Retooling for a global economic transformation

Articles and op-ed

Craig Emerson

Published in: The Australian

26 May 2012

Australia needs to position itself for the Asian century

Australia is undergoing its second major post-war economic transformation. Whether it constitutes a threat or an opportunity depends on our willingness, as Australians, to adapt to irreversible change.

Resist and we'll be left behind; adapt and we will build a safer, more prosperous and fairer future for our nation.

Though anxious about change, most Australians are up for the task of economic transformation as we free ourselves from the great complacency that economist Ross Garnaut had observed gripping politics and the community from the middle of previous decade.

Just as surely as an unsustainable global credit boom had lulled the Western world into complacency about the need to adapt to a transformational shift in the global centre of economic gravity to Asia, the global financial crisis shattered the illusion of wealth built on asset price bubbles.

Though the economic transformation centred on Asia was well under way by the early years of this century, many Western businesses were able to maintain outdated business practices and preserve entire industries based on unsustainably strong domestic demand built on capital gains financed by borrowed money.

Those borrowings were used to fund artificially high living standards.

In the poorly regulated US housing finance markets, home loans were granted to borrowers who had little capacity to repay unless house prices continued to escalate.

Businesses supplying the housing and fit-outs — and those offering consumer goods and holidays financed by credit cards — had little need to adjust their business models in response to Asia's rise. In many Western countries, new technologies were spurned and labour was hoarded, proprietors being acutely aware of the high cost of replacing departing staff.

It all had to come crashing down and it did, the GFC morphing into the deepest global recession since the depression.

Though decelerating from its breakneck speed, East Asia continued its rise during the global recession. Many American and European banks and most carmakers could not have survived the cataclysm, so they were bailed out or bought up by the US government. Southern Europe had lost its competitiveness long ago but was propped up by an industrious, entrepreneurial Germany within the eurozone.

Many Western business owners now complain: "I haven't changed my business model in 20 years; what's the government going to do about it?"

And for those wanting to change, easy credit is no longer available. Manufacturing plants in Western countries are using old technology, unable to access the funds they need to adapt their operations to the realities of shifting comparative advantage associated with the rise of Asia.

Australia can respond to Asia's rise in one of two ways: yearn for the past or seize the future.

Yearning for the good old days of soaring house prices and booming stockmarkets funded by easy credit is to deny that the years of the great complacency were illusory, based on unsustainable borrowings from future generations. Those years of squandered opportunity and reform fatigue artificially forestalled the adjustments we must now make to take full advantage of the Asian century.

Australia will continue to lose businesses whose practices are based on low wages and outmoded technologies. But we can gain many more businesses by playing to our strengths of abundant mineral, energy and agricultural resources, our proximity to Asia, and our acquired endowments of skills, innovative flair and entrepreneurship.

Australia needs retooling for its second great post-war transformation. Building on the open, competitive economy constructed in the Hawke-Keating era for its first economic transformation, the Gillard government is joining forces with the business community, union leaders and working people to achieve Australia's second coming.

Australia's retooling requires the removal of productivity-sapping business impediments, stronger incentives for workforce participation and mobility, and better incentives for investment in productivity-raising technologies and infrastructure.

Business and the Gillard government are working together with the states through a Council of Australian Governments business advisory forum to help drive reform measures to lift productivity growth.

A national industrial relations system, school curriculum, trade licensing system, occupational health and safety system, business names register and consumer credit system are but a few of the reforms completed or in progress.

Next on the agenda are streamlined environmental approvals, improved pricing and competition in national energy markets, more efficient processes for approving major projects, and ending duplication in carbon reduction and energy efficiency schemes.

The government is undertaking a review of the industrial relations system with a view to boosting workplace productivity while preserving fairness for working people.

Workforce participation incentives are being improved through a trebling of the tax-free threshold and greatly increasing the amount that single parents and young unemployed people can earn before their benefits are affected.

Investment in productivity-raising infrastructure is being encouraged by giving investors greater certainty that tax losses in projects can be used, and by preserving the value of any accumulated project losses by indexing them at the government bond rate.

Tax incentives are being rolled out to facilitate productivity-raising business investment, including instant asset write-off and loss carry-back provisions for small business. The government's business tax working group will continue to look at ways to deliver productivity-raising tax relief for businesses struggling in the patchwork economy.

Australia's second coming can defy Yeats's lament that "the best lack all conviction, while the worst are full of passionate intensity". Our economic transformation requires the best of us as a nation as we transform our economy again to take full advantage of the splendid opportunities on offer in the Asian century.

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