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Australia’s economic future, with Dr Ken Henry

Dr Ken Henry is the part-time Executive Chair of the Institute of Public Policy at the Crawford School of Public Policy, ANU. He is the former Treasury Secretary and the Prime Minister’s Special Adviser, responsible for the ‘Australia in the Asian Century’ White Paper.

Just where is the Australian economy heading? The investment mining boom has peaked, and the structural changes sweeping manufacturing continue. Dr Henry tells SBS business reporter Ricardo Gonsalves that Australia can reposition itself as a quality supplier of high grade goods and services the growing Chinese middle class will increasingly desire – but only if critical microeconomic productivity reform is taken seriously.

Q: There seems to be a lot of talk about a slowdown in China but even today, the Reserve Bank of Australia (RBA) said in its monthly board meeting minutes that ‘China’s economic activity appears to be expanding at a steady pace and Japan is pointing to continued growth in April’. So with that in mind, do you think Australia’s key stakeholders like the government and businesses really understand the importance of Asia?

A: Well it’s mixed frankly. When I go around Australia and indeed internationally, and talk to people about what’s happening in Asia – notwithstanding the publication of the White Paper, notwithstanding the intense focus that there has been in certain quarters about the developments in Asia – I find that some people understand what is going on very well, they get it. But there are still a lot of people who don’t get it, including in business in Australia. You know, this is true all over the world. I was in the United States last week talking to people who would see themselves as Asia experts and you know what? In my view they don’t get it.

Q: Well what aren’t they getting?

A: Well, the question that gets asked all the time about Asia is whether the spectacular growth we have seen to date can be sustained or whether it can’t be sustained and whether in particular, and this is a question which matters more to an American audiences than it does Australian audiences, whether in particular and when China is going to surpass the United States as the global superpower.

And people seem to get preoccupied with this question, when is China going to replace the United States as a global superpower? In my view, that question has limited relevance. What’s of much more interest really is how is the lives of people in Australia and the lives of people in the United States and indeed all over the world, how are they going to be affected by what is happening in China and other parts of Asia.

It is not just a China story, but of course it is largely a China story. And the truth is this, their lives have already been affected by the spectacular growth and spectacular economic growth of China and China’s growth will continue to impact on their lives for decades to come. Quite possibly right through this century. In fact, the emergence of China as a major economic power has to be recognised as the most spectacular economic shock ever, to hit the world.

Q: Okay, so which sectors will find it easy and in addition to that, you said in a recent interview that “some areas it may be already too late to get its act together in Asia”. Which areas are you talking about?

A: It’s too difficult, it’s quite difficult to be terribly specific. But look, there are some businesses and some sectors in Australia that really do get the implications of this structural change that is taking place in Australian economy. Those are the ones that understand the developments in Asia. Okay. Thus far, as I have said we’ve seen very strong growth in Chinese demand for Australian raw materials, particularly for iron ore and coking coal. India too, strong demand for Australian resources. Japan continues to have strong demand for Australian resources. In South Korea also, strong demand for Australian resources. But that’s not the only development that is underway in Asia.

Today, there are something like 60 million people in China that could be regarded as middle-class people. We think of ourselves as middle class here in Australia by and large. There’s probably three times as many middle-class people in China as there are in Australia today.

In 15 years’ time, Asia will have 3.2 billion middle class consumers. The Australian market, even if we define ourselves to middle class consumers, the Australian market will be less than 1% of the Asian middle class consumer market. Those business that are likely, those Australian business that are likely to be successful in the Asian century are those that have already figured this out and are already repositioning their businesses in order to market product, whether it’s goods or services, to that 3.2 billion middle class consumers in the Asian region.

And those that I talked to that I feel most confident about are those that understand the very important truth – that if you want to do well in the Asian Century, you don’t have to be a mass marketer of low-grade commodity in order to do well, you only have to get a tiny percentage of that 3.2 billion consumer market in order to be able to do well. How do you get a tiny percentage of that market? What’s the best ingredient for success? It’s quality. Quite simply, it’s quality.

You go to China – I was in China a couple of weeks ago – it’s evident wherever you go in China what the Chinese middle class want to buy is brand. That’s what they want to buy. Because brand means quality. They’re not buying trash. They’re not buying low-grade stuff. They’re into the very high-grade stuff. And they actually see Australia as a supplier of high-grade stuff and it’s not just wine by the way but also in design and architectural services, they see Australia as being a supplier of high-grade stuff. Then the big one, the really big one, is tourism. Australia is a major exporter of tourism services, we don’t always articulate it this way, but we are a major exporter of tourism services.

Q: For businesses to grow effectively, from Australia into Asia they need appropriate policies and regulations. So given that, is the government failing in its Asian relationship-building duties?

A: Well look, in the white paper, in the government’s own white paper – five platforms were articulated in order for Australia to secure its place in the Asian Century. And the first of those platforms was a productive and resilient economy – that’s what it says and that’s what the government commits to. The first point to make about that is that there’s much that Australia has already done in terms of building institutions and institutional frameworks and in terms of economic reform particularly microeconomic reforms through the 1980s and the 1990s in particular.

There’s already a lot that’s been done to construct a fairly dynamic industrialised economy. If you compare the Australian economy with the recent performance of the United States, or I would say with any economy in Europe including the United Kingdom, that’s not in the Eurozone but nevertheless in Europe, you’d have to say that the Australian economy exhibits extraordinary dynamism and much of that can be put down to that long period of economic reform.

But that’s not to say that everything’s been done. A lot of people recently have made the point and I have publicly myself that you would feel more comfortable about Australia’s ability to remain resilient in the future, in the Asian century, were we now doing on the economic reform front, more to lift national productivity.

One of the things in this respect that really disappoints me is that in 2007, in 2008, there was agreement among state/territory governments and the Commonwealth Government – agreement to embark on a sustained program of productivity-enhancing microeconomic reforms. And it’s fallen apart. And if we can’t secure national agreement to productivity-enhancing national reforms and then deliver them, then I’m going to have to continue to question Australia’s ability to make the most of the Asian Century.

Q: So which side of politics do you believe is better to lead Australia into the Asian Century?

A: I would make no comment on that.

Q: So given that we are headed into a federal election, which leader – Julia Gillard or Kevin Rudd – is more appropriate to lead Australia into an Asian Century?

A: I don’t want to comment on that either. But I would say this and I hope you don’t think this is ducking the question. I actually think this point is more important. What’s going to matter for Australia is policies, much more than leaders.

 

This article originally appeared in The Conversation on 18 June 2013.

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1 Comments
Paul Meleng
June 28, 2013

Interesting interview. Key point is you only need a tiny percentage of a huge market and that quality is the key. It includes quality intangibles like governance, management, design, training etc.
In Australia it can sometimes be frustrating to become extremely good at such things and yet not have the scale to leverage that quality. Some firms are managing to do so (get scale from their skill) by outsourcing the grunt offshore.
So here Ken Henry is saying to look in that direction. When one wants change and it seems everyone is already working hard then one needs to look for another way other than just shouting try harder.
In this case I believe the key to productivity improvement is under the nose in Ken Henry's tax reform paper. In particular, the elimination of 250 annoying anti business taxes and the replacement of a lot of the income related tax with Land Rent, or if you like, an end to all the exemptions on land tax.
If all income and profit related taxes were removed entirely the outpouring of real high quality high intelligence productivity would be staggering. Land rent is impossible to evade, easy to measure and admin as we already value every parcel of land in Australia for rating and other purposes. It is important that it be on the unimproved bare land value so as to not discourage maximum utilisation and all that flows from that and important that it be a flat rate with no exemptions.
Lazy wasteful speculative uses of land would give way, on farm, factory, office and home sites to intensely intelligent and productive uses of every square meter and at the same time the incentive to work, invest and innovate with a "small footprint" would have a rocket under it.
We are paying a very high price for continuing to protect the interests of the few who own most land and who benefit from passive tax advantaged capital gains that are created in fact by the growth and success in the economy won by the physical and brain sweat of others. On top of that this distortion is a prime underlying cause of the bubbles and busts that do so much harm.
Unless we take on this core issue we are only pretending we want real reform and all talk is hot air. But I reckon it could be done, and if not all at once then as much as possible as often as possible and with the end goal in mind.

 

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