Melbourne: a Parasite city?

Author:Birrell, Bob
Position:Essay
 
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Melbourne appears to be booming. Job growth is far more rapid than in Sydney. This article shows that Melbourne's economy is being driven by population growth and that most job growth is in the city-building and people-servicing industries. The city's apparent boom is obscuring its poor performance in exports to international markets. When export and imports are taken into account, the growth in per capita gross state product in Victoria is the slowest of all Australian states and territories since 2000-01. Melbourne is becoming increasingly dependent on external support.

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The 2010 federal election produced a sharp divide in voting patterns. Victoria moved strongly to Labor (along with Tasmania) while Western Australia and Queensland (the mining states) swung equally decisively towards the Coalition.

One interpretation of this is that Victoria's recent robust economic performance had left Victorian voters happy with the incumbent federal government. In the year to August 2010, 32 per cent of job growth in Australia occurred in Victoria, yet as Table 1 below shows, only 25 per cent of Australia's population resides in Victoria. By contrast, just 22.5 per cent of job growth occurred in New South Wales (NSW), yet 32.5 percent of Australia's population lives in NSW.

Table 1: Population growth in Australia by state and capital city, 2001 to 2009 2001 2003 2005 2007 New South Wales 6,575,217 6,672,577 6,756,457 6,904,942 Victoria 4,804,726 4,923,485 5,048,602 5,221,310 Queensland 3,628,946 3,809,214 3,994,858 4,195,981 South Australia 1,511,728 1,531,278 1,552,514 1,585,794 Western Australia 1,901,1159 1,953,070 2,017,088 2,112,967 Tasmania 471,795 477,646 486,327 493,204 Northern Territory 197,768 200,046 206,373 214,804 ACT 319,317 325,661 330,164 341,054 Australia 19,410,656 19,892,977 20,392,383 21,070,056 Capital city statistical divisions Sydney 4,128,272 4,190,874 4,245,045 4,344,675 Melbourne 3,471,625 3,577,411 3,680,609 3,817,806 Brisbane 1,663,120 1,744,111 1,822,074 1,902,235 Adelaide 1,107,986 1,121,742 1,134,513 1,159.131 Perth 1,393,002 1,435,907 1,485,823 1,559,178 Greater Hobart 197,282 199,853 203,467 207,330 Darwin 106,842 107,440 111,258 117,333 Canberra 318,939 325,340 329,865 340,766 2009 Change Change as State share 2001 per cent of total change to 2009 of 2001 New South Wales 7,134,421 559,204 8.5 22.0 Victoria 5,443,228 638,502 13.3 25.1 Queensland 4,425,103 796,157 21.9 31.3 South Australia 1,623,590 111,862 7.4 4.4 Western Australia 2,245,057 343,898 18.1 13.5 Tasmania 503,292 31,497 6.7 1.2 Northern Territory 225,938 28,170 14.2 1.1 ACT 352,189 32,872 10.3 1.3 Australia 21,952,818 2,542,162 13.1 100.0 Capital city statistical divisions Sydney 4,504,469 376,197 9.1 Melbourne 3,995,537 523,912 15.1 Brisbane 2,004,262 341,142 20.5 Adelaide 1,187,466 79,480 7.2 Perth 1,658,992 265,990 19.1 Greater Hobart 212,019 14,737 7.5 Darwin 124,760 17,918 16.8 Canberra 351,868 32.929 10.3 Source: Australian Bureau of Statistics (ABS). Regional Population Growth: Estimated Residential Population. Catalogue no. 3218.0 It is no wonder The Australian's George Megalogenis could describe Victoria as the 'Goldilocks economy' (1) or that prominent economist, Saul Eslake, was recently quoted as saying that Victoria is emerging as our strongest economy. (2) The advice from Megologenis is that 'Gillard should look to her home state of Victoria for inspiration'. He thinks that Victoria's economic performance is attributable to its recent leaders' willingness to take tough decisions on economic reform and the relative absence of corruption in the state. (3)

For some others, the election result has generated a distinctly sour interpretation of Victoria's circumstances. According to Michael Stutchbury (also from The Australian), the election result highlights the need to redouble structural change and reform in Australia. Stutchbury's concern is that Labor will indulge the regions and the states left behind by the mining boom, when it should be managing the economy to ensure that resources flow to where they will be most productively used--the mining states. This requires policy discipline and a flexible economy that allows the mining boom to draw workers and capital from the squeezed industries and regions'. (4)

This argument is an extension of the two-speed economy thesis. It has long been predicted that a mineral boom will drag capital and labour to the mining states where rates of return to capital and wages are high. This, plus a likely strengthening of the Australian dollar, will disadvantage growth in the non-mining states. Stutchbury is concerned that the Labor Party, dependent on voters in the disadvantaged states, including Victoria and Tasmania, will impede this process by subsidising the people and industries remaining in these states.

We are moving rapidly out of the realm of theory here because the Governor of the Reserve Bank has suggested that the rapid anticipated growth in mining investment and the inflationary forces thereby generated may prompt the bank to increase interest rates--which will, of course, impact on the second-speed components of the economy as well. Governor Stevens, however, questions the extent of the two-speed process on the grounds that mineral activity also boosts economic activity elsewhere in Australia. He cites the case of extra employment in the headquarters of mining companies located in Melbourne. (5)

There is an obvious conflict between the Megalogenis and Stutchbury perspectives. The mineral boom has been running through most of the last decade. How is it then that, despite this boom, Victoria can be dubbed a 'Goldilocks economy', with strong employment growth and a healthy state budget? In 2009-10, the state recorded a surplus of $644 million despite increasing expenditure on services by $5 billion or 12.5 per cent. (6) Perhaps Stevens is right: Victoria has shared in the fruits of the mineral boom.

To answer these questions requires a closer look at the Victorian economy. The state has done well in the creation of new jobs over the last decade by comparison with NSW. But, on other indicators explored below, including overseas trade and growth in per capita gross state product, Victoria has fallen below NSW and all other states. Perhaps Victoria's economic vigour is not due to the mining boom, but to factors distinctive to Victoria.

Victoria has experienced very rapid population growth relative to NSW. Could it be that population growth is driving Victoria's economy? Commentators are familiar with this idea when it comes to explaining the dynamism of the South East Queensland (SEQ) economy. It is obvious that economic activity deriving from accommodating and servicing the flood of people settling in that region is central to its rapid economic growth (at least until recently). The people-servicing aspect of the hypothesis derives from our previous work which shows that most employment growth in Australia is occurring in industries providing services to people where the demand for these services is closely related to population growth. These industries include the public health sector, education and community service industries and sections of the private sector professional services industries. (7)

We pursue the implications of this hypothesis after exploring the evidence available.

THE VICTORIAN RESPONSE TO THE TWO-SPEED ECONOMY PREDICAMENT

Victorian political leaders have been well aware of the potential dangers of a two-speed economy. Indeed, in 2006, the Victorian Department of Treasury and Finance published a discussion paper on the subject which concluded that the Victorian economy is vulnerable to competition from northern and western Australia for capital and people. (8) As we have argued in an earlier publication on the two-speed economy issue, Victoria is especially vulnerable because of its residual reservoir of manufacturing industries which evolved in the protectionist post-World War II era. (9) The capacity of these industries to export and to compete against imports falls as the dollar rises in value, especially given the low-tariff regime now in place. Remarkably, since coming to power in 1999, the two Labor premiers, Steve Bracks and then John Brumby, have not sought to restore a protectionist regime (with the exception of huge handouts to the car industry). Quite to the contrary, they have embraced the challenges of an open international marketplace and the associated need for continued economic reform, so as to encourage the most efficient use of resources. As stated in a 2005 paper summarising the Victorian Government's proposals for continued economic reform:

Australia must continue to expand its influence in sectors where it has global opportunities. These sectors, which include the traditional strengths of resources and agriculture ... and, increasingly, emerging manufacturing and service industries are likely to help drive Australia's future prosperity. (10) The Victorian Labor government thinks the state's most promising future lies in participating in the new innovative economy, through which it can build on Victoria's intellectual capital. To this end, it has sought to make Melbourne an exciting location for new enterprise, including the international student industry, by promoting the capacity of the city's educational and research institutions and by enhancing its cultural and physical attractions so as to entice smart, globally-mobile people to locate in the city. The attraction of international events like the Grand Prix is part of this strategy.

Is the Victorian government succeeding? Perhaps the city is attracting talented people and new industries. Alternatively, perhaps the city's apparent economic dynamism has more to do with city-building and people-servicing activities.

We start by analysing the scale of population growth, city-building and employment growth in Melbourne and Sydney. The differences between...

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