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CEDA 2008 State of the Nation Conference

INTRODUCTION

Thank you for that introduction.

It’s great to be here at CEDA – a think tank that has been advancing the case for serious, long-term economic reform for nearly half a century now.

I want to start by acknowledging the traditional owners of the land on which we meet.

When I made my first major speech after being sworn in as a minister last year, I said that I would be happy to be described as ‘the Minister for Productivity’.

I stand by that suggestion, and the pace of change since then has been rapid.

We have taken action on many fronts, from starting the abolition of Work Choices in the Parliament to bringing down the Rudd Government’s first Federal Budget.

We have proudly delivered our Education Revolution promises.

We have passed legislation to end the creation of new Australian Workplace Agreements. We have published an exposure draft of our 10 National Employment Standards and started the process of award modernisation.

We have commenced delivery of our new early learning agenda, including universal access to pre-school and new assistance to meet the costs of childcare.

We have signed partnership agreements to deliver Trade Training Centres and commenced the rollout of our Digital Education Revolution.

We have determined to address educational disadvantage and teacher quality through COAG National Partnerships.

We have invested $11 billion in an Education Investment Fund and $500m to meet the infrastructure needs of universities this year.

We have commenced the Bradley Review of Higher Education, to examine the long term issues and opportunities facing our universities.

My colleague Kim Carr has established the Cutler Review of Australia’s National Innovation System.

We have allocated the first 20,000 of our promised 630,000 adult skills places. We have also established that Skills Australia, our new vocational educational and training leadership body, will work with us, industry and COAG to deliver investment and reform in VET.

We have put forward a new model of Employment Services focused on achieving sustained participation in work, including for the most disadvantaged jobseekers.

We have established a Social Inclusion Board and its priority work program.

And we have agreed, through COAG, an historic framework for collaborative reform of our education and training systems.

This morning I want to address how all these actions fit together, and where they might take us.

We won the election by promising to focus honestly on the ordinary concerns of working Australian families.

Those concerns include the everyday price of the goods and services that people rely on: costs like housing, childcare, transport and groceries.

They also included Australia’s readiness for the future. We won because Australians recognised that we face new challenges which require a fresh, long term approach.

We argued that a successful Australia would invest in its future through responsible economic management. We argued that climate change presents a major new challenge.

And we argued that a human capital revolution is needed so that Australians are equipped to compete successfully in the global economy taking shape around us.

In all these areas, we argued that only by embracing innovation and reform would we develop the new infrastructure and capabilities required for success.

That is exactly what we have done.

There are two important connections between the arguments of the last few weeks on petrol, the shortages of skilled labour, the prospects of post-drought recovery for our farmers, and the need to improve educational attainment right across the lifecycle.

First, the current urgency of these issues reflects the failure of the previous government to prepare properly for the long term needs of our nation’s economy.

Second, they reflect a deep set of changes going on in the structure of the world economy.

What are these shifts?

Our record terms of trade reflect historic demand for Australian mineral resources, driven above all by the bursting of China and India into the world economy and the enormous processes of development they are undertaking.

This huge change, combined with other global uncertainties, is also driving demand for oil and energy resources.

At the same time, Australians recognise that we face the challenge of climate change, and that this involves putting a proper value on the natural resources – the so-called global commons – which we need for our lives and our economies to function.

The global response to climate change involves developing markets in carbon emissions which will create real incentives to reduce them.

Third, the emergence of China, India, Brazil, and many other economies previously considered ‘developing’, is leading to a re-pricing of goods, labour and ultimately of knowledge.

It is not just China and India, but Brazil and Vietnam, Chile and South Africa that are beginning to change the nature of global competition. Billions of people are joining global supply chains.

And their competition is based only partly on the cost of labour and production. All these countries are also moving determinedly up the value chain too.

In fact, China and India are important export markets for Australian education services, now our third largest source of export revenue after coal and iron ore.

China has been increasing its investment in Research and Development by more than 20 per cent a year over the last decade, and its share of world science publications has trebled in that time.

India is producing more than 2 million graduates in science, technology and engineering every year.

Brazil is becoming a global hub for open source software production.

These nations are rapidly becoming knowledge economies.

These juxtaposed forces help to clarify Australia’s economic challenge, and its opportunity.

While there is record demand for our output, this global phenomenon is also driving inflationary pressures in the domestic economy, through food and fuel price increases.

Our ability to grow our own productive capacity, and to compete in these international markets, depends increasingly on the supply of skilled workers the availability of specialist knowledge and on our innovation performance. This is true in mining, in financial services, in manufacturing, in construction, in health, in hospitality and in education.

This shift is confirmed by Alan Greenspan, former Chairman of the Federal Reserve, with his observation that value is increasingly created through:

"…the embodiment of ideas in products and services that consumers value. …Ideas are at the centre of productivity growth."

Fundamentally, productivity is about getting more value out of the things we have – not just our knowledge and labour but our capital, natural resources and other business inputs.

As Paul Krugman has said:

It can lead to higher wages, increased leisure for employees, higher profits and lower prices. The rising revenues it generates allow governments to invest in education, public health, welfare and the arts. By creating goods faster, with fewer resources, using less energy, it can make our economy more environmentally sustainable.

It is absolutely imperative that we do all we can to keep productivity rising as fast as possible.

Unfortunately, of late this has not been the case.

Across too many fields where it could make a difference – education and training, workplace relations, welfare reform and sustainability – the Howard Government’s efforts were piecemeal, unfocused, inadequate and directed to fighting the battles of the past.

It continuously traded long term competitive advantage for short term gain.

The results are plain to see.

During the most recent growth cycle from 1998 to 2004, annual growth in labour productivity averaged just 2.1 per cent.

This is 1.2 per cent below the record average growth of the preceding cycle when Labor was in office.

And 0.3 per cent behind the long-term average growth rate of 2.4 per cent.

Since the June quarter of 2004, annual productivity growth has been just 0.8 per cent.

And in 2006-07 market sector multifactor productivity declined by 0.6 per cent.

We know, because the Treasury has told us for several years, that stagnating productivity will have escalating consequences for us.

This is not just because of more intense international competition, but because of the impact of our ageing population.

Standing still means going backwards.

The Rudd Labor Government is taking a different approach.

Lifting productivity and participation together is essential for our future prosperity.

Our approach seeks to learn from the successful reforms of the past, and address squarely the economic conditions of the future.

During the Hawke and Keating Governments, Labor successfully laid the foundations of long term growth by undertaking major structural reform.

These reforms included floating of the Australian dollar, tariff reduction, the decentralisation of workplace relations and the construction of a vigorous competition policy.

They also included the creation of a mass higher education system underpinned by HECS, and a long term savings base through compulsory superannuation.

Taken together, they produced an outward-looking economy better suited to international competition and more adaptable to change.

These reforms were all politically difficult at the time, but people now understand that they have been key to improving our living standards.

They expanded the opportunities and security available to working Australians, so they could participate with confidence in a challenging economic transition.

Now we are embarking on the next transition.

Multifactor productivity growth is driven, as the term might suggest, by many different factors. Understanding the causal patterns in complex, open economies is not simple.

Exposure to competition, diffusion of new technologies and labour market flexibility have all played their part.

But the evidence is now converging around the central importance of human capital – knowledge, skills and capabilities – to future growth.

My own Department, DEEWR, has estimated that a one percentage increase in the proportion of the working age population with post-school qualifications would raise GDP by 0.9 per cent

A recent Canadian study based on the OECD-sponsored Adult Literacy Survey found that a country with literacy scores 1 per cent higher than the international average will achieve a 2.5 percent increase in labour productivity and a 1.5 per cent increase in GDP per capita compared to other countries.

And a study of the Australian economy between 1969 and 2003 estimated that 31 per cent of the annual increase in real per capita GDP was contributed by education.

As Gary Banks, Chairman of the Productivity Commission, argued in 2002,

"…our ability to continue performing well will increasingly depend on the innovativeness and analytical skills of people in the workforce and management alike. That in turn will largely depend on the quality and effectiveness of our education, training and research systems."

So we know that over long periods of time, the accumulation of knowledge and its application across our economy is fundamental to its performance.

And we know that demand for specialist skills and knowledge are among our most pressing immediate needs.

But we also know that, while education is central to human capital, simply increasing the supply of education will not automatically translate into higher growth rates.

That is precisely because market economies are organised into complex, decentralised webs of production, innovation and exchange.

So our challenge is not just to invest more in the supply side of human capital, but to radically improve the ways in which it is deployed and developed in the wider economy.

In short, our strategy is to:

Invest in people’s skills and learning across the lifecycle, from early years to post-retirement.

Empower Australians to aspire to more and contribute more, making meaningful choices about their own pathways through work and learning, and accessing the resources which allow them to pursue those choices over time.

Reform the institutional frameworks through which education and training services are delivered, to create higher expectations, higher performance and higher capacity.

Incentivise collaboration between governments, employers, and others with a stake in improving productivity growth.

Stimulate innovation to develop new ways of supporting participation and productivity.

Share the proceeds of productivity growth equitably to ensure re-investment in sustainable, long term growth.

Our agenda for productivity and participation does not end with education reform.

Well-functioning labour markets also play a hugely important role, and lifting participation rates will require new ways to engage and support potential labour market entrants.

That is why Brendan O’Connor has put forward a radical redesign of Employment Services, to focus on giving jobseekers the forms of flexible support that will help them to sustain work and develop skills over time.

This model is designed to encourage a personalised focus on each individual, and to create a more diverse and responsive market for employment services.

Our social inclusion agenda also focuses on the problems experienced by people with weak links to the labour market, and the support they need to become part of the labour supply solution. That includes the needs of families with children where nobody works.

It includes the renewal of local areas left behind by economic growth, where unemployment and entrenched disadvantage co-exist. And it includes a National Mental Health and Disability Employment Strategy, currently being developed by Brendan O’Connor and Bill Shorten.

Of course workplace relations is also a huge productivity issue.

Our substantive agenda – Forward with Fairness – has been specifically designed to support workplace productivity, with its emphasis on enterprise bargaining and its guarantee of greater workplace and individual flexibility through the modern awards system and individual flexibilities within collective agreements.

The Productivity Commission and the Melbourne Institute have both linked collective agreements to productivity improvement.

And the OECD has noted that:

In all the sectors I have outlined this speech, the former Liberal Government attempted reform.

Most often, it was described as a ‘market-based’ approach justified on the grounds of choice and efficiency. In general, I think it is fair to say that they pursued market liberalisation wherever they could find a version of it.

What often happened was that the former Government sought to undermine existing forms of universal service by subsidising the creation of private sector competitors.

For example, they created Australian Technical Colleges, but failed to do the system-wide reform necessary to avoid the skills crisis.

They used Child Care Benefit to develop a market for childcare which did not offer a consistent level of quality or work seamlessly with other early years services.

They subsidised private health insurance and penalised those who stayed in the public system, but did not build a long term framework to ensure that health outcomes and value for money actually improved.

They used Commonwealth funding to encourage the growth of private schooling, but left the issue of quality largely unaddressed.

They created full-fee places and bullied Universities into adopting their preferred model of workplace relations.

In my view, the results tended towards less equity, less efficiency and underinvestment in essential shared infrastructure.

But the lesson of these experiences is not to reject the workings of markets.

It is that we should acknowledge the power of market competition, in combination with a strong institutional framework and empowered, demanding users.

If we want our economic reforms to be productivity-enhancing, we must focus on the fundamentals of market design. To ensure that in sector after sector, the design of key institutions and the shared investment in knowledge and skills happens in ways which increase the distinctive strengths and adaptability of that sector.

Diversity and contestability of provision is one necessary feature of many healthy, productive markets. So is the empowerment of service users, and therefore the transparency of information in each market.

Institutional arrangements to ensure that public infrastructure, shared investment and collaboration produce maximum return must be tailored to each sector, while maintaining the principles of a strong competition policy.

What the systems and the mix of provision look like will vary. But in each significant area of our economy, including those service sectors that supply education and learning, we need to focus on how to accelerate the process of successful market design, and how to strengthen and grow those crucial public and collaborative institutions.

Only a government with a balanced, long term perspective can pursue such an agenda.

We intend to and we will need the active contribution of the business community, and of independent analysts and researchers in taking it forward. I know you will be there providing your perspectives, and I look forward to hearing them.

Thank you very much.

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