22 February 2012 in Speeches
PDF Printable Version
I want to thank the Lowy Institute for hosting this lunch today and inviting me to make some remarks.
This is a respected institution that conducts important debates regarding Australia’s place in the world.
All too often in modern politics the battle of ideas is overwhelmed by the events of the day, and hopefully my remarks, albeit from a junior position in the Opposition, will contribute to that battle.
I also wanted to make a point of acknowledging Andrew Shearer, as it was his idea that I address this august organisation in relation to this topic.
I recall The Australian’s Greg Sheridan last year describing Andrew as one of the best strategic minds in Australia and I know Andrew, through this organisation, has made a significant contribution to the battle of ideas.
My contribution today will make the point that the opening up of the Australian economy over the last three decades has been the stimulant that has led to substantially improved living conditions for our people and that now, more than ever, we must continue on that path to make the most of a rapidly changing global economy.
In particular, I will describe two global changes that demand our domestic attention, creating a new wave of opportunity that will drive our future prosperity:
First the stunning growth of the middle class in Asia;
And secondly, the rapid technological developments that are changing the way we work and live.
For Australia to make the most of the new economic world order, I believe we must play to our strengths, live within our means, reduce the impact of government on people’s lives and continue the thirty year journey of unshackling our economy.
The benefits of an open and trading economy
There are few phrases more maligned in our society than ‘free trade’.
For many in our community, it has become a phrase associated with a new unwanted world, where the old certainties no longer exist.
It is particularly maligned when the pace of change unsettles the existing order.
This is a perfectly understandable human reaction.
Change raises fear of the unknown.
Increased prosperity delivered by economic reform is hard to substantiate, while the language of protection gives a perception of certainty.
We see the pain of change through job losses individually, but rarely do we recognise the benefits to our people collectively.
It is easy to denigrate ‘free trade’ because like democracy, it is far from perfect.
Developed countries continue to protect sensitive markets, and global trade discussions remain bogged down with little hope of a break through.
Developing countries, in many cases, do not apply the same standards as developed countries, leading to accusations that ‘unfair trade’ is exposing Australia to an uneven playing field, allegedly destroying our industry and society.
At the same time, the interrelated toxic combination of the extraordinary growth in Asia and economic instability and change in the developed world, threatens to unleash a new round of global protection.
The President of the World Bank, Bob Zoellick, expressed this fear in January, when he said of the European debt crisis that, and I quote, ‘you can start to see a creeping populism and home country bias.’
Equally, while we have taken significant steps to open our economy, we shouldn’t pretend that Australia is as pure as the driven economic snow.
While many of ‘fortress Australia’s’ tariff walls have been torn down by Labor and Liberal Governments, the economy still contains substantial impediments to trade.
Direct subsidies, specific tax rules and industry standards are all designed to protect aspects of the economy.
While a world leading carbon tax and a still heavily regulated economy impedes our ability to compete.
But in spite of these imperfections, what is very clear from the evidence is that the thirty year journey of opening our economy has resulted in significantly higher living standards for our people.
All too often those who believe in and recognise the benefits of an open and trading economy, fail to outline what it means for Australia’s prosperity.
Let’s consider some basic facts.
Since the economic reforms of the 1980’s, Australia’s national disposable income per capita has increased by 71% in real terms.[1]
In addition, the price of goods and services in Australia has remained lower and more affordable than in most developed countries.
Since 1988, prices here have increased by an average of 3.4% per year, compared to the OECD average of 4.4%.[2]
According to Australian Government statistics, since 1985 the cost of major household appliances has dropped by 47%, small electrical appliances have dropped by 51%, furniture by 25%, and; clothes and footwear by an average of 37%.[3]
A recent Commonwealth Bank survey showed that car affordability in Australia was at a thirty five year low, taking an average wage earner only 28 weeks to purchase an average priced car, compared to 42 weeks in the mid 1990s. [4]
The Deputy Governor of the Reserve Bank, Dr Philip Lowe, made this point last week in a ground breaking speech on the Australian economy when he said:
“…the prices that Australians pay for many manufactured goods are, on average, no higher than they were a decade ago, despite average household incomes having increased by more than 60 per cent over this period.”
Ultimately, the biggest winners of the increased prosperity and lower cost of living are those on the bottom rung of our society.
This is essentially the point that the Treasury of the Secretary made late last week in a speech to the Australian National University, when he said:
‘We need people who understand that if you replace quotas and tariffs with other interventions, no matter whether to create ‘national champions’ or to support so-called strategic industries, you are placing producer interests ahead of those of consumers, and it is still akin to protection. And if intervention isn’t focused, defined and term-limited, any chance of ‘creating’ comparative advantage will disappear, and it is the poor who typically pay the ultimate bill.’
The simple message from the Secretary of the Treasury is that government attempts to stand against the forces of trade are akin to an engineer trying to build a dam wall with ply wood.
We simply can’t and we certainly shouldn’t attempt to rebuild ‘fortress Australia’.
The demographic and technological changes occurring around us are unstoppable.
To misquote former President George W Bush, we can either be with them or against them.
The Asian growth
We are hearing more often the term ‘Asian century’, but it should not be dismissed as just a glib political phrase, it actually has serious and long lasting consequences.
Let’s consider the impact of the growth and spending power of the growing Asian middle class.
The OECD defines ‘middle class’ as those living on incomes of between $US10 and $US100 a day.
With this definition in mind, the OECD reports that in 2009 Asia accounted for 28% or 525 million of the world’s middle class, and 23% or four thousand, nine hundred and fifty two billion dollars worth of global middle class spending. [5]
The OECD has projected that by 2030, Asia will account for 66% or 3.288 billion of the world’s middle class and 59%, or thirty thousand five hundred and ninety six billion dollars worth of global middle class spending. [6]
That means there will be two point seven billion more middle class mouths to feed, spending an extra twenty seven thousand billion dollars, in just twenty years, in Asia alone.
In addition to this, American author Thomas Friedman, in his book Hot, Flat and Crowded, points out that this growth in the middle class will result in even higher rates of consumption.
He describes how the resources consumed by one member of the developed world today, is the equivalent of the resources consumed by 32 people in developing Africa and 11 people in developing Asia.
People in the developing world want more sophisticated goods, more advanced services; they want what we have.
Friedman describes this trend: ‘Growth is not negotiable, especially in a flat world where everyone can see how everyone else is living. To tell people they can’t grow is to tell them they have to remain poor forever’.
In others words, not only are the numbers staggering, the resources required to meet this growing Asian middle class and its demands, are mind blowing and unstoppable.
Australians are already benefiting from the opportunities of this growth through the strength of the resource sector.
The growth in the resource sector, rather than being the economic and social problem many would have you believe, is already benefiting Australians directly and indirectly.
Again, the Deputy Governor of the Reserve Bank described the benefits succinctly last week, when he said:
“The indirect effects come through a variety of channels. Day to day, they can be hard to see but they do percolate through the economy. In effect, there is a chain that links the investment boom in the Pilbara and in Queensland to the increase in spending at cafés and restaurants in Melbourne and Sydney.”
The direct benefits of the resource sector growth are compelling.
According to ABARES, the growth in exports of resources in the decade between 2000 and 2010 was triple in terms of both value and employment.
Of course there is a massive glut of investment in the resources pipeline.
But the direct benefits of the Asian growth don’t end with the resources sector.
The unique opportunities the Asian middle class growth has for our agricultural sector must also be recognised.
Australia has a proud history as an exporting food producer.
It should be remembered that it was the agricultural sector that demanded the opening of our economy decades ago, so that they could take advantage of the growth markets internationally.
In the year of the farmer, we shouldn’t underestimate what potential the middle class growth in Asia offers for our agricultural sector.
Already the Australian agricultural sector is taking advantage of this growth.
For instance, in 2010-11, we exported one point four billion dollars worth of food to China – an increase of over 74% since 2005-06.[7]
Locally in my electorate, I have witnessed this growth and its positive impact.
The Bird in Hand winery in the Adelaide Hills for instance, has developed an export market in China which continues to grow.
It already has two cellar doors in China and plans to open a third later this year.
The effect in our community is that this successful exporter continues to grow and employ Australians, over forty today.
Unfortunately however, in many parts of Australia the perception is different from the reality.
Few would be aware that the value of our food exports to China is nearly twice the amount of what we import; in fact I suspect many would think it was the opposite.
There is a growing sense in the community that farmers and our food producers are under threat from cheap food imports, leading to calls for the government to ‘do something’ about it.
While there are some genuine concerns, it is forgotten in this debate that 93% of Australia’s daily domestic food supply is produced by Australian farmers. [8]
Furthermore, Australian farmers produce enough food each year to feed sixty million people, exporting 60% of total agricultural production.[9]
So while there are concerns about cheap food imports, it must also be remembered that Australia’s agriculture sector is mostly export orientated.
If we want to help farmers, we actually need more trade, not less.
Based on the perceived fears in some parts of the community, there are dangers that policy makers will over react, making it harder for our farmers to take advantage of the incredible growth in our region.
These community fears are largely centred on foreign investment in our regional communities.
But the fact is that we need investment to be able to capitalise on the growth opportunities.
Australia has always required foreign capital for growth and we always will.
While sovereign investment poses challenging questions, I am confident that existing regulatory instruments can deal with any potential problems.
Changes in this area could create more problems than they seek to fix.
I firmly believe that in the year of the farmer, our agriculture sector has never seen a brighter future.
As a nation we must back our strengths, and agriculture is certainly one of them.
One area that that will impact on our farmers ability to compete however is overly zealous natural resource management requirements, that seem to be more about ticking bureaucratic green boxes, than actual genuine environmental improvement.
Not only is this being pursued by local and state government authorities, but increasingly by aggressive regulatory purists at the federal level under the growing influence of the Greens.
I believe we should have a debate about this area of micro economic reform because as it currently operates it will hold us back for no good purpose.
Equally, at a macro level, increasing government debt at both state and federal levels will mean that taxes remain higher than necessary.
The intergenerational predictions that Peter Costello outlined in the previous decade are now quickly approaching, increasing the pressures on both the spending and revenue side of the budget.
Comparisons with other nation’s sovereign debt are as useless as a household comparing themselves with their next door neighbour.
Ultimately, what matters is the cost of meeting your debt obligations and the impact it has on your overall budget.
The bigger the debt, the higher the taxes to service that debt, the less money businesses have to invest.
The flattening world
At the same time as the world’s demography is changing, the way we live and work is changing too.
In 2004, Thomas Friedman predicted this phenomenon in his book ‘The world is flat’.
The truth is that the world has never been flatter than what it is today, just as Friedman predicted.
This ‘flattening’ is being driven by the reach of the internet.
In their recently released book, ‘Race against the machine’, MIT Professors Brynjolfsson and Mcafee describe the changes to our world as the ‘Great Restructuring’.
A time when rapid technological advancement is, and I quote, ‘racing ahead but many of our skills and organisations are lagging behind’.
They argue that this will mean jobs that now exist, will soon be gone, while new jobs and new industries will be created in their place.
So while the internet fundamentally changes our economy, it also changes the nature and importance of trade.
The consumer has never had more power than today.
The flat world has meant that consumers can now access a global market place, seeking the product of their choice, from wherever it is cheapest.
So while sovereign nations continue to argue about the rules and regulations surrounding global trade, the populations are taking advantage of the flat world without them.
This is changing the way our retail model is operating.
The consumer is no longer restricted to a local retailer to purchase their desired good; instead they have access to a global market place.
We now all carry access to the global market place, 24/7.
The growth in mobile access to the internet is extraordinary.
In 2010, the number of people worldwide with access to the internet via their mobile phone exceeded 500 million.[10]
By the end of 2011, it had increased to around 900 million.[11]
By 2016, Ericsson believes there will be five billion people with mobile broadband, representing year on year growth of about 60%.[12]
The story is no different in Australia.
As of June 2011, there were 9.7 million mobile handset subscribers, an increase of 18.1% in just six months.[13]
We are all now mobile consumers hooked into global commerce like never before and the results are showing.
According to PayPal, Australia’s online commerce market is forecast to hit $37.7 billion by 2013, up from $27 billion in 2010 and $22 billion in 2008.[14]
While my generation and those before me may have been reluctant to take the leap into the global market place, generation now has no such qualms.
Unfortunately, rather than adapt to take advantage of the change, too many of our traditional retailers have sought to stand against the tide.
For instance, rather than empowering themselves to use the increased market to their advantage, too many traditional retailers have decided to argue for peripheral issues such as a proposed tightening of the GST to try and restrict consumers from purchasing overseas goods.
To many this change looks like a simple answer to a complex problem, but like protecting industries against global forces, it simply will not work.
Rather we must empower our retail industry to compete in a global world.
We cannot continue to regulate the retail sector like it is the 1950’s.
Likewise we need to continue to work on distribution networks to ensure more certainty for retailers and consumers alike.
Conclusion - run to stay ahead
These global changes are happening and we can’t turn our back.
Opening our economy to increased trade has resulted in a vastly more prosperous nation.
But as former Prime Minister John Howard used to say, economic reform is like a foot race with an ever receding finishing line, it means you have to run faster and faster to stay ahead.
These global changes are making us run even faster than ever before.
These changes are not without pain.
But, in a dynamic economy, change will always occur and as the Treasury Secretary said last week, government intervention – however popular at the time - will only increase the eventual pain.
Our open economy has shown that trade stimulates growth, creates wealth, produces jobs, improves competition, generates innovation, and provides more choices to the consumer at a lower price.
Our challenge is to continue to lead our country on this journey, so that we can achieve the generational desire of leaving our country to the next generation in better shape than we found it.
That can only be done by continuing to open our economy, by becoming more productive and engaging more in the world.
Thank you for listening.
[1] ABS, 5206.0 - Australian National Accounts: National Income, Expenditure and Product, September 2011
[2] Datastream, from OECD data
[3] Department of Foreign Affairs and Trade, Gillard Government Trade Policy Statement: Trading our way to more jobs and prosperity, April 2011
[4] CommSec, Economic Insights, 23 January 2012
[5] OECD Development Centre, Working Paper No. 285, Emerging Middle Class in Developing Countries, Homi Kharas, January 2010
[6] OECD Development Centre, Working Paper No. 285
[7] ABARES, Agricultural Commodities: December Quarter 2011
[8]Australia and Food Security in a Changing World, The Prime Minister’s Science,
Engineering and Innovation Council, Canberra, Australia, 2010
[9] Australia and Food Security in a Changing World, PMSEIC
[10] Ericsson Fourth Quarter Report, January 25 2011
[11] Ericsson, Traffic and Market Data Report: On the pulse of the networked society, November 2011
[12] Ericsson, Traffic and Market Data Report
[13] ABS, 8153.0 – Internet Activity, Australia, June 2011
[14] PayPal, Changing the way we pay, October 2011