2000 with the latest completed in 2012.
The 2016 NIEIR Review of EDD Standards for Victorian Gas Forecasting report follows on from these reviews with a particular focus on the development of new weather standards for annual gas consumption and peak day to inform the Gas Access Arrangement Review (GAAR) over the 2018 to 2022 period.
This report covers:
- background to weather normalisation and how the EDD index is formulated;
- the development of new annual EDD standards under alternative methodologies;
- the development of new 1-in-2 and 1-in-20 peak day EDD standards under alternative methodologies;
- The impact of climate change on annual and peak day weather standards;
- The correction applied to temperature to account for the change in location of the official Melbourne weather station from the CBD to Olympic Park in 2015 and;
- monthly standards are also estimated for gas consumption and peak day.
Download the NIEIR Review of EDD weather standards for Victorian gas forecasting report:
Full Report (26 pages | PDF | 1,328 kb)
Tables (XLSX | 87 kb)
Both Australia and Kazakhstan are large in physical area but relatively small in population. Both have extensive mineral deposits complemented by relatively fragile manufacturing sectors. Thanks to high prices for energy minerals and iron ore, the terms of trade of both countries were highly favourable from 2006 to 2014. Australia is well endowed with coal, iron ore and natural gas, all of which fetched high prices during the boom years; Kazakhstan has a similar endowment with the addition of oil. In Australia, the central and state governments have surrendered control over national investment strategy to the private sector and are also, with the exception of the petroleum sector, have foregone the capacity to exact additional revenue from the mining sector during times of high mineral prices. From 2009 high profitability in the sector triggered considerable investment in capacity expansion. Australia’s exchange rate is market-determined and followed the terms of trade, in the short term facilitating mining investment but in the long-term exacting a high cost: its manufacturing and other non-mining trade-exposed industries suffered loss of competitiveness, with a resulting lack of investment and industry closures. The Australian banks also borrowed overseas, and now that the boom has ended the Australian banking system finds itself with high levels of short-term overseas borrowing and very low levels of foreign exchange reserves. By contrast, Kazakhstan’s market-oriented reforms over the past three decades did not surrender broad state control of the pattern of investment. Its government responded to the high mineral prices by concentrating on the oil industry, using negotiated agreements to finance developmental investment and build up an Oil Fund. This allowed control of the exchange rate to give its manufacturing industries the opportunity to upgrade their competitiveness. Royalties on other minerals were maintained at rates which discouraged exploration. The author is much more familiar with the Australian history than with that in Kazakhstan (the two countries are seldom compared) and will seek views as to whether his interpretation of Kazakhstani history is correct. The initial conclusion is that Kazakhstan managed the mineral price boom much more effectively than Australia.
Since 1998 the National Institute of Economic and Industry Research has prepared an annual State of the Regions report for the Australian Local Government Association. The report includes coverage of urban as well as country regions – for example, the Sydney metropolitan area is divided into nine regions and South East Queensland comprises six regions, one of which is Gold Coast.
Each report includes an array of data for each region. These data are also available by Local Government Areas. The data is intended for use in local economic development planning and project assessment, and is collated from a wide variety of sources. The paper describes the availability of primary data at regional level, including the Census and administrative data available by postcode (especially Social Security and tax statistics), housing sales and prices and local government valuation data. Survey data are also discussed, including methods by which surveys can provide local estimates for variables not explicitly observed at the local level.
The paper takes the City of Gold Coast as an example and compares the economy Gold Coast with that of Australia as a whole and also with other selected regions. The structure of the Gold Coast economy is similar to that of Australia as a whole in many respects, though its dependence on tourism as an economic base results in lower than average value added per person employed.
Victorian electricity sales and peak demand forecasts to 2025, reports and excel spreadsheets.
Overseas examples have pinpointed the importance of a knowledge economy to regional prosperity. An obvious example is Silicon Valley in the US, but the Silicon Fen (or Cambridge Cluster) in Cambridge, UK, is another example of rapid knowledge economy development based on research, industrial development and both large and small scale investment. The important characteristic of these economies is their ability not only to generate but to commercialise new knowledge.
The most concerted efforts to decentralise metropolitan jobs by downgrading the fashionability and status of central business districts have been in the USA. These were not deliberate policies, they were the indirect results of fiscal arrangements which led to poor maintenance of public assets in the downtown areas. Silicon Valley is listed as the pre-eminent example of a suburban, car-based knowledge economy but the same applies to the office employment established around the beltways which circumscribe various American cities. However, even in the US the major CBDs showed resilience. New York City, Chicago, Boston and Philadelphia began to refurbish their transit systems, finding them necessary supports to the knowledge economy, and other cities including Los Angeles and Dallas began the costly (and not always successful) task of retrofitting mass transit. Even if the congregation of knowledge-economy jobs in central cities is but a matter of fashion, it is a fashion which is difficult to break.
Creativity is also pivotal to a knowledge economy. In today’s economy, successful regions develop an advantage based on their ability to quickly mobilise talented and creative people, resources and capabilities that can turn innovations into new business ideas and commercial products. Studies have shown that these people are attracted to regions that tolerate and accept diversity – same sex households, migrants and artists of all types – and that this kind of area is ideal for nurturing the creativity and innovation that characterise the knowledge economy.
Business incubators throughout the region have proved to be a successful way of developing and growing local industry. Offering accommodation and support for start-up businesses, these incubator services can be extended to offer young people the opportunity to start businesses in areas like ICT, design and new media. Support, such as new financial services and micro-loans, are vitally important in the early phases of new business development. There is an important correlation between the region’s incubators and appropriately targeted finance.
In the near future, the local manufacturing industry will need to deal with the impact of climate change, with its problems and costs. This means that the application of research and innovation to improve efficiency is even more important – ignoring this issue now will only create competitive disadvantage in the future.
The lack of an equitable telecommunications service has been recognised as a barrier to the development of a knowledge economy in many areas. The outer and rapidly developing parts of a region are particularly affected. It is important that businesses and households have equitable, affordable and high standards of connection to broadband services – both businesses and households must be able to compete in an increasingly globalised economy.
Young people are attracted to the income-earning, educational, cultural and entertainment opportunities of the metropolitan centres and can more easily adjust to high housing costs than people with family responsibilities. The same is true of some empty-nest seniors. However, people will continue to desire greater housing space as they form families, hence the problems of appropriate investment in commuting infrastructure.
State of Australia’s knowledge economy
Judging by patent applications, Australia’s most intensive knowledge-based regions are its metropolitan centres, though several of its independent cities are shaping up. Most regions are connected to the knowledge economy via a metropolitan city, either as suburbs or as hinterlands. An important weakness of the northern Australian regions, and hence of the country as a whole, is that they have no readily-accessible metropolitan centre through which they can be linked to the world knowledge economy.
The Internet, as yet, is doing little to disperse the knowledge economy to Australia’s regions. If a region outside of these centres is determined to develop towards an Internet based knowledge economy, the effectiveness of local strategies is crucial. In this case lifestyle attributes as well as high speed connections are required to attract knowledge economy workers. In some regional areas, a lack of capacity of local government to understand Internet-related opportunities and threats combined with a low level of knowledge economy skills (as there have been few opportunities for residents to develop these skills) within their region are barriers to diversifying the knowledge economy to a wider geography outside of the traditional knowledge economy regions. These changes are cultural and social as well as economic and new ways of working, new ideas can face considerable hostility in some places. This is why a regional strategy to develop the knowledge economy in regions which wish to do so is vital, as is support and consideration for a region’s Internet entrepreneurs.
Developing Australia’s knowledge economy
Recent statistical work has documented a general tendency for average earnings at the centre of metropolitan areas to increase as the size of the metropolitan area increases. The basic reason for high earnings in city centres is summarised as the economies of agglomeration – the greater the labour market that a central place draws on, the greater the productivity of its workers. In other words, city centres are the hotspots of the knowledge economy.
Australia’s difficulties in adopting the knowledge economy would be eased if knowledge economy jobs could be decentralised. This has proved very difficult, though there has been some decentralisation to inner metropolitan suburbs (particularly when they share the walkability of the city centre) and some to regions with attractive lifestyle options. Further decentralisation is likely to be incremental. It will require infrastructure support, especially investment in telecommunications and transport.
Infrastructure deficiencies make it difficult for low productivity/high unemployment regions to increase productivity. Relatively low housing costs are an advantage for regions seeking to attach themselves to the knowledge economy, as are lifestyle choices; these assist in attracting knowledge workers. However, such workers must be provided with the means to be productive, by placing themselves at the interface between the local economic base (particularly export industries) and the global economy. This requires investment in telecommunications and transport. It also requires low-key local investment so that every main street becomes an outpost of the knowledge economy.
The affordability of metropolitan housing could be addressed directly by investment in mass transit to make additional fringe areas available for commuter housing and by investment in local transit to extend pedestrian range and so support the geographic expansion of knowledge-based regions. It will also be important to support the diffusion of knowledge into hinterland regions, and back from the hinterland regions so that the combination of hinterland and metropolitan know-how generates innovation: telecommunications and transport are again required. Even if all of Australia’s knowledge regions are combined, they are but small compared to the megametropolitan regions of Asia, Europe and North America. Further economies of agglomeration could be achieved if the metropolitan areas were integrated to become a single globally-positioned knowledge economy. This will require a retreat from parochial mindsets, more interaction and more specialisation. Competition between states and regions should be re-focused on competition with the world at large. Yet again this would be facilitated by investment in improved telecommunications and transport.
Among those who concede the reality of economies of agglomeration, it was proposed that transport congestion on the routes into the CBD could to be relieved by the decentralisation of knowledge economy work into a limited number of major urban sub-centres strategically located within each metropolitan area, each of which would replicate the agglomeration advantages of the city centre. This ‘City of Cities’ approach relies on diminishing returns to agglomeration; the idea that there is a threshold above which there is no point in adding to any city centre.
If knowledge-economy jobs cannot be decentralised to beltway or suburban centres, why not disperse them widely and especially into lifestyle locations, beyond the urban fringe? This argument appeals to the proposition that telecommunications would substitute for personal contact, so freeing knowledge-economy work from locational constraints. Without challenging the importance of telecommunications as a foundation for the knowledge economy, practical experience has been that they do not substitute for the importance of meeting personally. This seems to be essential to the development of trust between economic participants and can also have serendipitous consequences when people with complementary ideas come into contact.
The least ambitious, and most practical, way to disperse knowledge-economy jobs within metropolitan areas is the expansion of city centres to include the inner suburbs. This reduces the distance from the fringe to the edge of the knowledge-economy region by a few kilometres and saves on expensive high-rise construction in the city centres but requires investment to connect inner suburbs to the centre and to each other by rapid, congestion-free transport. It is also important to maintain the walkability of the inner suburbs, all of which antedate the age of motoring and are hence at least potentially walkable. The typical European metropolis achieves this with a metro system backed up by on-street public transport. Sydney, Melbourne and Brisbane are all moving, tentatively, in this direction.
The bottom line is that until the National Broadband Network is completed the growth in knowledge economy firms and government online services will continue to be constrained, holding back the competitive position of firms, and, in government services, delaying cost savings that could have been achieved by online service delivery. High speed broadband is an essential part of this economic integration.
The termination of carbon pricing in Australia is occurring at a time when moves towards carbon pricing and more stringent climate change policies are appearing around the world, for example in China and the United States. The international Panel on Climate Change 2013-2014 reports cover the science, effects on ecosystems, the economy and population and policies to combat climate change. Overall the IPCC sees substantial net costs of climate change and the need for urgent action.
In Australia carbon pricing is planned to be replaced by a Direct Action Plan (DAP) at the Federal level. The DAP will mainly subsidise greenhouse gas abatement (GHGA) delivered by an Emissions Reduction Fund (ERF) through bidding for GHGA though a reverse auction (lowest bids win). The ERF will be funded by tax payers so, in fact it is a form of carbon tax.
The ERF is the central element of the Coalition Government’s Direct Action Plan (DAP) to meet the target reducing greenhouse has (GHG) emissions by 5 per cent below 2000 levels by 2020.
The ERF will help reduce Australia’s greenhouse gas emissions while delivering valuable co-benefits to Australian businesses, households and the environment. The ERF will operate alongside existing programs that are already working to offset Australia’s emissions growth such as the Renewable Energy Target and energy efficiency standards on appliances, equipment and buildings.
The overriding objective of the Emissions Reduction Fund (ERF) will be to reduce emissions at lowest cost over the period to 2020, and make a contribution towards Australia’s 2020 emissions reduction target of five percent below 2000 levels by 2020.
The Government set out a commitment to the Emissions Reduction Fund of $300 million, $500 million and $750 million – a total of $1.55 billion over 3 years with total funding capped at $2.55 billion. These funds will be allocated flexibly over time according to the profile of projects contracted under the ERF.
Businesses, community organizations, local councils and other members of the community can undertake activities and offer to sell, at auction, the resulting emissions reductions to the Government. Winning bids will be paid for out of the ERF.
Emissions reductions will be verified and credited according to approved methods. These methods will ensure that emissions reductions are genuine. Emissions reduction methods will set out rules for estimating emissions reductions from different activities. To let a wide range of businesses participate in Emissions Reduction Fund, a menu of emissions reduction methods will be available. This will let businesses choose the method that best suits their specific projects.
Some emissions reduction activities such as re-vegetation and household and commercial energy efficiency may often be smaller scale actions that are most cost-effectively implemented through aggregation. There are many businesses and organisations that are well placed to aggregate the emissions reductions resulting from these activities. The design of the Emissions Reduction Fund will encourage business models that aggregate emissions reductions.
- Lack of an explicit carbon pricing signal which we regard as an essential element of the internalisation of greenhouse gas emissions.
- Additionality, that is, what projects would have been undertaken in the absence of the ERF
- Attribution, that is, what amount of the project greenhouse gas abatement (GHGA) could be attributed to other programs such as Renewable Energy Target (RET, now under review) and State White Certificate Programs (VEET, ESS and REES)
- The potential credit costs under the ERF, that is, what are the ‘likely’ bid costs under the ERF auction. No estimates have yet been provided.
The ERF is based on the erroneous assumption that an externality (global warming) need not be priced, in this case by pricing carbon dioxide equivalent (C02e) emissions. Externality pricing is fundamental to addressing externalities. Although pricing will, in most cases and certainly in the global warming case, require complementary actions as under the previous Government’s Climate Change Policy package. That is, carbon pricing alone is necessary but not sufficient to reach climate change targets.
The 2020 GHG emissions target may be achieved through economic and other policy circumstances. However, the more aggressive targets required from the overwhelmingly accepted climate science will not be achieved without some form of carbon pricing (carbon tax, emissions trading system) at the core of climate change policy.
Apart from the core carbon pricing issue, concerns with the ERF- design include:
- The costs of achieving GHGA through the ERF
- The limited ERF budget for the period to 2020
- Additionality and attribution of GHGA from ERF projects
- Safeguarding of emissions growth outside the DAP/ERF
The outcomes emanating from these concerns will become evident over the next 12 months. We will be reporting on and critiquing the DAP/ERF developments as they evolve.
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