No faith

Did Australia ever really believe in itself?

Stan and Bert Kelly

A couple of weeks ago (I know, falling behind schedule again), I attended the Stan Kelly lecture at the University of Melbourne, presented by Assistant Governor (Economic) of the RBA, Luci Ellis. But on the same day that it was announced Australia, in a moment for the history books, had voted in favour of marriage equality, the lecture’s significance was somewhat overshadowed.

The lecture was named by Bert Kelly, former Member of Parliament and commentator, for his father, Stan. Both men were strong free trade and open economy advocates. Even though Stan actually sat on the Commonwealth Tariff Board, he opposed the broad use of tariffs. Not only did tariffs hinder economic performance, they were inherently unfair, supporting not the most deserving sectors or the sectors that provided the best products or customer service, but the sectors with the loudest lobbyists.

The lecture was quite technical, but Luci linked it all together with a good story about Australia’s journey from a protectionist, inward-looking, low growth, high inflation economy with lagging living standards of the late 1950s (when Bert Kelly first entered Australian Parliament) to the prosperous and internationally open economy of the modern day. And this journey was thanks in no small part to the actions of both Bert and Stan.

What has filled the void left by the mining and resources sector? Housing, public infrastructure, and participation.

Then the lecture turned to the challenges of the modern day, and the topic of the lecture itself – where is growth going to come from? Since the mining and resources boom ended, Australia has searched for a new ‘engine of growth’ – a single sector that will fill the void left by the mining and resources sector and drag the rest of the economy with it.

Initially, it was residential housing construction. But even at its peak, it only contributed to the economy about a third of the growth that the mining and resources boom had at its peak. And with the housing market reaching dangerous heights, APRA and the RBA enacted a series of macro-prudential measures to reign it in, lest it get too overheated and crash, dragging the rest of the economy with it (a downside of having single drivers of growth – they can also be the drivers of recession if they crash). And these measures appear to be working.

Public infrastructure investment (the kind I've been advocating for a while as an economic kick-starter) is now taking on some of the burden, especially transport infrastructure. This would appear a sensible transition sector, being a similar activity – and using similar skills – to the mining and resources construction boom. It also directly drives private sector activity and helps boost productivity broadly across the economy. But this kind of boom, like the mining and resources investment boom, and indeed a housing construction boom, is inherently temporary. Over-investment is a potential risk, so we can’t rely on this as the main engine of growth indefinitely.

Similarly, the rise in labour force participation rates since the GFC (particularly women and older people) that has driven growth is also only a once-off boost – you can’t re-join the labour force more than once without first leaving it.

So where is growth going to come from next? Well according to Luci, in a word, everywhere.

Firstly, remember that the mining and resources investment boom gave way to a subsequent boom in mining and resources exports, which is still growing as more projects come on line.

In fact, as the Australian dollar falls, all export sectors should benefit, not just mining and resources. Manufacturing, tourism and agriculture (sectors that suffered under the high exchange rate of the mining and resources boom) will pick up again. Also services exports like education and health, which Luci argues is not taken seriously enough as a real and sustainable engine of growth. Maybe because it’s not a physical product like iron ore, wheat or wool. Or maybe it’s seen as driven by government activity, and therefore isn’t ‘real’ growth from the ‘real’ economy. Or simply because productivity in services is so much harder to measure, therefore it’s not real. But Luci disagrees.

“There's a hint of the eighteenth century physiocrats in this mindset, but with manufacturing and business investment taking the place of agriculture in the firmament of virtuous activities … Do people genuinely think it’s not really production if you can’t drop it on your foot?” Luci Ellis

Services are a very real, sustainable and potentially prosperous sector. Not only do sectors like health, education and child care generate benefits in their own right, they also foster productivity and innovation in other sectors, and help drive participation rates and workforce longevity (as we've recently seen above).

Then Luci pointed to immigration fostering growth – immigration of generally younger, more highly education individuals driving productivity and living standards, not just the raw size of the economy. And as most of this immigration concentrates in cities, economies of scale will drive activities and efficiencies that could only happen in large cities.

“There are some sorts of industry, even of the lowest kind, which can be carried on nowhere but in a great town. A porter, for example, can find employment and subsistence in no other place. A village is by much too narrow a sphere for him; even an ordinary market town is scarce large enough to afford him constant occupation.” Adam Smith

And so it is with management consultants, medical specialists, and all manner of activity that can only occur in cities.

Luci also highlighted R&D investment and rates of technology adoption – recently at relatively low levels in Australia – as potential drivers of growth in the future.

We still don’t believe in ourselves.

So Luci takes issue with the idea that Australia needs a single engine of growth – an external factor, like a Chinese-driven commodities boom or foreign investment in our housing market, or government infrastructure investment. When in reality, growth can come from everywhere and it can be through our own productivity and innovation, not some external factor beyond our control.

And the key insight I found from her lecture was her conclusion as to why Australia thinks like this – because we still don’t believe in ourselves. Just like the late 1950s and the Kellys’ time when Australia didn’t think its industries could compete against international competition without government tariff and subsidies support, let alone be good enough to actually export, Australia still believes we don’t have the capacity to be universally productive and innovative enough without a single outstanding and exogenously-driven industry to keep us going.

While we have come a long way, liberalising our trade policies since the 1970s, opening up our manufacturing and agricultural sectors to the world, and floating our currency in 1983, consequently discovering – to the surprise of many – that we actually had an incredible ability to compete internationally (manufacturing exports skyrocketed in the 1980s and 90s in response to this), we still seem to hang on to that mid-20^th century insecurity that says we can’t do it ourselves.

There will always be some sectors – for whatever reasons – that grow faster than others, but that doesn’t mean we need them to drive the rest of us.

So to paraphrase Luci herself:

When someone asks you where growth is going to come from, tell them … everywhere.