Realizing Economic Growth in Western Australia

Australian landscape with large plume of smokeThe Growth Lab worked with the Government of Western Australia (WA) through its Department of Primary Industries and Regional Development (DPIRD) between 2019 – 2020. The project aimed to identify both high-potential economic diversification opportunities and structural challenges to sustained and inclusive growth. Our research team applied growth diagnostic and economic complexity methodologies to inform policy recommendations in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across WA.

Western Australia has experienced highly imbalanced economic growth, both over time and among regions. Its past engines of growth have been dominated by its world-leading mining sector together with other primary industries, but the economy had few complementary engines of growth. This has exposed WA to commodity price-driven boom-and-bust cycles, where booms manifest in unsustainable stresses on key markets, including housing and real estate, and busts result in unfortunate levels of job loss. Repeated cycles, including an extended economic expansion tied to commodity prices between 2002-14, have entrenched structural features of WA’s productive structure that constrain the emergence of a more diversified, resilient and inclusive economy. 

The Growth Lab used its Growth Diagnostics and Economic Complexity methodologies to analyze the State of Western Australia’s economy and to identify avenues for productive diversification and sustainable economic transformation both at a state and regional level.

Key Diagnosis

Diagnosis of Systemic Barriers to Diversification

WA’s productive structure has generated several self-reinforcing negative externalities that have undermined the emergence and scaling of nascent industries and have intensified over the last two decades. These externalities persist because of several causal channels. First, WA’s labor market struggles to respond to volatile demand for labor due to a mix of natural and policy-driven factors. This leads to persistently high wage premia and painful labor market dislocations. Second, fiscal policy is pro-cyclically oriented, which intensifies boom-bust cycles, whereas counter-cyclical fiscal policy would buffer shocks. Third, public good provision effectively serves the existing structure of the economy and population dynamics, but does not serve the needs of a diversified economy. These systemic issues require systemic solutions.

Policy Framework to Address Systemic Issues

The Growth Lab’s extensive Research Findings and Policy Recommendations Report summarizes its earlier Growth Perspective Report and Economic Complexity Report and provides an overarching framework to overcome these interacting issues so that greater economic diversification may take place. The ultimate goal of this policy framework is to create the conditions for more sustainable and resilient economic growth to take place in order to create more and better job opportunities for generations of Western Australians. The framework is structured around three main policy goals — namely, achieving labor market balance, counter-cyclical fiscal policy, and better alignment of public goods provision — and the cross-cutting goal of actively supporting the development of new engines of growth. For each policy goal, the report outlines key principles that must be utilized to address underlying factors that cause systemic problems to persist. The report also discusses a range of policies and processes that may be appropriate under each principle of the framework.

Location of Promising New Opportunities in Custom-Designed Employment Space

While addressing these systemic barriers is necessary to jumpstarting diversification and allowing for the growth of nascent industries, active approaches can be taken to help coordinate the removal of barriers for particular industries and within particular locations. The Growth Lab’s Economic Complexity Report analyzes WA’s existing productive capabilities and identifies a range of economic activities that would be likely to thrive in the state if obstacles are overcome. The report presents specific industries that are grouped in the following areas: (1) primary industries and related; (2) intermediate inputs and materials manufacturing; (3) technology and advanced manufacturing; (4) professional services; and (5) tourism.

Project Dates

2019 - 2020

FUNDED BY

State of Western Australia, acting through its Department of Primary Industries and Regional Development

TEAM MEMBERS

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Publications

Western Australia – Research Findings and Policy Recommendations

Hausmann, R., et al., 2021. Western Australia – Research Findings and Policy Recommendations.Abstract

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia.

This report is organized in six sections, including this brief introduction. Section 2 is an Executive Summary. Section 3 explains the methodologies of Growth Diagnostics and Economic Complexity, including its theoretical foundations and main concepts. Section 4 describes the main findings of the Economic Complexity Report, including a characterization of Western Australia’s complexity profile. This is done at the state, regional, and city levels. Additionally, this section identifies diversification opportunities with high potential and organizes them into groupings to capture important patterns among the opportunities. This section also contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions. Section 5 highlights the main findings of the Growth Perspective Report. This section describes the economic growth process of Western Australia — with a focus on the past two decades — and identifies several issues with the way that growth has occurred. This section highlights three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The section provides perspectives on the ways in which each of these channels have hampered the quality of growth and explores the deep-rooted factors that underpin these adverse dynamics. Section 6 introduces a policy framework that can be leveraged by WA to capitalize on revealed diversification opportunities and address the factors that impact the quality of the growth process of the state.

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Economic Complexity Report for Western Australia

Hausmann, R., et al., 2021. Economic Complexity Report for Western Australia.Abstract

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development (CID) at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia.

This Economic Complexity Report is organized in six sections, including this brief introduction. Section 2 explains the methodology of economic complexity, including its theoretical foundations and main concepts, as well as the adjustments that were required to obtain the required export data at a subnational level and incorporate the service sector to the analysis. Section 3 describes the structure of the WA economy, identifying its productive capacities and exploring its complexity profile. This is done at the state, regional, and city levels. Section 4 identifies industries with high potential and organizes them into groupings to capture important patterns among the opportunities. Section 5 contextualizes the opportunities further by identifying relevant viability and attractiveness factors that complement the complexity metrics and consider local conditions, as well as a criterion for regional participation in the state-wide diversification strategy. Finally, Section 6 summarizes the main findings of this report and discusses implications for Government of WA strategy and policy toward capitalizing on these revealed opportunities.

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Growth Perspective on Western Australia

Hausmann, R., et al., 2021. Growth Perspective on Western Australia.Abstract

The Government of Western Australia (WA), acting through its Department of Primary Industries and Regional Development (DPIRD), invited the Growth Lab of the Center for International Development at Harvard University to partner with the state to better understand and address constraints to economic diversification through a collaborative applied research project. The project seeks to apply growth diagnostic and economic complexity methodologies to inform policy design in order to accelerate productive transformation, economic diversification, and more inclusive and resilient job creation across Western Australia. As its name implies, this Growth Perspective Report aims to provide a set of perspectives on the process of economic growth in WA that provide insights for policymakers toward improving growth outcomes.

This Growth Perspective Report describes both the economic growth process of Western Australia — with a focus on the past two decades — and identifies several problematic issues with the way that growth has been structured. In particular, this report traces important ways in which policies applied during the boom and subsequent slowdown in growth over the last twenty years have exacerbated a number of self-reinforcing negative externalities of undiversified growth. The report analyzes three key channels through which negative externalities have manifested: labor market imbalances, pro-cyclicality of fiscal policy, and a misalignment of public goods. The report includes sections on each of these channels, which provide perspectives on the ways in which they have hampered the quality of growth and explore the reasons why problematic externalities have become self-reinforcing. In some cases, new issues have emerged in the most recent iteration of WA’s boom-slowdown cycle, but many issues have roots in the long-term growth history of WA.

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ATLAS OF ECONOMIC COMPLEXITY