Why Australia is losing its competitive edge

Sitting back and waiting for policy settings to ‘fix’ the exchange rate and high wages won’t do much to resolve Australia’s productivity crisis. Businesses must step up their investment or fall behind.

A lot of the rhetoric we’ve seen concerning Australia’s prosperity misses the point. Certainly the country needs to be more competitive and ‘productivity-enhancing reform’ should be a key focus of every government in every year. No reasonable person would dispute that and discussions on how to achieve these are always worthwhile. The problem to date is that the debate is being focused or framed incorrectly.

The Business Council of Australia is a case in point. The council has certainly made a worthwhile contribution by producing two papers; writing one and commissioning the American consultancy McKinsey & Company for the other. Yet far from highlighting how Australia could be become more competitive, I think these reports instead exemplify why Australia is losing its competitive edge.

It’s not that there is much wrong with the jargon and flowery language used in the reports. McKinsey rightly notes that the best way to lift our competiveness is to increase relative productivity or reduce relative costs. Similarly, the BCA suggests the country needs to “rethink the role of government”, “lift trade and investment” and incentivise innovation. All very sweet-sounding notions, as is the idea that “Australia should focus on the sectors where it can win” because we “can’t win at everything”. This seems intuitive and appeals to logic. Basically the message is that we should focus on the trade-exposed sectors: agriculture, mining, education and tourism.

It’s only when you drill down deeper that the Business Council’s damaging solutions to our competiveness problems – well, the logic of them -- become apparent. At a very simple level, the Business Council and McKinsey appear to suggest that the answer to lifting Australia’s competitiveness and prosperity lays in cutting real wages and the real exchange rate. Yet these are not in fact solutions -- they are part of the problem.

According to McKinsey, this is required because it is ultimately higher input costs that account for the country’s uncompetitive position (at least relative to the US). I don’t doubt that this is indeed the case in some industries like mining and mining exploration. Yet two-thirds of our industry sectors fail to make the grade, apparently. Productivity itself doesn’t appear to the problem as “…labour productivity has kept pace with many developed markets”, although the argument is that this lift in labour productivity has not been “sufficient to offset increased costs and the high exchange rate”.

The reason this is a dangerous approach to Australia’s competitiveness, prosperity and the whole debate around productivity, is because it places the onus for action squarely at the feet of government. It effectively absolves the business community of the primary responsibility for driving their own destiny -- their own performance. This is the antithesis of productivity-enhancing reform and it is why the nation is losing its competitive edge.

RBA governor Glenn Stevens’ recent lament that “… if people simply don’t wish to take on new business risks, monetary policy can’t make them”, captures a simple truth. Despite ample policy support, businesses aren’t taking on new risks and haven’t been for a very long time. Indeed non-mining investment has fallen as a percentage of GDP over recent years and is weaker now than during the ‘90s recession. If businesses are not prepared to invest in capital or technology, how can they be expected to lift productivity or compete?

This is a problem given interest rates are at their lowest in a generation; global growth itself is around trend and domestic growth otherwise comfortably above. That is, there are no good reasons why business isn’t investing, and every reason why it should be. The governor suggests, “Perhaps the answer is simply subdued animal spirits -- low levels of confidence” -- and that is certainly correct. Regular readers will know this has been my thesis for a number of years now.

We can add to that this excessive reliance on government ‘to do something’. We talk of ‘reform’, we talk of ‘productivity’ and ‘lifting our competitive standing’ -- all the rhetoric is great, yet they’ve all become meaningless buzz words. Rather than invest, innovate, adapt or otherwise learn how to compete, effort is wasted on lobbying to slash rates, cut the exchange rate and reduce real wages. These are not reforms. This is industry welfare in another guise (The BCA discovers free enterprise, July 30).

If Australia is to have any hope of lifting its competitive edge, enhancing productivity growth and raising living standards, the first step is to redirect the national debate away from lazy attempts at influencing macro-economic policy settings. Instead, business must be weaned off the government teat and encouraged to invest, adapt and compete of its own accord -- regardless of the policy settings of the day.