Speaking to the Melbourne Institute “Securing the Future” Conference

Last Friday I was a speaker in the final panel session at the Melbourne Institute ‘Securing the Future’ conference, along with prominent economist Judith Sloan and fellow MP Andrew Leigh, the Labor Member for Fraser (in the ACT) and former ANU economist.   This extremely important conference, sponsored by The Australian, attracted a heavyweight collection of policymakers, academics, officials and business people as speakers and participants.

Other speakers included Tony Abbott, Wayne Swan, Penny Wong, Malcolm Turnbull and Andrew Robb.

Our task in the final session was described by Judith Sloan in a piece she wrote in The Australian last Friday:

The final session sees two leading thinkers from the government and opposition - Andrew Leigh and Paul Fletcher - draw together the themes of the conference in the context of lessons for policy.

Andrew Leigh, shrewdly, chose to essentially ignore this rather challenging brief and instead spoke about two key challenges that he perceives for Australia: keeping our education system world competitive, and encouraging entrepreneurship. Being more literal-minded, in my remarks I highlighted four themes which I drew out from the conference.

The first theme was the importance of Australia getting its reform ‘mojo’ back.

Australia’s recent economic history is very much a case study of the benefits of sustained economic reform over the quarter century period from the early eighties: floating of the dollar, the entry of foreign banks, deregulation of telecommunications, the Hilmer competition process, empowering the RBA to set interest rates, privatising Qantas, CSL, the Commonwealth Bank and Telstra and introducing the GST, just to mention a few.

I spoke of this at some length in my maiden speech in 2010, noting that “Australia today is vastly better off [thanks to this process]…Our economy is much more competitive, flexible and efficient.” In 1990 Australia had the 16th highest per capita GDP in the OECD; by 2010 we were sixth.

But it is commonly observed today – and it was a theme of the conference – that the pace of economic reform has faded since 2007. We have lost our reform mojo. One piece of evidence is the reduction in productivity growth: according to a recent paper from McKinsey, annual multifactor productivity growth was 2.4 per cent from 1993 to 1999; 0.9 per cent from 1999 to 2005; and negative 0.7 per cent between 2005 and 2011.

Another is the contrasting approaches of the present government and previous governments. Under the Hawke-Keating Government we saw for example the Button plans in automotive and textiles involving the steady reduction in tariff barriers and protections. Under the Rudd-Gillard Government we have seen a steady increase in regulatory burdens and restrictions such as the new protectionist rules in domestic shipping, and the new Road Safety Remuneration Tribunal with powers to determine wages and operational practices in road transport.

Under the Hawke, Keating and Howard Governments, we saw the opening up of telecommunications to competition; under the Rudd-Gillard government we have seen the creation of a government owned telecommunications monopoly and legislation to bar new entrants operating vertically integrated broadband networks.

A third piece of evidence is the increasing weight of voices arguing against competition and against economic growth as a desirable objective – for example the Greens Party. In a recent speech Greens Leader Christine Milne said she wanted to challenge the “accusation that our detractors often throw at us that we are anti-growth” - and then said that she supported “growth in quality of life, growth in equality of society, and growth for the long term.” What she conspicuously failed to say is that she supports growth in GDP as a policy objective.

It is a truism of public policy that this loss of reform energy has happened because the resources boom has allowed this government to put off reforms that might be politically challenging.

The second theme I drew out from the conference was the need to recognise Australia’s changing competitive landscape.

Thomas Barlow, in his excellent recent book The Australian Miracle – an Innovation Nation Revisited, argues that in the nineteenth century it was recognised that Australia needed four things to be competitive: an export market - given the small size of the local market; products that could command high enough prices to offset high transport costs; products that could survive long transport times; and products that needed a relatively small labour force. In 1900, thanks to this competitive focus, we had the highest GDP per capita in the world.

Then, for much of the twentieth century, Australia pursued an economic strategy which made little sense. We thought we could turn our back on world competition and operate ‘the Australian settlement’ behind high tariff walls. Outside observers from time to time commented unfavourably on these delusions, with Singaporean leader Lee Kuan Yew famously saying Australia risked becoming “the poor white trash of Asia”.

In my view one of the key challenges for Australia today is recognising our changing competitive landscape. Some countries are rising and some are falling and that affects who our competitors are.

For example, typically we benchmark ourselves against Europe and the US on issues like government spending and tax as a share of GDP and on the share of government expenditure going to expenditure on social security. (Today the Commonwealth government spends around $130 billion on social security; this is over one third of the total budget of around $374 billion.) Increasingly, however, Australia’s competitors are countries in Asia which spend less on social security and charge lower taxes.

In resources – the engine room of our economy – we are seeing a supply response to the boom as new mines come on stream in many countries in Asia and Africa; increasingly the way for a large mining company to diversify its portfolio and lower its risk is to allocate capital away from Australia

But in my view the more profound set of changes comes from two factors. The first is the increasing mobility of labour and capital. Australia is a capital importing nation and we need to recognise that there are more competing investment opportunities than ever before.

As to the mobility of labour, there are estimated to be around one million Australians in our global diaspora. If our economic performance depends more than ever on brainpower, then we need to be alive to the risk of losing too many people overseas. In New Zealand, for example, this has been a significant issue, with a high proportion of the country’s most talented and best educated people moving permanently to Australia or the wider world. It is good and natural that smart Australians will be attracted to live and work around the world – but we need to make sure we are getting plenty of smart and capable people coming into Australia under our immigration programme as well.

The second fact is the ever growing share of our domestic market open to international competition. The internet is exposing much of our domestic economy to international competition which did not previously exist.

This is affecting sector after sector. For a decade or more we have been familiar with call centres in India or the Philippines serving customers of Australian banks or travel agencies or phone companies. Increasingly professional services face such competition too, with law firms, accounting firms, architects and others able to serve clients in London or New York or Sydney using professionals based in Mumbai or another lower cost location.

The real world is increasingly resembling the economics textbook. As international competition becomes more intense, it is ever harder to operate in sectors where you cannot match international cost structures – and it is ever more important to focus on industries where you do have a competitive advantage.

The third theme I discerned from the conference, and which I think is extremely important in public policy, is playing to our strengths as a nation.

My Coalition colleague Andrew Robb been talking about this for a while: earlier this year he wrote that in all his time in politics, “…there has never been a serious debate about the top things we do as a nation: the strengths we should leverage, those we should foster and not compromise.”

In business, it is axiomatic that you should focus on your strengths – and that you are more likely to succeed if you do a few things well than if you try to be all things to all people. (In his session at the conference, Nick Greiner made a related point: pointed out that with over eighty items on the Council of Australian Governments agenda, you might as well have zero items as nothing will get done. If you want to achieve reforms, you need to focus on a few big ones.)

Yet in politics there seems to be almost the opposite instinct: if you have a competitive advantage in a particular sector, you should be worried. For example, there is lots of debate about whether we are too heavily reliant on mining and resources and we are running down sectors like manufacturing.

In Greens Leader Christine Milne’s speech I quoted earlier, she said we need to “invest in a future that doesn’t rely on digging up, cutting down and shipping overseas.” In other words, the Greens Party wants us to exit a sector where we are truly world class and world competitive. This makes no sense to me.

Of course national economies are very different to corporates, and very frequently (and thankfully) our economy goes in directions which naturally make sense, regardless of the decisions made by bureaucrats in Canberra.

But surely it would make sense to have a guiding principle in our policy settings that we will seek to play to Australia’s strengths and not place impediments in the way of companies in those sectors? Few would disagree that we have great strengths in resources and agriculture. Another area of growing strength is financial services, leveraging our $1.4 trillion in national superannuation savings. Australia is a major exporter of educational services, and we clearly have areas of world class research, such as in medical technology.

What can governments sensibly do to build on these strengths? Recently Dr Chris Roberts of Cochlear gave the JJC Bradfield lecture on the topic of “Innovation in Australian Business.” He argued that government’s priorities should include reducing regulation (in other words, don’t stand in the way of private sector businesses that are world-competitive); an excellent education system producing people with good strengths in STEM (science, technology, engineering and maths) subjects; and leveraging Australia’s attractiveness as a destination to bring in smart and qualified people.

The final theme I drew out was political salesmanship to sell necessary reform. The GST was a necessary and desirable reform, championed by most tax economists; but it only became a reality thanks to the shrewd and effective political salesmanship of John Howard and Peter Costello. Conversely, whatever you think of the merits of the minerals resource rent tax announced by Kevin Rudd and Wayne Swan in 2010, it is inarguable that they did an atrocious job of selling it; because they failed to make a public case for it (or even show that they understood how it was supposed to work…) this tax was dead on arrival.

In presentation after presentation at the conference, it was suggested that a particular reform was desirable but the politics made it impossible. I think this is the wrong way to frame the question. Economists and policy makers should be saying: this would be a hard reform but it has very big payoffs, and here are benefits which I think politicians can sell. That doesn’t mean that every such reform will be taken up by politicians; but over time some might be.

Smart politicians recognise that they can achieve reform but they need to make the case for it over time. They recognise that you should focus on a finite number of key items rather than trying to do everything (as Kevin Rudd showed, if you try to do everything in the end you achieve nothing.) Politicians also know that if a government is not driving reform there is no point in being there and you will let down the electorate by achieving little of substance (look at the Fraser and Carr governments for two good examples.)

This was an important conference and I was pleased to have the opportunity to be part of it. Over time I hope that some of the themes which were discussed will be reflected in public policy.