The Case for Change

Despite years of policy changes, Australia faces formidable challenges to our future prosperity.

Australia has long been a comparatively wealthy nation within the global community, providing a good standard of living for its citizens.

When most Australians think about the future, they are rightly concerned that our nation be able to continue to provide a good living standard for all our citizens in an age of great technological change and globalisation.

The Taskforce does not accept that these processes — the cause of much anxiety in Australia — must necessarily erode Australians’ living standards in the years ahead. The task before us is how we equip our citizens — all our citizens — to be successful and prosperous. The first step in that process is a clear-eyed view of the challenges to Australia’s prosperity this century. We achieve nothing by being needlessly alarmist or excessively complacent.

The good news is that in purely economic terms, Australia remains a wealthy nation, currently ranked 13th in the world in terms of GDP per capita. (4)

The bad news comes in three parts:

1. We are slipping behind in earning our living in the world.

2. We face a great challenge to boost Australia’s productivity, and hence living standards, for the future.

3. Without prompt action our success in the world will come at the cost of a more divided society.

We now deal with these in turn:

1. We are slipping behind in earning our living in the world.

International trade is important to Australia’s living standards. Our export earnings boost Australian economic growth and help to fund our imports from the rest of the world. The impact of international trade on the Australian economy is illustrated by Australia’s terms of trade — the average prices of our exports, divided by the average prices of our imports. Australia has suffered a long-term deterioration in our terms of trade over the past four decades, as shown in Figure 3.

Put simply, this means that Australia’s export earnings cover less and less of the bill for our imported products, detracting from our total national income. This can be illustrated by adjusting GDP per capita today for the change in the terms of trade. If we enjoyed the average terms of trade of 122 in the 1960s, as shown in Figure 3, GDP would be 2.8 per cent higher than it is today, or around $900 of extra national income for every man, woman and child in Australia.

What can be done to reverse the decline in Australia’s terms of trade? It is widely accepted that the reason for the decline is the shift of global trade towards higher value added goods and services, whereas Australia’s exports have not undergone a commensurate transformation. Australia must therefore accelerate development of its share of global trade in emerging growth industries in ICT, environmental management and biotechnology, as well as across a range of elaborately transformed manufactures (ETMs), and radically improve its performance in latent high value-added services trade, such as education and health care.

The conclusion is that to earn a better living from international trade in high value added sectors, including those of the new economy, Australia must become a Knowledge Nation.

FIGURE 3: Average terms of trade by decade (5)

View full size, 7 Kb.

(4) World Bank, World Development Indicators 2000
(5) Note: Index year 1998–99 = 100

2. We face a great challenge to boost Australia’s productivity, and hence living standards, for the future.

Improving productivity — the amount of national output produced by inputs (especially labour) into the production process — is crucial to improving national living standards.

Put simply, increases in productivity are the best sustainable way of increasing living standards because they produce the extra output that can then be distributed back to those who made it, rather than relying solely on redistributing income from elsewhere within the economy.

Australia’s productivity performance in recent years has been impressive. Table 2 shows labour and multifactor productivity since the 1970s. (6)

TABLE 2: Australian productivity growth rates (annual average)

Source: ABS 5204.0

In its recent review of Australia’s productivity performance, the Productivity Commission concluded that this improved performance was the result of microeconomic and labour market reforms during the 1980s and 1990s. (7)

Interestingly, the Productivity Commission also concludes that this productivity acceleration has not been due to the take-up of new technologies. (8)

A key benchmark for productivity is the United States, driven in particular by the fact that United States living standards (GDP per capita) are more than 50 per cent above Australian levels. (9) In this case, the comparison is less encouraging. As Table 3 shows, Australia has closed the (labour) productivity gap with the world’s leading economy more slowly than all but five of the 22 OECD countries listed. (10)

So where is the next big productivity boost to originate that will allow Australia to bridge the productivity (and hence living standards) gap with the leading global economies?

The Taskforce argues that while additional economic reforms such as those of the 1980s and 1990s can and will further improve Australian productivity, the great productivity gains in the future will flow from investing in human capital, innovating in industries, and embracing new technologies.

This conclusion is supported by the findings of a recent two-year OECD study into the drivers of economic growth for the future: (11)

And

The conclusion is that Australia must become a Knowledge Nation to improve the productivity and, therefore, the living standards of our people.

(6) Labour productivity is simply output per hour worked. Multifactor productivity measures the efficiency with which both capital and labour inputs are used in the economy.
(7) Productivity Commission (19 June 1999) The New Economy? A new look at Australia’s productivity performance.
(8) Note, however, that recent (and heavily qualified) research from the Reserve Bank of Australia (David Gruen ‘Australia’s Strong Productivity Growth: Will it be Sustained? ’ Reserve Bank of Australia Bulletin, February 2001) does suggest the use of IT was a significant factor in Australia’s productivity growth during the 1990s.
(9) In $US at Purchasing Power Parity (1998). Source: United Nations Conference on Trade and Development (UNCTAD) Handbook of Statistics Table 6.1
(10) These labour productivity figures were prepared on a Purchasing Power Parity basis
(11) OECD (2001) The New Economy: Beyond the Hype 1 — Final Report on the OECD Growth Project OECD. http://www.oecd.org/subject/MCM/2001/products/0001321e.pdf
(12) ibid, p1
(13) ibid, p13

3. Without prompt action our success in the world will come at the cost of a more divided society.

The Taskforce believes it is morally unacceptable for the benefits of economic growth to go disproportionately to the few.

History teaches us very clearly what happens if change and reform are not in the interest of the majority of people. A recent book, Globalisation and History: the Evolution of a Nineteenth Century Atlantic Economy, disproves the popular belief that the globalisation of the early part of the 20th century was brought undone by the First World War. It was brought undone by a popular backlash against globalisation before the First World War. (14)

The same point was well made by The Economist, which stated in a recent editorial:

In this context, a report by the National Centre for Social and Economic Modelling makes sobering reading. (16)

TABLE 3: Productivity levels in OECD countries, 1950– 98 (GDP per man-hour relative to the United States)

1 Excluding Mexico and Germany.

Source: OECD estimates.

(14) KH O’Rourke and JG Richardson (1999), Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy. MIT Press
(15) The Case for Globalisation, The Economist, 21 September 2000
(16) A King (May 1999), Trends in the Distribution of Australian Incomes, National Centre for Social and Economic Modelling

Analysing income distribution trends between 1982 and 1993–4, the report concludes that:

Over the period 1982 to 1993, Australia shared this phenomenon of increasing inequality of market incomes with most other developed nations. However, the report goes on to note:

In this, Australia stood out against an international trend. This is a laudable achievement, but the concern must be that a government without a similar commitment to social justice will allow these underlying inequalities to emerge.

The Taskforce believes that the job for government in the century ahead will be to attack the root causes of inequality in market incomes as well.

There has been much argument that globalisation has led to a decline in low-skill wages (in developed nations) relative to high-skill workers. There is little empirical evidence for this in Australia. However, a recent study by the Economic Planning and Advisory Council (EPAC) indicated the significant returns to high-skilled workers, in the form of higher employment growth, as indicated by Table 4. (18)

This supports what most Australians understand intuitively — that higher skills are the road to more secure employment in the modern Australian economy.

The conclusion is that Australia must become a Knowledge Nation, investing in the education and training of all its citizens, to give each a secure and prosperous place in the modern Australian economy.

Taken together, these three elements of improving our international trade performance; boosting our national productivity; and bridging the skill, employment and income gaps in our society, illustrate briefly the Taskforce’s case for a radical change towards making Australia a Knowledge Nation.

The next task is to describe how Australia is performing in creating a Knowledge Nation compared to other countries.

TABLE 4: Wages and employment growth by occupational group (%)

Source: EPAC (1996)

(17) ‘The Case for Globalisation’, The Economist, 21 September 2000
(18) Economic Planning and Advisory Commission (EPAC) (1996) Future Labour Market Issues for Australia; EPAC Paper #12; AGPS