The trick to lasting prosperity

The trick to lasting prosperity

By David Hetherington

14 February 2012

The list grows longer. This month, so far, Westpac, Macquarie, Holden and Mortein. Last month, it was Toyota, Dick Smith, ANZ and Heinz. Each has used the long summer lull to announce permanent job cuts. Australians are accustomed to constant summer tidings of flood, fire and storm. This year, we have borne a second stream of ill tidings – of job losses far and wide.

Since tariff cuts began in the 1980s, such announcements have become part of our national story. We have become resigned to them, telling ourselves we will replace jobs foregone with better paying ones higher up the value chain. The implicit bargain is that these job losses will be repaid with future prosperity.

But what if we are wrong? What if it’s now just as easy to locate the high-value jobs in Shanghai or Bangalore, and we can no longer count on replacing those less-skilled jobs that disappear with such depressing regularity?

On the evidence of the past two decades, this sounds like scaremongering. After all, we have sustained low unemployment and strong growth the whole time we have been shedding these jobs.

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But look to the US or Britain to see why it’s far from impossible. The manufacturing hubs of the American Rust Belt have disappeared. And as Steve Jobs told the US President, Barack Obama, even high-tech tasks such as iPhone assembly are gone for good.

Similarly the factories of Britain’s industrial north have closed, while City lawyers have seen much junior legal work move offshore.

Why can’t this happen to us? When the tariff walls came down, we were told – rightly – that we would prosper through our competitive advantage in areas such as mining, agriculture and tourism that nature allowed us to do better than others. To these activities, we added the outputs of our knowledge economy – education, finance and engineering services. For years, this approach has served us well.

But recent developments call it into question. Supply chains have become so globally integrated that companies are free to locate their production wherever labour is cheapest, irrespective of where the goods or services are consumed. So Mortein and Heinz do not need to be made here to swat Louie the Fly, or smother that sausage sanga. You can buy your clothes online at Gap and your music at the iTunes store, delivered straight to your door or desktop.

The minerals boom has driven our dollar so high that our competitive advantage in all but mining has been eroded. We have assumed this is fine as long as mining continues to propel the economy forward. It is true the growth benefits us as consumers with cheaper imports thanks to a high dollar. But mining and its support industries sustain surprisingly few jobs. Not many who lose jobs in education, retail or tourism will pick up work on a mine site. And when the minerals are depleted, or the Asian expansion plateaus, those struggling export industries will be tough to rebuild.

Most disconcertingly, the knowledge gap between us and the east Asian economies has closed so fast that for many companies it does make more sense to locate the high-value jobs in Shanghai or Bangalore than in Sydney or Melbourne. That is why the roles disappearing are not just in factories, but in banking, information technology, law and engineering.

To date, these changes have not resulted in widespread unemployment or shrinking wages. But underemployment has been on the rise since the global financial crisis. Last month, we had the weakest jobs growth in 19 years.

If the bargain has really fallen apart, we cannot expect the laws of nature to replace vanishing jobs with shiny new high-paying ones. So how should we respond? Our task is to build those tradable sectors where we can deliver higher quality products than anyone else in the world, and avoid trying to compete on cost alone. Mining, certainly, is one but we need others that can outlast the boom – education, tourism, biotech and high-tech manufacturing.

Three steps matter. First, we need to reinvest the proceeds of the growth across the economy – the minerals resource rent tax aims to do this, although it is set far too low. Second, we should divert some of the boom’s proceeds into an offshore stabilisation fund, putting downward pressure on the Australian dollar and giving us a hedge against the currency’s eventual decline.

Finally, we must invest in the people – the human capital – and supporting physical infrastructure that will enable us to be globally competitive in our chosen sectors. Public spending on universities and R&D has been progressively reduced over the past 10 years. If we are to retain high-value jobs in Australia, this must be reversed, and in a way that targets those sectors where we want to succeed. Some will rail against ”picking winners”, but public investment should be delivered in a way that deepens the common pool of expertise instead of playing favourites.

These steps cannot be put off. The warnings get louder with each new announcement; we must act soon if we are to avoid many more summers of bad news on the jobs front.

References

The trick to lasting prosperity, The Sydney Morning Herald, 14 February 2012

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