WE NEED TO REV UP AUSTRALIA'S STAGNANT ECONOMY
The Canberra Times, 24 February 2020
On many of the standard measures, the Australian economy is in a bad way. Since 2013, economic growth has slowed. Wage growth is the worst on record. Household spending is growing at its slowest pace since the Global Financial Crisis. Retail is amid its deepest downturn since 1990, with Harris Scarfe, Dimmeys, Bardot and Jeanswest among those to hit the wall. New car sales last year fell 8 percent, with fewer vehicles sold than at any time since 2011. Construction is now shrinking at its fastest rate since 1999. Business investment is at its lowest level since the 1990s recession.
But that’s just the surface metrics. It is a sad fact is that Australia’s economy is less productive, less nimble, and less dynamic than many other advanced countries. Indeed, on many indicators, the economy has become more stagnant over time.
Let’s start with productivity. According to the latest update from the Productivity Commission, labour productivity — output per hour worked — fell by 0.2 percent in 2018-19. In other words, workers in the last financial year produced less per hour than the previous year. The worst falls were in agriculture, manufacturing, construction, tourism and professional services.
This isn’t normal. Since the 1970s, labour productivity has grown by around 2 percent. But since 2013, there has been a major slowdown. And now productivity has gone into reverse.
What’s going wrong? Part of the problem is that many firms aren’t investing in new technologies. Less than half have invested in data analytics or intelligent software systems. Only three in five have invested in cyber security.
Across the economy, businesses are cutting back on research and development and investing less in good management. Just eight per cent of Australian firms say they produce innovations that are new to the world – down from 11 per cent in 2013.
Innovation collaboration is especially woeful. Across a sample of around 30 OECD nations, Australia ranked second-last in collaboration between businesses and universities.
A survey of management practices in manufacturing firms found that Australia’s managers rank below those in Canada, Sweden, Japan, Germany and the United States.
And then there’s the dearth of new firms. Focusing on employing businesses, Treasury estimates that the new business formation rate in the early 2000s was 14 per cent a year. Now, it’s down to 11 per cent a year. Strip out non-employing businesses and it turns out that our economy simply isn’t hatching new firms like it used to.
Australians are also less likely to move house. In the 1960s and 1970s, 40 percent of Australians reported moving house in the previous five years. In the 2000s, that figure fell to 38 percent. A similar decline in geographic mobility has occurred in the US, where the share of people moving each year has almost halved since the 1950s. Among the suggested causes are a lack of portability in pensions, high moving costs, high costs of living in large cities, and inconsistent occupational licensing requirements.
The overall picture for the Australian economy came into sharp relief last year with the release of the latest update to the Harvard Atlas of Economic Complexity, which measures the complexity and diversity of an economy. Lead author Ricardo Hausmann and his team liken the problem to Scrabble. A player with just a few letters can only make a few words. More complex countries are like scrabble players who can make more words. The world’s most complex economies are Japan, Switzerland and Korea. Australia ranks a disappointing 93rd. The three countries ahead of us are Morocco, Uganda, and Senegal.
A final indicator is to look at the top firms on the stock market, and see what they say about the economy.
In the US, the biggest public firms in 2010 were Exxon Mobil, Microsoft, Apple, Wal-Mart and Berkshire Hathaway. In 2020, they are Apple, Microsoft, Alphabet, Amazon and Facebook. That’s five technology companies, three of them that weren’t in the list a decade earlier.
Australia’s largest public firms in 2010 were BHP, CBA, Westpac, ANZ and NAB. In 2020, they were CBA, CSL, BHP, Westpac and NAB. That’s three banks, a mining firm and a biotechnology firm. Only one of Australia’s largest five firms wasn’t in the top five a decade ago.
Compared with the United States, our largest firms are more entrenched, and less technologically focused. In the case of Australia’s banks, they primarily serve a domestic market.
How do we make the Australian economy more dynamic? Encouraging firms to collaborate with universities on research and innovation would help students get more practical insights, and ensure that firms were doing more to stay on the leading edge of technology. Creating pathways for more young people to try entrepreneurship ensures that society is getting the benefits from talent everywhere, not just in the leafiest postcodes.
When it comes to business, we’ve seen a motza of mergers, but a scarcity of startups. As Adam Triggs and I outlined in our Federal Law Review article last year, this follows a period in which courts and regulators were under the spell of the ‘Chicago School’ philosophy to competition policy, which took too much of a ‘big is beautiful’ approach. It may be time to change tack.
Our relationship with the Asian region has been seen through the lens of people and goods flows. But another aspect is the flow of ideas. Improving Asia-literacy among managers won’t just boost our exports, it will also expose firms to new production processes, management structures and collaboration approaches. Improving our understanding of Asia and our engagement with Asia will be a crucial part of creating a more dynamic economy.
Finally, there’s education. In the face of automation and artificial intelligence, cloud computing and mobile devices, it’s vital that our education system keeps pace. That means attracting and retaining the best people into the teaching profession, creating more opportunities for vocational education students, removing artificial caps on university places, and accrediting high-quality MOOCs so that they form part of the higher education ecosystem.
Andrew Leigh is the Shadow Assistant Minister for Treasury, and his website is www.andrewleigh.com. This is an edited extract from a speech delivered to the John Cain Foundation.
Authorised by Paul Erickson, ALP, Canberra.