How close are we in becoming an ‘insourcing’ economy?

The Australian economy is one of the largest in the world. Patrick Gibson explains why we are far from becoming an insourcing economy by providing some historical background.

First, a background on the history of the Australian economy: According to Wikipedia (which is actually a reliable source) the Australian economy is one of the largest capitalist economies in the world, possessing a gross domestic product of US$1.57 trillion as of 2012. In the 1800s there was a large interest in mining properties in Australia.

Before this, the British Australian economy relied on fine wool and other commodities for British markets. When gold was discovered in 1851, it led to an increased demand in gold, which increased immigration. Less people were satisfied when they went to Australia and found none of the precious minerals that had been promised, therefore, wool retook its niche as the main product so that the immigrants at least had something to show for their efforts.

In 1861, the first Australian Stock Exchange opened in Melbourne. As fertile land decreased and became scarcer for new settlers, wool producing industries increased their land holdings to have more foothold and more profit. In the early 1900s however, new goods were becoming part of the Australian market, and exportable goods – wheat, dairy and other farm produce – slowly overtook wool as they did so. This was in part due to the better preservation of these products in shipping from refrigeration and disease-proofing of certain agricultural products.

The manufacturing sector of the economy experienced its peak growth right after World War II because of the demand for various materials that only manufacturers could provide. This boom ended in 1974, after the growth was too coddled by the government and failed to become competitive internationally. The time to the present situation has been alike. There is growth in the economy.

We now define a few key terms in economics which will be used.

Gross National Product (GNP) is the total produce of all the businesses of a country that belong to the country, whether or not the business operates within the country.

Gross Domestic Product (GDP) is the total produce of all the businesses inside a country.

The definition of insourcing, in simpler terms, is that a company stops hiring (or does not hire) from outside contractors and starting to perform the functions the contractors did by themselves. Insourcing is a sign of self-dependence – not independence, because companies still rely on each other to perform tasks. An extreme and nationwide example of this is Japan’s Insei, the Cloistered Rule, where Japan virtually locked themselves out from interaction with foreigners to develop a sense of nationalism, among other things.

In contrast, outsourcing is the opposite – the contracting of third parties to perform certain business functions and processes. This is usually done when a company has no way of doing the things an outsourcer can do as efficiently and as cost-effectively as an external contractor can do it.

Related to insourcing and outsourcing is backsourcing, where a formerly outsourced business process is insourced instead. For instance, if a company learns the necessary process to make a product or service more efficient and cost-effective, it may stop outsourcing the production of this product and do it themselves.

Insourcing is different from inshoring. Inshoring is moving the operation of business from another country back to the country of origin. Inshoring has the advantage of raising GDP.

Offshoring is the transport of certain business processes overseas. This raises GNP, but does not affect GDP.

The Australian economy at the moment is far from becoming an insourcing economy. One of the major contributing factors to this is that sourcing companies in China are cheap. China provides very cheap labour and manufacturing. The tag “Made in China” is a cultural meme because so many things are made in China, after all.

Australia is working far too much on exporting its raw materials and re-importing them as finished products, which is in a way outsourcing. However, the main strength of the Australian economy is the fact that it handles money very often and in large amount. Banking companies comprise more than half of the top ten companies in Australia, which allows it to stay a first world country. Banks can run on money alone, and, in their own way, they generate money by the fees for money handling, safe-keeping, transfer, etc.

Trying to industrialise more may help the Australian economy, but the scarcity of fertile lands may make this a difficult venture. Australia is a long way from becoming an insourcing economy. However, this is not necessarily a bad thing.