Australia has managed to avoid a recession for the last 30 years and may well dodge the next one, with a leg up from the current spike in commodity prices. But what matters much more for long-term growth and jobs are productivity and global competitiveness, especially in the industries and technologies of the future.
The latest Productivity Commission report reminds us that Australian productivity growth lags both past performance and the performance of comparable countries. What it does not do is explore the related decline in the competitiveness of advanced industries, let alone what to do about it.
Readers of InnovationAus.com will by now be familiar with the Harvard Atlas of Economic Complexity, which ranks Australia 91st in the world for the diversity and research intensity of its export mix, just ahead of Namibia. In this article, we share new findings from a US dataset which further illustrate the relentless “hollowing out” of Australia’s industrial structure.
Australia once had a strong manufacturing sector, with steel, chemicals and autos having a major role. Even with tariff reductions in the 1980s and 90s, the shift from large-scale, vertically integrated, mass production industries to smaller, more specialised, globally oriented firms saw an increase in the exports of elaborately transformed manufactures (ETMs).
But instead of using the subsequent resources boom to capitalise on this shift, successive Australian governments frittered away the windfall gains. The increased terms of trade associated with higher commodity prices not only made domestic manufacturing uncompetitive but masked a structural deterioration in productivity performance.
To unpack Australia’s performance, we used the Information Technology and Innovation Foundation’s ‘Hamilton Index’ to examine data on seven key advanced industries: pharmaceuticals; electrical equipment; machinery and equipment; motor vehicles; other transport equipment; computers and electronics; and information technology and information services.
While Australia’s global share of GDP increased from 1.2 per cent in 1995 to 1.6 per cent in 2018, these data indicate that its share of advanced industry output stalled or went backwards. Its global share of pharmaceutical output fell from 0.70 per cent to 0.50, machinery and equipment fell from 0.60 per cent to 0.26, and motor vehicle output fell from 0.54 per cent to 0.21.
Australia lost global market share in all major industries, except computer and electronics and computer programming and information services, which were unchanged at 0.32 per cent and 1.62 per cent respectively. Indeed, the latter is a rare bright spot for the Australian economy as far as advanced industries go.
Another way to examine Australia’s performance is to look at industries’ share of the economy compared to its share of the global economy – what economists call the location quotient (LQ). If Australia had the same share of advanced industry output as the global economy, its LQ would be 1.00.
In 1995, Australia’s advanced industries’ LQ was 0.56, meaning it had 44 per cent less advanced industry production as a share of its economy than the world. But by 2018, its LQ had fallen to 0.41, ranking 51st of 74 nations, just ahead of Costa Rica and behind Iceland. To compare, America’s LQ is 0.94, China’s 1.34, and Germany’s 1.74. Even the UK and Canada, which have also deindustrialised, lead Australia, with 0.80 and 0.60 scores.
The LQ for motor vehicles was just 0.13, which may be understandable with the closure of car assembly, but electrical equipment was 0.17 and machinery and equipment 0.20. To compare, both Germany and Mexico have LQs of over 3.00 in motor vehicles, China and Korea have LQs of over 2.00 in electrical equipment, and Japan has an LQ over 2.00 in machinery and equipment.
If policymakers want Australia’s advanced industry output to be the same share of its economy as the global average, output would have to increase by almost 1.5 times, or $105 billion. Gaining share in advanced industries is critical because it means a larger economy, fewer supply chain vulnerabilities and a more robust and sophisticated industrial base.
The question is how to reverse the slide towards a third-world natural resources, tourism and student economy? The newly established National Reconstruction Fund is a key building block for industrial transformation, but as a financing mechanism for business it cannot do the job alone. Here are three further ideas, which draw on international experience, including recent legislation from the Biden Administration in the United States.
The first is to increase public funding for mission-driven “discovery” and applied research with high potential impact. The current situation requires universities to cross-subsidise much of their research from international student fees, and CSIRO to become excessively dependent on short-term project funding from industry. This is unsustainable.
While the need for more effective commercialisation of research is also important, especially as Australia lags other countries in turning ideas into commercial outcomes, there has to be something to commercialise. Otherwise we invite a continuing downward spiral of both research and innovation.
Second, research commercialisation is no longer a linear pathway from lab to market but rather a more complex, constantly evolving process of interaction between industry and researchers in place-based “innovation ecosystems”. The evidence suggests that this works best when it is coordinated as part of a whole-of-government approach to industrial policy, including foreign direct investment attraction.
The problem in Australia is not just the amount we spend on research and innovation, but how we spend it. Right now, the R&D Tax Incentive accounts for the bulk of the Commonwealth R&D budget, which is way out of line with other OECD countries. This reflects a convenient but unexamined preference for indirect measures over targeted intervention, and a missed opportunity for achieving transformative outcomes.
Third, there is a need for improved support structures to build enterprise “absorptive capacity”, which would facilitate the take-up of new ideas and technologies in the domestic economy, whether originating in Australia or elsewhere. Even the Productivity Commission concedes that the comparatively limited diffusion of new technologies in Australian firms is an example of “market failure”.
Given its small size and remote location, Australia will never be able to be as strong in a wide array of advanced industries as nations like Germany and Japan. But it can be successful on a global scale in areas where it has existing and emerging strengths, such as digital and spatial technologies, robotics, resources value-adding, biomedical and renewable energy technologies.
Australia’s future prosperity depends on the development of a more diverse and knowledge-intensive economy, with a much greater share of advanced industries. The Albanese government has begun this task with a passion, but it’s a monumental one which will benefit from the active participation of all sections of industry and the community.
Robert D Atkinson is founder and President of the Information Technology and Innovation Foundation in Washington. Roy Green is Emeritus Professor and Special Innovation Advisor at the University of Technology Sydney.
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