Keynote Address to CEDA: Boosting Australia's Trade and Competitiveness

Melbourne

Speech, check against delivery

6 March 2012

Why trade and competitiveness?

The traditional role of any Australian Trade Minister is to open markets for our exporters.

It is a responsibility I have been discharging for the best part of 18 months.

In 2011 Australia's exports reached $313 billion — a record for a calendar year.

A colleague joked that my press release announcing the record should be headed: “Emmo delivers!”

Oh, if politics were so glorious - but the truth is that Australian businesses, small, medium and large, delivered.

Yet our export performance continues to be dominated by minerals and energy resources.

Their price is competitive, owing to the quantity and location of our resources, combined with the unsurpassed expertise of our major resource companies.

But exporters of other goods and services do not necessarily enjoy such advantages.

There's little point in any Trade Minister opening doors for exporters if the price of those exports is uncompetitive, preventing our businesses from walking through the open door.

That's precisely why Prime Minister Gillard decided in last week's Ministerial reshuffle to add Competitiveness to my portfolio.

It's a recognition that trade policy, competitiveness, productivity and micro-economic reform are inextricably linked.

As Minister for Competitiveness I will work on policies to boost the capacity of Australian businesses to take advantage of the enormous opportunities being opened up by the shift in the global centre of economic gravity to this, the Asian region in the Asian Century.

At a personal level, as a former economic adviser to Bob Hawke, this appointment allows me to build a bridge between the micro-economic reform program of the Hawke-Keating era and that of the Gillard Government.

But what is the relationship between trade, competitiveness, productivity and micro-economic reform?

A country might have an absolute advantage over another in the production of all goods and services. That is, it can produce each good and service using fewer inputs such as capital, labour and energy than the other country.

But both countries will gain if one specialises and trades in the goods and services in which its absolute advantage is the greatest and the other in goods and services in which its absolute disadvantage is smallest.

Any country, therefore, will have a comparative advantage in producing something even if it lacks an absolute advantage in producing anything.

Like any country, Australia cannot, by definition, have a comparative advantage in producing everything.

Indeed, Australia's future is as a high-skill, high-wage country.

Any industry that relies for its survival in Australia on cutting real wages, in competition with low-wage countries of Asia and Africa, has a bleak prognosis.

Australia cannot win a race to the bottom of workers on low wages producing low-value goods and services for export or in competition with imports.

Australia's minimum wage is $15.50 an hour. Wage rates in overseas countries producing cheap socks and underpants are around 80 cents an hour.

Racing towards 80 cents an hour is a race we should not enter, a race we should never want to win.

Australia is unlikely to have a comparative advantage — and therefore to be competitive — in any low-skill, labour-intensive industries.

But we can be competitive in high-productivity industries whose workforce is using modern equipment embodying the latest technology, whose management is innovative and agile and which utilise Australia's abundant mineral, energy and agricultural resources.

Yet these are the very industries carrying the burden of a high exchange rate associated with an unprecedented mining boom.

The high Australian dollar is itself a vote of confidence in the future of the Australian economy.

Australia, a Triple-A rated economy by all three ratings agencies for the first time ever, is a favoured destination for long-term foreign investment and for short-term international capital flows.

Australia has an investment pipeline of $450 billion, and the latest Reserve Bank statement on monetary policy reports that over the coming year investment as a share of GDP is likely to reach its highest level in at least half a century.

The policy task confronting government and the challenge confronting high-skill, high-wage industries bearing the burden of the high Australian dollar is to increase their international competitiveness by lifting their productivity performance.

How important is productivity growth?

Today's productivity growth is tomorrow's prosperity.

Over the last 40 years productivity growth has accounted for 80 per cent of the increase in per capita incomes of Australians.

At present there are five working-age Australians for each Australian over the age of 65 years.

As Australia's population continues to age, it is projected that by 2050 there will be just 2.7 working-age Australians for each Australian over the age of 65 years.

That's far fewer working Australians earning the incomes and paying the taxes to support those too old and too young to work.

We will need to be more productive if Australia is to be more prosperous and if as a nation we are to provide opportunity for all.

Productivity growth means working smarter, not harder.

It means using the most modern equipment and technology, it means a highly-educated, highly-skilled workforce and it means using the best possible management practices.

Australia's recent productivity performance

Australia's productivity performance over the last decade has been woeful.

The previous Coalition Government took the pulsating productivity performance inherited from the Hawke-Keating micro-economic reform program and allowed it to flatline on the national heart monitor.

By creating Australia's open, competitive economy, the Hawke and Keating Governments unleashed a productivity boom during the 1990s.

But starved by the Howard Government of a new productivity-raising reform program, productivity growth began slowing from the year 2000.

And multi-factor productivity growth, which picks up the effects of innovation and better management practices, actually turned negative in 2006 and has been going backwards ever since.

After reaching a high point of 90 per cent in the late 1990s, Australia's labour productivity relative to that of the United States has slumped back to the levels of the 1970s — well before the Hawke-Keating reform program had yielded its productivity dividends.

The previous Coalition Government refused to accept that Australia had a productivity problem, dismissing the deteriorating productivity figures as the product of a set of so-called one-off factors.

It cited drought, declining oil fields, a mining investment boom and less productive workers gaining employment as the economy approached full employment.

Australia has not experienced its last drought, our oil fields will not replenish themselves, the mining boom continues and unemployment remains low.

Australia's productivity slump is widespread.

During the 2000s, productivity growth across 13 of Australia's 16 industry groups was below the country's long-term average.

In utilities, productivity declined on average by 4.7 per cent per annum.

These industry groups comprise more than three-quarters of the private economy and almost 90 per cent of private sector employment.

The Coalition used the excuse of one-off factors to avoid confronting the reality of declining productivity growth with a new productivity-raising micro-economic reform program.

Just as there was a lag of several years between the implementation of the Hawke-Keating reform program and the productivity dividend it yielded, there will inevitably be a lag between the Gillard Government's reform program and a pick-up in productivity growth.

This is especially so as the new sources of productivity growth have longer lead times than the original sources of the 1980s and early 1990s.

The big productivity-raising micro-economic reforms of the Hawke-Keating era involved refashioning an Australian economy protected from international competition by high trade barriers to an open, competitive economy.

These reforms exploited catch-up possibilities, enabling Australia to catch up to the already open, competitive economies in the Asian region and beyond.

But as Paul Keating observed, having opened the door to competition once, you can't open it again.

I would add that you can keep it open, and push it a little wider, but essentially Paul was right.

A new productivity-raising reform program

The next phase of productivity-raising economic reform involves investing in the 21st Century sources of productivity growth and ensuring the right incentives are in place for productivity improvements to be realised.

The pre-eminent 21st Century sources of productivity growth are education and innovation.

Both have long lead times.

Even the most rapid reform of the education system will not yield discernible productivity improvements until those young people are through the school, university and vocational education systems.

In fact improvements to our school system take around 50 years to be fully reflected in productivity figures, as this is how long it takes to completely replace the workforce with current and future school students.

And research and development will not yield productivity improvements until its results are commercialised and embodied in products, services and business practices.

Since its election the Labor Government has been laying down the foundation stones of a new economic reform program.

It began with moving Australia towards a seamless national economy by reforming business regulation, shifting towards a single, national industrial relations system, preparing a single, national school curriculum and streamlining federal payments to the states.

Large investments in skills formation and infrastructure helped ease capacity constraints on the economy and a revamp of federal government support for research and development boosted incentives for smaller businesses to innovate.

The Government has since embarked upon a more comprehensive economic reform program to build on the Hawke-Keating reforms. The new reform program has nine priorities:

  1. Fiscal consolidation;
  2. Relieving skill shortages and nurturing creative talent;
  3. Easing infrastructure constraints;
  4. Putting a price on carbon;
  5. Creating a seamless national economy;
  6. Improving the efficiency of social service provision;
  7. National health reform;
  8. Revamping trade policy; and
  9. Tax reform.

1. Fiscal consolidation

In the aftermath of a deep global recession a process of fiscal consolidation is necessary to make room for private sector expansion, ease inflationary pressures associated with the mining boom and give the Reserve Bank the capacity to consider further reductions in interest rates.

The Gillard Government will return the Budget to surplus in 2012-13. Australia's net government debt will peak at 8.9 per cent of GDP, which is about 10 per cent the level of net debt in the major advanced countries as a whole.

2. Relieving skill shortages and nurturing creative talent

Early investment by the Rudd Government in skills formation through the Productivity Places program provided important short-term relief of skill shortages, but a comprehensive investment and education reform program is needed to tackle Australia's ongoing skill shortages and to ensure we have the creative talent to take full advantage of the Asian Century.

The 2011-12 Budget provided for a comprehensive skills-creation program including reform of the vocational education system to make it more responsive to the needs of different industries.

The Budget also adopted measures designed to lift workforce participation by improving work incentives and strengthening obligations to seek work.

And the Government has reformed and boosted funding for Australia's universities, giving them greater say in the courses they offer and removing limits on the number of publicly-supported university places they can offer.

These reforms encourage universities to specialise, increasing the diversity of offerings for undergraduates and graduates.

From July 2012 the Government will provide HECS-style loans for students studying for a Diploma or Advanced Diploma, allowing students studying at TAFE to study now and pay later.

The Gillard Government's decision to uncap university places has resulted in an estimated 545,000 student places at universities this year.

There has been a 27 per cent increase in the total number of Commonwealth-supported student places since 2007.

The Government will put forward a major package of national reform of our skills system to the Council of Australian Governments, to deliver an entitlement to high quality skills training for all Australians.

The Government will continue to deliver reforms to improve the quality of our schools, through the national curriculum, teaching reform, empowering local schools, support for students with disabilities and investment in trade training centres and computers.

3. Easing infrastructure constraints

In formulating policies to relieve infrastructure blockages it is necessary to distinguish between minerals-related export infrastructure and non-mining infrastructure.

Some minerals and energy developments lend themselves to dedicated, single-user infrastructure funded and owned by the resource operator.

Increasingly, however, the ownership by different companies of different leases within a mining or energy province is calling for the provision of common-use infrastructure, which might be owned by a consortium of resource companies or by a third party.

Beyond mineral-related export infrastructure, a national ports strategy and a national freight strategy are needed to increase the competitiveness of Australia's non-mining exports and to reduce the cost of imported consumer goods and inputs into Australian industries. Both strategies are being developed by the Gillard Government.

Australia's urban transport infrastructure is inadequate in a number of capital cities, especially Sydney.

Comprehensive traffic management planning, combined with planning for urban consolidation, are essential to relieving congestion, itself an important cause of poor productivity growth.

The 2011-12 Budget improved tax incentives for private investment in infrastructure, making it easier to claim tax losses while preserving their value by allowing them to be carried forward with interest.

The National Broadband Network will provide super-fast fibre optic cable to most Australian households and businesses.

It will be an enormously powerful technology, enabling productivity-enhancing rapid downloading of complex programs and documents and teleconferencing facilities for businesses in regional Australia.

4. Putting a price on carbon

During the 21st Century, the global economy's production methods will undergo their greatest transformation since the Industrial Revolution.

Coal-fired energy production will need to become less carbon-intensive, by responding to a price on carbon emissions, or through cost-effective technologies.

Australia is well-placed to adapt to this energy transformation.

For decades Australia has experienced a comparative advantage in energy-intensive production compared with other developed countries owing to its abundance of fossil fuels such as coal and gas.

But Australia is also fortunate to have a unique set of other natural endowments — such as sunshine, wind, geothermal resources, and sequestration potential — which means it has strong prospects for continuing to enjoy this comparative advantage in energy production even as we move towards a low-carbon world.

Natural gas is widely regarded as the transition fuel to a low-carbon economy. Australia has abundant reserves of natural gas, with coal seam gas in eastern Australia adding to the vast reserves off the coast of Western Australia.

Putting a price on carbon will not only help make the transition to a lower-carbon economy, it will help insulate Australia from any future retaliatory action by Australia's trading partners against carbon-intensive imports from countries that have refused to price carbon.

The Gillard government has announced an emissions trading scheme starting with a fixed price permit for three years followed by a price set in the market. From the time of the floating price the scheme will be linked to international carbon markets, enabling the lowest-cost opportunities for reducing carbon emissions both in Australia and overseas to be utilised.

5. Creating a seamless national economy

In many areas of government regulation Australia has not a single market but up to eight state and territory markets.

The Government has embarked on a program of reducing and harmonising business regulation across the states and territories, reducing the regulatory burden on business and allowing for increased business productivity.

Of the 27 areas of business regulation identified for reform, 16 have been completed, and the Gillard Government is determined to see the rest of them through.

Prime Minister Gillard today announced the creation of a Business Advisory Forum to advise the federal, state and territory governments on how best to identify and reform further areas of business regulation. This is the latest move in the pursuit of competition policy reforms to ensure that Australia's open, competitive economy remains open and competitive.

Creating a seamless national economy means encouraging greater workforce mobility.

Mobility will be further enhanced through the move to a single national school curriculum, enabling families to move interstate without undue disruption to the school year for students.

Further aiding mobility, transparency through the MySchool website enables parents to make better-informed choices about schools for their children in new locations.

6. Improving the efficiency of social service provision

Most of the productivity-raising reforms of the last quarter century have been directed at greater competition in private markets and public utilities.

Yet more than one-third of Australia's gross domestic product is generated in the public sector.

Any attempt to improve the performance of the economy without also addressing the delivery of public services would therefore be far from comprehensive.

The introduction of the MySchool website and the future My University and My Hospital websites will provide valuable information to the public about their local services.

This transparency will create strong incentives for quality improvements in health and education services.

The ongoing challenge the Government must address in reforming service delivery is not a simplistic choice between the market and the state, but the more sophisticated challenge of market design so that we bring public and private resources together to deliver better services and increased productivity.

7. National health reform

With an ageing population, the cost of financing health care has been growing strongly and would have consumed state health budgets within the foreseeable future.

That's why the Gillard Government has delivered national reform to the public financing of Australia's health system, with unprecedented levels of transparency and accountability, less waste and significantly less waiting for patients.

8. Revamping trade policy

The Gillard Government has released a trade policy that reconnects with the Hawke-Keating era of trade policy and economic reform.

Chief among the policy's guiding principles is the indivisibility of trade policy and economic reform: the best trade policy is domestic economic reform, since economic reform increases productivity and trade competitiveness.

The policy gives primacy to multilateral trade negotiations and the multilateral rules-based system through the World Trade Organization.

Australia has developed an enviable reputation internationally as a friend of the system and will use that influence wherever it can to advance the cause of multilateral trade liberalisation.

The meeting of World Trade Organization members in December 2012 endorsed the Gillard Government's proposed new pathway for completing the Doha Round.

The Government's commitment to free trade extends to negotiating bilateral and regional agreements on a non-discriminatory basis.

In negotiations, Australia does not seek preferential access to markets, just an opportunity to compete on terms no less favourable than those granted any other country.

Australia's trade promotion activities, through Austrade, are being refocused towards emerging and frontier markets, where the transactions costs for individual businesses can be so high as to be prohibitive but where commercial opportunities can be very large.

9. Tax reform

Tax reform can lift workforce participation and productivity.

The Government has reinvigorated the tax reform agenda through a wide-ranging review, out of which the Government is introducing a profits-based mining tax, reducing the company tax rate, providing small business tax relief and simplifying personal income tax returns.

In association with the introduction of a price on carbon, the Government is trebling the tax-free threshold from $6,000 to $18,200, with a further increase to occur in 2015.

This reform will increase work incentives for casuals and part-time workers and take one million Australians out of the tax system.

Through the Business Tax Working Group, the Government will consider changes to the tax treatment of losses to support transformation of businesses, as well as longer-term business tax reforms to support investment and innovation.

The Gillard Government will continue to encourage the states and territories to reform taxes such as stamp duties and insurance taxes that create a drag on the economy.

Other ideas?

This Government does not have a monopoly on productivity-raising, competitiveness-enhancing reform ideas.

My colleagues and I are keen to engage with the business community, trade unions and researchers in identifying other ways to lift Australia's productivity.

But productivity growth cannot be equated with cutting wages or cutting company tax rates.

Both may boost after-tax company profits, but neither lifts labour productivity, which is GDP per hour worked.

Reviving productivity growth is a shared responsibility — a national responsibility — involving governments, business and trade unions.

Australia's prosperity above and beyond the mining boom requires a co-operative national effort not seen since the Hawke Government's National Economic Summit of 1983.

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