Australia's international ranking on competitiveness
Posted : Friday, August 24, 2012
Speech delivered by Professor the Hon Stephen
Martin at the Export Council of Australia/Shipping Australia
Limited Seminar: Building competitiveness in our export
and maritime industries on Friday 24 August,
Thank you for the opportunity to be with you today.
CEDA has a long and distinguished history of thought leadership
in framing the economic issues that affect Australia. In particular
we have taken a keen interest in the interconnection between
productivity, competitiveness and Australia's export industries'
future and what define these.
While some recent statistics for GDP growth and employment paint
a picture of an economy on steroids, there are some lingering
questions about macro and micro measures of the economy's health
and the current and future contribution of various sectors to the
nation's long-term economic sustainability. These questions go
directly to the issues confronting this conference - and will help
shape the very nature of Australia's future economy.
Australia in August 2012 is a very interesting place. Much is
still being heard about a two-speed or multi-speed economy- an
economy very much being sustained currently by the resources
sector. Wealth generation, despite some pessimism as to its
sustainability, is very much centred in the mining industry that
employs about seven per cent of the workforce.
But other sectors are not doing as well, particularly those that
also have an export focus. Genuine concerns have been voiced by the
higher education sector, tourism operators and manufacturing
industry about their economic viability. In some sectors
fundamental structural adjustment is occurring at a substantial
pace affected as they are by the value of the Australian dollar,
international competitiveness and skill shortages.
There is no doubt that the international environment is a
significant influence. Europe's woes, uncertainty about the United
States' economy and concerns about China's economic future,
depending on who you believe, are all considerations in how
Australia's competitive advantage and productivity challenge may
play out in the coming years.
So what effect then are the twin determinants of prosperity-
productivity and competitiveness- having on Australia's current
economic circumstances, and what can we assume will be the future?
What strategies are needed to tackle the issues confronting
Australia's current and potential export industries, what needs to
be done to rebuild Australia's competitive strength and how can
lifting our productivity assist this process?
Productivity is the current buzzword used in the media and
elsewhere to describe everything that is wrong with Australia's
Some use it for shorthand to describe what it considered the
real bogey of the current Australian economy- industrial relations,
or more precisely, the Fair Work Act 2009.
But when we speak of productivity it is far more than that. It
is what the Reserve Bank of Australia defines as the efficiency
with which an economy employs resources to produce economic
As Paul Krugman said:
''Productivity isn't everything, but in the long run, it's
almost everything. A country's ability to improve its standard of
living over time depends almost entirely on its ability to raise
its output per worker.''
It is now widely recognised that growth in Australian labour
productivity-output per hour worked-has slowed since the late
1990s, notwithstanding stronger data in the past few quarters.
Labour productivity growth explained less than half of the growth
in average incomes since the turn of the century, compared to an
average of around 90 per cent of income growth over the four
Multifactor productivity-the output produced from a bundle of
labour and capital inputs-has scarcely grown at all this
decade. While the deterioration in performance is partly due
to unusual developments in mining and utilities, the slowdown from
the 1990s is broadly evident across most industries .
Labour market trends show this bifurcation in growth. Over the
three years since May 2009, employment in agriculture,
manufacturing, construction, wholesale and retail trade, and
transport, postal and warehousing services has fallen by a combined
140,700 people. At the same time, employment in the rest of the
economy increased by 733,000 people, with the mining sector alone
accounting for 120,400 jobs. Most households that have lost jobs
are finding new ones and benefiting from the mining boom.
Interestingly, it is the mining industry itself that is the
chief culprit for the productivity decline, because the hundreds of
billions the sector has been investing in new projects are yet to
result in output .
Employment growth by industry - May 2009 to May 2012
Annual average percentage change
Source: Treasury calculations based on ABS cat. no.
The notion of Australia being competitive in a global context is
one of the most critical unresolved issues facing industry,
governments and policy makers.
The World Economic Forum defines competitiveness as the set of
institutions, policies, and factors that determine the level of
productivity of a country that in turn sets the level of a
country's prosperity. In other words, a more competitive economy is
one that is likely to grow faster over time .
WEF notes there are many determinants driving productivity and
competitiveness- including education and training, technological
progress, macroeconomic stability, good governance, firm
sophistication, and market efficiency.
Using its 12 measures of competitiveness Australia dropped four
spots to 20th place out of 131 countries in its latest
survey. It found Australia's most notable advantages are:
- Efficient financial system, supported by a banking sector that
counts among the most stable and sound in the world;
- Performance in education;
- Macroeconomic situation;
- Low government debt; and
- Transparent and efficient public and private institutions,
While Australia's disadvantages are:
- Burden of government regulation;
- Business sophistication; and
IMD World Competitiveness Yearbook is an annual survey of world
competitiveness that ranks 59 countries on their ability to manage
their economic and human resources to increase their prosperity
. CEDA is the Australian partner for this survey.
This year's report painted an alarming picture of a first world
economy that was slipping in many of the measures of
competitiveness. Australia's ranking of 15 out of 59 countries
represented a drop of 10 places in two years. Australia has been
overtaken by Germany, Norway, the Netherlands, Denmark, Malaysia
Big drops in labour market and international trade
competitiveness were suggested as the key contributors to our
For labour market competitiveness significant reasons
contributing to Australia's poor ranking included the high
Australian dollar, skills shortages and the re-emergence of
industrial relations as a key national issue. While economists and
policy-makers have acknowledged for some time the negative impact
of the high dollar on sectors such as manufacturing and tourism the
reality is Australia is likely to see more manufacturing production
move overseas where production and labour costs are lower.
Australia is unlikely to compete with emerging and developing
economies in the production of low-cost, large scale manufacturing,
particularly in our own neighbourhood. Indeed, as we are constantly
reminded, Australia is a high wage, high skill economy, and
structural adjustments are required to meet the challenges that
What was also clearly highlighted in this report was that we
cannot rely on the mining boom to insulate Australia from the
current global economic slowdown.
Yet Governments and some economic commentators seem to believe
that the mining boom will go on indefinitely regardless of evidence
of slowing commodity prices and demand from traditional markets,
skill shortages and regulatory instability and barriers.
The reality is the increasing cost of doing business in
Australia is beginning to impact this sector, with commitment to
major projects being reassessed or deferred. BHP-Billiton's
deferment of Olympic Dam in South Australia is a case in point.
These same economists and policy-makers assume that the current
elevated terms of trade will return to more normal conditions while
business investment will continue for several years to support GDP.
However many of these assumptions are based on Australia's
continuing trade relationships with our Asian neighbours,
specifically in commodities, and the view that these will continue
at current levels.
Obviously a key factor to consider is the sustainability of
China's growth and whether a rapid decline in demand for
Australia's resources may occur if there is a drop in China's
It is critical to note in this respect that the actions of other
resource-rich nations, particularly in Africa are also relevant.
While Australia has a 'first mover' advantage in exploiting
resources, in the medium term the exploration and investment
underway elsewhere will have a major influence on the terms of
trade and the willingness of business to continue high-level
investment in Australia. If Australia becomes a high cost
investment destination, with regulatory uncertainty, it may price
itself out of future business investment.
Commentary around how to resolve these and other issues,
particularly whether Australia should continue to sustain
non-competitive industry sectors, is caught up only in an argument
about subsidies and employment support in marginal electorates.
I would argue that Government should only intervene with
subsidies for any sectors where a clear strategic imperative can be
demonstrated. Instead their focus should be on reducing regulatory
burdens to allow businesses to become more competitive, and invest
in skills allowing businesses with long-term viability to make the
necessary adjustments to survive the current changes in our
Another report with respect to competitiveness that received
some emphasis in the conservative media was the Economist
Intelligence Unit's Global Index of Workplace Performance and
Flexibility, released in early July. It ranked 51 nations on how
each was seen as a place to operate a business productively, fairly
and flexibly supported by three sub-index rankings in the fields of
economic performance, operating environment, and workplace policy
and regulatory framework
Australia's operating environment ranked 8th best in the world,
but our policy and regulatory framework placed down at number 19.
Economic performance ranked at 34 highlighting Australia's
stuttering productivity record over the last 10 years relative to
our global competitors. It was concluded that in a globalised
competitive world Australia's regulatory framework stands out as
overly restrictive and conducive neither to optimal performance nor
It should be noted however that this report relied on data from
2010, and many of its observations were very much skewed to
consideration of workplace relations changes that were considered
necessary to achieve flexibility.
Innovation, skilling and education
Innovation is perceived by many as the panacea for an economy's
ills. Be innovative, jobs will come and the economy will
Australians have always been innovative. From the boomerang to
the black box flight recorder, underwater torpedo, ultrasound,
bionic ear, electronic pacemaker, spray-on artificial skin to
A recent report undertaken for GE undertook a global analysis of
the innovation environment in 22 countries and assessed country
performance across seven innovation indicators . What it
concluded was that Australia was a leading nation for innovation in
university-industry collaboration, R&D expenditure, patents,
STEM education and business environment, and above average in
venture capital deals and technology exports.
It concluded that innovation was the main lever for a more
competitive economy and the best way to create jobs. Further, it
found that energy, healthcare and telecommunications would benefit
most if governments implemented more efficient innovation policies
and that innovation would be driven by SME's and a combination of
players (industry, government, universities) partnering together
over the next decade.
An important element of innovation that can lift competitiveness
and productivity in export industries is that of skilling and
education. The Federal Government has a critical role in this area.
It has committed some $3billion over six years to improve the
skills of Australia's workforce through reforms to the vocational
education and training system, delivering industry-focused
training, developing innovative approaches to support apprentices
and trainees, and encouraging workforce participation.
But education and training must obviously be targeted at meeting
Australia's skills requirements, with implications for the current
and future labour market and in skilling and educating Australia's
workers to meet future export job opportunities.
The 2012 National Workforce Development Strategy  seeks to do
this by seeking to predict employment and skills needs to 2025 by
developing four scenarios for Australia each with particular
relevance to Australia's export industries.
These confirm demand for high levels of skills can be expected
to continue into the future in response to technology-induced
change, structural adjustment, a progressive shift to
services-based industries, Australia's changing demographics and
increasing globalisation with Asia a burgeoning market for
The fact is that education and training is critical to ensuring
an appropriately-skilled workforce is available to meet the current
and future requirements of Australia's economy. Investment in
these by governments and business must be coordinated, incentives
provided and clear strategies adopted that deliver meaningful
outcomes. They will be ultimately be measured by improving
productivity, our ability to respond to global competitiveness and
our economic sustainability.
This then brings us to consider what this means in terms of
opportunities for Australia.
Clearly there are some lingering questions about Australia's
ability to rise to the challenge of improving competitiveness and
productivity as well as the current and future contribution of
various sectors to the nation's long-term economic
There are also implications with respect to what export
industries will emerge in the future, what jobs will be
needed to support these and what are the implications for policy
makers in achieving these desired outcomes to ensure sustainability
In my view it comes down to the right reform agenda that is
comprehensive and inclusive.
CEDA's Council on Economic Policy has noted that Australia would
only need to improve productivity growth to around 1.5 per cent per
annum, although still low in historical norms, to potentially
underpin robust economic growth for the next decade.
Australia's current economic prosperity has been supported by
past policies that have focused the nation on its international
competitive advantage, including innovation and educational
up-skilling, and that focus needs to be reinvigorated. But it must
In the 1990s Australia was a leader in business innovation but
unfortunately this is no longer the case. A lack of global
competition and a relatively stable economy has created a
complacent society and has not provided any incentive for business
to innovate. In part this has contributed to our productivity
Increased investment in skills, in particular science, research
and technical skills, would allow us to be a leader in high value,
high-tech manufacturing and in resource extraction and development,
increasing our ability to deliver high value product and a massive
It is the services sector that needs careful strategic support
from governments to take advantage of opportunities being presented
through the current phase of industrial restructuring, including
substantial and increasing export opportunities.
Continued technological advances are expanding what constitutes
tradable goods and services. While this represents a potential
opportunity for a highly educated nation such as Australia, it also
represents a potential challenge to sectors of the economy that
have not been globally integrated or exposed to international
competitive pressures in the past. These include significant parts
of the services sector.
Mining engineering, IT, legal, accounting, high-value
manufacturing, health and education services are but some of the
components of the future wave of employment generating and
export-oriented opportunities that must be exploited.
However, a significant risk for Australia is that jobs growth in
the future will be determined by these sectors that have
historically not exhibited high levels of productivity growth.
In particular, the fact that the National Competition Policy
reforms of the past largely ignored the major services sectors may
mean Australia's economy is not as well positioned to adjust to
changes in those areas as it should be.
With the mining boom taking the spotlight in recent years, it is
easy to forget that the services sector provides 80 per cent of
Australia's employment and when the resource-related investment
diminishes, as is likely at some stage, future employment
opportunities will most likely continue to predominantly be in
Australia's current economic prosperity owes much to the
sweeping economic reforms of the 1980s and 1990s, the minerals boom
and associated investments and fiscal and monetary policy working
in tandem to secure Australia's resilience in the face of global
However, the large employing sectors of health and education
were not a focus of those reforms and have had only limited focus
in terms of productivity since. Yet it is precisely in these areas
that major innovation should have occurred. Rather
intergovernmental squabbles over responsibility, funding
arrangements and commercialising research have dominated.
With an ageing Australian population and improving prosperity in
Asian nations, it is more important than ever that these sectors
are exposed to meaningful reform to enhance their effectiveness and
capacity for innovation. Export opportunities are expected to be
robust, but only if their potential is realised through an
appropriate policy mix.
We need reforms that focus on building competitive capability to
ensure they are better equipped to adjust - and innovate - as
future competitive pressures evolve. Reforms that focus on building
competitive capability, through reviews of areas such as the tax
system, workplace relations, regulatory frameworks and public
spending are essential.
Increased investment in skills, in particular science, research
and technical skills, is also a vital component, and would allow us
to be a leader in high value, high-tech product and knowledge.
Developing a long term skills plan for Australia is a vital
component in making sure that we can capitalise on growth sectors
that can and will contribute to Australia's future prosperity. But
the policy must ensure the future of work is the driving force
Achieving the changes necessary cannot simply fall to government
to determine and implement.
The private sector needs to step up as well and invest far more
in innovation, research and development, improving productive
capacity through new business systems and cooperative working
relations and not simply put their collective hands out for
Recognition of the need for vital economic change helped drive
public acceptance of the sweeping reforms of the 80s and 90s. These
have been key factors in protecting Australia from the
international economic turmoil of recent years. The current
economic climate provides a real opportunity to again drive a
reform agenda with a long-term vision, but it must be driven in
unison by both government and business.
 Dolman, B and Gruen, D (2012) Productivity and
Structural Change Paper presented to 41st Australian
Conference of Economists, Melbourne, 10 July.
 World Economic Forum (2012) 2011-12 World
Competitiveness Report, WEF, Geneva
 IMD (2012) World Competitiveness Yearbook,
24th Edition, Lausanne.
 Economist Intelligence Unit (2012) Global Index of
Workplace Performance and Flexibility, July
 Australian Workforce and Productivity Agency (2012)
Future Focus: Australia's skills and workforce development needs
Discussion paper, July, Canberra
Australian Workforce and Productivity Agency (2012) Future
Focus: Australia's skills and workforce development needs
Discussion paper, July, Canberra
Department of Education, Employment and Workplace Relations
(2012) Review of the Fair Work Act 2009, Canberra
Deloitte Australia (2011) Building the Lucky Country: Where is
Your Next Worker?
Dolman, B and Gruen, D (2012) Productivity and Structural Change
Paper presented to 41st Australian Conference of
Economists, Melbourne, 10 July.
Economist Intelligence Unit (2012) Global Index of Workplace
Performance and Flexibility, July
Gelb, David (2012) Research and Development and Innovation
Presentation to CEDA Forum, Sydney, 6 July 2012
Henry, Ken (2003) Economic prospects and policy challenges,
Address to the Australian Business Economists, Sydney, 20 May
IMD (2012) World Competitiveness Yearbook, 24th
Milken Institute (2012) Innovation Report
Productivity Commission-ABS (2011) Competition, Innovation and
Productivity in Australian Businesses
Stevens, Glenn (2012) The Lucky Country, Address to The Anika
Foundation Luncheon, Sydney, 24 July
World Economic Forum (2012) 2011-12 World Competitiveness
Report, WEF, Geneva
Return to the news