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Speech to the Centre for Independent Studies: ‘Our national competitiveness and where the digital economy fits in’
It is a privilege to speak to the Centre for Independent Studies about the importance of maintaining our national competitiveness –and where the digital economy fits into the achievement of that policy goal.
The CIS has been a consistent –and sometimes rather lonely –voice for rational economic policy settings and for core principles like keeping debt under control; keeping taxes as low as possible; maximising competition and minimising regulatory barriers in the economy.
These views are not always fashionable. Many prefer to argue - in the words of the title of the excellent recent book by Reinhart and Rogoff –that This Time Is Different.[1]
But as their subtitle makes clear –Eight Centuries of Financial Folly–such arguments are typically employed while debt and deficit rises and rises, before it all ends badly.
In my view there is an intriguing similarity with the arguments used by the Rudd Government to justify their wasteful approach to the NBN.
My broader theme this afternoon is to ask how these core principles of wise policymaking apply in an economy which is transforming due to digitisation.
The authors of a recent book, Why Nations Fail: The Origins of Power, Prosperity and Poverty, Acemoglu and Robinson, argue that: "during the critical juncture created by the Industrial Revolution, many nations missed the boat and failed to take advantage of the spread of industry."[2]
Today, a nagging question for policymakers in many countries is whether, by failing to capitalise on the digital transformation sweeping through the economy, their nation is going to miss this particular boat.
A good recent statement of this concern comes from Mike Cannon-Brookes, co-founder of Australian software company Atlassian:
The biggest problem with government is it doesn’t understand technology. Technology is going to be the major driver of change over the next 25 years. It has been over the last 25.
Now, if we’re not participating as a country in creating that technology, we’re going to be purely a consumer of overseas technology.
We’re not going to have the wealth created here and I don’t think the government understands that in the way that they behave.[3]
It is very pleasing that Australian technology leaders like Mike Cannon-Brookes, and his co-founder Scott Farquhar, are participating vigorously in the public policy debate. These two men are in their early thirties –and they have created a software business valued at $3.5 billion which employs 800 people around the world.[4] We should listen very seriously to what they have to say.
Today I want to start by talking about the critical importance of Australia’s competitiveness –and in turn of disciplined public policy to underpin and drive such competitiveness.
Next I want to speak about how the Rudd Government’s NBN policy was a gross failure to deliver disciplined public policy.
Thirdly, I want to argue that the digital transformation of our economy certainly is vital to our future competitiveness –but this does not mean we should throw out the traditional economic policy rule book.
Finally, I want to highlight some key elements in the Abbott Government’s policy approach to digital transformation –as part of a wider agenda of restoring and stimulating our national competitiveness.
Critical Importance of Competitiveness – and of Disciplined Public Policy to Underpin this
Let me turn first then to the importance of economic policies which boost our competitiveness and productivity –and hence our national income.
In my maiden speech in Parliament I spoke of the bipartisan economic reform process which kicked off in the early eighties –and noted that as a consequence “Australia today is vastly better off…Our economy is much more competitive, flexible and efficient.”
In a recent speech, Treasury Secretary Martin Parkinson observed that Australia has some of the highest living standards in the world –thanks to this reform process.
Past structural reform efforts were not always popular but they provided the dividends of growth we now all enjoy – indeed we now take them for granted![5]
The same reform process is discussed in the influential recent book, Why Nations Fail, to which I referred earlier. The book’s core argument is that countries rise when they establish and maintain pro-growth political institutions and economic and legal structures –and fail if they do not. The authors cite Australia’s economic reform process from the nineteen eighties as an example.
Another recent book, Why Australia Prospered, by economic historian Ian Hancock makes a similar argument. He attaches considerable importance to our high quality economic and political "institutions" - legal system, property rights, control of corruption, political arrangements and social norms.
Of course our natural resources were also very important: land suitable for producing wool, and gold in the ground, drove the first two resources booms for Australia. But the role of institutions was critical in Australia using these resources wisely.
Rudd Gillard Rudd Government Policy Failure
Over the long term, then, Australia’s prosperity has depended on sensible policy making, rational use of our resources –and prudent economic reform.
Under the last government, however, it seemed that a wonderful new path to prosperity had been discovered.
Here is what then Prime Minister Rudd said in his April 2009 press release announcing Labor’s decision to build this network:
It will help drive Australia's productivity, improve education and health service delivery and connect our big cities and regional centres… The Government will invest in this major nation-building infrastructure to stimulate jobs in the short-term and pay a dividend to the Australian people through enhanced productivity and innovation in the long-term.[6]
Soaring rhetoric indeed –and language which reeked of a “this time is different”mentality. This time we could disregard the normal rules of economic policymaking because the NBN was a shimmering pathway leading upwards to a bright new future of digital prosperity. Hence, for example, there was no cost-benefit analysis conducted to determine whether spending $43 billion on the NBN could be justified.
Even as the NBN rollout performance under the previous government grew worse and worse, Kevin Rudd kept the faith, saying just before the 2013 election:
The NBN will not only transform the Australian economy and improve our national competitiveness, but will also directly benefit every family in the country.[7]
In an unfashionably rational assessment of the Rudd Government’s NBN policy, the Centre for Independent Studies ‘Policy’Journal published an article by UK telecoms consultant Robert Kenny. Kenny described the ‘fibre to the home’plan as ‘an enormous gamble’and said it looked increasingly isolated from the approach in most other countries.[8]
The Productivity Commission’s recently released paper on infrastructure highlights the serious public policy problems with Labor’s approach to the NBN.
There are many examples of inadequate project selection that have led to costly outcomes for users and taxpayers…An Australian Government example is the decision to proceed with the National Broadband Network without doing a thorough analysis of its costs and benefits.[9]
In short, Labor’s approach to the NBN was the very opposite of the rational economic policy making that has been key to our national prosperity.
The Digital Transformation of our Economy
At the same time, Labor’s fibre fetishism in many ways blinded it to the real question: how can Australia remain competitive as digitisation transforms our economy? A fibre connection will not instantly make small businesses more tech-savvy, nor will it allow start-ups to get the funding they need to build sustainable businesses, nor will it give entrepreneurs the support they need to make great ideas a reality.
How extensive is the digital transformation of our economy? In a powerful presentation at Parliament House a few months ago, Australian internet pioneer Daniel Petre gave some indicators:
- Between 2003 and 2013, the market capitalisation of Fairfax and TEN fell by 80 per cent and 87 per cent respectively, while that of online jobs market Seek.com was up by 500 per cent and online real estate portal REA was up by 900 per cent[10]
- Video stores like Blockbuster are being wiped out by online video, be it YouTube or NetFlix or Apple TV
- Domestic businesses which sell advertising such as newspapers and television are losing share to global digital media players like Facebook – these global digital media players are expected to have at least one third of the entire Australian advertising market by 2017.
Over the last twenty years we have witnessed many industries and corporates being completely wiped out by new internet-based competitors. The encyclopedia business collapsed thanks to Wikipedia. Kodak collapsed due to the rise of digital photography. Many newspapers have disappeared.
A recent report from Deloitte Digital found that almost one-third of the Australian economy faces imminent and major disruption due to the transformative power of the digital economy.[11] The sectors most likely to be affected include some of Australia’s biggest employers, such as retail and professional services.
Given this transformation, there is a lively public policy debate about how best to respond. One good recent example is the ‘Crossroads’report recently issued by the StartupAUS consortium,which argued that:
As a nation we need to take immediate and far-reaching steps to address market failures that are impeding the maturation and growth of our start-up ecosystem.[12]
The Right Policy Approach
Which brings me to the question: what is the right policy approach to take?
The Abbott Government does not believe that the digital transformation of the economy means you abandon proven public policy principles –the kind identified in Why Nations Fail and Why Australia Prospered. Rather, we want to apply these proven principles to best position Australia to leverage digital disruption.
The first principle is to back the private sector. This point was explained well by Treasury Secretary Parkinson, in the speech I cited earlier, when he highlighted
‘…the distinct philosophical change underpinning Budget measures, one that views government's role in improving living standards as primarily one of supporting the private sector in generating sustained employment and income growth.’[13]
This is a very different approach from that of the previous government. Its default approach was that if a sector was vital to the economy, then we needed to pump billions of taxpayers’dollars into establishing a state owned enterprise to dominate the sector. This was its justification for the establishment of the $43 billion NBN and similarly the $10 billion Clean Energy Finance Corporation.
Another example, on a smaller scale but in my view quite instructive, was the proposed intermodal freight terminal at Moorebank in Sydney’s southwest. The case for establishing such a facility is persuasive –but it is mystifying why the previous government thought it needed to own and operate this facility, given the number of private sector transport, logistics and property companies with much greater expertise than the federal government.
The principle applies equally strongly to digital economy businesses. It is instructive to look at how much wealth has been created by digital economy businesses in Australia in the last two decades, as they have started out and then grown to reach substantial scale. The Crossroads report I cited earlier has an impressive list, including such companies as Seek, Wotif, Carsales, Freelancer and Atlassian.[14]
A key reason this matters is because of the outsize role of startups in job creation –and in turn the disproportionate role of the high-tech sector in generating startup companies.
A recent report from America’s Kauffman Foundation found that new business formation was 23 per cent more likely in the high-tech sector of the US economy than in the private sector as a whole. Moreover, in information and communications technology (a sub-set of the broader high-tech sector) it was 48 per cent more likely. The report also found that new and young firms in the high-tech sector are more robust job-creators than such firms in the broader economy.[15]
The Crossroads report cites the UK innovation agency NESTA, which says that half of the new jobs in the UK between 2002 and 2008 came from a mere 6% of UK businesses –those which had the highest growth rates.
The OECD reports similar findings in its most recent Science, Technology and Innovation Report: one third of job creation in the business sector comes from young firms with fewer than 50 employees –even though these make up only 11 per cent of total employment.[16]
The second principle is to promote competitiveness –and play to our strengths. Given the profound disruption occurring across the global economy, we need to have a clear idea of where Australian companies can be competitive. Where do we have strengths and how can we play to those strengths?
This fairly obvious point seems to escape our political opponents. Consider the Australian car industry. Between 2007 and 2012 domestically-made cars fell from 19 per cent of total car sales in Australia to less than 13 per cent. The inevitable result has been a decision by global car companies to cease manufacturing in Australia.
Labor thinks it can hold back the tide; it reacted to the recent announcement from General Motors by demanding even greater taxpayer assistance for the car industry. This is despite senior GM executives saying the decision to exit manufacturing in Australia was driven by basic scale economics, not by government incentives or reductions in them.
On the plus side, Australia certainly has the capacity to be world competitive in developing and exporting software –and unlike many other products, because it is weightless and incurs no transport costs, we do not face a cost disadvantage from being a long way from major markets.
But on the minus side, businesses located in lots of other countries can also be world competitive. So it becomes even more important to work out what your strengths are –and where you are going to be good enough to build not just a strong market share in Australia but a strong market share globally.
One implication of that principle, I believe, is that if Australia has a world class, large scale resources industry, or agriculture industry, then the development of IT applications and services to make that industry more productive and efficient might be a niche where Australian companies have an advantage.
A recent report on technology in the mining sector by BAEconomics pointed out that Australia is a global leader in R&D for mining automation.[17]
I recently had the chance to visit the extremely impressive Rio Tinto Control Centre in Perth. Some 300 people work in this centre, and it looks rather like a foreign exchange dealing room in a bank, enhanced with the largest and highest-resolution wall-size video screen I have seen since visiting the Foxtel network control room in Macquarie Park.
This centre controls 14 mines, multiple railway lines, and several ports –1500 km away in the Pilbara. It is a powerful demonstration that modern mining is extremely capital intensive, highly technologically sophisticated –and just as susceptible to productivity improvement through digital technology as is banking, travel, entertainment, or any other industry.
There are similar opportunities to develop world-leading technology to support the Australian agricultural sector. Applying digital technologies, such as low-cost sensors, can assist farmers in monitoring irrigation, soil moisture, vegetation, livestock, and farm equipment.
The Sense-T initiative, led by CSIRO and the University of Tasmania, is an example. Sense-T is a state-wide program using electronic sensors to gather data –aggregated in the cloud –to more efficiently manage industries including agriculture, viticulture, and aquaculture. Sense-T is also looking at market pathways –how best to get goods from the paddock to the plate.
Another implication of this principle of playing to our strengths is in the way that we should allocate research funding. That is a key reason why we recently announced the Medical Research Future Fund –to build on Australia’s proven capabilities and track record in medical research.
When this fund reaches its full size of $20 billion, it will roughly double the amount of money going into medical research in Australia each year –from one billion to two billion dollars.
The capacity to fund Australian researchers to unpack the mysteries of the human genome is just one example of the data-crunching I hope we might see spurred by this fund.
The third principle is to get the enablers right. While ultimately it is the private sector which must build businesses and create jobs in the high-tech economy, there are key enablers which are delivered by government. That means an obvious focus for the Abbott Government is to get those enablers right.
One is our digital infrastructure. Tony Abbott has promised to be the infrastructure prime minister – and the government’s biggest single infrastructure commitment is to spend $29.5 billion to deliver the national broadband network.
The Coalition inherited a shambolic mess following the 2013 election. Four and half years after announcing the NBN, the previous government had spent over $6 billion and yet passed a mere 258,000 premises with fibre, less than 2 per cent of what needed to be done.[18] Of that unimpressive figure, only 47,000 fibre connections had been activated.
Following the election the Coalition undertook a Strategic Review of the NBN, which revealed that completing the project on the previous
Government’s plans would require $73 billion in Government funding – $29 billion (or 65 per cent) over the cost forecast in NBN Co’s corporate plan.[19]
We are systematically doing the work to transform NBN Co into a businesslike, well-run organisation which executes efficiently on a sensible rollout plan – a plan which does not spend more money than is required. By June 30 2014 the NBN passed 492,000 premises with fibre, compared to a target of 467,000 premises –the first time it has ever managed to exceed a target.
Another enabler is the way that government delivers services. Our priorities include increasing the use of cloud computing, and stimulating the online delivery of government services. Our goal is that by the end of 2017 all major services and interactions will be available to the public online.
A third enabler, of course, is our education system. It is vitally important that our universities are as strong as they can be, and of course important for digital economy companies to get as many students as possible taking STEM –science, technology, engineering and maths –subjects.
We are strengthening our universities by freeing them up, including allowing universities to set fees based on the market value of the degree. In a world where the returns to intellectual property continue to grow, the importance of our university system as a national economic asset, and vital element of our competitiveness, can hardly be overstated.
Fourthly, we need to remove the blockers. Many companies start out as small start-ups, hoping to turn their innovation into a product. A small number make it all the way to becoming publicly listed, employing hundreds or even thousands of people and selling a product which is used around the world.
Along the way there are many, many blockers. A wise government will seek to remove or minimise those blockers –and that is a priority for the Abbott Government.
One blocker is that it can be hard to find help or advice. That is why we have established the Entrepreneurs’Infrastructure Programme. $484.2 million in funding was announced in the budget for the Programme, which is designed to bring research and business together in developing and commercialising home-grown ideas.
Another blocker can be difficulties in getting the people with specialised knowledge you need to help your business grow. The Abbott government is responding to this need with key immigration measures. In this year’s immigration programme, nearly 68 per cent of Australia's migration places are allocated to skilled migration, and there is a reprioritisation towards employer-sponsored visas.
Yet another blocker can come in raising capital. The government is considering a recent report to it from an advisory committee on corporations law, which makes recommendations about ‘crowdfunding’–that is, how could we streamline the regulations governing the raising of investment capital to facilitate the use of the internet to raise small sums of money from large numbers of people.
Another blocker is attracting and retaining talented staff. Employee share ownership plans and share options are a key tool, widely used in the tech sector in the US and other countries.
Today our tax settings mean that Australian start-ups –and indeed later stage companies - cannot match the equity and option offerings of tech firms overseas, including the US. This issue is being looked at by the taskforce which is working on the National Industry Investment and Competitiveness Agenda: the taskforce will report to the Prime Minister later this year.
Conclusion
Let me conclude, then, with the observation that the digital transformation of Australia’s economy is of profound importance.
The previous government seemed to think that this transformation justified abandoning well-established principles of economic policy-making –policies that have served Australia well over many decades and which have contributed to us being one of the most prosperous nations in the world.
The Abbott Government takes a very different view. The best way for Australia to capitalise on this profound economic transformation is with a continued focus on maintaining and improving our national competitiveness. We need to back the private sector; understand this intensely competitive world and play to our strengths; get the enablers right; and remove the blockers.
There is plenty to do in this space and the government will have lots more to say –but there are some clear themes to our approach.
The world’s economy is being transformed by digitisation: we need to be on the right side of that transformation to remain a prosperous nation delivering a high standard of living to its citizens.
[1] C Reinhart and K Rogoff, This Time is Different: Eight Centuries of Financial Folly, Princeton University Press, 2009.
[2] D Acemoglu & J Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty, 2012, Profile Books, p 217.
[3]http://www.businessinsider.com.au/the-atlassian-founders-say-the-australian-government-doesnt-understand-tech-2014-5, downloaded 9/6/14
[4]‘Atlassian valued at $3.5 billion’ http://www.smh.com.au/it-pro/business-it/atlassian-valued-at-35-billion-20140409-zqsjo.html
[5] Martin Parkinson, Treasury Secretary, Speech 2 July 2014, http://www.treasury.gov.au/
PublicationsAndMedia/Speeches/2014/Challenges-and-opportunities-for-Australia-over-the-next-decade, downloaded 17/7/14
[6]http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2009/036.htm&pageID=003&min=wms&Year=&DocType=
[7]http://www.abc.net.au/news/2013-09-04/report-shows-households-will-be-3800-better-off-under-nbn/4932976
[8] Policy: A Journal of Public Policy and Ideas, Vol 29 No. 2 p17
[9]Productivity Commission Report p6
[10]Fairfax’s share price has risen this year so currently it is around 70 per cent down on 2003 levels.
[11] Deloitte, Digital disruption: short fuse, big bang? September 2012, page 9.
[13] Martin Parkinson, Treasury Secretary, Speech 2 July 2014, http://www.treasury.gov.au/
PublicationsAndMedia/Speeches/2014/Challenges-and-opportunities-for-Australia-over-the-next-decade, downloaded 17/7/14
[14] http://startupaus.org/crossroads/
[15] Tech Starts: High-Technology Business Formation and Job Creation in the United States, Kauffman Foundation, August 2013, http://www.kauffman.org/what-we-do/research/firm-formation-and-growth-series/tech-starts-hightechnology-business-formation-and-job-creation-in-the-united-states
[16] OECD Science, Technology and Industry Scoreboard 2013: Innovation for Growth. Executive Summary, p 13. http://dx.doi.org/10.1787/sti_scoreboard-2013-en, downloaded 20/7/14.
[17] BAEconomics (Brian Fisher and Sabine Schnittger), ‘Autonomous and Remote Operation Technologies in the Mining Industry: Benefits and Costs’, BAE Report 12.1, Canberra, http://www.baeconomics.com.au/wp-content/uploads/2010/01/Mining-innovation-5Feb12.pdf
[18]http://www.malcolmturnbull.com.au/media/freedom-of-speech-media-diversity-and-the-nbn-address-in-reply-speech
[19]NBNCo Strategic Review, December 2013, p17
