Do Australias Foreign Economic Relations Determine Its Foreign Policies - Case Study Example

Do Australia’s foreign economic relations determine its foreign policies? Introduction: The purpose of this paper is to ascertain the truth behind the thesis statement that has been offered at the start of the paper which simply asks a question: Do Australia’s foreign economic relations determine its foreign policies? Over the course of this paper we would aim to determine whether this statement holds true for the Australian economy and what specific economic conditions have acted as directives towards foreign policy. However, for the purpose of this paper, we will be taking a rather novel mechanism of dissection: instead of creating a country or field specific hypothesis, we will try and create our hypothesis based on two of the most critically important factors in the world at the current point in time: Human Resource Outsourcing and the exchange rate structure of the country. This article has created a strong presence for itself in the Australian economy at the current point in time and certainly has deep seated implications of the entire economy in general. Another major reason behind choosing this specific article is that it exemplifies the correlation between economic necessities and political imperatives i.e. outsourcing opens a country to other countries around the world and successful business outsourcing would lead to better relations between firms based in different countries, whereby Australia would be hard pressed to establish better relations with these countries in order to facilitate the business process of the firms in their country. The exchange rate regime is a pivotal section of every politico-economic debate, which is why despite our novel approach to the topic at hand, we could not ignore and remove from this argumentation. This issue will further help us understand the implications of exchange economics decisions on the foreign policies of the country. Finally, we would try to use the analysis that would be conducted over the course of this paper to determine whether this statement is indeed applicable to the Australia or it is merely an opinionated judgment of certain sectors of the economy. [12] History of the Australian Economy: Before the economic recession that has severely slowed down the global economic process, the Australian economy was going through a purple patch without a shadow of a doubt. It was in its sixteenth year of an incessant economic expansion; which represents by far the largest period of boom in the country. Over this period, the level of wealth in the country has more than doubled whereas the overall economic output of the country has raised itself by a factor of 2/3, labour productivity by a shade under half, the capital stock in the economy by more than a half and finally, and most importantly with regards to the population, the level of employment by a quarter. The growth in the level of income per person has been a much more rapid pace in Australia as compared to Canada, the United States, the United Kingdom and even New Zealand. At this while, the Australian economy has been more strictly integrated into the global economy as the exports and imports into and out of the country have increased as a share of its overall Gross Domestic Product, and Australian foreign direct investment has been much more than investment into firms that are based in Australia as well as foreign direct investment from outside Australia into the country. What is even more remarkable is the fact that the performance of the economy before 1991, which we date as the start of the period of economic expansion, was essentially poor as the country had witness five recessions, two of which were of enormous proportions, over a period of twenty years. Now, let us move onto the major part of our case: the debate on human resource outsourcing and its impact on the economy. [13] Human Resource Outsourcing: “Human Resource Outsourcing can be defined as the purchasing by an organization of ongoing HR services from a third-party provider would otherwise normally provide for itself.” [3] The main idea behind outsourcing has always been, if you’re not good at it or if it is not worth your time, to outsource it. Find a vendor who specializes in it. If you’d rather not be bothered by trivial non-core processes then maybe you should consider human resource outsourcing. Benefits obtained from Human Resource Outsourcing: Outsourcing that is tactically determined based on strategic competencies of the firm lead to the following advantages: Cost-cutting is a major factor when it comes to human resource outsourcing even if it certainly is not the only reason for this decision. Outsourcing reduces the needs which are a requisite when a firm decides to handle its own human resources i.e. a large capital investment amongst other things. Therefore, firms in the contemporary global business landscape have been able to derive a certain manner of speed and flexibility which is essential for these firms in order for them to compete in this highly competitive environment as companies now would not have to fret over their .human resource systems and infrastructure as these matters would now be handled by the outsourcer. [1] Outsourcing allows a company to ascertain the best practices for any activity for its own firm i.e. it is able to get the best in the field to work for them. Therefore, firms can outsource their human resource functions to organizations whose core competencies lie in human resource management. [2] It is a generally accepted notion that every firm competing in the contemporary settings have a limited number of resources. Outsourcing can help a manager prioritize where it would want to essentially employ its key resources; all the while outsourcing activities that are peripheral in nature and do not particularly contribute towards the service of the customer. [2] There a greater number and inherent degree of risks when it comes to matters related to human resources. The cost that is accrued whilst one provides high quality services related to human resources are prohibitive in nature. Now when a firm decides to outsource human resources to an external vendor, then these concerns become the headache of the vendor and do not remain a critical problem for the central firm; who in turn undertakes these risks that are related to human resources and manages them as they are considerably better in ascertaining mechanisms on how to avoid these risks as they fall under their area of expertise. [2] Outsourcing allows a firm to access the latest technology related to the human resource management as highly developed programs have become a prerequisite in order to manage the employee data in this highly specialized world s of ours where we exist in today. [3] Specialized knowledge of human resources of the vendor are indicative of high levels of quality in the service with regards to human resource that is provided and the entity to whom the order has been outsourced to. Companies may have undergone major restructuring over which might have seen its human resource management process taken greater importance or lose its value in the firm. In order to avoid this, it is particularly helpful for organizations to outsource their human resource management services as human resource companies are exports in their fields and they would allow the host company not to loose out on the competitive advantage that can be derived from this specific business activity. [2] Companies that have undergone corporate restructuring, mergers and acquisitions, or repeated downsizing may have seen their key HR functions being taken apart and having lost pertinent expertise. This matter is resolved by outsourcing HR as HR companies are experts in their field and they also maintain their level of expertise to maintain competitive advantage. [3] Type of Risks Faced by organizations: Risk management is an essential segment of modern business. The Risk exposure of a company has risen due to increased business activities involving banking institutions across all sectors as wll as increased outsourcing activities. There are four standard types of risks faced by companies which are listed and analyzed below: Credit Risk Market Risk Liquidity Risk Operational and other Risks Credit Risk: This type of risk basically consists of basically seven categories: lending, contingent, issuer, pre-settlement, settlement, country/transfer and any other type of risks related to credit. This type of risk is usually managed by applying limits and safeguards on issuing and borrowing activities. Credit approval authorities and transaction approval process assist this process a great deal as well. Financial portfolio management techniques for this risk include Portfolio management objectives i.e. balancing the desired level of risk with diversification to maximize risk adjusted returns on investment. They also include techniques to spread risk: syndication, sub-participation, whole loan sales, credit derivatives and securitization etc. [4] Market Risk This type of risk is basically associated to the interaction of the business institution with the market in general. Basic measures of identifying these risks include the Portfolio versus transaction approach, the Trading Book v Banking Book, the Value at Risk (VaR) mechanism; which is widely used and considered most useful by many. Other key identification methods include the Volatility of trading profits and the systems for aggregating exposures to the market. This type of risk is managed primarily by the risk desirability vs. capital requirements trade-off. This represents perhaps the most significant source of volatitlity for an organization when it contemplating outsorucing its activities as that leaves the organization open to changes which are not a problem for a closed organization. [4] Liquidity Risk This type of risk is encases the ability of investments to be easily and quickly converted into liquid funds. Basic types of Liquidity risks include funding and transactional risks. We can better identify these risks by applying Gap management concepts: interest, currency, and maturity mismatches and the concepts of cash capital. Banks can manage this risk by using asset and liability management techniques: gap limits, contingency liquidity techniques using the concept of securitization. This represents the most pivotal question that has to be asked when an organization is contemplating outsourcing its activities to different organzizations: what level of a hit is the firm willing to incur on its liquid assets in order to inculcate external firms into its busienss environement and what risks of tranactions are present to this organization and the company to whom the order has been outsourced to. [4] Operational Risks The risk that a company runs during the acutal process of oursourcing its activities are known as operational risks. These risks are basically those risks to a business that only arise in the real world in light of the increasing business environment for the central organization. For example, if a company outsources its human resources management activities to an external firm and during the process of human resource management, the external firm suffers from a natural calamity and losses all the pivotal informationthat it has acculmulated with regards to the central company; then the central company bears a loss despite nothing affecting its personal scope of activities. In addition, if the human resource management process was not outsourced, the central firm would have to bear this loss. Suffice to say, the extra risk associated with the pratical conduction of outsourcing would consitute operational risk in these circumstances. [5] Analysis: The case of moving competencies The moving competencies concept is basically defined as the ability of an organization to successfully and optimally channel its resources and creativity from one genre of production to another based on different reasons. Now, the major strength of the moving competencies concept is the fact that it allows firms to optimally allocate its resources at all times by allowing it to move its resources freely and inexpensively into different manners of production. Therefore, we can say that firms have little in terms of sunk costs and all their costs are largely variable costs which allow them to freely change their structure of production. The major weakness of this concept is ironically related to its major strengths in that the rather malleable nature of production does not allow the firm to establish a solid ground in any of the different businesses that it participates in i.e. its becomes somewhat of a jack of all trades and master of none. Due to this lack of immovability, the firm is not able to continue a specific production practice for a large period of time, hence, is unable to ascertain best production practices and any other cost cutting techniques, thus, it always produces at a level that has to be considered in optimal for the firm. [6] We can clearly see now the situation in Australia at the current point in time. Firms in Australia have ascertained production techniques and best practices from business which has led these firms towards optimization of profits. In this scenario, it becomes essentially important that an inflexible dynamic is not present in front of the firms as a major obstacle during this process. Therefore, in order for the firms to realize their potential, it is especially important that they receive the complete backing of their government during this process of re-engineering. Hence, the role of the government becomes important in this sense. The other major point that government needs to take into consideration is the risk involved with human resource outsourcing. When an organization out sources its products to a disparate firm which doesn’t share the same vision, philosophies and culture, then there is a great propensity of a movement of these said attributes into a shared set of beliefs for both these firms. Now it is essentially important for the government to realize and subsequently monitor this flow of ‘soft’ information into the country and/or out of it as this has the ability to change the entire fabric of the society and if human resource outsourcing could lead to the benefit of a few firms at the expense of the larger society, then it is a matter that the government has to intervene in and supervise in order to ascertain the proper conduction of business; which does not come at the expense of the society. [14] Now, we will move onto the case of the exchange rate regime. This, despite not being the focal point of our paper, is an extremely important issue which cannot be ignored and has to be considered during the formulation of the foreign policy. Australian Exchange Rate Regime: The December of 1983, was to prove a huge turning point in the history of the Australian financial sector and its relevant activities. This was the time when the Australian government of that time made the move to dispose of the managed exchange rate system, whereby they kept the exchange rate pegged to a certain level against a base currency, thereby, initiating the commencement of the first period of floating exchange rate system which is the present system meaning that it has withstood the many changes in fiscal and monetary macroeconomic policies till date. [7] A key thing to note is that the system implemented by the Australian government in 1983 came after similar steps of abandonment had been made by other governments’ vis-à-vis their respective managed exchange rate systems. Since the initial change till almost a decade later, the Australian government implemented different systems that were considered to be more flexible than their respective predecessors. [8] Despite these efforts, none of the proposed systems proved to be easily applicable and implement able strictly from the point of view of performing the monetary policy of the country in a global landscape that was witnessing continuously increasing levels of globalization of the financial markets and drastic and incessant shifts in the levels of inflation and overall economic activity around the world. Approximated flow of capital from period to period categorically dented any attempts that were initiated in a bid to bring together the different goals of the exchange rate system and the macroeconomic stability of the country. [9] [10] Now, the decision taken by the Australian government to put the currency on a floating exchange rate had monetary policy implications at the back of it, but also had the added objective of the decreasing the government induced conformity that had been brought to the financial system in general. [11] Impact on the Foreign Policy: Based on this brief historical outlook, we can see that the exchange rate regime in a country plays a particularly important role in determining the activities of the country. In Australia, before 1983, during the fixed exchange rate regimes, countries where the price level of goods was lesser than that prevalent in Australia were more desirous to the Australians as compared to then those where the level of inflation was greater than that compared to Australia. This was largely due to the fact an Australian basket of good would be able to receive more goods in return in countries with lesser price levels during a fixed exchange rate regime. However, during a floating exchange rate regime, Australia would be more interested in knowing the interest rates in the foreign countries as it would essentially desire the interest rate in Australia to be higher than the interest rate in the foreign country in order for its currency to appreciate in the future. Therefore, under each exchange rate system, Australia would have different preferences vis-à-vis which countries it would like to trade with which would further determine which countries it would like to build better relations with, hence, determining its foreign policy. Conclusion: Foreign policy is a very significant part of any government’s activities; however, whether fortunate or unfortunate, every decision for every government is solely geared towards the economic growth of the country. Therefore, one has to somewhat begrudgingly agree to statement at hand as despite every government’s personal interests, it can only befriend those who can benefit itself and its people while avoid those like a plague who could be detrimental towards their activities. Bibliography 1. Bajpai, N., Sachs, J., Arora, R., & Khurana, H. (2004). “Global services sourcing: Issues of cost and quality” [CGSD Working Paper No.16]. Retrieved August 30, 2008, from http://www.earth.columbia.edu. 2. 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Poterba and L.H. Summers (1990a), ‘Speculative Dynamics’, NBER Working Paper No. 3242. 10. Tease, W.J. (1990), ‘The Balance of Payments in the 1980s’, Reserve Bank of Australia Research Discussion Paper No. 9004 11. Dwyer, J., C. Kent and A. Pease (1993), ‘Exchange Rate Pass-through: The Different Responses of Importers and Exporters’, Reserve Bank of Australia Research Discussion Paper No. 9304. 12. John Edwards, John (2006) “Quiet Boom”, Lowy Institute Paper 14, Lowy Institute for International Policy 13. Edey, M. and M. Britten-Jones (1990), ‘Saving and Investment in the 1980s’, Reserve Bank of Australia Research Discussion Paper No. 9003. 14. Henry, Ken. The fiscal and economic outlook: address by Dr Ken Henry to the Australian Business Economists, Tuesday 17 May 2005. 15. McLean, Ian. (2004) “Australian economic growth in historical perspective.” Economic Record Vol. 80 No. 250, pp 330–345. Read More