Outline

Queensland has a history of adopting economic strategies which have been (and continue to be) ineffectual in developing a productive modern economy - as evidenced by continued low community incomes by national standards, relatively low per capita state product and the problems which many regions suffer.

Queensland's 'traditional' strategy (ie that of the 1980s) involved: facilitating major foreign investments; low taxation; and minor amounts of 'assistance' to fill market gaps. Unfortunately it produced poor quality growth, eg tourism and capital intensive resource operations - which have their productivity limited by competition from low wage economies. Moreover an emphasis on 'growth' (without concern for development) can result in activities with large and rapidly increasing revenues and expenditures but where the difference between these (which contributes to economic product in the form of profits / wages / taxes) is small. And government 'assistance' to individual firms is the opposite of, and a major obstacle to, development of the economy.

Queensland missed an opportunity to significantly improve its 'traditional' strategy in the 1990s - partly because an ineffectual process of public sector 'reform' eliminated the capabilities to do so which had been emerging in the 1980s.

By the start of the 21st century, Queensland's strategy was aimed at higher goals (eg developing a more productive economy, and an innovation capability so as to profit from, rather than be the victim of, economic change). However to achieve this, populist rather than realistic policies have been adopted. Government has foolishly tried to force the pace and direction of economic change (eg under the Smart State agenda, and by trying to 'bribe' external firms to locate in Queensland - a tactic which had lost credibility elsewhere many years earlier because of competition from low wage economies for the location of 'footloose' firms). In particular, the Department of State Development seemed to see itself as having a hands-on responsibility for developing the 'state' - rather than developing the 'economy' so that business and the community could effectively develop the state.

There is increasing pressure for improved performance (eg because of currency revaluation; the need for a stronger tax base to fund public services and infrastructure expectations; the increasing importance of exports after bursting of housing bubble in the face of a deteriorating international trading environment and worsening export performance; infrastructure and skills deficiencies that limit growth; the changing economic environment and greater uncertainty associated with Asia's increased economic significance; environmental risks; the probable need to 'reinvent' resource related industries; escalating social dysfunctions which have economic dimensions; and international instabilities). Simultaneously stronger competition is emerging to challenge traditional activities (eg because of rapid development of medium technology capabilities in Asia; global outsourcing; and a potential US Free Trade Agreement).

Queensland's main problem in responding is the lack of adequate machinery to cope with economic change - especially in relation to the mutual support required between complementary elements of industry clusters. A more effective economic strategy might involve: development of civil institutions able to accelerate 'learning' by whole industry clusters; emphasis on creating competitive advantages, rather than reliance on the given comparative advantages of regional economies; public stimulus to adjustment by economic 'losers'; increased taxation partly to slow the ongoing shift to a less economically productive population through migration; increased concern for effective international economic and political environments; and renewal of Queensland's Public Service on a professional basis.

Queensland's Traditional Economic Strategy

The history of Queensland's economic strategy (eg a touch of socialism in the 1920s; a strong agrarian / state corporatism tradition until 1957) will not be considered here.

However what is now seen as Queensland's 'traditional' economic strategy (ie that of the 1980s) involved:

• trying to attract investment (especially that linked to natural resources) by government support for major investors;
• encouraging population and business growth through relatively low taxes; and
• provision of minor amounts of government 'assistance' to fill market gaps.

Queensland's population and economy grew relatively rapidly under this formula.  What was not considered was the poor quality (ie low value-added) of the industries which it encouraged, eg: 

• primarily capital intensive mining and mineral processing which produced very poor rates of return to investors in the 1990s probably for structural rather than cyclical reasons (See Note 9 on Queensland's Challenge); and
• tourism (see Section 5 of SEQ 2001: A Plan for an Under-developed Economy - noting specifically links to references related to tourism in SE Queensland has an Underdeveloped Economy and in Notes on SEQ 2001 methods) 

Problems with this formula were that:

• attracting investment, which had been seen as a key economic development tactic in the industrial era, had lost credibility in Europe and North America since the 1970s as a path to a high productivity economy because of competition from low wage economies (see Comments on Buying Industry). Developing existing capabilities appeared to be the preferred option;
• the priority given to 'major' projects was inappropriate, as project size is no guarantee of high economic benefit, and there is more to be gained by developing economic and administrative systems as a whole than by central government engagement with isolated 'projects';
• the resource sectors in which growth was being encouraged were seen to have limited prospects because of low global demand growth and poor terms of trade. And as noted above, primarily capital intensive production also appeared to encounter structural obstacles because of low wage competition from less developed countries

  [Note: the latter comments should not be seen as indicating a view that industries linked to natural resources are inappropriate for Queensland - merely that naive commercial and economic strategies are inappropriate. Managing Australian Mineral Wealth for Sustainable Economic Development (if combined with competent business and economic strategy) would appear to point towards very relevant opportunities)

• direct government 'assistance' to firms to fill market gaps tends to be the opposite of, and economically inferior to, developing the economy (ie of enhancing the ability of business and the community to provide the support firms require).

The problem with direct government 'assistance' to firms is that:

• high quality of advice and assistance about enterprise development or innovation requires 'market conscious' organizations with relevant experience and skills. Government agencies have to be more politically than market conscious, and thus tend to provide support of poor technical quality (or else to be under-resourced);
• public accountability requirements attached to assistance programs will tend to distort firms' priorities and needs (or, if accountability constraints are limited, rorts will be likely);
• the budgetary cost of assistance directly reduces the economic value-added (and contribution to overall economic productivity) of any resulting activities;
• a well developed economy could provide support for (say) 20 firms for each one that can be supported from limited public funding, yet the latter tends to prevent non-governmental support from initially emerging - because it appears to be free. In other words, while 'assistance' to firms may be provided because market gaps exist (as they always will in a changing economy) the risk is that government 'assistance' programs will lock-in those market gaps, and prevent the economy from developing;
• while creating  what appear to be business successes under 'hothouse' conditions can provide political gains for government, those 'successes' will tend to fail, or be taken over, when serious competition is encountered because they will not have equally serious support from their business environment;
• it is impossible for authorities to know what type of assistance will actually improve economic performance;
• government is subjected to political pressures from various interest groups, and what may have been envisaged as positive support for economic adjustment risks turning into costly 'business welfare' supported by entrenched lobby groups.

A better alternative involves stimulating attention to the opportunities that are available from providing services to fill market gaps - but though this is not a role which politically accountable organizations can be relied upon to fulfill adequately, because political understanding and acceptance of the need will often tend to be 10-15 years too late.

Furthermore traditionally emphasis was only being given to economic growth ('more' activity) but not to economic development ('better' activity). 

The difference between 'growth' and 'development' is suggested in Section 5.1 of SEQ 2001: A Plan for an Under-developed Economy (1994). In over-simplified terms an emphasis on 'growth' can yield industries with large receipts and large expenditure - but where the difference between these (ie the value-added which is counted as economic 'product' and finances return on investment, wages and salaries and net payments to government) may be small. An emphasis on 'development' can increase that difference (by creating competitive advantages for firms) and so increase community incomes, as well as increasing attractiveness for investment and growth.

Strategies in the 1990s

An opportunity was available from the late 1980s to adopt a more sophisticated strategy.

Unfortunately this chance was missed, and four general state economic strategies from 1987 to 1997 did little but slightly increase (ineffectual) government 'assistance' to fill market gaps.

The reason that economic strategies in the late 1980s and early 1990s, such as Quality Queensland and Leading State, did not result in effective machinery for development of Queensland's economy is suggested in a 1992 summary of a review of the Leading State strategy.

The missed opportunity and what went wrong are outlined in Defects in Economic Tactics, Strategy and Outcomes and summarized in Queensland's Challenge (see Section 1).

The latter referred to:

• public recognition of the need for economic change - but not of the fact that the economic goal posts had been raised by changes in the economies that Queensland / Australia were seeking to emulate;  
• the lack of any substantive change in practice to what was naively seen as Queensland's 'winning' economic formula;
• the fact that increasing competition (through  market liberalization) is also insufficient to ensure the (often systemic and institutional) capabilities required for firms and individuals to compete successfully;
• the role which government 'assistance' to firms has in locking in market failures and creating bottlenecks that prevent the economy from developing - see also comments above

A major factor in missing this opportunity was the further weakening of the institutional capacity which Queensland needs to develop its economy because 'reform' was undertaken to build a political power base rather than to improve performance and this damaged the technical competence of the Public Service (see Towards a Professional Public Service for Queensland). Efforts to develop a productive modern economy, that were frustrated by the priority given to inappropriate (eg distorted financial) goals in the 1980s, were often frustrated in the 1990s by the ignorance and inexperience of those politically favoured to mis-manage more progressive goals. This is illustrated by the comments on Smart State below which refer to methods which might allow its virtuous goals to be achieved that were developed through experience in the 1980s but then lost through politicisation and de-skilling.

Populism in the Early 21st century

Strategy developed under the present state government has been well meant. Section 2 of Queensland's Challenge argued that:

• current strategy in 2001 (like the 1997 strategy of the previous government) had apparently recognized the vital importance of developing a more productive economy;
• the emphasis given to innovation was vital if Queensland was to benefit from, rather than be the victim of, economic change.

But unfortunately the practical competencies required to have any real prospect of developing a more productive economy in Queensland were not demonstrated.

In particular government seemed to be trying to force the pace and direction of economic change. 

The Smart State strategy, despite claims of measurable economic gains, seemed likely to produce mainly short term applause from a few commentators and benefited interest groups, rather than resulting in commercially and economically relevant innovation systems (See  A Commentary on Smart State: Illustrating Queensland's Lack of Realistic Public Policy and  Queensland's Biotechnology Bubble). The basis point is that Smart State involves an attempt to force-feed economic change by (a) funding more 'smart' economic inputs (eg education and research) and (b) directly stimulating commercial activities based on those inputs.

The problem with this is that Queensland's mainstream economy is largely uninvolved because:

• the economy lacks the systemic capabilities required to make highly productive use of such 'smart' inputs (and this is the main reason that an innovation-capable economy has not emerged before from the 'smart' inputs which have always been available); and
• rather than stimulating such systemic capabilities (eg by methods similar to those suggested in Developing a Regional Industry Cluster) government is trying to directly force commercial gains from its new 'smart' inputs - and, by doing so, it is reinforcing (rather than eliminating) disabling market gaps and weaknesses.

If emphasis were given to upgrading the ability of the mainstream economy to use 'smart' inputs then (a) economic productivity should substantially increase and (b) returns on funding 'smart' inputs would be significantly improved.

Further examples of forcing the pace and direction of economic change (and comments on them) include:

• an emphasis on new economic sectors is being seen to be at the expense of traditional sectors [1] though, to gain practical results, it is always best to build on what already works.
• an ambitious program was announced to make IT Queensland's second biggest industry (Hellaby D., ''Smart state' gets $1bn', Australian, 7/9/99) [Note 6]
• in discussing the State Government's economic strategy the 2001 budget documents refer to such issues as creating a competitive business environment and employment initiatives (2001 Budget Paper #3, p3-11) - yet only what government itself is doing in such areas is considered, and this is only a part (and not the most significant part) of what 'Queensland' is doing. As noted above, providing government 'assistance' is the opposite of developing the economy (ie of enhancing the ability of business and the community to provide support)
• efforts are being made (often with large subsidies) to recruit industry - which is simply not a credible method for building a productive modern economy (see Buying Industry) despite its political appeal as a way to show that ‘something is being done’;
• financial support was provided for a magnesium project (see Public Investment in Magnesium Project) which later experienced serious management and financing problems which reflected the fact that it was only naive over-confidence which led to the view that Australian business had the ability to undertake such endeavours;
• numerous other grants and subsidies are provided eg for:
  • Targeted Industries (incorporating Queensland Industry Development Scheme; direct assistance by the Queensland Manufacturing Institute consultancy services; and support for Industrial Supplies Office) - efforts that seek to increase exports, investment, innovation and adoption of e-commerce;
  • Regional Business Development - by identification and development of opportunities;
  • Sustainable Technology and Sustainable Energy
  • biotechnology (Biostart) [See Queensland's Biotechnology Bubble]
  • research facilities [see About Queensland's R&D Strategy - which suggests that the real need is to create a greater business demand for R&D facilities by increasing the economies' ability to succeed commercially through innovation]
  • development of cooperative research centers [see one observer's assessment of CRC scheme]
  • technology and research parks [see Queensland. Premier's Department, The Role of Research / Technology parks in Queensland's technological Development,  June 1984 - which suggested that such facilities provide useful infrastructure in regions with an innovative culture and ready access to venture capital, but do not in themselves create an environment ensuring that those pre-conditions emerge];
  • seed funding for innovation start-ups;
  • collaboration in commercializing R&D and generating intellectual property

Moreover the Department of State Development seems to: focus excessively on 'large' projects; want to 'develop the state' itself rather than enabling business and the community to do so; and be intent on involving itself in 'assisting' firms in ways which merely prevent the economy developing.

There have been numerous efforts to 'fix' DSD's problems.

In March 2002 the Department of State Development (DSD) reportedly outlined a strategy which emphasized:  increased exports; luring head offices north; establishing large projects (including the New Guinea gas pipeline); DSD as chief advocate for business in the state, more involved with business and effective as an investment agency; and development of public-private partnerships [1].  In October 2002 attention was drawn to Queensland's In October 2002 attention was drawn to Queensland's (a) 19 state development centers which provide one stop shop support to small enterprises - with training and help cutting red tape and (b) 24 different grant schemes of which only one involved incentives to external firms to locate in Queensland [1]

The problem with such arrangements is that:

• as noted above buying industry is not a credible way of developing a productive industry cluster;
• endorsement of investments because they are 'large' (and provide opportunities for political statements) despite of their low economic productivity, has been a major factor in Queensland’s ongoing economic under-development (see Section 3 of detailed version of Queensland's Challenge)
• DSD's basic mission seems misguided. It sees its role as developing the ‘state’ (ie involving itself directly in: assisting business; advocacy on behalf of business; promoting projects; stimulating exports and investment) rather than in developing the ‘economy’ (ie stimulating the ability of: commerce and industry to provide the support firms need; and of business and the community to undertake such strategic operations). The difference is critical to whether Queensland overcomes:
  • its ‘branch office’ status with an economically dependent community lacking in strategic business and economic capabilities and
  • its relatively low community incomes due to encouraging activities which benefit the ‘state’ (ie the political establishment) rather than those with commercial payoffs that might benefit the economy;
• mis-management of the PNG Gas Pipeline appears likely to give Queensland a poor international reputation in relation to sovereign risk;
• public-private partnerships seem likely to be an unsatisfactory way to achieve their presumed objectives (ie more efficient delivery of infrastructure and services, and mobilizing additional financial resources) and offer far less benefits than private-public partnerships focused on development of industry clusters;
• criticism has been leveled at Austrade's efforts in export development [1]. Are those of the Department of State Development significantly better?

In April 2003, a strategy for development of manufacturing was announced [1]. While this scheme identified plausible goals (in terms of industry sectors and economic functions) it contained significant limitations in achieving its apparent goal of enhancing manufacturers' supply chains. In particular:

• the effect of government 'assistance' can only be to impart to affected firms a politically-idealized (and thus commercially sterile) version of the capabilities that are seen as being needed to develop this sector. The problem in picking winners in terms of industry sectors / firms is that the information required to do so is too complex and widely diffused in the economy to be assembled. This same constraint applies to 'picking winners' in terms of best business practices - a judgment for which there is no general answer
• the goal of the program is stated as 'attracting' venture capital. The latter involves a combination of (a) money and (b) commercial skills to support the rapid growth of inexperienced firms. The latter skill would be an essential part of the supply chain of a well developed local manufacturing supply chain - not something that should have to be 'attracted'

In April 2004 DSD was 'smartened up' by senior level sackings, reorganization and assuming responsibility for the Smart State program while the Department of Innovation and Information Economy (DIIE) was abolished [1].

There can be little doubt of the desperate need to 'smarten up' DSD and that DIIE  was not really contributing in a practical way to Queensland's development (see Commentary on Smart State). However simply re-organizing a set of poor economic functions can not achieve anything - any more than rearranging the deck chairs on the Titanic would have stopped it from sinking. 

The intended new arrangement did not reflect a sense of realistic strategic direction for either DSD or Queensland's economy in the face of significant economic risks intensifying competitive pressure. In particular:

• it did not involve strategic R&D machinery (either in-house or preferably externally) to develop a sense of direction for Queensland's economy as a whole (or its major industry clusters, or economic regions);
• proposed programs addressed 20 year old agendas (eg facilitating major projects which had always been suspect, innovation capabilities the need for which had been identified in the early 1980s and which could have been in place a decade earlier with a more systematic approach). Newer types of economic capabilities were not yet properly reflected in the developmental agenda (eg industry clusters; supply chain management; global outsourcing);
• emphasis was given to Public Private Partnerships (PPPs) for providing infrastructure though these are: (a) not in themselves a way of achieving necessary increase in the amount spent on infrastructure overall - as government or users still ultimately pay; (b) often an inappropriate way of seeking value-for-money given that functions become government responsibility because their complexity causes market failures - and that this complexity ensures that potential production cost savings via PPPs are likely to be offset by high contract management costs (see Public Private Partnerships for Infrastructure); (c) ideally only a minor issue - as PPPs can only really be of value for a small percentage of infrastructure projects; and (d) in practice a serious added complexity in Queensland's already highly Defective Machinery for Planning and Delivery of Infrastructure.
• DSD appeared likely to continue undertaking 'business welfare' programs involving subsidised support to individual firms - whose main effect is to prevent Queensland's economy from developing

However some progress may have been in August 2004 when it appeared that the futility of 'buying industry' with incentives was belatedly recognized [1]

In July 2005 an attempt was made to rejuvenate DSD by giving it a higher ministerial status  - apparently under the impression that it had previously been successful when it was a super-department with clout by (a) attracting big name companies (b) developing new policies (eg for forestry, energy, water reform and local content purchasing) and (c) handling of redevelopment of Suncorp stadium - though this did now win it friends, and others subsequently took the opportunity to get their own back [1].

However the assumption that a politically 'heavy' approach will achieve economic progress is touchingly naive. For example, many of the claimed successes achieved by DSD were dubious, eg:

• industrial recruitment ('ie attracting big name companies') is an amateurish approach to economic development);
• some policies that were developed were clearly inadequate (eg for energy [1], water [1], local content purchasing);
• the redevelopment of Suncorp Stadium was seen by one observer as a prime example of politics getting in the way of good government [1];

Moreover Queensland's experience in the 1970s and 1980s shows that systematic organizational development is a superior way to make government easy to deal with, while central attempts to force through politically-endorsed (but perhaps relatively unproductive) projects is counter-productive both economically and by generating conflicts and breaking down effective governance.

To achieve real progress a less politically-coercive and more market-driven approach to Smart State would be a good way to start.

In general trying to force the pace and direction of economic change will not improve overall economic performance because (a) it is impossible for authorities in a Western-style democracy to know what actions should be encouraged because of the complexity and changeability of the economy and (b) forcing outcomes will stifle the natural mechanisms of the economy - ie those that are based on initiative by members of the local and external community.

The predictable outcome is slowing of the overall rate of growth and change (and also risking fiscal losses). This is probably a significant factor in Queensland's at-times poor jobs' performance [1, and others). A somewhat similar phenomenon was associated with the activities of Victoria's Cain Government in the 1980s (see The Fall of the House of Cain) where that government's expensive efforts to force economic change resulted in worse economic performance than other states achieved at the same time (and also proved a financial disaster).

Even more significantly:

• Queensland is belatedly struggling to create the type of economic capabilities (eg Smart State's emphasis on innovation) which were identified in the early 1980s as needed based on study of best international practices in the 1960s and 1970s. No serious work on more recent 'best practice' requirements (eg supply-chain integration or international outsourcing based on e-commerce) seems to have been undertaken; and
• while government incentives to achieve social, environmental or regional goals or to stimulate attention to new economic infrastructure may be very useful, trying to 'assist' firms by directly filling market gaps is not likely to improve the overall performance of the economy for reasons outlined above..

As well as trying to force the pace and direction of economic change:

• Queensland seems currently unable to plan effectively for the provision of infrastructure (see Defects in Infrastructure Planning and Delivery in Queensland ).
• government still tends to throttle information flows (see FOI). In other words, government is seeking to be Queensland rather than to govern Queensland.
• observers do not seem to believe that Queensland's industrial relations system is effective (see article by McCarthy and Courier Mail editorial). An Enterprise Bargaining system that works seems essential - because flexibility to respond to market changes is critical to raising economic productivity and business income, and the equitable sharing of business income is vital to social justice, harmony, strong consumer demand and a healthy tax base.
• a BCA study concluded that Queensland was the worst state in terms of red tape affecting business [1].

The Need to Do Better

Despite the long period of strong global economic growth which has been virtually recession-free, pressure for better economic performance is increasing, because:

• the factors that have allowed global growth to be maintained seem likely to become unsustainable at some point (see The Potential for Economic Instability). The Bank of Japan's decision to end the process of creating the easy liquidity that has allow countries such as Australia to fund large current account deficits cheaply seems particularly significant. [1]
• BIS study suggests that $A is more vulnerable to capital flight than almost any other currency in the world  because of the growth of Australia's foreign debts.  The currencies at most risk are those most supported by the 'carry trade'.[1]
• the ongoing devaluation that priced Australian's into jobs and gave the impression of superior economic / productivity growth during the 1990s (see Impact of Economic Liberalism in Australia) seems likely to reverse [1] due to changes in international financial market conditions (especially an easing /  reversal of the strong capital inflow into the US).   The increase in $A value to $US70c cut exporters margins 25% as they can not raise prices [1]. And Australian manufacturers have had a tough time in spite of the strong growth in the global economy [1, 2]. Treasurer warned of tough conditions facing exporters because of stronger $A [1]
• It is getting harder for manufacturers to operate in Australia - because of low cost overseas competition [1].
• a stronger tax base is needed due to state financing problems which have complex causes but are being brought to a head (see Pressure for Tax Increases). Moreover increased tax rates can be expected to force some changes in the industrial structure geared to serving rapid population growth which relatively low tax rates have encouraged (especially in SE Queensland);
• Australia's current account deficit has increased to what was seen as 'banana republic' levels in the 1980s (ie around 6% of GDP) - in spite of the most favourable terms of trade in a generation. Without that improvement (which is unlikely to be sustained) the deficit would have been over 15% of GDP [1]. Predictions of increased export values never seem to occur despite record commodity prices [1]
• Australia's current account deficit should have significantly improved as commodity prices have skyrocketed. But in early 2006 export valued have remained flat, while imports grew rapidly - resulting in near record deficits. Commodity price boom will end eventually - and see current account in real difficulties [1];
• the level of Australia's foreign debt has become a threat to the federal government's AAA credit rating [1];
• financial deregulation allowed households to gear up (eg by property investment) which has provided demand to drive strong growth, but created difficulties in managing a highly leveraged economy because of the effect any increase in interest rates must have [1];
• growth has been driven by domestic consumption and housing construction (which involved heavy reliance on credit [1]) but appears in future to have to depend on exports [1, 2, 3],  However
• Australia faces an increasingly difficult trading environment. For example:
  • challenges are merging to economic globalization because job creation and increasing real wages have slowed in the mature, industrialized economies as the Internet has changed the way business is done. Previously rich countries would lose market share in manufacturing but this was not a serious threat because they had many highly-educated knowledge workers in services. This distinction is now disappearing. Gains in the developing world are increasingly at the expense of the developed world. [1]
  • in order to increase productivity in this environment it, another 'new' business model appears to have emerged - involving 'platform companies' geared to exploiting the current global organization of production. [1] Such models do not yet appear to have received attention in Queensland;
  • US demand has driven global growth for more than a decade - but seems unlikely to be able to continue doing so given the US's resulting financial imbalances, Moreover it is not clear that alternative growth drivers are available (see Structural Incompatibility Puts Global Growth at Risk);
  • international trade has declined in the less certain environment that has emerged since 2001, and Australia's share of export markets has fallen [1];
  • given the September 2003 breakdown of global trade talks, a free trade agreement with the US has been seen as best remaining prospect for major new export markets [1, 2]; 
  • export growth has stagnated [1, 2]. In particular Australia's exports have fallen for 3 years; domestic costs have risen faster than trading partners; the development of a FTA with US has not prevented the latter from increasing protectionism; Canada's experience with a US FTA with US was of declining exports to other markets; discrimination in third markets is rising because of other US FTAs [1]. Manufacturing, which was a major driver of export growth in the early 1990s, has suffered setbacks as a result of: Chinese competition; less favourable exchange rates; and increasing outward manufacturing investment [1]. On the other hand, others have seen evidence of good export performance over a longer time scale [1, 2], and the Reserve Bank ascribed Australia's export slowdown to a lack of resource investments between 1998 and 2000 [1]
• infrastructure bottlenecks are seen as one factor constraining exports [1, 2, 3], as has a lack of relevant skills [1, 2, 3]. Queensland in particular has been seen to have good growth prospects which are at risk from infrastructure bottlenecks [1]. Problems in attempting to regulate privately owned 'public' goods (eg those with a monopoly character) may be a factor in one case [1];
• businesses are generally seen to lack the management ability to identify and implement the sorts of strategic initiatives required for development of exports [1];
• attempts to support / encourage innovation have been suggested to be based on poor understanding of how this is undertaken in Australia [1, 2];
• Australia has enjoyed rapid increases in income but has not spent / invested the money wisely in new productive capabilities [1]
• a large percentage of individual workers have been shown to be suffering unhealthy and unsustainable levels of work stress [1];
• significant shortages of skilled workers are a constraint on growth [1, 2];
• while there has been a high rate of job creation, this has often been of poor quality. Large numbers of jobs are shifting from full to part time status [1]
• Australia (Queensland in particular) will need to rely on elderly, disabled and parents of school age children because of worker shortage due to rapidly aging population over the next five years [1]
• future growth is likely to be more difficult because past growth has been driven by improved terms of trade (which are likely to start to decline) [1]
• the rapid growth which is occurring in Asia will change the character of of global markets [1], and Australia has traditionally been uncomfortable doing business (other than selling commodities) in that region because of significantly different cultural features [1];
• Australia's manufacturing and services exports have been declining - being offset by increased commodities exports to China on whose continuance Australia's export future now seems likely to depend [1]. In particular another resource boom is now expected [1]
• major new opportunities (eg for commodities, services) are seen to be emerging from economic reform and rapid development in China [1] - however China's progress seems unlikely to be sustainable (see China's Development: Assessing the Implications). Around April 2004 an intention to slow China's growth (which could potentially reflect structural rather than cyclical factors) was announced (see Slowdown or Crisis?). In October 2005, the state government suggested that for the first time event strong growth for 30-40 years could be expected based on coal exports [1], while some other observers highlighted the volatility of resource markets and thus the downside risk [1]. In January 2006 the World Bank argued that China's growth pattern is unsustainable - because it is based on cheap capital. Rapid gains in manufacturing productivity and stagnant agricultural productivity drive inequality. Growth can't be sustained without household demand and service industries a reduced emphasis on manufacturing exports (and resource inputs) and greater emphasis on agricultural exports. [1]
• though commodity prices are very high - but so are production and construction costs, as the mining sector struggles to expand [1];
• major industries face environmental risks (eg related to greenhouse gas reduction [1]; salinity; access to water; Great Artesian Basin; Great Barrier Reef). It is also possible el Nino or other climatic influences could change weather patterns permanently from the historically benign patterns of recent centuries;
• agriculture, traditionally an important industry, faces significant environmental challenges related to water as well as poor and deteriorating soil quality [1] - problems which have led to substantial adjustments in recent years [1], and to suggestions that the scale of the industry needs to be significantly phased back [1]
• prior to the emergence of a new resource boom associated with China's growth surge, currently important mineral and energy industries also faced significant challenges which must be met if those industries are to have more than a boom / bust character.

In particular:

• there was a probable need to re-invent capital-intensive strategies for resource-based industries (which were major drivers of investment in the 1990s) because of changes in their competitive environment.

Detail: Queensland / Australia's resources firms generally had low return on capital in the 1990s. Amongst the reasons for this is the lack of market power that is available to producers of undifferentiated commodities (ie prices tend to get bid down to just above production costs) and the strong competition from low-wage developing countries. However value added is possible from later-stage processing - which is a demand, rather than supply, driven and thus provides producers with market power. To restore decent profit margins leading resource firms are now looking at strategies such as value-chain management (ie involvement at all stages from mine to market) and aggregation of supply (to gain more market power). However Queensland's unsophisticated Department of State Development seems to be pursuing an antiquated approach to adding value - involving downstream processing only to the stage of undifferentiated commodities which simply makes no commercial sense.

• the lack of an effective industry cluster (ie of supportive commercial and technological functions) led to project failures and loss of control [1, 2]
• subsidized Chinese coal was threatening Australia's dominance of global coal markets [1];
• Queensland regulatory regime for minerals and energy has been seen as hopeless [1];
• anecdotal evidence suggests that China (which has immense resource endowments and low wages) appears likely to skip the 'basic processing' emphasis and move directly into competing on the basis of the strategies of the leading firms (eg value-chain management). This is a feasible option because it suits the effective bureaucratically-endorsed networking / consultation within 'Chinese' communities. Combining low wage competition with leading-edge methods also parallels the strategy Japan used to catch up with / surpass Western countries in manufacturing. Moreover:
• the attractiveness of mineral rich locations in Australia may diminish, because surface geology suggests that the mineral potential of East and South Asian (especially China) is immense, and sufficient for their future needs. Infrastructure, environmental and social challenges need to be overcome but the resources will probably be proven upwards while hydro power potential (and other alternative energy potentials) will also have a significant impact.
• native title and environmental currently constrain access to resources, and there is a future need to develop protocols for linking mining with alternative surface uses (native title; recreation; water; farming; ecology);
• global efforts (via OECD Chemical Risk Reduction Program) to reduce health risks are proscribing materials that are targeted for elimination (eg copper, lead, zinc, polyethylene triglycerides which are significant in Queensland's economy);
• the introduction of full environmental and social costing on corporate balance sheets as good business practice will reshape perceived costs and focus attention on areas that are socially and environmentally acceptable to mine - which could be significant for Australia given native title and ecosystem sensitivities;
• the cost of greenhouse emissions is becoming a significant factor in evaluating major investments [1]
• improvements in geophysical techniques that allow geological resource endowments at depth to be defined will become standard;
• the environmental implication of mining need attention especially:
  • relationship with ecosystems containing biological resources of currently unknown value;
  • effect of water constraints (eg World Heritage listed Great Barrier Reef - which has important biological diversity; Gulf of Carpentaria which is shallow and sensitive; Great Artesian Basin where the effect of mining and land clearing is unknown).
• a serious skills deficiency has affected the industry because of the closing of many university departments world-wide that had provided graduates [1]

• Australia has been said to be experiencing the effect of a 'resource curse' in 2006. Because things are too easy, there is no imperative for political or economic reform, as it is believed that good times will last forever .[1]
• the sustainability of growth based on a resource boom is uncertain. In the past such booms have proven highly unstable and have been suggested to adversely affect other industries (eg by altering their competitiveness through affecting the exchange rate). It has been suggested that speculators seeking a hedge against a structural decline in the status of the $US could be a factor in the resource boom in 2005 [1]
• Australia has lost its attraction for exploration, as miners seek to get the most out of existing sites rather than develop new ones, arguably because subsidies in the form of tax advantages are required to attract explorers. [1]
• many regions are experiencing economic difficulties (see above);
• some social difficulties appear to have economic implications - in particular:
  • market liberalization, which has allowed economic adjustment in Australia, has been accompanied by increased inequality - as much job creation has been of poor quality with low incomes. Those trapped in low incomes or long term unemployment are seen to be emerging as an underclass (see above). Reasonable equity has been maintained to date by increases in welfare payments (which erode the benefits of higher productivity and translate into increasing dependency). Overcoming such problems ultimately requires (amongst other things) an economic regime able to create accessible higher-income job opportunities;
  • an 'asset economy' (ie one in which demand is financed more by increasing asset values, rather than by income) has been suggested to exist in the US [1] - and seems likely to have emerged in Australia also.  The incomes of the 'middle-class' have tended to stagnate [1] (presumably because of the effect of outsourcing of increasingly high-skill jobs to low wage economies) and consumption has increasingly been maintained on the basis of escalating asset values. When / if this bubble bursts, the problem of income inequality (with its adverse implications for political stability) could be well beyond being corrected by government welfare payments unless something has been done to upgrade the ability of the economy to generate large numbers of high-paid jobs;
  • the ethical foundations on which Australia's legal and governance systems have assumed individual liberty (an arrangement which has very significant economic benefits) appear to have been eroding (see Moral Foundations of Individual Liberty);
• there is a need to strengthen all aspects of developed societies to overcome threats apparently posed by extremists favouring pre-modern social, political and economic systems (eg see Discouraging Pointless Extremism).
 And a related significant concern arises from the potential security risks associated with ineffective economic and political systems in many neighbouring nations.
• the Free Trade Agreement with the US must expose firms directly to the most competitive business environment in the world, and one in which the research and lobbying by organized groups is also more intense and competitive than elsewhere.

Moreover there are indications of significant changes in the global economic environment that will create competitive pressures requiring a new round of structural changes in all relatively developed economies.

Something new now clearly needs to be tried because these trends have apparently made it virtually impossible for developed economies to increase real income levels (as the Internet allows globalization of the service industries which had previously provided scope to continue increasing incomes as manufacturing migrated to lower wage economies [1].

What could be done?

Behind the growth which has been sustained by potentially unstable global economic bubbles, many specific areas of structural weakness in Queensland's current economic situation have been mentioned above including:

• low economic productivity, under-employment and high unemployment;
• weak tax base and exposed public finance;
• lack of machinery for effective planning and delivery of infrastructure, and potential for losses by infrastructure GOCs in a competitive environment;
• exposure of major industries to environmental constraints and tough competition;
• struggling regions;
• unrealistic 'populist' economic programs; and
• inflexibility due to lack of effective mechanisms for enterprise bargaining.

However the root cause of these difficulties is probably that Queensland lacks adequate machinery to deal with economic change.

The effectiveness of an economy in generating wealth and jobs depends heavily on the support which exists for business activity (from customers, regulators, suppliers etc). The business environment involves far more than what can be seen as 'good' government policy and programs.

Over the past two decades mainstream economics has concluded (on fairly reasonable grounds) that prospects for economic growth and development are optimized when government creates a stable and supportive environment for private enterprise by constantly seeking to provide:

• a rule of law, a reliable basis for contracts, and a simple legislative / regulatory regime;
• systems of weights, measures and prices;
• a competitive market environment;
• stable monetary policy - characterized by no significant inflation / deflation;
• fiscal policy which balances budgets over business cycle, and involves reasonable taxation;
• measures to promote social equity (and a 'safety net'), stimulate less developed regions, counter business cycles, ensure environmental responsibility, encourage adjustment in failing industries;
• efficient public goods and services (ie those subject to market failures);
• investments in human capital (education, training, health) and in pre-competitive information assets (eg basic research);
• agreement with other governments which permit trade, investment, people movement;
• sufficient understanding of the business environment to avoid doing accidental damage in seeking to achieve other goals.

However government only provides a minor part of  the environment for private enterprise. The greater part of their environment is accounted for by:

• the community (as workers, customers, holders of knowledge / skills, savers / investors, voters);
• other businesses as competitors, suppliers, service providers, financiers, customers, parallel customers of the same suppliers / service providers, or simply other occupants of the same economic space; and
• other organizations concerned with economic / social functions (eg education and training, public information, health) directed to community or business.

Furthermore the rate of change in individual businesses and in their supportive environment in response to changing market demands and technologies can be critical to the ability of business to be economically productive and thus to produce high returns to investors, employees and governments. This is because in a competitive environment the productivity of any given activity will always tend to be reduced over time, requiring a shift into new activities to escape (for a time) from the competitive pressure. 

Economic development can be thought of as a learning process affecting the overall economic environment (ie involving identification of opportunities and threats and re-organizing to respond). Economic growth theory recognizes that knowledge has the key role in generating growth. However economists have not properly understood that this arises mainly because knowledge allows (and encourages) economic systems to change rather than by providing an input to an economic system (see Defects in Economic Tactics, Strategy and Outcomes). Innovation within individual enterprises is only one of various levels at which this effect can arise.

One practical implication of taking a broader view of the scope for economic 'learning' is the potential for creating effective leading-edge mechanisms to accelerate the development of industry clusters as a whole. In Queensland's case this might be directed initially to (say) agribusiness; minerals and energy; and globally focused SMEs, and this (given a basic governance framework along the lines outlined above) could significantly transform Queensland's economic potential over 5-10 years whilst also building in the ingredients required by social and environmental challenges.

The main obstacle to accelerating the development of economic subsystems to provide stronger support to individual enterprises is that Queensland generally lacks civil institutions (eg associations, research institutes, foundations, financial institutions, regional development bodies) which competently undertake serious and applied R&D in relation to Queensland's economic and industrial functions. In the absence of such entities:

• Queensland: has a relatively low productivity economy and a weak tax base; and remains a branch office state, because:
  • diversification away from traditional economic functions with low added-value is slow;
  • no one is able to take effective leadership roles in development of industry clusters (which are the environment that individual enterprises depend upon for support) because politically accountable entities can not do this in a market-relevant way due to the pressures and expectations they are subjected to (see Economic solutions appear to be beyond politics);
  • business, media and the public lack access to strategic economic intelligence (which is the basis for building the competitive advantages required for higher productivity);
  • interstate migration (encouraged by cheaper taxation and housing) has the effect of reducing the productive capabilities of the state's human capital [1].
• systematic 'analysis' of Queensland's financial and economic position tends to be misleading because it ignores structural defects [1; 2; 3]
  • For example, the latter referred to an analysis which continued a tradition long popular with Queensland's Treasury of placing a 'spin' on the state's economy that prevents attention to its structural problems. Its economy was labeled 'strong' and a 'buy' despite having very low per capita incomes by Australia's declining standards (which also translates into a weak tax base, and the need for fiscal subsidy through Grant's Commissions horizontal equalization). Why would continued growth by tourism (a generally low productivity sector) and mining (which had very poor returns for structural reasons in the 1990s) automatically be good? Why would an investment surge triggered by population growth and government subsidies (see Buying Industry) be a sign of economic prowess? Describing an unprofitable business as 'strong' and a 'buy' - just because it is growing - is the sort of analysis that contributed to the dot-com bubble in the US, and to the Asian financial crisis;
  • More realistic analysis would expose the limited competencies of the leaders of politically influential interest groups - and tends to be strongly resisted;
• Queensland's political process is poor and populist (and Parliament and Oppositions have traditionally been weak relative to incumbent governments) - as outlined above;
• many people just give up on Queensland (despite its lifestyle advantages) because of the traditional ignorance and autocratic destructiveness of the political system (see Authoritarian Government in Queensland?).

Also of concern is the lack of professional credibility and competence in Queensland's Public Service that has been politically induced for more than a decade - which further inhibits the effectiveness of the political system and government administration.

An appropriate strategic response by Queensland leaders might involve:

• strengthening of civil institutions required to (a) provide business and the community with more relevant intelligence (b) stimulate leading-edge market-relevant changes to economic systems as a whole by the development of cross-functional indicative plans and (c) overcome the chronic weakness of the political system by providing informed raw material for public policy debates;
• an emphasis on the development of competitive advantages (rather than reliance given comparative advantages) to advance the prospects of regional economies. In practice this would result in development of regional industry clusters (say those linked to agribusiness, minerals and energy and globally-focused SMEs) using methods like those in Developing a Regional Industry Cluster. Effective use of such methods outside SE Queensland in particular might create viable alternative population 'magnets' which would reduce problems associated with growth management in SE Queensland (see Growth Management in SE Queensland).
• government programs based on similar methods to stimulate market mechanisms (eg information, institutions) to accelerate economic change in 'trailing-edge' regions and sectors (ie those being left behind). While government can not be relied upon to pick economic winners, it can be expected to identify economic losers - and needs means to respond to them without merely imposing regulations or subsidies which impede change and development;
• developing government's role as a demanding customer eg by (a) seeking leading edge technologies in undertaking public functions - where appropriate and (b) using service delivery and procurement processes which support the development of those capabilities in firms;
• reducing Queensland's low-cost attractions as a destination for interstate migration because of the adverse effect which this has on the quality of the state's human capital [1]. Higher tax rates would allow numerous apparent spending obligations to finally be funded. Reduced migration would also require changes in the structure of industries that depend on rapid population growth, and reduce both public revenues and expenditure demands.
• increased concern for international economic and political conditions involving perhaps (a) efforts to cooperate with neighbouring nations in the development of civil institutions as outlined in South Land Connections project and (b) creation of an international order better able to provide for general social, environmental and economic welfare - eg as suggested in New Manhattan Project
• re-creating an effective system of professional accountability for the Public Service so that it is able to provide competent support with public policy formulation / implementation and in delivery of services / infrastructure (see Renewal of Queensland's Public Service and Accountability of Queensland's Senior Public Servants).

Political leaders could contribute to stronger civil institutions in Queensland by:

• publicly asking strategically important questions (eg is Smart State a realistic process for developing economic capabilities?), and emphasis on identifying and endorsing the economic validity of others' R&D rather than trying to undertake basic economic research, because:
  • it is easier to build credibility by pointing out important questions, than by guessing the answers to such questions when one does not have enough information to do so competently;
  • general understanding / support / action is needed from the community and business for any political agenda to work;
• stimulating many (say 20-30) credible independent (non-government non-political) entities in various functions, sectors and regions to start serious economic and industrial R&D. Stimulation might involve (a) asking important questions - as above (b) dissemination of information about public economic policies and programs and (c) highlighting to business and the community the non-governmental resourcing needs that such entities have if they are to raise Queensland's economic and industrial capabilities in the longer term. The desired output of such entities (of which some 5-10 might be might prove effective and successful in the long term) might be:
  • formulation of 'enterprising' options for enhancing economic (or community) systems in the form of indicative plans that might be implemented by the collaborative effort of several existing organizations and require no special government support, and enabling those who may have an enterprising interest in such options to study and evaluate them; and in parallel
  • identification of public policy issues that emerge to a relevant Committee established by Parliament to report to it periodically on such evidence, and also to the public through the media or publications. These proposals would become one basis of stronger public policy debate.
• identification of 'models' through which such civil institutions might be expected to act in the public interest while producing both these types of outputs, and accepting advice preferentially from those who conform to such a model;
• give the State Government a financial incentive to develop a productive modern economy by phasing out the interstate financial transfers to Queensland under Commonwealth Grant's Commission horizontal equalization arrangements. At present those transfers mean that Queensland's weak tax base can be ignored. However if there were no such transfers the retention of the financial benefits that flow from strengthening the tax base would motivate all state governments to get very serious about economic strategy.  Naturally such an approach could only be viable if methods whereby progress might genuinely be made were widely supported (as incentive without capability can translate into failure).

Revised October 2002