Why Things Are Looking Up Down Under

I won't pretend to be an expert in Australian football, or "footy," as it's called, but my son, David, is a huge fan—thanks to cable TV. So it was really exciting to attend a couple of Australian Football League (AFL) games during our recent trip there. (For the record, the Geelong Cats, No. 2 in the current standings, crushed hapless Brisbane, while a tough match between St. Kilda and Hawthorn ended in an unusual draw.)

To a casual observer, "Aussie rules" football seems like a mashup of rugby, American football, and the Battle of Bataan. The game is played wide open, 18 players to a side. In many ways, it's a metaphor for Australia itself: tough, grueling, unconventional. The main reason the Aussies haven't made a big effort to export footy to the U.S., where organized mayhem is a top-seller, is that it's played on cricket ovals, which are in short supply in the U.S.

While footy isn't one of Australia's primary exports—though the game is now played in more than 30 countries, according to the AFL—just about everything else Australian is being exported, from wheat to diamonds.

Australia's Boom

Australia is clearly blessed. While the U.S. is still dealing with the worst economic crisis since the Great Depression, walking a fine line between slow growth and a double-dip recession, a "walkabout" in Australia's largest cities, Sydney and Melbourne, reveals little of the downturn. Prosperity and optimism are visible everywhere. Perth, the country's fourth-largest city and capital of the state of Western Australia, is a boom town. Not only that, the city of 1.6 million people also tied for eighth place on The Economist's 2010 list of the "World's Most Livable Cities."

Australia's unemployment rate is relatively low—approximately 5.3 percent. This is higher than in 2008 when it averaged 4.2 percent, but well below France's 9.6 percent, America's 9.5 percent, Italy's 8.5 percent, Canada's 8 percent, the U.K.'s 7.8 percent, and Germany's 7.6 percent.

The Australian job market is so hot that some Australian companies are having problems finding enough people to do all the work. The Housing Industry Assn., for example, reported labor shortages in 10 of 13 skilled trades at the end of last year. The mining industry also faces labor shortages.

While residential housing prices struggle to find solid footing in the U.S., prices Down Under are relatively steady. People are spending and investing. Banks are lending—and competing for deposits by paying competitive interest rates. At the beginning of October, for example, the Bank of Queensland was paying 4.1 percent on online savings accounts above $2,000; 6.10 percent on one-year investment accounts exceeding $100,000. Some U.S. banks are offering interest rates of 0.1 percent for similar deposits.

While many U.S. economists are worried about deflation, in Australia inflation is the big worry. The Australian dollar that not so long ago was worth 65 cents U.S. is now worth more than 90 cents.

Three Advantages

How can things be so upbeat Down Under and so downbeat elsewhere?

There are three closely related answers: natural resources, proximity to the high-growth economies of Asia, and economic freedom.

With a land mass about the size of the continental U.S., Australia is blessed with an abundance of natural resources—including iron, coal, copper, tin, gold, silver, uranium, tungsten, lead, zinc, diamonds, natural gas, and petroleum. These are the raw materials China, India, South Korea, and Japan—Australia's top four trading partners—need to keep their economic engines running. (The U.S. is a distant fifth, just slightly ahead of New Zealand.) With commodity prices rising and the economies of China and India growing at rates of nearly 10 percent and 8 percent, respectively, all Australia has to do is dig things out of the ground and sell them. This is a great position to be in: lots of valuable resources and a relatively small population (about 22 million, not much greater than Florida). And when global growth resumes, Australia's prospects become even brighter.

The third key to Australia's success is its economic policy. The 2010 Index of Economic Freedom (published by The Wall Street Journal and The Heritage Foundation) ranks the Australian economy as the third-freest in the world. The book observes: "Sound macroeconomic policies and well-implemented structural reforms have allowed the Australian economy to weather the recent global financial and economic crisis better than many other advanced economies." A strong rule of law protects property rights, the book notes, while monetary stability and openness to global commerce encourage investment. Succeeding where others failed, "robust supervision and sound regulation" of the financial sector prevented the kind of economic meltdown that threatened the U.S. and Western Europe.

Manufacturing's Decline

Among the structural changes taking place Down Under has been the general decline in importance of heavy manufacturing, an ongoing process—as in the U.S.—that began in the 1960s when Japan's economy spread its global wings. The trend continues as China rises as an industrial power. According to the Australian Bureau of Statistics, manufacturing peaked at approximately 25 percent of gross domestic product in the 1960s and has declined steadily since then, to just over 10 percent of GDP. While Australia still exports machinery and transportation equipment, including cars, just three automakers now manufacture in the country: GM-Holden, Ford (F), and Toyota (TM).

As recently as 2001-2002, manufacturing accounted for 48 percent of Australian exports. Today, it's less than half of that: just 19.7 percent in 2009, according to Australia's Foreign Affairs & Trade Dept.

Australia seems to have made a careful calculation: Dig up what it's got; sell the stuff to China, India, South Korea, and Japan; and buy it back after it's been processed in the form of cars, computers, office machines, consumer electronics, and just about everything else the Australians need.

Finite Resources

Looking ahead, what does this mean?

First, it means that the road to rags or riches in Australia depends increasingly on the fortunes of others. If the economies of China, India, and South Korea boom, Australia's will boom; if they stumble, Australia's will likely, too.

Australia's heavy reliance on commodity sales also means Australian leaders need to look far off into the future. These riches won't last forever. Some day they'll run out, as many oil-rich OPEC countries belatedly are starting to realize. Balance and diversity are important. The time to start planning is now.

While most of Australia's population lives in seven large cities, experts estimate the earliest inhabitants of the continent arrived an estimated 40,000 years ago. It is from this seed that the indigenous people known today as Aborigines sprung. For eons the Aborigines have survived in Australia's unforgiving outback, the vast semi-arid and desert expanses that provide most of the mineral wealth. The Aborigines are tough, no doubt about it.

We visited the outback following a rain, which made my wife happy, since she was able to examine some of the plant species that appear only after rain. Overall, we learned, some 85 percent of the flowering plants in Australia are unique to the continent—creating a mother lode of diversity.

Diversity and grit, which have helped make Australia what it is today, are the keys to its economic future as it pushes ahead in the world of globality. They are good qualities for the rest of us as well.

Lessons for Executives

What can executives learn from Australia's success story?

First, that you always need to play to your strengths. Australia's greatest assets are its natural resources and its relative proximity to the rapidly growing Asian market. It is properly exploiting both of those strengths. Executives need to exploit their companies' competitive advantages as well.

Second, that advantages typically don't last forever, so make sure you are always in the process of building new ones. Things change. Australia needs to plan for the day when its resources will be less abundant, or perhaps less in demand, as the marketplace finds substitutes. Corporate managers, while working to generate profits today, also need to think far into the future.

Finally, that hard work and hard play both contribute to success. A visit to Australia will convince anyone that the Aussies know how to play hard and have fun. This spirit is missing from many businesses today. Corporate executives need to help their managers and employees rediscover it.

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