Global Access Partners: National Economic Review

I’m liveblogging this event today from NSW Parliament House.  We begin with a keynote from the Minister for Trade in Australia, Craig Emerson.  This session is called ‘Restructuring the Australian Economy in the New Asian Century’. 

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It was not until 1957 when Menzies signed the Commerce Agreement with Japan (controversially at the time) who truly began trade with Asia. This was followed up by Holt’s support of trade with China and Whitlam’s recognition of the PRC. Then Bob Hawke engaged with China in a way that led him to the position of characterising the 21st century as the “Asian century”.

But while our early trade with Asia was dominated by selling resources to the region, it was clear to Hawke and Keating that transformation of the tariff wars was required through reduction of tariffs, floating the dollar and making sure Australian businesses were subject to competition.

When Keating came to power, he formally launched competition law in Australia. Eventually, around 1995-1999 productivity was clearly indicated in Australia, dominantly produced by the economic reforms. From 2000 productivity dropped and from 2006 that productivity has remained negative. This government has embarked on lifting creativity and skills in order to address negative productivity. Current government has also invested in infrastructure building, tax reform and regulatory reform. There has been a kick up in productivity over the past 12 months. This is not necessarily going to result in positive productvity overall but it is the first sign of productivity growth in 6 years.

It doesn’t take a rocket scientist to determine that education takes a while to generate productivity benefits. We wouldn’t expect to see benefits of education reform immediately. But investment in education does generate benefits in productivity over time, globally. We are now seeing a shift in the socioeconomic shape of tertiary education as a result of these reforms. But the really big reform that still needs to be implemented is the response to the Gonski report.

Also important to look at regulatory reform to get to a seamless economy. Productivity |Commission has identified reduction of boundaries of doing business across states as a result of recent reforms. But if we are to take advantage of opportunities in the Asian century, we need to be competitive. Most successful schools are in Asia. Even if we were reluctant to pursue reforms in education, it would be imperative anyway.

We have an opportunity to make minerals and energy products to Asia. This will continue to be the case. But by the year 2030 there will be 3 billion middle class residents in Asia. This creates a huge resource and goods demand. We can go to our traditional strength in agriculture (which has languished in past 30 years) to feed these people. But we will need foreign investment to achieve this. This isn’t about buying up the farm and losing our land. But there is a need to lift productivity to meet these opportunities.

We also need to address a move in to a service economy to meet the needs of these 3 billion middle class. We need to make sure we have the education and facilitation of Asian business. We also need to ensure we have sufficient tourism infrastructure services. We need legal services, architecture and accounting/financial services advanced to engage the Asian markets. We need to visit these countries, have coordinated policy and thinking and a positive attitude to fully address the opportunities of the Asian century.

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 We now move on to David Masters from Hewlett Packard.  

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Australian economy is doing well.  We avoided the recession in the GFC.  But while we did get some gains in the 1990s, and our economy is diverse, much of the boom came from the mining boom.  Now we need to think beyond the boom and to consider the opportunities of the Asian Century.  We need an honest and frank consideration of our strengths and weaknesses.  Depending on how you measure it, 75% of Australians are working in services. We need to develop these services and skills oriented industries, and we need to consider how emerging technology is making some skilled roles redundant.

We have the opportunity to use our access to Asia as a strength.  But we have a chance to target Europe as a place to attract skilled workers and help us win the battle of ideas that is required for Australian competitiveness.

We also need to think about the context globally.  The Brazilian construction industry needs double as many engineers it currently has – about 20 million.  While some of these will come from surrounding areas and Portugal, there is a chance for Australia to meet this need.

We need to look outwards and inwards in terms of migration.  Targeted migration and education is best way of meeting competitiveness opportunities.  We need to be open to more migrants and we need to develop education to meet the world’s needs.

We have the right culture and the right people to meet those needs.

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Following on from David Masters we have Adair Fox Martin from SAP.

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As an Irish woman from Dublin, it was extraordinary when Fox Martin first moved to Asia, her address was Dublin House, Dublin St. Since then she has used her time in Asia to explore the similarities in cultures between Ireland the region.

At the commencement of the industrial revolution, it took Britain 150 years to generate a return on the growth.  It took the US 50 years.  It took China and India 12 and 15 years to generate growth.  With its varied cultural and political landscape it is fast becoming an economically integrated region.

Two very practical opportunities in the Asian region for Australia.  First is with SE Asia contenders.  These companies have global ambitions and growing at twice rate of global peers.  Collectively focused on commodities and they are family owned.  Business strategies focused on access to resources, low cost labour and focus on SE Asia market alone.  Historically these companies focused on efficiency and productivity, not innovation.  Opportunity is therefore to offer training and technology products in the region.

Doing business with these firms is based on value and trust model.  Put everything you can in to the firm, and show the value of pricing modelling, and you will generate ongoing trust.

In today’s world of fragmented markets, infrastructure is key. So far Australia has only participated in a small number of bids for infrastructure and projects that build relationships and governments in SE Asian regions.  Perhaps there is a role for government or companies like GAP to get more involved in these projects and provide support for these bids.

SAP’s strategy in China has changed from providing support in the region, to doing R&D in the region, to moving offices to ensure continuing local support.  This has been a 20 year plan which has generated profits and productivity.  Innovating specifically to local needs, talent acquisition and retention, establishing a presence and a trust, and practicing local innovation and research are key to success in the region.  This is a journey.  Is Australia on board?

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Discussion from the floor focuses on the need to ensure that Australian attitudes towards SE Asia needs to be more open as well as respectful of diversity of cultural practices.  We also need to be aware that business is becoming more complex and that understanding complex project management could be an opportunity to add immense value to the region. 

The next session – after the break – will be on ‘Productivity, Public Value and Leadership’. 

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We’re back after the break and I managed a quick coffee around mails and finding power slots before moving on.  We’re on to our second session now on Productivity, Public Value and Leadership.  Speakers are:
Chair – Rohan Mead, Managing Director, Australian Unity
Dr Ian Watt AO, Secretary, Department of the Prime Minister & Cabinet Australian Government
Professor Judith Sloan, Honorary Professorial Fellow at the Melbourne Institute of Applied Economic and Social Research, University of Melbourne.
Senator Arthur Sinodinos AO, Senator for New South Wales and Chairman, Coalition Deregulation Taskforce

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Mead notes that it’s been said that productivity is not everything but it’s nearly everything.  Cased together with public value and leadership we have most important combination.  He notes that in his business at Australian Unity, he believes that it is time to revisit the Medicare Select proposal to help manage some of the growth in outlays.  Pressures on delivery of services so significant that we need to change the business model.

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Ian Watt takes the stage.

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Public sector productivity does deserve and attract considerable debate.  We need to improve on it, but it’s difficult to measure and changes are usually required by bureaucrats and governments.  2011 report on measures of productivity noted there is a lack of data for changes in productivity.  there’s no market price.  Outputs instead measured by cost of delivery and efficiency and effectiveness of delivery.

We can do more than this though.  Commonwealth can use partial measure of productivity in the manner of the private sector, and is doing so in part.  Could improve on this.  For example military infrastructure and supply chain management being measured by lean supply metrics.  Can use different measures in tax office, licensing and other services.  Can’t use single measure as with private sector, as it doesn’t make sense, but we can deliver better measures to get more accurate assessment of what matters to productivity.

Productivity levers – public sector doesn’t have the imperatives operating on the private sector.  Correct but public sector does have the efficiency dividend (incentives to seek more efficient means of carrying out government services).  Over the years efficiency divident has fluctuated between 1-4%.  Generally government departments have had to find 1.5% efficiencies year-on-year.

Commonwealth now also using more benchmarks to assess productivity.  We lack a centralised database though, to compare different government departments.

Leadership matters enormously in improving productivity if they support metrics and benchmarking as part of the culture.  Leaders in private management are responsive to their team needs and productivity outputs.  In the Australian public service we need leaders that have a greater focus on productivity.

Lots of initiatives to improve productivity – work on structures systems and processes, and work on our people, workforce and culture.  But we need more time on improving leadership and management and focus on employees and productivity to truly change outputs of public service.

Australia’s not alone in seeking productivity improvements in public service.  Eg UK reassessment has improved productivity by focusing on key priorities.  Continuous improvement and productivity measures central to this change.  The Digital By Default system is one plan to ensure that the majority of communications should be delivered via digital channels – Oz a long way from that.  Better management across the civil service and information services also a challenge – we can learn from this.

Despite what some commentary suggests, public service is not incapable of improving productivity.  We won’t ignore it, we aren’t ignoring it.  But we need to embed productivity in to our culture and leadership more to change.

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Judith Sloan now up.

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Sloan recounts her time in youth parliament, and because she’d been late back to parliament, Tony Abbot’s youth parliament had fallen.  He’d screamed at her for failing to be there to support him. (Highly amusing.)

The only way we can produce improvements in living standards without increasing labour output, is through productivity gains.  Really important though to consider what makes up productvity.  Not going to look at how you measure it necessarily – that’s sector dependent.

For the last 12 years we have not had great productivity. Sweet spot in the 1990s and another in the 1960s. So we need to analyse what affects productivity.  Rule of law, infrastructure and healthcare necessarily to ensure productvity as extended drivers.  Then there are intermediate factors; education, trade practices, industrial relations regulation, etc.  Then there are immediate drivers; innovation, be it in terms of new products as well as process innovations (eg: adaptations of existing processes).

Should note that economists talk about technical efficiencies (maximum output for given cost), allocative efficiencies (ensuring that existing processes are best for producing outputs), and dynamic efficiencies (how do firms respond to change). There’s a lot in the dynamic efficiency area that ensures that global changes and local changes are considered in long term strategies.

We shouldn’t just be talking about productivity, but also about costs.  Industrial relations regulation has been reformed through Fair Work Australia.  But there was nothing wrong with State systems.  When you think about how industrial relations regulation you need to think about what affects productivity.  One size fits all model of same penalty structures, working conditions is inappropriate.  Also enterprise bargaining regulations and individual grievances regulation  have caused problems in setting precedents and have negative impact on employment prospects of marginal groups.  So while employment protection laws might sound like a good idea, but when they hurt the very people they want to support, you have to question their legitimacy.

The publkic sector is 30-35% of the economy so productivity of public sector is crucial.  There are 10,000 people in Dept of Health.  What do they do?  8,000 in Dept of Education.  There’s a lot of scope for contemplating the size of the Commonwealth public sector.

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Up next is Arthur Sinodinos.

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Here to make the point that the role of the politician is to be an advocate of change.  Politicians are there to identify and to spruike change.  Need to think about the problems of the country rather than the politics of the day.  The challenge at the political level is to be coherent, continuous and credible.  Philosophical base for policy change as well as a process for implementation is needed.  As politicians ‘productivity’ is used as a catch-all.

Governments can either be the centre of an economy or can facilitate people who are in the workplace making decisions.  (Sinodinos of course, believes in centering on people.)

Part of the lesson is that structural change will be ongoing.  You need to build a sustainable economic advantage to be able to take advantages of emerging opportunities. We need to know how efficiently we are using current infrastructure.  More transparency in the process, the more opportunities there are to find improvements in productivity. Need to get federal and state representatives to find ways to enact change in infrastructure to improve productivity.

Innovation central to productivity.  Need to create an innovation culture and support that in enterprises – it’s a different mindset and a different framework.

Regulation should be cut back wherever we can to help create a market framework.  Law doesn’t fix problems necessarily.  It can duplicate expenditure without generating improvements.  We can’t just chop and change policies. With regulation we put in new rules constantly – damages confidence in sectors.  Not a matter of reducing standards, but rather finding ways to support self-regulation and implementation of regulation where market fails.

Where we can we should marketize the delivery of public services.  Need a more transparent framework for measuring public services.

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We’re back after lunch and on to session 3 for the day, ‘SMEs: Challenges and Opportunities for the Australian Entrepreneur’.  Speakers are: 
Chair – Vicki Telfer, Executive Director, NSW Industrial Relations
Russell Zimmerman, Executive Director, Australian Retailers Association 
Ed Husic MP, Member for Chifley, Australian Government.

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Zimmerman begins by talking about the challenges, threats and opportunities for retailers.  Biggest challenge is rent.  If you’re renting premises in Westfield today you get asked to pay 3% +CPI.  This is effectually unaffordable for smaller retailers, but hard for all. Both large retailers and small retailers say that their landlord says they have to hand over revenue figures.  This model is broken.  Should be handing revenue statements to a third party rather than directly to retail venues.  Also Sunday loading for employees is broken.  It causes a social problem as no employees keen to work on Sundays, and financial incentives won’t overcome this.  Needs to be more flexibility for part-timers, changes in penalty rates, etc.

There are other inhibitors to industry. Taxes are problematic… This impacts on job security, tendency to adopt new methods of communication, etc.

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Ed Husic is now up

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Achieving change in parliament and to advance issues requires stubbornness. In particular, pricing of IT in Australia has been a focus of Husic in his role.

Radio broadcast took 38 years to reach an audience of 30 million people, tv took 13 years.  The internet took 4 years.  Our broadband infrastructure is rated lower than most of northern Europe, and we have the 5th most expensive “low-cost” broadband in the world.  This is why the NBN is crucial to productivity.

Husic cites the Sensis e-business report, saying that technology is essential to most business.  And improving productivity is one of the key reasons for investing in technology.  Up to 2 million Australian SMEs will spend on IT this year more than A$11,000. Australians are paying between 60-80% more than other countries for IT. This could potentially artificially raise business costs in order for businesses to recover this price discrimination.  Necessary for ongoing enquiry to access vendors and get their response before we can achieve change for Oz business.

Discussion ensues… Useful question from the floor on need for change in business model for retail sector. Response is that the future of retail will change.  No question that retailers need to be online, but needs to be a level playing field.  

JJ’s response: Actually would have liked to have heard more about service based SMEs.  I think opportunities and challenges for them are more interesting!

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We round up the day with the final session of this event.  

Introduction & Vote of Thanks will be delivered by Philip Ruddock MP, Shadow Cabinet Secretary and Federal Member for Berowra.  The speaker is David Murray AO, Former Chairman, Future Fund.  This will be followed by discussion and a final vote of thanks from Peter Fritz, MD Global Access Partners and Group MD, TCG group.

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Ruddock talks about his assessment of diplomats in Australia in a competitive sense.  Of the thousands he has assessed he only remembers about a dozen.  He says that people-to-people communication and their capacity to advance the interests of their nations and relations with Australia are rare talents among diplomats.  Same goes for private sector.  Very few Company Directors you know and remember and communicate with.  One is David Murray.

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Murray takes stage…

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Murray notes that if people are free they are more likely to innovate, invest, and adapt through a change process, to make a profit.  However economists have concluded that market governments are neither supporting nor realising opportunities.

The European crisis was caused by huge build up of leverage throughout the world, in turn caused by poor fiscal policy, poor fiscal practice and government debt.  Momentum in markets made it easier to borrow and to accumulate expensive assets. Financial organisations were the beneficiaries of this system. The leverage build up was so significant that the work out period was always going to be difficult.

Why is the Europe situation so bad? It stems from  systemic failure in which the Eurozone decided that a single currency should be established unbacked by a rule of law.  Yet very learned people in Europe considered the Euro would generate the advantages that the US economy had experienced.  What they ignored was that the US set up a single economy with a rule of law which earned them a status as a world currency.  Europe’s currency began on the notion that advances in borrowing would produce a flourishing economy, without any basis for accumulating wealth.

As a result we see a whole series of mini-crises and now spend most of their time changing the name on the IOU.  Europe will continue to have these mini crises until the leaders implement some reform. Why don’t they reform.  They believe that they do not need to reform.

Leadership is about organising people in a work system to turn intention in to a reality.  Without an intention it can’t be done.  If that process is productive and creative it has to be based on the notion that you cannot coerce people to do anything and they have to be free to create.  So there’s a moral aspect to leadership.  Leaders have tools to achieve their intentions – system of work, their own behaviour and the manner in which they handle their finances.

Murray notes that the day that the Greeks decide to make the Drakma a legal tender and the Euro an illegal one.  On that day, Greece will need humanitarian aid. But it will happen.  But there is a stubborn belief within the EU that Greece will not get out of the EU.

Murray posits that rule interpretation is not where our best and brightest students should be going. They should be sent into creating new things.  Yet this practice and evidence of it – 250+ bills through parliament – is regarded as productivity?  It’s not. Codified law is not dynamic enough to respond to emergent technology and complex processes.  Complexity makes it harder and harder to hold our politicians accountable.  The only way it can be successful is where the politicians want to be accountable and the public holds them accountable.

We need to battle a few myths.  You don’t need to be on the left or the right of politics.  Crony capitalism and welfare dependency don’t work because the former is exclusive and the latter doesn’t provide a basis for enabling those who cannot be accommodated by a welfare state.

We need to find a path which is both responsible and which addresses the distortions in the financial system.  These mistakes need addressed with leadership and working out of it.  Step-by-step solutions are required.

[JJ’s comment – really enjoyed this presentation.]

Discussion from the floor ensues, with an interesting question about what happens to the Euro.  

Murray notes that by staying out of the IMF the Constitutional court of the Euro has authority.  But the lack of a single rule of law means that members of the Euro can vote against proposals which disenfranchise preferred bond holder status.  Thus whenever a single economy in the Euro loses preferred status, then they vote against it. The system won’t repair itself until leaders come together and accept the structural problems in the system. So Europe won’t have much, if any, growth. US will have slow growth.

New question – what dangers will Australia face and what measures should we take to avoid them.

Australia is 5% global land mass 0.3% of population. We are a price taker for commodities.  We tend to push commodities.  But we need to keep building other capability.  If you look at demographics of the world, there will be need for commodities but plenty of other providers of those.  Biggest challenge is feeding the future demographic of the planet and ensuring water is delivered.  We need to keep innovating, but we need to build capabilities in these areas.

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Peter Fritz now closes the day. 

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This is the end of the third GAP National Economic Review.  GAP will commit to another three summits if we participate.  We are directed to review a map for the GAP initiatives.  The next initiative is to look at Information as Critical Infrastructure.  And the next GAP Summit will be on Food.

Fritz notes that a major theme of today’s event was to consider leadership. GAP now plans to develop a taskforce to consider the somewhat nebulous concept of leadership.  Also several other ideas in planning. These projects all made possible by the sponsors.  Hope to achieve more with expanded support.

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That wraps up my liveblog of the event.  Thanks for reading. 

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