Committee for Economic Development of Australia Annual Dinner, Sydney, 14 November 2017
The Committee for Economic Development of Australia
Annual Dinner, Sydney, 14 November 2017
The Three Great Transformations
Retrospective and Policy Address
Paul Keating
I want to begin tonight with a little retrospective about three great economic transformations that have taken place in our lifetimes.
The three great transformations that most closely concern us.
One is our own.
Another is China’s.
And the third is the transformation wrought by technology – the dazzlingly rapid change in the global economy, in our lives, being brought about by information, by cheap, fast and ubiquitous communication, and by the connectivity of the internet.
Three transformations that have changed our world, are changing it now, and will continue to change it in coming decades.
They are the three biggest economic developments of my lifetime and in the lifetime of most of you here tonight.
Unlike many transformations these have not only been long lasting and consequential but also, mostly favourable.
But favourable as they have been, they pose big challenges for us.
Challenges to which we are responding only hesitantly, encumbered by the baggage we bring from a world rapidly disappearing behind us.
The Transformation of Australia
The first transformation is not important to the rest of the world, but it is very important to us.
It is the transformation that has prepared us to more readily respond to the other two.
This is the transformation we have made of ourselves, of the Australian economy.
Just six weeks ago Australia began the 27th year of uninterrupted economic expansion.
No other advanced economy in the world has matched that record.
In 1991 I said we were about to snap the inflation stick that had obstructed Australia for the previous quarter century.
I said then that we would have a long economic upswing with low inflation and high productivity.
We had created the conditions by dramatically floating the currency, deregulating finance, dismantling tariffs and selling off government businesses. We introduced capital gains taxes and fringe benefit taxes and used those revenues to sharply lower the top marginal personal income tax rate and the company tax rate. We ended the double tax of dividends by introducing a system of dividend imputation.
I then announced that we would transition away from our century long system of centralized wage adjustments towards a system built around enterprise bargaining, and we completed that transition in the following three years, after I became Prime Minister.
I confidently predicted it at the time, but the durability of the upswing, the enhancement of Australian prosperity which began way back then in the third quarter of 1991 has pleased me no end. When the gadget works, everyone profits.
Between 1960 and 1991 the Australian economy had six recessions.
And since then, 26 years of uninterrupted growth.
Among advanced economies we have been uniquely prosperous.
In those 26 years our output of goods and services has much more than doubled, comfortably exceeding the growth of the UK or the US or Canada or Germany or Japan.
Labour productivity has increased by around 66%.
Real income per head has increased by roughly the same – by two thirds.
On one measure, average wages have increased after inflation by over 70%[1]
The volume of our capital stock has more than doubled.
We have built over 4 million new homes.
Australia is a much bigger place, a more productive place, a better-equipped place.
It is also a far wealthier place.
The net wealth of Australian households has increased more than sevenfold in those 26 years. A remarkable statistic if ever there were one.
In 1991 we had $118 billion in superannuation assets.
Today we have over $2.3 trillion - a twentyfold increase.
And these assets aren’t owned only by the people already well off.
The best part about it is, that we have had all that growth, all that prosperity, without destroying the values on which Australia is built.
Our income distribution after tax and government transfers is not as flat as most of Western Europe.
But it remains much flatter than the comparables - the US and the UK.
Even the lowest fifth of Australian households by income have seen a nearly two thirds increase in real income over the last 20 years. The top fifth have done better, but not outrageously better.
We built a good social safety net, but rigorously means-tested it so we could afford meaningful benefits.
We switched to enterprise bargaining but importantly we kept the base and safety net of minimum wages in our award system.
Above all, the long run of economic success has meant we have high workforce participation and relatively low unemployment.
But it hasn’t been without its problems.
I am concerned that our income distribution is becoming more unequal and our wealth distribution much more so.
But what a contrast in attitudes between then and now.
In 1991 we had had more than two decades of economic unsuccess. These two decades had been followed by what many people found to be a bewildering struggle over economic reform and change.
And then, 26 years of prosperity.
It has not only been a remarkably prosperous time, but also a culturally enriching one for us.
Our population has become much more diverse.
Nearly one third of Australians today were born somewhere else.
The share of children who finish school at year 12 is more than twice as high today as in 1983. So too the share that are now able to go on to university or apprenticeships or other forms of training is much higher. In fact, we trebled university places.
We have become even more a services economy than we ever were.
And we have become much more oriented to Asia.
China’s Transformation
This introduces the second great economic transformation which concerns us tonight.
In 1991 just over half of our goods exports went to Asia, and when I pointed this out at the time, we were astounded at how big the share had become.
Today more than three quarters of our goods export go to Asia, and the share of exports in our GDP has increased from one sixth to one fifth – a big change.
Services exports have increased sixfold, and particularly with an Asia focus.
International students studying in Australia now account for spending of just on $20 billion – a fivefold increase in just 17 years.
And two thirds of those students are from Asia.
Tourism exports have increased more than fivefold compared to 1991.
Again, the most rapidly rising tourist numbers are from Asia.
We have turned to Asia to an even greater extent than I was expecting in 1991, and especially to China.
Our goods exports to China now account for one third of our total exports of goods, compared to less than one thirtieth in 1991. You don’t need to get your ‘threes’ mixed up here to know how profound that shift is.
Students from China now account for over a quarter of the total of international students in Australia.
Tourists from China now account for more revenue in Australia than tourists from any other country.
Just a decade ago the stock of China’s direct investment in Australia was derisory - around half a billion dollars.
US direct investment in Australia was 174 times larger.
By last year, the stock of Chinese direct investment in Australia had grown to $42 billion, an 80 fold increase, and getting on for about one quarter of the stock of US investment.
China has become more important to us, as it has become more important to the world.
It is the centre of the second great economic transformation that is changing our lives and our children’s lives.
But our own transformation coincided with China’s.
When Bob Hawke and I and the great reforming Labor cabinet took office in 1983, Deng Xiao Peng had already been reforming China’s economy for five years.
While we opened up the Australian economy to the world with the float, freeing finance, breaking down the tariff wall, he was opening China to the world.
He was inviting foreign businesses to manufacture there. He was telling Chinese state owned enterprises to invest and to export. He was encouraging the Chinese to set up their own businesses and to become as rich as they were able. He began building the heavy industries to support China as the export powerhouse it has become.
While our economic output has more than doubled in the last 26 years - a very good result - China’s has increased more than eightfold over the same period. Not only remarkable – without precedent in human history.
Our per capita GDP has increased 150% - China’s 700%.
Purchasing Power Parity weighted GDP per capita in China is now double India’s, and is a third higher than Indonesia’s[2]. The wages of factory workers in China are now higher than in many economies in South America[3].
On IMF purchasing power parity measures China surpassed the United States as the world’s biggest economy in 2014. Even on current exchange rates it has long surpassed Japan and Germany to become the second biggest economy in the world.
China is more than ten times our size in output, nearly fifty times our size in population and our productivity level is, let us say, about four times China’s.
But all that said, there were similarities between the way we went about opening both our economies to the world, deregulating and looking to trade and investment for growth.
Both transformations required clarity and urgency in political leadership and against fierce opposition. Significantly, both were politically driven.
In both cases, the leaders needed to bust the old arrangements and release the creativity and the aspirations of their people.
Both sets of leaders took big risks.
In my discussions over the years with former premier Zhu Rongji, former President Jiang Zemin, and more recently with President Xi Jinping, I’ve always found a keen interest by the Chinese in the lessons of Australia’s economic reforms.
The Internet and its Meaning
So the transformation of the Australian economy and of China’s economy and China’s role in the world have had a vast impact on us, on everyone in this room tonight
But the technological transformation now underway may well prove more consequential for us than either of those great changes.
When the long running Australian economic expansion began in 1991 we were still getting used to the novelty of having computers on our desks
We went to bookshops and record stores, we read newspapers that were actually printed on paper.
We spoke a lot on the telephone but thought twice about calling overseas.
We still sent letters, we examined printed catalogues, read printed advertisements.
We already had the IBM personal computer and its competitors, we already had Microsoft with Word and Excel but it would be another three years before Amazon got going and another seven years before anyone had heard of Google.
We were just beginning to use the internet for emails. We carried big, clumsy mobile phones and thought they were amazing.
We had barely begun to realise the possibilities of the internet.
Now digital technologies are changing every aspect of our lives
They have the changed the global economy and our own. They are changing the way we relate to people, the way we communicate.
They are changing our culture.
They are offering us new economic opportunities and new impediments and threats.
We are moving into a way more lateral, interconnected collaborative world – one that does not respond or interact with a managerial hierarchy as formerly in all industrial organisation.
In short, we are in a new world.
A world we have to comprehend; and absorb.
So, let me sketch out where I think we are now – in the afterglow of Labor’s and Australia’s great reform period.
Lessons of the Reform Period.
I am always gratified by the frequency with which the nineteen eighties and early nineties in Australia are hailed as the golden age of economic reform.
Even when the applause comes from groups and interests who were opposed to what Bob Hawke, my colleagues and I were doing to remove the shackles on the Australian economy at the time.
So I say this.
Nostalgia for the reform politics of the eighties and nineties is not going to advance us mightily.
It was not, as is often today suggested, a period of consensus between the parties on what needed to be done.
Today the Business Council of Australia tells us we need to go back to the Keating reform era. When we were actually in the Keating reform era, the Business Council was of no help. They opposed any notion of a tax on consumption, the taxation of capital profits and fringe benefits, and therefore they opposed the means necessary to fund lower personal income and company taxes and put into place dividend imputation. They also opposed our enterprise bargaining reforms, as did the Opposition.
And I can tell you the then Liberal and later Howard Opposition did not wave things through as conservative apologists suggest these days. They voted against means testing pensions, enterprise bargaining reforms, the superannuation guarantee, and the broad elements of the landmark 1985 tax reform package. They opposed each and every pay increase under the Accord -the Accord that broke the back of Australian inflation.
My colleagues and I had to fight for every one of those reforms – invariably against the Opposition, mostly against the business lobbies, occasionally with our own caucus.
But they were fights worth having.
When I superintended the last national macro and micro reform program, it was all about opening our protected sclerotic economy to global forces. It was about getting blood to the muscle of the economy.
And through the big tariff reduction program, trying to ensure that our investable capital found its way into the optimal places in the then, more open economy.
Essentially those reforms revolutionised the traded goods sector of the economy, making them ultra-competitive and open to productivity gains.
But I had great difficulty with the non-traded economy; the part which in very broad measure, belongs to the authorities of the states, in areas like transport, health and education.
To encourage the states to do something about these lethargic instrumentalities, I established a formal competition policy in which I had a range of payments available to the states for pro-competitive things I was encouraging them to undertake. A program most states took up with some enthusiasm.
So in the broad sweep of just on a decade and a half of almost daily reform decisions, the focus was all about opening the place up while generating real competitive forces in a country comfortably used to monopolisation and protection.
Now, that agenda has been accomplished. Those changes have been made; these things have been done. The exchange rate can only be floated once. The financial system can only be liberated once. The tariffs can only be abolished once. The privatisation of big government assets like the Commonwealth Bank, CSL, Qantas and Telstra can only happen once - there is just no point or profit in returning to those particular wells.
But today, the economy is still crying out for liberating forces, in the nature of those we employed in that tumultuous period.
As a consequence, these days, people incessantly talk about reform. As I remarked in the 1980s, so ubiquitous was it then, even the pet shop galahs knew about micro-economic change.
Yet you hear, these days, reform expressed by organisations like the Business Council as simply being about a reduction in the corporate tax rate or hopping into low paid workers by knocking off their penalty rates.
The limitedness of it is remarkable – the laziness and backwardness of it, profound.
If you had any foresight or understanding of the forces now available to promote the kinds of changes we employed in the opening of the economy thirty odd years ago – they are staring you in the face – globalisation and galloping international digitisation.
These dual forces are all about competition: competition and complementarity in the provision of goods and services through globalisation – and with digitisation, competition in all fields of products and services with the accelerating ubiquity of the global digital economy, with telecommunications and the smart phone facilitating much of it.
Digitally enabled business models are reshaping entire industries which the technology facilitates to scale faster and at lower prices.
And in reshaping those industries, bringing down monopolies, smashing market barriers, while lifting the utilisation of otherwise static and underperforming assets.
You can see examples of this with Uber and Airbnb alone.
We can see the first big phase of this shift already, with consumers responding directly to the smorgasbord of things on offer – and at their fingertips.
And, as we can also see, information lowering prices.
The wider phase, the grander phase, where even larger gains are to be had, is in the heavily government influenced areas of health, aged care, education and human services.
With the use of big data it is possible to make the delivery of these services smarter, less costly, more tactile and more friendly to the consumer.
Informed by mass data and automation, simplification at work will be facilitated by machine learning and computational language processing.
This same artificial intelligence should be applied in the efficiency of health delivery, education, our road and transport systems and the general operability of our cities.
These are the reform horizons we should be concentrating on, and not the dross handed down from the Business Council or the Financial Review - with the holy grail simply arriving with a company tax cut. Or whinging from the ACCIs of this world about penalty rates, when the reality of static wages growth stares us in the face.
Changes on a canvas of this kind are not going to drop from any department. You will not find them falling from a Treasury printer. Because of their essence, they require imagination, the principal tool that was employed in underwriting the 80s and 90s changes.
If you can’t imagine it, you are as sure as hell never going to see it.
As I said earlier, often these days, people talk about reform as though you could dial it up if you only could remember the number or the prefix.
Of course, before the 80s, Australia never had reform. It couldn’t even conceive of what a reform program would have looked like, much less articulated it. Australia was a locked up and locked down little insulated economy long presided over by that vacuous dandy, the great god Ming.
In the long Menzies torpor and with his modest successors, we gently slipped into an industrial backwater. Ever so quietly, mind you. No fuss.
The kind of slipping we are seeing now. Quietly also, gently doing nothing other than genteel subsidence. And there is another thing conservative Australia never had any respect for or understanding of and that is inclusive growth.
Inclusive Growth
The rarely, if ever acknowledged second strut of the 1980s and 90s reforms was, as I mentioned earlier, the concomitant commitment by the government to equity and inclusion.
In the cooperative framework which the Accord process engendered, large slabs of the garnered productivity were allocated to new community social standards, in such things as Medicare, universal superannuation, a world-leading system of minimum award rates of pay and strong real wages growth.
The twenty six years of our current expansion was designed so that all Australians had a share in the national action.
I don’t particularly wish to make overt political comments in this address but it is apposite to point out that the then opposition, led in the main by John Howard, opposed each and every one of the new community standards we sought to entrench.
He fought Medicare to a standstill, like he did superannuation, like he did minimum award rates of pay with his miserable WorkChoices program, like he did each and every national wage adjustment over fifteen years under the Accord process. And, while it mattered, like he opposed the capital gains tax and the fringe benefits tax, which as I said earlier, funded the big personal and company tax cuts that so changed the competitive landscape.
The Hawke/Keating changes, while market oriented, differentiated themselves from neo-liberalism and the plain reactionism of the Howards of this world by the commitment to inclusion.
The government at the time was committed to market reforms but uppermost in its mind, were the economic and social imperatives of inclusion and justice.
We can see in America today what the loss of these balances means, watching the extremes of income and wealth rip at the fabric of American society. And we can see, now time has passed, how superior Australia’s model under Labor has been to that of the United States, or for that matter, most comparable industrial countries.
This question of inclusive growth remains large and will loom larger because of the continuing impacts of globalisation and technological disruption.
Large percentages of the population have been able to enjoy the benefits of trade and open competition, while others have suffered the brunt of the concomitant adjustments.
This effect, these trends, are likely to amplify themselves as the network economy moves large chunks of commerce into automation under the strategem of artificial intelligence.
The productivity surges with losses in employment have to mean that management of the economy has to focus heavily on inclusion. Large bodies of people cannot be left out or be left behind.
In the 1980s and 90s we established these principles and they have served Australia so very well. So, we know what to do and we know the outcomes will be superior.
But this also tells us that in the cascading digital age, where self-learning algorithms and computational processing eke away at today’s jobs before it is clear where tomorrow’s jobs are coming from, comprehensive inclusionary programs must become central to our economic progress and with that, our social bindings.
We are in the somewhat early stages of this remarkable change but 2016 was the tip-over year when developments in artificial intelligence made clear that this was a primary and new technological pathway.
We are now in a new world – a world which requires new world thinking and awareness that other states, not simply the United States, but states like China, will set the pace in these competitions. A competition we are all in.
So, while we were able to do capital so well in the 1980s and 90s, the challenge for Australia now is in human capital, as the knowledge economy, the network economy, tears away at an exponential speed.
All of our lives we have witnessed change, more or less on a linear basis over time; discernible progress, but over time.
These technologies dramatically change those trajectories. From now on the changes will be so rapid, so exponential, we will have difficulty, even in our mind’s eye, at comprehending their scale and implications – let alone planning for them.
All the more reason our imagination must be leaping, not being at all relaxed and comfortable.
Australia’s Strengths
So we have a lot of challenges, and we are going to need enlightened and resolute political leadership to deal with them.
We have so far avoided the political rebellions against trade and immigration evident in the UK Brexit vote and the election of Donald Trump as US president.
We have the advantage of being increasingly integrated into an economic community which is the fastest growing in the world and which has China at its centre. We fit well.
We have the advantage of those 26 years of uninterrupted expansion which have given us much more confidence in accepting change, in meeting and dealing with our problems.
We have the advantage of a diverse population, one of the most diverse in the world, and one without any serious ethnic or even cultural tensions.
And we have an immense demographic advantage.
On UN projections Australia’s workforce will in coming decades increase more than six times faster than the UK workforce, five times faster than the Canadian workforce, and nearly three times faster than the US workforce. These are important indices.
With sensible policies, Australia’s economy can expand more rapidly and its living standards increase faster than most other advanced economies, including the US.
America and China
Let me finish up tonight with a comment not on what we need to do here, but on our external challenges.
The issue that most concerns me now is how the US and China manage their relationship over the next couple of decades.
For Australia, there is no bigger threat than a breakdown of cooperation between the US and China.
We must do all we can to resist such an impasse.
America is still and will remain our security alliance partner, the world’s predominant military power, and a great democracy to which we are philosophically akin.
But we are increasingly part of a regional economy based on China.
We have an overwhelming interest in seeing these two huge economies, these two powerful states, coexist as harmoniously and as fruitfully as possible. Last week’s meeting between US President Trump and Chinese President Xi Jinping was encouraging in these respects.
We have no interest whatsoever in publicly or privately encouraging either America or China down the paths of crude economic nationalism.
A mercantilist path where investment in each other’s economy is resisted, where trade is thought of as wins and losses, where agreed global rules can be suspended.
I’ve spoken elsewhere of my very firm view that America must accept, for all its power and for all it has done, that it cannot remain strategically preponderant in the western Pacific.
There are increasing signs that the inevitable strategic competition between these two nations risks spilling into trade, investment and technological competition as well as issues of global economic governance.
I have said before that the Clinton presidency and the Bush presidency that followed, denied America the opportunities offered by the US victory in the Cold War.
I wanted them to use that opportunity to reshape the world, by allowing the great populous states of China and India and Indonesia a place at the great strategic table.
I wanted the US to make room for China and for India, and to come to proper terms with Russia.
The fact was and remains that there was no coherent American strategic plan for the post-Cold War world.
And America is now paying a huge price for this, as China rises rapidly and confidently in the East.
It is clear that the US can be the framer and the guarantor of the Atlantic but not now the Pacific, as China will never allow itself to be a strategic client of the US as Japan has been for seventy years.
Yet, the US can be and should be the balancing and conciliating power in the Asia Pacific. We need it here. But the notion of the alternative, ‘the pivot’, that the Chinese state is going to be superintended by the US military, is now simply incredible.
Well, I’ve tried to cover a lot of ground tonight. We have some big challenges, but we have some big opportunities. We have come a long way, but now the pace is quickening. There is no rule book or plan for this next phase. But imagination and boldness have to be the essential elements of our next major advance. CEDA has been an important contributor to the national economic debate, now, for a long time.
The range of its interests and the breadth of its membership equips it to make an enhanced contribution as these challenges come in on us.
I was pleased to accept tonight’s invitation.
[1] Male full time AWOTE increase from December 1994 to June 2017, deflated by the change in the CPI over the period. The newer labour price index shows a somewhat lower rate of increase, but the series commenced long after the long expansion began.
[2] Lowe speech 21 Sep
[3] FT piece