‘Globalisation’ may have fallen down the league ladder of most quoted economic jargon, but it continues to have a powerful influence on our lives, including the economic trajectory of our big cities.  By ‘big’ we mean those with more than a million residents, that is, the greater metropolitan areas of Sydney, Melbourne, Brisbane, Perth and Adelaide.

Globalisation, as measured by export activity as a proportion of all production, accelerated sharply in the early 90s.  This reflected a supposed world consensus on liberal, market based, economic policy signalled by the fall of the Berlin Wall in 1989.  This rapid growth in export volumes and value was maintained through to the Global Financial Crisis of 2008.  With super-power tensions, political fragmentation, the COVID Pandemic and war breaking out in Europe, the growth pattern has been disrupted.  But it is worth reminding ourselves that merchandise exports today still account for about half of world GDP.  Throw in trade in services, including tourism, and that share would undoubtedly be significantly larger.

So, the business practices embedded in global trade are still very much at work.  A pre-eminent factor in this is the continued ‘unbundling’ of the business value chain.  This refers to the propensity of firms to focus on their core business or IP while outsourcing component segments of value adding process.  For example, an Australian based fashion house might abandon most local production in favour of lower cost off-shore manufacturing, but may retain high value added functions locally, such as design and marketing.  This is in contrast to early post WW2 ‘Fordist’ models of value creation which focused on vertical integration.

Unbundling is evident in the changing contributions of key export sectors in the Australian economy.  Prior to WW2 Agriculture was a key driver of national GDP, accounting for around a quarter of the economy.  Its proportional share of GDP is now less than 5%.  Manufacturing, which grew behind protectionist walls and boomed in the early post WW2 period saw its peak share of national GDP at close to 30% around 1960.  This has now shrunk to just over 5%.  Meanwhile, Business Services have grown rapidly in terms of share of GDP, broadly tracking the rise in globalization, to contribute about a fifth of national income today.

These trends do not reflect a decline in agricultural or manufacturing activity in Australia.  In fact, in terms of $ value, these sectors are larger today than what they were when they dominated the charts in terms of share of GDP.  What the chart highlights is that functions which were once carried out within agricultural, manufacturing and, indeed, all other enterprises – like accounting, financial brokerage, design, legal advice, marketing, human resources recruitment and training, and so on – have been outsourced to specialized providers in the Business Services sector.

Figure 1    Share of GDP – Selected Sectors – Australia

Source:  ABS, calculations by SGS Economics & Planning Pty Ltd

This systemic outsourcing is an unsung accelerant of innovation for two reasons.  Compared to notional in house providers, outsourced service providers have a greater propensity to generate insights within their domain by virtue of their specialization and formal or informal experimentation within their relatively narrow field of practice.  Secondly, they are likely to migrate these ideas from client to client, either directly in outsourcing transactions or through labour market churn.

Accordingly, Business Services tends to be a high value added sector.  Firms pay a premium for access to this productivity advantage.

These forces have reshaped the roles of Australia’s big cities.  Probably because of their historic advantage in a large and deep labour pool, Sydney and Melbourne have become the Business Service hubs of the national economy.  The three biggest exports from these two metropolitan areas – that is, sales from these areas to other parts of the nation and overseas – comprise Finance, Professional Scientific and Technical Services, and Wholesale Trade which, amongst other things, includes a wide range of brokerage functions.

Through the unbundling process, the value chains generated by much of Australian enterprise, whether it be in agriculture, manufacturing, tourism, health, construction or elsewhere, will likely pass through Sydney and Melbourne.

This is reflected in the economic standing of these metropolises.  Together Sydney and Melbourne comprise 40% of the Australian population, but they account for more than 60% of the Australian economy measured by GDP.  These two metropolises have also experienced the fastest rates of economic growth on average per year over the past decade, compared to other big cities in Australia.  Indeed, they have outstripped the rate of growth in the national economy as a whole (2.5%).

Greater Brisbane’s economy is noteworthy for the relative export strength of its Professional, Scientific and Technical Services sector.  This shows that it has a beachhead into a services fuelled innovation economy.  The city now has an opportunity to leverage this capacity, including by diversification from its host State’s traditional focus on commodities.  This diversification is likely afoot with an orientation towards neighbouring Asian economies.  Deepening the labour market, both through home grown sources and immigration, will be a key factor in this pivot.

At present, the Greater Perth economy is firmly tied to the State’s commodities base, which carries a strong emphasis on mining.  These tend to be capital intensive, high wage industries generating a relatively high GDP per capita for that metropolis.  Diversification is an imperative for Perth, if it is to avoid the cyclical shifts that inevitably affect commodities trade.

Greater Adelaide’s economy has shifted from a traditional reliance on manufacturing to one focused on personal services.  Given the nation’s rapid population growth, and its ageing profile, personal services represent a strongly expanding sector of the national economy.  This is reflected in the relatively high rate of average annual growth in the Adelaide economy.  However, in some contrast to Perth, Adelaide’s driver industries tended to be characterized by lower value added margins.  This shows up as relatively low GDP per capita in the South Australian capital.

Authors:

Dr Marcus Spiller, Principal & Partner, SGS Economics & Planning Pty Ltd

Laura Hutcheson, Consultant, SGS Economics & Planning Pty Ltd

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