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Introduction
Good evening ladies and gentlemen.
I am delighted to be delivering the second Kevin McCann lecture.
I understand that this follows Ziggy Switkowski, who delivered the inaugural lecture last year.
I should add, despite being here at the University of Sydney Law School, I – like Ziggy – am not a lawyer.
My time here at Sydney University was spent – among other things – studying economics.
But as we see, nowhere more clearly than in looking back at Kevin McCann's career, law and economics are inextricably linked.
Kevin McCann was a successful lawyer – serving as a Partner of Allen Arthur Robinson from 1970 until 2004, and Chairman of Partners from 1995 until 2004.
He has gone on to lead a successful career as a non executive director, as well as contributing to society through a range of activities.
I got to know Kevin well when we both served on the Council of the National Library of Australia.
Kevin has a strong sense of public service.
Many people in this room may not know that Kevin narrowly lost Liberal preselection for the safe seat of Warringah in early 1994 – 55 votes to Tony Abbott’s 65 votes.
This is a timely reminder of just what a difference branch members can make.
In this case, six votes could have changed the preselection result.
But the outcome of that preselection was a major win for the business community, given the enormous contribution Kevin has gone on to make.
But I am not here to talk about politics tonight.
Tonight I want to talk to you about the importance of economic growth.
About the opportunities economic development in our Asia Pacific neighbours is providing for Australia.
About how we make the most of these opportunities and about how we manage and adjust to the resulting structural change in our economy and society.
Resources and energy are very much at the heart of this change.
It is in these sectors that many of the current and future opportunities lie.
But as we know, new opportunities also mean new challenges.
So tonight I also want to talk to you about the importance of sound policy making in supporting economic growth.
The importance of economic development
Let's begin by looking at why economic development is so important.
Living in Australia, enjoying the high standard of living that we do, we can sometimes lose sight of just how key this is.
But we must always remember that it is economic development and economic growth that lifts people out of poverty, and helps fund education, health and welfare.
The best social security outcome is a job.
Last week I was in China – a country that is, as we all know, renowned for the rapid growth of its economy, and for its emergence as a global economic powerhouse.
But what is perhaps less well known is that poverty remains a real issue, with hundreds of millions of people living on less per day than what it costs us to buy a cup of coffee.
Likewise, 20 per cent of the world's population – 1.4 billion people – still lack access to electricity.
So when I talk about the need for economic development globally, I am talking about the need to ensure that people have the opportunity to lift themselves up and improve their lot in life.
Economic development directly improves outcomes for people on the ground by:
- increasing income;
- improving the quality of diet;
- increasing access to medical services;
- reducing avoidable illness and things such as infant mortality; and
- giving people the basic tools we take for granted like literacy and numeracy.
This is something that the Greens and certain environmental non-governmental organisations often overlook in their anti-development stance.
The drivers of growth
But the fact is that economic development is occurring – and nowhere more so than in our region of the world.
The industrialisation of countries such as China and India is substantially altering the global economy.
In Beijing last week I saw this development first hand.
The Chinese numbers are staggering.
China makes up:
- 53 per cent of global cement consumption;
- 48 per cent of global iron ore consumption;
- 47 per cent of global coal consumption; and
- 41 per cent of global aluminium consumption.
But it is not just the volumes that are staggering, it is also the speed at which these volumes have increased.
To give you just one example, China's share of global steel production rose from 18 per cent of global production in 2001 to 44 per cent in 2010.
This of course creates huge demand for mineral commodities but also for energy.
In 2010 the IEA predicted that global energy use will rise by 36 per cent between 2008 and 2035.
Ninety three per cent of this energy growth is coming from non-OECD countries.
And China is the most significant driver of growth.
To put the increase of China's energy use in context, the IEA estimates that between 2000 and 2009 China went from using half the energy the US uses to overtaking the US as the world's largest energy user.
Boom times
Australia is – and in my view will continue to be – a significant player in - and beneficiary of - this unfolding story of economic development.
As we have seen, the growth in demand, particularly out of Asia, has driven up commodity prices and sparked an unprecedented expansion of Australia's resources and energy sectors.
In just ten years, between 2000/01 and 2010/11:
- Australia's total export value of iron ore has increased from $6 billion to $55 billion; and
- Australia's export value of coal has increased from $11 billion to $43 billion.
Total export earnings from Australia’s resources and energy exports reached a new record last financial year of $175 billion – accounting for 60 per cent of our total goods and services exports.
This financial year they are forecast to reach $215 billion – an increase of 21 per cent.
What's more, this growth is set to continue.
The pipeline of planned capital expenditure in minerals and energy projects in Australia stands at a staggering $430 billion.
Liquefied natural gas (LNG) is a particular stand out in this investment pipeline.
Only yesterday I was in Perth for the final investment decision on the Wheatstone LNG Project.
Wheatstone is the fifth new LNG project in Australia to be sanctioned in the last twelve months and the seventh since 2007.
Together, these seven projects represent total capital investment of over $140 billion and they will more than triple our current LNG export capacity, putting Australia on track to be the world’s second largest exporter of LNG in 2015.
But LNG is not alone in experiencing strong growth.
We have also seen a raft of new investments in coal - to both expand existing operations and to develop new ones.
Indeed there is an entirely new coal precinct opening up in the Galilee Basin.
Australia, as the largest exporter of coal in the world is, together with Indonesia, forecast to provide much of the increase in world thermal coal exports predicted for 2011 and 2012.
This includes servicing the fast growing Indian market whose imports for thermal coal are forecast to increase 32 per cent from 2010 to 2011.
Australia’s changing economy
This significant increase in the value and to a lesser extent the volume of our energy and commodity exports is bringing about fundamental change in the Australian economy.
Competition for labour has increased and pressure on wages has gone up.
The Australian dollar has risen, challenging non-resource export sectors and import competing sectors.
However we must also recognise that the current changes in our economy and associated pressures are not dissimilar to those experienced in the past.
For instance, Australia saw the original development of the Pilbara iron ore industry fifty years ago, built off long term contracts with Japan – a valued long standing trading partner.
In the context of an appreciating Australia dollar in recent years, it is important to remember that in 1973 and 1974 Australia's dollar was buying $1.48 against the US dollar.
So the current strength of the dollar relative to recent history does have some longer term historical precedent.
We must remember that Australia is a dynamic country, and change in the composition of our economy is nothing new.
“Booms”, whether in gold, wool or minerals have long been part of our nation’s economic history, largely in response to global demand.
They have all contributed to our national prosperity while at the same time reshaping our economy.
We cannot stand in the way of change or pretend it isn’t happening.
As a trading nation we have always been exposed to global trends, and this remains true today.
This, of course, has both up and downsides – and the transition can at times be difficult.
Looking back over the last half century, agriculture and manufacturing have fallen from contributing around 13 per cent and 26 per cent respectively of Australia's economic output in the 1960s to approximately 3 per cent and 12 per cent over the last decade.
Mining has increased from 2 per cent to 9 per cent now.
Over this period Australia has emerged from behind a tariff wall and our economy is now stronger, more flexible and frankly more attractive to international investors due to tough reforms taken by governments in the past.
That is why it is so important that - while giving proper attention to the challenges that change in our economy presents - we must also retain our perspective.
We must not lose sight of the fact that in the current climate of global financial volatility our close ties with growing, commodity hungry economies – such as China and India – are on balance to our great advantage.
We must recognise that resisting change and taking an inward looking policy approach will lead to longer term harm.
The long term consequences of protectionism and isolationism outweigh the short term costs involved in embracing change.
We cannot forget that the drivers of growth in resources and energy offer opportunities not just challenges for other sectors.
I know there is community concern that strong commodity prices and upward pressure on the dollar is squeezing sectors such as manufacturing and tourism.
I cannot deny this pressure.
But at the same time I reject narrow views and definitions, particularly when it comes to Australian content.
We should not forget that the benefits to Australian industry from our resource and energy sectors is about more than just downstream manufacturing.
Large resources and energy projects also create opportunities for Australian engineers, project managers, transport companies, travel agents, catering firms, bankers, environmental scientists – and of course lawyers – to name a few.
Nor should we forget that the economic development of our Asia Pacific neighbours also offers opportunity for other sectors such as tourism.
China is Australia’s biggest growth market for tourism.
Regearing our businesses, outside of resources and energy, to take advantage of these markets is vitally important.
As Alan Joyce put it last weekend - in his characteristically direct way:
"Anyone with a basic understanding of global affairs can see the world around Australia is changing.
Anyone with a shred of economic intelligence understands that Australian companies must change with it…"
This of course is what Qantas, among others, is seeking to do.
Clearly, it is neither an easy nor a popular task, but it is a response to an inescapable economic reality that must be dealt with head on rather than ignored in the hope that it will somehow go away.
Part of responding to this changing economic reality is also acknowledging that there is more to the story than just a high Australian dollar.
As analysis from the Reserve Bank clearly shows, consumer behaviour has altered dramatically in recent times.
People are saving more, focussing on paying off their mortgages, reducing debt and are spending in different ways.
Last year Ziggy spoke about some of the significant technological advances that have come about since the mid nineteen nineties.
Things like growth in telecommunications and the internet.
He talked about the impact these have had on energy usage and demand – something I am only too familiar with.
But what the uptake of new and improved technologies has also meant is that today our incomes are directed more and more into paying for these services.
Into paying a mobile phone bill.
Paying for internet access at home.
Paying for pay TV.
At the same time, household incomes have gone up considerably.
In fact, in the seven years between 2003-04 and 2009-10 average national weekly household incomes increased by 36.7 per cent, when adjusted for inflation.
This means that more and more Australians can - and are - travelling overseas.
These factors among others are contributing to structural change.
However, as Glenn Stevens highlighted three weeks ago, Australia has the advantage of facing current challenges from a position of strength.
In particular, we have:
- record terms of trade;
- effective full employment;
- a strong banking system; and
- strong governance arrangements.
And to this I would add a strong investment pipeline, and collectively, a population with incredible capacity.
Productivity
In talking about change, we cannot avoid a discussion of productivity.
Much of the increase in Australia's prosperity over the last decade has been due to rising prices, rather than increased output or increased productivity.
This must change, and I think it will change.
Productivity is a vitally important element in long term economic growth.
Productivity outcomes can deliver visible change – for instance, we no longer see staff operating elevators, or staff serving petrol, and there are fewer and fewer doormen in our society.
These jobs have been replaced by technicians and electrical engineers who design, service and build many labour saving devices.
With respect to Australia’s productivity performance, I am a bit more optimistic than some other commentators.
I am optimistic, despite Australia's annual productivity performance over the last five years averaging 0.7 per cent, compared to 1.7 per cent over the preceding five years.
Fundamentally, I think part of the story of the last five years is explained by the significant expansion in capital investment in our resources and energy sectors.
The investments in LNG I mentioned earlier highlight this point.
It won't be until around 2014/15 or later that we start to see production from the majority of LNG projects currently under construction.
These projects mean that in recent years we have seen significant capital investment that is using resources in our economy, and to date the increased production volumes from this investment haven't been fully reflected in our output figures.
This could be holding our headline productivity figures down, and could in part explain our current productivity paradox.
For these reasons, I am not yet prepared to accept that our productivity performance won't improve in future years.
However improvements in our productivity performance are not assured.
The relationship between managers and their workforce is a critically important determinant of productivity.
As a nation we need maturity in an industrial setting from companies and unions.
Short term thinking will be to our long term disadvantage.
Speaking from personal experience, in the 1980s and 1990s there were many occasions when I and other union leaders made tough decisions.
Decisions that were about fronting up to change, decisions that were not always popular, and decisions that involved short term pain for some.
These were always explained honestly to workers on the shop floor.
We were forced to argue out these decisions and convince people of the need for change by offering compelling reasons as to why this was in the long terms interests of working people.
As a nation we are better off for these reforms. Goods such as cars and clothing – not to mention electrical goods – are accessible on a scale never previously envisaged.
I still believe that Australian workers are prepared to embrace change when it is in their long term interest, when there is an honest debate about the costs and the benefits.
Such outcomes require union and business leaders with the capacity and inclination to participate in such conversations in a mature manner, driven by the long term interests of the workforce.
Importance of sound policy
And of course government too has a key role to play when it comes to improving productivity and creating an environment that supports economic growth.
Australia, as a nation rich in resources – capital, labour and natural resources – must never become complacent or think the world owes us a living.
We cannot underestimate the importance of sound government policy in attracting investment and facilitating economic growth.
Investment capital is footloose, and Australia is competing globally to attract this capital and investment.
Despite economic growth in the Asia Pacific region and rising demand for natural resources, Australia must remain active to ensure we seize opportunities and bring on economic development.
The challenge of securing access to an adequate and competitive supply of resources and energy will shape the next century.
In this respect Australia is extremely well placed.
We are one of three net energy exporters in the OECD and have an abundance of energy and resources including, for example, the world’s second largest economically recoverable reserves of iron ore, copper and bauxite.
However, there are many countries in the world with significant resources. For instance, in terms of iron ore, copper and bauxite it is Ukraine, Chile, and Guinea respectively that rank ahead of Australia in terms of resource base.
A resource base alone is not enough to ensure prosperity.
Prosperity and economic growth also rely on factors such as government policy, legal frameworks, education and labour force skills, migration and infrastructure.
Fundamentally, sound policy is required to attract investment in capital intensive projects.
Likewise, sound policy helps nations absorb the pressures resulting from structural adjustment that I have discussed tonight.
Australia’s flexible economy is a result of previous reforms.
It is this flexibility that acts as a shock absorber to soften what would be greater pain caused by structural adjustment if our economy were as rigid and inflexible as it was in the past.
I would remind you of the important role that our floating dollar has in moderating excesses in times of economic change – such as we are currently experiencing.
Role of Government
Further to discussing the importance of sound policy in facilitating economic growth, it is also an appropriate time to stand back and examine the role of government in the resources and energy sectors.
The government – whether it be state in terms of onshore or the Commonwealth in terms of offshore – owns the resources and grants companies a right to exploit those resources.
In this context, the role of government is to strike the right balance in terms of generating an appropriate return to the community while encouraging exploration and economic development of these resources in a sustainable way.
The introduction of the Minerals Resource Rent Tax and the extension the Petroleum Resource Rent Tax to onshore projects are key policy reforms to help achieve this.
As are our investments in skills, training and education.
And our openness in approaching the question of temporary migration, through things like the introduction of Enterprise Migration Agreements, which will support the pipeline of development.
Which will help ease pressures on labour in the resources and energy sectors but also more broadly in the economy.
Which will help ensure mega projects are delivered on time and on budget – and maintain Australia’s attractiveness as an investment destination.
Proper regulation and effective legislation that have regard for competing needs and interests are essential.
And these must evolve to reflect changes in the operating environments.
Our recent changes to the regulation of the offshore petroleum industry in the wake of Montara and Macondo is but one example of how we must take on board and apply the lessons of such incidents to ensure that economic development does not come at the expense of the environment or the safety of our workforce.
It is also the role of government to maintain energy security.
To ensure the nation benefits from a secure and reliable energy supply – the foundation of any modern economy.
The Energy White Paper – which my department is currently working on – is another important piece of policy work to ensure that as a nation we have got the policy settings right.
And of course the legislation currently before the parliament to price carbon is critical to providing the certainty required to bring on the investment we need in our stationary energy sector.
Investment that when all told stands at some $240 billion.
Investment that is necessary if we are to continue to meet demand and give our economy the capacity to grow.
And investment that is geared towards substantially reducing our greenhouse gas emissions.
Again this comes back to the need to strike the right balance – in this case between fundamentally changing the way we produce and use energy, while at the same time ensuring that we do this in the most cost-effective way.
This is why a market-based approach is so important.
Unprecedented levels of direct and indirect government support for the development of renewable and clean energy technologies will accelerate their deployment by helping to make them more competitive.
And the government will have a central role to play in ensuring a smooth transition.
Policy maturity
I have talked about the importance of sound policy in facilitating economic growth, and this also requires maturity from policymakers.
Australia remains a federation – and in the interests of seeking optimal outcomes for the Australian people, we need a mature relationship between different levels of government.
Policymakers at all levels on occasion need to put aside partisan politics to support policies that are in Australia’s long term economic interests.
Elected politicians have an important role to play in determining how Australia responds to the opportunities and challenges I have discussed tonight.
As a young union official in the 1980s and 1990s I saw a profoundly enlightened period in Australia's economic policy development.
The Labor Party confronted previous dogma head on and embraced reform and embraced economic growth, supported by the then opposition.
There is an important role for Australia’s major parties in supporting sensible policy and economic development.
Such an approach sometimes requires prioritising policy maturity over political opportunism.
At the end of the day, the electorate should reward those seeking real policy outcomes.
The major parties are important here, as the policy realism required to support economic development is often beyond the capacity of the Greens.
Future outlook
I want to finish tonight by looking ahead.
And I must say, from where I stand ladies and gentlemen, the outlook is positive.
The International Monetary Fund’s latest World Economic Update highlights just how fortunate Australia is compared to many other developed countries.
Looking out to 2012 the IMF forecast continued strong growth out of China and India, at 9 and 7.5 per cent respectively.
Leveraging off this activity, Australia’s growth is forecast to be 3.3 per cent.
That is almost double the forecast average growth for advanced economies (1.9 per cent) and well above predictions for the Unites States – at 1.8 per cent and the Euro area – at 1.1 per cent.
It is in this context that we are pursuing our reforms.
As things stand today, by this time next year there will be a carbon price operating in Australia.
And by this time next year there will be a minerals resource rent tax operating in Australia.
Factoring in both of these policy developments Treasury predicts that by 2020, less than nine years from now:
- the mining sector will have grown 77 per cent;
- Construction by 51 per cent;
- Services by 38 per cent;
- the Agricultural sector by 12 per cent; and
- Manufacturing by 5 per cent.
So while structural adjustment does pose challenges, ours remains a story of enviable growth.
Australia’s current period of economic strength enables us to tackle reforms and manage change in a measured way.
Provided we are prepared to embrace change.
This includes recognising that embracing change and supporting economic growth requires sound policy and maturity from policy makers.
This is vital to ensuring we maintain our capacity to maximise the unique opportunities on offer.
Given his roles at both Macquarie Bank and Origin, Kevin absolutely appreciates the need for Australia as a nation to grab the opportunities that are currently before us.
For the students here tonight, I hope that I have given you a sense of this too because you will be the ones who take forward this chapter in our nation’s history.
To assure our prosperity we must pursue economic growth and continue the policy reform that will facilitate this.
The coming century will be the Asian century and Australia – with supportive Government policy – is well placed to be a part of this story of economic development.
Thank you