Flushing Australia's luck down the loo

In the digitally-powered economy, many industries will need global scale to underpin their survival. Australia’s paltry marks for innovation and export-oriented jobs should have policymakers very worried.

While Australia has done well economically in the last 20 years, new studies from the Business Council of Australia and Europe’s INSEAD business school show how we can keep it that way.

The BCA paper, Building Australia’s Comparative Advantages, draws upon a McKinsey study into the Australian economy and complements the findings of the 2014 Global Innovation Index, launched at the B20 meeting in Sydney earlier this month. Together they provide a roadmap as to how Australia can maintain its living standards in the 21st century.

On first reading, the Global Innovation Index is very good news for Australia: it has shot up in the rankings from 19 to 17 (six places in the last two years). However, the factors measured in the index also illustrate weaknesses underlying that success.

Speaking at the report’s launch, World Intellectual Property Organization (WIPO) director general Francis Gurry said Australia’s performance was “stronger on the input side”, scoring towards the top of the table on environmental, infrastructure and education measures.

Dragging the country out of the top 10, however, were the outputs: on ‘business sophistication’, Australia ranked a lowly 26; on knowledge and technology outputs, 31.

This lowly ranking on outputs is the focus of the BCA paper, which was released this week by BCA president Catherine Livingstone at an Australia Israel Chamber of Commerce luncheon in Sydney. One key focus of the report is poor skills training and tertiary education -- something that Australia’s paltry ranking of 73 in science and engineering graduates in the Global Innovation Index underpins.

A lopsided economy

A more immediate concern for Australians, though, is the lopsided economy that the BCA and McKinsey reports describe.

The top-five sectors for employment are public services, professional services, domestic services, construction, and the wholesale and retail trades. Together these sectors employ over 8 million workers yet only generate eighteen billion dollars in export earnings.

At the other end of the scale are the exporting industries: mining, commodities processing, tourism, food manufacturing and agriculture. Each of these sectors generates more export earnings than the country’s big-five employment sectors -- yet their total employment is only 1.5 million.

This imbalance illustrates how dependent the vast majority of Australians are upon an economy kept afloat by house prices and consumer confidence.

The 1990s, the government policy of ‘go early, go hard, go housing’ when faced with economic troubles has built Australia into a country that, superficially, is travelling well but is struggling with over-investment in property speculation and under-funding in business capital.

Illustrating the effects of capital underinvestment in the BCA report is McKinsey’s relative competitiveness score, which ranks the nation against a global benchmark. Here, Australia is competitive in agriculture, mining, tourism and international education, with potential in niche manufacturing and food processing.

This list of potential national champions is remarkably static -- it could have been written 30 years ago -- and yet agriculture and tourism have languished due to under-investment in both capital and skills

READ MORE: How to manufacture an Australian world champion

Domestically protected industries

Comparing internationally those industries which employ the majority of Australians, the picture does not look good. According to the BCA, Australia’s “enabling sectors” (finance, utilities, professional services, construction, logistics and real estate services, which are “key inputs to trade-exposed sectors”), are less competitive in Australia than in the US.

“Those sectors that until now had been largely shielded from international competition -- retail and wholesale trade, communications, and local and public services -- are also less competitive than the US,” the BCA report said.

As previously outlined in Technology Spectator (The middle class is about to get minced, July 2), many of those fields are no longer shielded from international competition and are in the process of being disrupted -- as the taxi industry is finding out as struggles to competes with Uber.

While the BCA is rightly concerned about the effects of international competition and the skill level of the Australian workforce, in some respects their report is still stuck in the 1980s -- particularly on the question of scale.

Back then, the belief was that Australian businesses lacked the scale to compete on the global market, and that strong domestic champions were necessary if local corporations were to succeed on the world stage.

For the Australian economy, the domestic-scale policy has been a disaster as successive governments allowed domestic consortiums to dominate local markets. Nowhere is this more starkly illustrated than in the liquor and retail sectors.

According to Deloitte’s Global Powers of Retailing 2014 report, Woolworths and Wesfarmers are the 17th and 18th biggest supermarket chains in the world, yet neither has a meaningful presence outside Australia and the entire sector is responsible for less than half a per cent of the nation’s exports.

The wine industry is probably the most stark example of that failure; Fosters was a disaster for the domestic sector, and while the Melbourne Club’s great and good struggled with the difficulties of selling outside of cosy, protected duopolies, the task of promoting Australian exports fell to smaller players like Griffith’s Cassella Wines.

“Firms that tailor their products for the domestic market will need to change their orientation from domestic needs to focus on the needs of export markets and the opportunity to specialise as participants in a global value chain,” the BCA notes.

The benefits of a global refocus are exemplified in the New Zealand success story of accounting software company Xero. “When you’re from a very small country -- a small set of rocks in the South Pacific -- you have to get offshore quickly,” Xero chief executive Rod Drury says. “I think coming from a small market you have to be quite good to break out of the market.”

But the final word on how Australia needs to change its mindset comes from the Global Innovation Index’s co-author, INSEAD’s Bruno Lanvin.

“The theme of this year is the ‘human factor’,” Lanvin says. “We got confirmation that talent is the core element of innovation and without appropriate policies in education, in making the business, academic and public sectors work better, you won’t foster the human factor so important to innovation.”

A focus on the human factor -- particularly education and industry policy -- by both INSEAD and McKinsey puts the federal government’s incoherent budget into perspective. Rather than cutting education and research, the eight million Australians employed in domestic-facing sectors need better skills and more workplace investment to compete in the global economy.

The BCA says that “any approach to growth needs to build on Australia’s competitive strengths so that our biggest employers can transition successfully to a world where almost every job and every service and product will be tradeable”.

For Australia, both the BCA report and the Global Innovation Index show clearly where the country’s opportunities lie. The challenge is now for businesses, workers and voters to make sure we -- and our increasingly incoherent political leaders -- don’t squander the nation’s advantages, and keep Australia lucky.