Introduction
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 and competitiveness and what define these, with a
significant emphasis on education and workforce skilling.
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.
Retailers have complained the loudest, although the latest figures
for May and June would indicate shoppers have returned on the back
of interest rate cuts and government carbon compensation. There are
also signs that the expected skills shortages in the mining
industry have not materialised, or at least are being appropriately
managed.
Genuine concerns however have been voiced by tourism operators
and manufacturing industry about their economic viability, no more
so than in Victoria where fundamental structural adjustment is
occurring at a substantial pace. 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.
The international environment is also a significant influence.
Europe's woes, uncertainty about the United States' economy and
concerns about China's economic future 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 rebuild labour market strength and to
invest in skilling and education as critical contributors to
lifting Australia's competitiveness and productivity?
Productivity
Productivity is the current buzzword used in the media and
elsewhere to describe everything that is wrong with Australia's
economic performance.
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.
Reserve Bank of Australia defines it as the efficiency with
which an economy employs resources to produce economic output.
Economist Saul Eslake says productivity is what a workplace, a
business … or a nation gets by way of goods and services for what
it puts in, in terms of labour, capital and other factors of
production.
US economist Paul Krugman (1994) 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.''
The most widely discussed link between national prosperity and
regulatory arrangements in the labour market is through
productivity [1]. There are other important links between the
labour market, its regulatory arrangements and national prosperity.
These include the overall growth rate of wages (which influences
consumer price inflation), the response of wages to changes in
demand for and supply of labour, the amount of industrial
disputation and time lost associated with disputes, the regulatory
burden imposed on employers, and the level of employment and
participation in the workforce.
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
previous decades.
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 [2].
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 [3].
Employment growth by industry - May 2009 to May 2012
Annual average percentage change
Source: Treasury calculations based on ABS cat. no.
6291.0.55.003.
Competitiveness
The notion of Australia being competitive in a global context is
one of the most critical unresolved issues facing industry,
governments and policy makers.
World Economic Forum (WEF) defines competitiveness as the set of
institutions, policies, and factors that determine the level of
productivity of a country. The level of productivity, in turn, sets
the level of a country's prosperity. Productivity level also
determines the rates of return obtained by investments in an
economy, which in turn are the fundamental drivers of its growth
rates. In other words, a more competitive economy is one that is
likely to grow faster over time [4].
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 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,
physical security.
While Australia's disadvantages are:
- Burden of government regulation;
- Innovation;
- Business sophistication; and
- Infrastructure.
In late May, the findings of the IMD World Competitiveness
Yearbook, an annual survey of world competitiveness that ranks 59
countries on their ability to manage their economic and human
resources to increase their prosperity were released [5]. 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
and Luxembourg.
Big drops in labour market and international trade
competitiveness were suggested as the key contributors to our
slide.
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, highlighting the
increase in the number of high profile disputes in the Australian
economy.
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
this brings.
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
economic activity.
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
economy.
A second major 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 [6].
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
social equity.
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
Innovation is perceived by many as the panacea for an economy's
ills. Be innovative, jobs will come and the economy will
flourish.
A joint Productivity Commission-ABS report concluded that
Australian firms appear more likely to innovate if they face
stronger competition. The results suggested that innovation is
associated with better productivity outcomes [7].
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
Vegemite.
Yet the traditional definition of innovation is what most would
believe. That is, applying some new scientific principle or
improved manufacturing process to an existing industry sector to
get a better product or outcome.
It is however much more than that [8].
"Innovation is the implementation of a new or significantly
improved product (good or service), process, new marketing method
or a new organisational method in business practices, workplace
organisation or external relations". Oslo Manual
"Research and experimental development (R&D) comprise
creative work undertaken on a systematic basis in order to increase
the stock of knowledge, including knowledge of man, culture and
society, and the use of this stock of knowledge to devise new
applications." Frascati Manual
The Milken Innovation Report [9] 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.
The Report concluded that innovation was the main lever for a
more competitive economy and the best way to create jobs. Further,
it was found that the sectors of energy, healthcare and
telecommunications would benefit most in terms of job creation and
increased profits if governments implemented more efficient
innovation policies. It concluded that innovation would be driven
by SME's and a combination of players (industry, government,
universities) partnering together over the next decade.
However, the World Competitiveness Yearbook survey referred to
earlier sounded a note of caution, indicating 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
slowdown and must be addressed as a matter of urgency.
Skilling and education
When discussing productivity and competiveness, the third of the
three amigos steps up- skilling and education.
The Federal Government has a critical role in this area. It has
committed some $3 billion 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. The National
Broadband Network should also enhance productivity with education
and skilling benefits.
But education and training must obviously be linked to meeting
Australia's skills requirements, with implications for the current
and future labour market. The 2012 National Workforce
Development Strategy [10] seeks to do this. It makes some
interesting observations which touch on the key issues for policy
development:
- Skills shortages in some areas and industries threaten wage
inflation and risk growth-constraining monetary tightening;
- There are pockets of high unemployment across Australia's
regions, especially among young people; and
- There is also scope for improving leadership and management
skills to bolster innovative capacity.
In seeking to predict employment and skills needs to 2025, four
scenarios are developed for Australia.
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
Australian services.
The discussion paper also indicates that it is important that a
shift to higher skills does not leave the low-skilled and unskilled
behind. Strategies are needed to help disadvantaged groups gain
skills and employment, including better matching of human capital
with those regions and industries in need. Entry-level positions
are needed for those waiting to get a foothold on the employment
ladder.
There is no doubt that the role of the tertiary education sector
is critical in meeting these challenges. Issues concerning the mix
between theoretical and practical skills, developing jobs-ready
graduates, the impact of demand-led higher education and vocational
education and training (VET), fostering STEM (Science, Technology,
Engineering and Mathematics) subjects for Australia's future
competitiveness in the global marketplace and keeping pace in the
Asian century require appropriate policy settings.
A current issue however that needs a more rapid policy response
goes to national skill shortages, particularly in the face of
falling immigration and rising retirement. Deloitte has
examined this with respect to the positive actions business and
government can take [11].
Table 1 Deloitte 12 Levers of Economic
Prosperity
|
Population
|
Lever 1
|
Your next worker is still being educated
|
|
|
Lever 2
|
Your next worker is in the crowd
|
|
|
Lever 3
|
Your next worker is overseas
|
|
|
Lever 4
|
Your next worker is waiting for a visa
|
|
Participation
|
Lever 5
|
Your next worker is retired - or about to
retire
|
|
|
Lever 6
|
Your next worker is juggling work and
family
|
|
|
Lever 7
|
Your next worker has the ability
|
|
|
Lever 8
|
Your next worker is interstate
|
|
Productivity
|
Lever 9
|
Your next worker is not needed
|
|
|
Lever 10
|
Your next worker is in the mail room
|
|
|
Lever 11
|
Your next worker is knocking on your door
|
|
|
Lever 12
|
Your next worker may currently be on cruise
control
|
It noted that the problem in Australia in coming years won't be
a lack of jobs - it will be a lack of workers. Businesses need to
recognise that in the future:
• Competition will be for workers rather than jobs;
• An employee already working for you will be more valuable than
someone new; and
• Allowing an employee to retire without exploring the options
to keep them for longer may represent a wasted (and costly)
opportunity.
Deloitte's paper noted that Dr Ken Henry outlined three
supply-side contributors to economic growth known as the 'Three
Ps': population, participation and productivity [12] and went on to
suggest there were 12 levers which business and government
can use to solve skills problems and boost growth prospects.
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 ultimately be measured by improving
productivity, our ability to respond to global competitiveness and
our economic sustainability.
Australia's opportunities
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
sustainability.
There are also implications with respect to what jobs will be
needed in the future, what skilling needs to occur to ensure
sustainability and productivity and what are the implications for
policy makers in achieving these desired outcomes.
In my view it comes down to the right reform agenda that is
comprehensive and inclusive with education and skilling as one of
its core determinants.
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
be targeted.
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
slowdown.
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 of course 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.
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
these sectors.
Some of these sectors are not as productive, at least not as
measured by official statistics, as other areas of the economy and
the ability of them to lift productivity - of which their ability
to innovate will be a key factor - is vital.
While expenditure to drive innovation has gradually increased in
the last decade, mostly in the mining and resources sector, growth
in investment by business in many of the key services sectors is
minimal.
Conclusion
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
uncertainty.
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
behind this.
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
government subsidies.
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.