Monday, August 01, 2011

Two speeds?  Too vague

A few years ago, our economy was stereotyped as ''a quarry and a beach''.  (Thanks to the high Australian dollar we now no longer fear we'll be turned into a nation of tourist boat operators.)

In the 1950s, we supposedly ''rode on the sheep's back''.  The claim these days is that Australia has a ''two-speed'' economy.  The story goes that there's the resources sector experiencing record prices because of demand from Asia, then there's the rest of the economy lagging behind.

Describing the economy as simply two-speed is inaccurate and sloppy.  Worse, it encourages lazy policymaking.  The economy doesn't have just two speeds.  It has thousands of speeds.  Every company faces its own sets of challenges and business conditions.

A two-speed economy implies that something as complex as a national economy such as Australia's can be simplified into a fast part and a slow part, and that the speeds at which those parts travel can be manipulated to get a desired result.  It assumes government should either slow down or speed up the economy, when in fact the job of government is to get out of the way.

It's true the resources sector is booming, but it's altogether too simplistic to label the rest of the country's economy as ''other''.

The services sector accounts for 80 per cent of the economy and 85 per cent of all jobs.  Within the services sector, there's a multitude of different activities.

Tourism and education for international students are down, but healthcare driven by an ageing population and ever-increasing government spending is up.  Parts of the retail sector are in diabolical trouble, but consumer spending in shopping centres in regional Australia is holding up relatively well.

The notion of a two-speed economy also makes no mention of a sector growing nearly as quickly as resources -- government.  Spending by the commonwealth government in 2008-09 increased by 12.8 per cent over the previous year.

The only time in recent Australian history when government has grown as quickly was in 1974-75 and 1975-76 when, under Whitlam, government expenditure grew by 19.9 per cent and 15.7 per cent.

Dividing the economy in two means that inevitably those parts of the economy doing well get all the attention -- and the rest are ignored -- which is exactly what's happened.

When award modernisation pushed up the hourly rates of pay for the retail sector the perception was that it was only a few noisy shopkeepers complaining.  Now that the resources sector is affected by the federal government's re-regulation of the labour market, more people are paying attention.  Business leaders and their associations are slowly being roused into action.

The Treasurer, Wayne Swan, has said, however, that so far there is no ''fullthroated call'' for reforming the Fair Work Act.  This is an interesting statement in itself from the Treasurer.  It implies that if there were a ''full-throated call'' from business, then maybe the government would consider doing something about it.

A desalination plant in Victoria paid for by taxpayers running millions of dollars over budget because of labour disputes is not very interesting.  But when a $10 billion gas project on the North West shelf is threatened with strike action, people start to take notice.  Overseas customers for Australia's resources also take notice.

''It is now just about impossible to avoid the conclusion that productivity growth performance has been quite poor since at least the mid-2000s,'' Reserve Bank of Australia governor Glenn Stevens said on Tuesday.  ''Apparently easy affluence, conferred by favourable international conditions probably lessened the sharpness of our focus on productivity.''

There's no ''probably'' about it.  It's no coincidence the decline in productivity improvement Stevens talks about coincided with the resources boom and the taking hold of the idea that we had a two-speed economy.

We assumed profits from the ''fast'' part of the economy, that is, resources, would underwrite the rest of the economy.  This was precisely the purpose of Kevin Rudd's resource super profits tax.  The only productivity agenda the Rudd government had was to increase taxes on the most profitable parts of the economy.

There's no mystery as to why productivity growth slowed from the middle of the past decade.  We took it for granted that in a two-speed economy, the ''slow'' part of the economy was slow anyway and not much harm would be done if it slowed even further.

ADVERTISEMENT

No comments: