Two Economies, With One Set of Flaws: The Economies of Australia and Canada | Econ

Australia and Canada are about 14,000 km  apart, but they have a lot in common. Both nations are members of the Commonwealth of Nations, sharing a British colonial heritage, and their governments are similarly structured  as federal states and constitutional monarchies. Both nations also manage the unique challenge  of having relatively small populations spread across vast and inhospitable landscapes.

What’s  particularly fascinating about their geography is that nearly 80% of Canada's population  lives within 100 miles of the U. S. border, while Australia sees a similar concentration  of its population along the coastlines.

If Australia and Canada were one economy,  they would be the world’s fifth-largest, bigger than India and just behind Japan. They  both have similar levels of GDP per person, with Australia at around $63,000 and Canada  at $58,000, when you consider how much you can buy with that money. In terms of economic  structure, both countries exhibit striking similarities in primary production sectors such as  manufacturing, mining, and agriculture.

However, Australia leans more heavily on mining and less on  manufacturing compared to Canada. If you look at how their stock markets have grown over the past  30 years, you'll see that they follow a similar path. That's because both countries’ economies  are highly dependent on exports of their rich natural resources around the planet, the strong  correlation between the two is unsurprising.

Back in the late 1800s, the gold rush made  the town of Charters Towers in Queensland so wealthy that it even opened its own stock  exchange. Now, over a hundred years later, Queensland is feeling the effects of another  mining boom coming to an end. The ups and  downs of the mining industry are tough, but Australia has managed to stay strong through  it all.

At its peak, mining investment was  so big it made up 9% of the country's GDP, especially when Australia was rushing to supply  China with iron ore and coal, leading to a huge spike in profits. But when the demand and  prices for these commodities dropped, mining companies stopped investing in big projects,  which led to less spending and fewer jobs. Similar booms have occurred in Canada.

In the  1850s, Canada witnessed the first significant oil boom in North America. For most of  the past 30 years, rising investment in oil and gas has supported increases in crude oil  production volumes and export values. Over time,  as technology advanced and oil prices rose, the focus of investment in oil and gas projects shifted towards oil sands projects in Canada. 

However, since 2008, falling oil prices have put a damper on things, slowing down economic  growth from the western Canada all the way to the central provinces, leading to a contraction  in the services and manufacturing sectors. Their worlds of business are near-identical too.  For example, Macquarie, an Australian company, is the biggest manager of infrastructure  investments in the world, and Brookfield from Canada is right behind it.

However, when you  look at the biggest companies globally by revenue, according to Fortune, you'll see that six  out of the top ten are either American or Chinese. while the top Canadian  firm, Brookfield Asset Management, is ranked only 117th and top Australian firm,  BHP Group, a Mining company is ranked only 180th. This shows Canadian and Australian  firms have “forgotten how to compete”.

It also seems as though the world's largest  economy is a model of perfect competition. In Australia, the two largest supermarkets, Coles  and Woolworths, control 59% of the grocery market. Over in Canada, Loblaws and Sobeys together  sell 34% of all groceries, which is even more than what the top four grocery stores in the U.

S.  sell combined. When it comes to banking, the four biggest banks in both Australia and Canada hold onto three-quarters of all the money deposited by people, while in the U.

S. , the top banks have less  than half of that. And it's not just groceries and  banks.

In both countries domestic aviation is a  duopoly and telecoms a triopoly. The list goes on. If companies need to reach a certain scale  to be economically viable—for instance, to afford necessary investments in  computer systems—then a small economy may struggle to sustain more than a few  players in various industries.

Notably,  Australian-Canadian national champions, particularly in groceries and banking, are significantly more profitable  than their American counterparts. Fittingly, Australia has produced a number of top  surf-clothing labels, just as Canada has developed a niche in parkas and other winter wear. And,  of course, both are home to commodities giants.

Canada boasts the world’s fourth-largest proven oil reserves, with massive reserves in Alberta’s tar sands. Along with crude oil, Canada’s major  commodity exports include natural gas, coal, and iron ore. Australia dominates in coal and iron  ore and is also the biggest producer of lithium, the third-largest producer of cobalt, and the  fourth-largest producer of rare earths.

By 2030,  it aims to become, "a globally significant" producer of processed critical minerals. But, there's a flip side to this story. Both  Australia and Canada are finding it tough because they rely a lot on sending their goods  to bigger economies.

Australia, for instance,  is really tied into China. Since China is the second-biggest economy in the world, it's a  super important trading partner for Australia.  A big chunk of what Australia sells abroad, like iron ore, coal, and natural gas, goes  to China to help power its huge manufacturing and energy needs.

In 2023, these goods made  up a big part of Australia's earnings from exports, which really shows how much  Australia counts on China's business. In the same way, Canada's economy is really  tied up with the United States. It's a big deal because the U.

S. is Canada's number one trading partner, with trade between the two nations being a cornerstone of Canada's  economic prosperity. A significant portion of Canada's exports, including automotive  products, energy, and natural resources, are destined for the American market.

This trade  dynamic underscores Canada's economic reliance on U. S. demand, which directly impacts its  employment, manufacturing, and overall economic growth.

Moreover, the U. S. represents  a major source of direct investment in Canada, funding various sectors from manufacturing to  technology, which further ties the economic fortunes of Canada to the policies and  economic health of the United States.

It's possible that what's happening reflects a  situation known as the "resource curse," which has caused problems like political unrest  and slower growth in countries in Africa and South America that have lots of valuable  resources. For Australia and Canada, though, it's more like their reliance on resources has  made them less interested in developing industries that could compete worldwide. That might be why,  apart from commodities and outdoor clothing, there aren't many big companies from Australia  and Canada that have made it big globally.

Their Inc. 's are particularly lacking at  the cutting edge of technology. Products deemed "high-tech" by the World Bank, such as aerospace, computers, pharmaceuticals, scientific instruments, and electrical machinery,  represent more than 7% of the combined exports of OECD members, but only 4% for Canada and  less than 2% for Australia.

According to  the World Intellectual Property Indicators, patents granted per 10,000 people are a mere 5. 9 in Canada and 6. 7 in Australia, compared  to 9.

9 in America and 28. 2 in South Korea. This doesn't mean that Australians and Canadians  lack talent.

In fact, they're quite skilled, as shown by their rankings in the World Talent  Ranking, where Canada sits at 13th place and Australia at 18th. They also have top-notch  universities and some of the highest rates of tertiary education in the OECD. The issue lies  more in their innovation systems not getting enough support.

In both countries, spending  on research and development is quite low, only around 1. 7% and 1. 8% of GDP for  Canada and Australia respectively, compared to an OECD average of 2.

7%. Moreover,  the total investment in venture capital, which helps fund new businesses with big potential for  growth, was just $8 billion in 2023 for Australia and Canada combined, and that's about half of  what it was the previous year. On top of that,  they're not very open to foreign investment, with strict rules, ownership limits, and other obstacles making it hard for foreigners  to start businesses in these countries.

However, both Australia and Canada are  hotspots for immigration. Canada, especially,  is notable among countries with high levels of immigration. Australia has maintained its annual immigration target at 160,000.

Immigration  plays a crucial role in their economies and their long-term success. Without it, both countries  will age. Moreover, Immigrants bring diversity, innovation, and a broad spectrum of skills,  contributing to the labor market's expansion and the filling of critical skill gaps  in various sectors such as technology, healthcare, and engineering.

Economically,  immigrants not only increase the labor force but also contribute to consumer demand for goods  and services, stimulating economic activity. Also, immigration significantly impacts the  housing markets in both Canada and Australia, contributing to increased demand and rising  property prices in major urban centers. As two of the most popular destinations for immigrants,  both countries have seen their populations grow substantially due to immigration, leading to  heightened demand for housing.

This demand drives up real estate prices, particularly in  cities like Toronto and Vancouver in Canada, and Sydney and Melbourne in Australia,  where the majority of immigrants settle. However, Canada and Australia are not  alone. House prices are high relative to incomes across the rich world.

This chart  shows the big divergence between home price growth and real disposable income in the  two countries. The average home in Canada is now nearly 650,000 U. S.

dollars, which  is more than nine times household income. This divergence isn’t limited to Canada —  home prices have deviated from disposable income in a much larger fashion in other parts  of the world, making the U. S.

look very cheap. Even though Australia and Canada share a lot  in common, Australia seems to be doing better overall. They differ notably in two important  economic areas—what economists call "productivity performance" over the long term, and the growth  of living standards.

Productivity is a big deal because it shows how well a country's people can  turn raw materials, hard work, and ideas into useful stuff. Australia has been doing really  well in both of these areas for a long time. Meanwhile, Canada, along with many other wealthy  countries have seen wages stagnant for decades.

Right now, Australia is ahead of Canada by four  dollars when it comes to productivity, which means they produce more goods and services for every  hour worked. Since 1990, Australia's income growth per person has been half a percentage point higher  on average compared to Canada. And when it comes to overall income growth, Australia has been  beating Canada by 0.

8 percentage points. These might seem like small differences, but they really  stack up over time. For instance, the average income per person in Canada is around US$58,000,  while in Australia it's about US$63,000.

Australia benefited from extensive economic  reforms beginning in the early 1980s and continuing through the 1990s, which opened up  the economy to foreign trade and investment, deregulated markets for goods and financial  services, privatized state-owned businesses, and introduced sweeping competition  reforms. Put simply, the Australian economy has outperformed Canada because of  investment. At least until very recently, Australia has sustained a much higher level  of investment as a share of its economy.

Investment spending is key to new innovations  and technologies that drive productivity growth. Compared to Australians and Canadians, Americans  are generally wealthier. However, there was a time when Australians and Canadians were actually  doing better.

In the early 2000s, their economies boomed thanks to rising prices for commodities. At  one point, around the early 2010s, their GDP per person even briefly surpassed that of the United  States in terms of dollars. But their fortunes are closely linked to the demand for commodities,  which can be really unpredictable in the long run.

Canada's heavy reliance on exporting oil and  gas could face challenges due to efforts to reduce carbon emissions. On the other hand,  Australia might fare better because it has large reserves of minerals like copper needed for  the transition to greener technologies. However, Australia's economy could suffer from its  dependence on selling commodities to China.

In 2020, China started limiting imports of  Australian coal, timber, and other goods, possibly in response to Australia's calls for  an investigation into the origins of COVID-19. Despite these restrictions, Australia managed  surprisingly well, and they have since eased. However, if China's economic growth slows down  in the long term, as many economists predict, it could hit Australia hard.

While Australia's  and Canada's economic systems aren't about to collapse, their weaknesses in certain  areas could cause problems down the line.