Economic Reform: Are you Ready?

Australia is perhaps at a crossroads in terms of economic reform. This government has set its mandate on encouraging innovation, entrepreneurship and a reshaping of business around embracing technology to improve and sustain international competitiveness. In this paper we explore the need for reform and the challenges surrounding current policy. More importantly, with the government’s forthcoming Innovation Statement and the likely introduction of new incentives and support for business to adopt 21st century technologies, we ask the question “are you ready”.

Government and State
Australia has experienced revolving political leadership over the last ten years, perhaps largely on the basis of perceived poor choice of economic policy or poor fiscal management. This would come as no surprise to Daron Acemoglu and James Robinson (authors of “Why Nations Fail” http://whynationsfail.com/ ), who maintain that political and economic strength:
“is based on the concept of consensually strong states. Precisely because politicians and political elites are weak, citizens are happy giving them a “long leash” in the economy, consenting to high taxes, regulation and involvement by the state, with the expectation that the politicians in power and the bureaucrats will use this capacity mostly for things that the citizens like. And what if they don’t? This is where the political weakness of the state is key. Because of this weakness, citizens know that they can easily kick out the current crop of politicians, thus making it incentive compatible for them to use the huge resources they control for the benefits of the citizens, for example for public goods provision and control of monopoly, rather than for their own or their cronies’ benefits.”

The age of the internet and mobile communications has magnified such citizens’ powers, placing even greater pressures on governments to get their policy settings right.
Over the last 35 years public policy discussions and debate around the world have been built upon a general acceptance of the economic benefits of the laissez faire open market economy. Since the Global Financial Crisis (GFC) empirical analyses have been bringing this acceptance into question.

The Need For Reform
It is in this environment that economic, business and political commentators are all talking about the need for economic reform. But what is this reform for, what is it trying to achieve and why? Similarly those commentators are promoting innovation as the way forward for Australia. But what do they mean by innovation and how does that underpin Australia’s future? Are these separate policy matters or one and the same? Has too much reliance has been placed on open market economics, especially for a small and relatively young economy such as Australia’s? To answer these questions it is essential to see the “big picture”, a view of Australia’s long term future that provides a context within which any call for new economic policies can be communicated and debated.
As a starting point it is important to have a view about the objective of economic reform for Australia, as this provides the framework within which the policy challenges and changes are viewed. For commentators generally, such an objective could best be described as sustainable prosperity for all Australians. More specifically this would encapsulate a high and growing per capita income and wellbeing, personal freedom and security, and the general availability of economic and social opportunity. By its very nature this is a long term objective.

So what is the outlook for the Australian economy over the next 30-50 years? PricewaterhouseCoopers have prepared economic growth projections out to 2050. The Australian Government has prepared a 40 year outlook in its Inter-Generational Report. Both of these reflect a “business as usual” policy approach, that is, a continuation of reliance on open market economic policy. They both show that sustainable prosperity is not guaranteed for Australia due to slowing long term productivity growth, an aging population, rising levels of income inequality and a relatively weak response to the economic and social impacts of climate change. Even more concerning is the references to poor performance in capital investment, education and technological development suggesting that the long term risk factors associated with these outlooks are more on the downside than the upside. There can be no doubt that significant policy changes are needed for our future success.

The policy debate so far has been built upon the need to improve Australia’s competitiveness, emphasising budget repair (tax and government expenditure reform), labour market reform and/or regulatory reform. But the reality is that these are just more “business as usual” responses, necessary but not sufficient to deliver the desired long term outcomes. After all, such policies have been the mainstay of economic reform of the last 35 years, but our long term outlook remains challenging nonetheless.
The Government’s forthcoming Innovation Statement has the capability to refocus the reform debate. It certainly would do so if its focus is upon building the sources of future national income that underpin sustainable prosperity by proactively supporting the diversification of the Australian industrial base that can better participate in the 21st century digitally driven economy.

Embracing The Challenge
Such a transformation needs to be built upon the creative capabilities and confidence of Australians to deliver long term productivity and competitiveness. Australia is a young, creative and adaptive society. The challenge is how to channel those attributes to Australia’s economic advantage, transforming Australia from technology adopters to technology developers. By its nature this means a reform agenda would be founded upon innovation, or more specifically a culture or mindset that drives and rewards successful innovation. While Australia has a well-developed innovation process, it is deficient in culture and mindset. The Innovation Statement has the potential to show the leadership and explore the policy settings now most needed by Australia.
By its nature this means engagement with 21st century technologies ones that result in new products, changed business costs and/or operating processes, or improved business models. For government the challenge is that policy moves beyond just supporting improved labour productivity to one of growing new businesses and new industries, building a balance between long term job creation and destruction. For businesses the challenge is to access new information that opens up product development and/or cost cutting opportunities, seek out new markets, and more effectively utilize mobile communications technologies.
There is no doubt that Australia’s taxation and expenditure policy, and competition policy will change. Significant groundwork has been undertaken in the establishment of a wide range of bi-lateral trade agreements paving the way for business to seek out new markets. The Innovation Statement is likely to introduce a new set of incentives and support for business to adopt 21st century technologies.
So are you ready to embrace the challenge? Do you have an innovation strategy which will guide your business as it reaches its own crossroads? With a clear and defined plan of action you too could be among those looking towards a future of growth and new opportunity.