Business Council and McKinsey say Australia needs improved competitiveness to stay prosperous

Yesterday’s speech by Business Council of Australia President Catherine Livingstone, entitled Vision for a Competitive Australia, makes an important contribution to the national economic policy debate. Ms Livingstone argues that after two decades of growth – driven by an economic reform process and by a resources boom – we face the question of how to achieve continuing growth and maintain our national prosperity.

In answering that question, we need to recognise three fundamental forces which are transforming the global economy – and Australia’s. The first is the impact of digital technology – which as Ms Livingstone points out is ‘making every sector tradeable and the market for labour global.’ (I spoke about similar issues in my speech to the Centre for Independent Studies last week, entitled Our national competitiveness and where the digital economy fits in.)

Secondly, there is demographic change, at both ends of the age scale. As the population ages, we face higher health care and social welfare costs.  At the other end of the spectrum, she argues that we face ‘a worrying increase in youth unemployment as digital technology drives the phenomenon of jobless growth.’

The third force highlighted in Ms Livingstone’s speech is the rise of global value chains – meaning that 70 per cent of global trade is in intermediate goods and services and capital goods, rather than end products and services. In turn, if you are to increase export earnings you need to understand global supply chains and where your product fits in. One success story she highlights is New Zealand’s dairy exports – rising from around AUD 2 billion to AUD 9 billion between 1990 and 2013, particularly meeting demand from the growing middle class in Asia. Australia’s dairy export performance has been much less impressive.

Along with Ms Livingstone’s speech, the BCA released research commissioned from consulting firm McKinsey, in a report entitled Compete to Prosper: Improving Australia’s Global Competitiveness (available here along with related BCA work.)  The McKinsey paper argues that there are four priorities to maintain our prosperity:

1. Australia must improve its economic competitiveness as ‘job number one’ for our long term prosperity.  That means increasing our level of trade (specifically increased exports, although the corollary will be increased exports); today our level of trade (defined as the sum of exports and imports as a proportion of GDP) is about half that of South Korea and Germany.

2. We need to focus on the sectors and tasks where we can win.  McKinsey divides the economy into five sectors and argues for a focus on two of them, Advantaged Performers (mining, agriculture, education and tourism) and Latent Potentials (food manufacturing, pockets of advanced manufacturing and selected niches in global supply chains).

3. We must improve the competitiveness of individual sectors, including through securing investment and ‘continuing to move away from firm-level government assistance.’  McKinsey particularly highlight the need to improve productivity in sectors making up much of our economy, the Enabling Industries and the Domestic Core.  As digitisation continues, these sectors are becoming increasingly trade exposed – for example as retail stores face ever more competition from online providers based all around the world. 

4. We need a purposeful approach to raising Australia’s competitiveness, with key actions including (i) continuing to attract investment and people from around the world (ii) regulating sectors of our economy in a way that recognises the global context – in other words, overregulation in Australia can make us an unattractive place to do business (iii) firms in Australia need to innovate and rethink how they use technology (iv) create pathways to the jobs of the future – ensuring our mix of skills matches the kinds of jobs that will grow in importance, particularly what McKinsey calls ‘Interaction Jobs’ involving less routine tasks and more individual judgement.

The BCA and McKinsey work highlights some critical challenges facing Australia. Clearly government policy settings are key as we respond to these challenges, as Ms Livingstone highlights: “The idea that governments don’t have a role in wealth creation, and can leave it all to business, ignores the reality that government controls key inputs into growth.”

This statement, while sensible, overlooks a key danger to wealth creation coming from the opposite direction: the notion beloved of the Rudd Gillard Rudd Government that some sectors are too important to leave to the private sector.  This was its justification for the $43 billion NBN and the $10 billion Clean Energy Finance Corporation. (Another telling example was the proposed intermodal freight terminal at Moorebank in Sydney’s southwest, which oddly the previous government thought it needed to own and operate.)

The work of the Abbott Government is consistent with many of the themes in this report. Trade Minister Andrew Robb, for example, has spoken repeatedly about the importance of Australia playing to its strengths.  Similarly, the McKinsey report highlights how misdirected much of Australia’s industry assistance has been in its focus on declining sectors. The Abbott Government’s recent decision not to provide yet more assistance to our sub-scale, uncompetitive automotive manufacturers is very much in line with this finding. 

But there is much more to do as we work to find the new sources of growth in our economy. This work by the BCA and McKinsey is part of making the case for the further transformation which our economy requires.