Opinion piece by CEDA, Chief Executive, Professor the Hon Stephen Martin as published in the Australian Government's Australian Innovation System Report - 2012.
Australia's current economic prosperity owes much to the sweeping economic reforms of the 1980s and 1990s, the minerals boom and associated investments and fiscal and monetary policy working in tandem to secure Australia's continued resilience in the face of global uncertainty.
However, a lack of global competition and a relatively stable economy over the last decade has created a complacent society and has provided limited incentive for business to innovate. In part this has probably contributed to our productivity slowdown and must be addressed as a matter of urgency.
While some would ask why this is an area of such concern, with recent statistics for GDP growth and employment painting a picture of an economy on steroids, we need to take a long-term view.
Economists and policy-makers generally assume that the current elevated terms of trade will return to more normal conditions while business investment will continue for several years to support GDP. However, many of these assumptions are based on Australia's continuing trade relationships with our Asian neighbours, specifically in commodities, and the view that these will continue at current levels. A key factor to consider is the sustainability of China's growth and whether a rapid decline in demand for Australia's resources may occur if there is a drop in China's economic activity.
It is critical to note in this respect that the actions of other resource-rich nations, particularly in Africa are also relevant. While Australia has a 'first mover' advantage in exploiting resources, in the medium term the exploration and investment underway elsewhere will have a major influence on the terms of trade and the willingness of business to continue high-level investment in Australia.
New global competitors and the predicted eventual slowdown in mining-related activity is why areas of potential jobs growth in the future must be our focus now if we are to capitalise on any emerging opportunities.
Australia's current economic prosperity has been supported by past policies that have focused the nation on its international competitive advantage, including innovation and educational up-skilling, and that focus needs to be reinvigorated. But it must be targeted.
Continued technological advances, particularly ICT-related technology, are making goods and services increasingly tradeable on global markets. While this represents a potential opportunity for a highly educated nation such as Australia, it also represents a potential challenge to sectors of the economy that have not been globally integrated or exposed to international competitive pressures in the past. These include significant parts of the services sector such as health and education.
With the mining boom taking the spotlight in recent years, it is easy to forget that the services sector provides 80 per cent of Australia's employment and when the resource-related investment diminishes, as is likely at some stage, future employment opportunities will most likely continue to predominantly be in the services sector.
Some of these sectors are not as productive, at least not as measured by official statistics, as other areas of the economy and the ability of them to therefore lift productivity - of which their ability to innovate will be a key factor - is vital.
If this is not addressed now, Australia's future potential for productivity growth may be at risk, and this may have consequences for continued economic prosperity. With the right reform agenda in place for key sectors such as services we can ensure future economic growth. We would only need to improve Australia's productivity growth to around 1.5 per cent per annum, although still low by historical norms, to potentially underpin robust economic growth for the next decade.
With an ageing Australian population and improving prosperity in Asian nations, it is more important than ever that these sectors are exposed to meaningful reform to enhance their effectiveness and capacity for innovation. Export opportunities are expected to be robust, but only if their potential is realised through an appropriate policy mix. Improving productivity in the services sector, such as education and health, must be a priority if Australia is to maintain its strong economic growth into the future. This will require all participants, be they government, businesses or unions to work cooperatively to deliver the key outcomes Australians expect in a developed economy.
Increased investment in skills, in particular science, research and technical skills, is a vital component, and would allow us to be a leader in high value, high-tech product and knowledge.
Investment in skills has a two-fold benefit - ensuring innovation in the mining and resources sector allows us to continue to compete as other countries emerge as competitors and also ensures we have the right skills available for the likely growth in the services sector. We need reforms in these sectors that focus on building competitive capability to ensure they are better equipped to adjust - and innovate - as future competitive pressures evolve. However, to achieve the changes necessary it cannot simply fall to government to determine and implement.
The private sector needs to step up as well and invest far more in innovation, research and development, improving productive capacity through new business systems and cooperative working relations and not simply put their collective hands out for government subsidies.
Recognition of the need for vital economic change helped drive public acceptance of the sweeping reforms of the 1980s and 1990s. These have been key factors in protecting Australia from the international economic turmoil of recent years. The current economic climate provides a real opportunity to again drive a reform agenda with a long-term vision, but it must be driven in unison by both government and business.