Changing Gear: Preparing for a different world

The Hon. Lindsay Tanner, Special Advisor to Lazard and former Federal Minister for Finance and Deregulation, delivered the following address at Global Access Partners’ National Economic Review 2011: Australia’s Annual Growth Summit in Sydney on Friday 16 September 2011.

The core theme of today’s discussion is ‘Changing Gear: Preparing for a different world’, and hanging from this is of course the impact of demography. As Keith Suter pointed out, it’s not true to say that demography is destiny. But, to steal a concept from Paul Goodman, demography is an awful lot of destiny.

As a person who, amongst other things, is a historian by training, one of the things I’m very conscious of is just how powerful the dynamics of demography and demographic change have been in driving economic and political change throughout human history. And, the interactions between demographic phenomena and artificially imposed human rules. The European culture of primogeniture was famously a central force in the Crusades by causing a lot of idle, well-off young men to have to go off internationally to find something useful to do, like kill lots of people and steal things.

If we move later through history you can see the impact of demographic changes in sanitation, producing changes in life expectancy, as a key driver of structural economic change, turbulence, revolution and the like. Even now, we are seeing examples around the world of demographic change in action in areas like the Horn of Africa, where the critical dynamic is very high birth and population growth rates in a world that has poor soil fertility and very considerable vulnerability to famine and drought. The Rwandan genocide was very much a product of demographic land use factors combining. It was not just about the rivalry between Hutu and Tutsi.

We’re seeing demographic factors being incubated in places like India and China at the moment. Very scary demographic factors, and not only in those countries, where you are seeing populations that have been artificially induced that literally threaten to unleash upon the world these hoards, millions of sexually dissatisfied young men. I’m sure many of you will understand that sexually dissatisfied young men are a pretty dangerous beast. So the thought of millions of them roaming the planet, in about 20 years’ time, is very scary. But that is what we are incubating.

Demographic change is a real driver of political and economic outcomes. In Australia, demography looms very large, it looms larger than we often care to realise. I want to run through some of the critical issues our country is trying to deal with due to demographic factors, and put them together in an overall picture, making some final observations about what that means in terms of policy imperatives.

What should we be focusing on? Not necessarily to set out prescriptive solutions, but what are the conversations we ought to be having about the medium to longer term future of Australia?

Lisa Middlebrook mentioned one area which I think we’re all fairly familiar with – the ageing structure of the population and the impact this will have on longer term fiscal settings. Keith Suter made an important observation that this is not inherently as bad a thing as it is sometimes portrayed. In fact, in a world where we collectively spend a higher and higher proportion of our overall incomes on crap, it is not a bad thing that the proportion of national spending that goes on health services increases. Would you rather that we spent that money on personalised number plates, for example? Some may. We spend more and more money on crap, so actually spending more and more money on the health of our citizenry is not a bad thing. The efficiency and liquidity with which we do that is what matters.

There are very big future challenges for Australia because we have got an existing arrangement that, if left untouched, will produce enormous structural fiscal pressures in the not-too-distant future. We are now roughly at the tipping point in our demography of workforce participation. The percentage of our population of workforce age is roughly at its peak now, and it is going to fall off a cliff fairly shortly thereafter. That produces obvious arithmetical consequences that cannot be denied. But there are a whole variety of ways we can deal with these things, and we need to deal with them in a balanced and intelligent way.

Associated with that is the question of superannuation and retirement incomes. Australia has been ahead of the world in unhooking ourselves from the defined benefit scheme, and in particular avoiding the problem that is apparent in many countries, of using the corporation as a vehicle to deliver social welfare.

In a world of services, of flexibility and innovation, of the need for speed and less and less capital, using corporations to deliver health, housing services, and pensions is a recipe for economic disaster, as has been discovered in places like China and the US. Australia has been ahead of the curve and up front by delinking, even though the corporation is the vehicle for payments. Therefore, we are in a much better position to deal with those pressures in a more modern economy.

We do face some obvious challenges. We are overweight in equities, which is sort of a logical position to be in when you have a got a pension system that is overweight in contributors, as opposed to pensioners. Again, we are facing a structural shift that is coming through the pipeline. I can’t, off the top of my head, quote the figures, but we are facing a structural shift where the ratio between people contributing to our compulsory superannuation pool and people drawing down from it is going to shift. Of course, that will drive a shift in the risk profile of the investments of that pool that are currently in a relatively high-risk frame, with a very substantial overweight investment in equities. All you’ve got to do is line that up showing equities as a proportion of total pension investments in this country relative to other parts of the world. We were off the dial. Now that is not necessarily a bad thing now, but it has to change.

Also, the regional distribution of economic activity in this country. That famed phrase, regional development, which as a former finance minister I always saw as one of those many phrases that is code for ‘give me money’. The word ‘strategic’, that’s another good phrase that means ‘give me money’. I won’t divert here because I might go on for 10 minutes about phrases that are a code for ‘give me money’.

Regions by definition are not necessarily easy to define. But in a very geographically dispersed country like ours, it’s probably easier than it is in some parts of the world. The critical thing, economically, is that a region has to export something. I grew up in a small country town called Orbost in far-east Gippsland. We used to export timber, a bit of dairy, and beans. My father grew beans, amongst other things. So we exported things to other parts of Australia. In return, other parts of Australia exported stuff to us.

For a region to exist it has to export something. It has to have an economic purpose. Because regions in this country are typically lightly populated and thin, it doesn’t take much of a disruption to the underlying economics of what they export to put them into big trouble. If you have a massive increase in the productivity of the sector that your export business is in, then you have problems. Productivity in the timber industry soared in the 1980s. Coupled with the pressures of unsustainable logging, the economy of Orbost was dramatically depressed because, even if it was producing the same amount of timber, the number of jobs it was going to sustain was going downwards dramatically with technological change.

Equally, wider external change can alter the demand for your product. Somebody else eats your lunch, whether it’s imports or whether it’s changing technology, you’re left high and dry. That is the core driver of structural regional disadvantage. One of the critical reasons why some remote indigenous communities have such intractable problems is that they export nothing. Because they don’t export anything to the wider community, they are, in a sense artificial economies that depend on artificial assistance to survive. That carries with it a whole range of challenges.

The challenge for us on that regional economic development dimension is how to manage the impact of structural change on regional economies without the kind of feather-bedding and hand-outs stuff that regional development is code for. That is ultimately counter-productive and usually involves wasting a lot of money. There are some policy things that can be done in that space, but they are typically fairly hard to land on, and not always politically popular or exciting.

The other dimension, which is looming larger and larger and again is a demographic question, is cities. This is an area that’s becoming increasingly interesting for people engaged in public policy debate in this country. We have a huge problem. We have congestion problems. We have a whole lot of things that Sydney has kind of invented and Melbourne is now copying, and Brisbane’s not far behind. We all know the dimensions of these issues. They were crucial to loss of government in Victoria last year, in spite of it being, in my view, a reasonably good government. They were central to the long-running decline and support for Labor in New South Wales and ultimately, among other factors, a key player in political change here as well.

There are a lot of things in play here, a lot of moving parts. But it seems to me there is one single dominant fact that is inescapable as the core question. That is that we have outrun the even remotely efficient boundaries of the land-centric city. We have cities in this country that have been built up around the notion that our land is infinite and that capacity of infrastructure systems to spread laterally without loss of efficiency is also infinite. Eventually we got to the point of discovering that both of those things are wrong.

The trouble is that it is not easy to turn a mono-centric city into a multi-polar city. If you look at the western and northern suburbs of Melbourne – now the fastest growing regions in Australia – we are seeing a massive increase in population, coupled with a modest increase in local jobs. The end result is that the burn on the West Gate Bridge has gone through the roof and we have got gigantic congestion problems. We now have to spend $10 billion to create a second crossing to parallel that.

You would think it would make sense to ask the question – “Instead of trying to spend all this money to move all these people back to where all the jobs are, how about we move the jobs?” There’s one or two tokenistic things that have been done on that front, but nonetheless, that growing disparity between location of employment and the location of residence has become a critical problem. It’s also being driven by a number of structural factors – the shift from the single income to two income households and the shift from blue collar to white collar employment. You don’t see many high-rise factories.

When you have a shift to professionals your capacity to cram large numbers of workers on very small bits of land increases dramatically. The underlying economies, if you don’t worry about where they live or your infrastructure or transports costs, are obvious. The more workers you can jam on a small bit of land, the better off you are. That’s what we’re doing. But of course those workers have got to live somewhere. We now have a situation in Melbourne, and it’s probably not totally dissimilar in Sydney, where it would be a really good idea to move the Department of Education headquarters from the centre of Melbourne. There’s no particular reason why it should be there. There are no more schools in the CBD than there are elsewhere. It would probably be a good idea for it to be in Bendigo or Shepparton, or even Dandenong or Geelong.

There is a slight problem though. You can pretty well guarantee the people working there come from all corners of the compass. As soon as you move their location in any direction at all, half your workforce suddenly discovers it’s going to take them two hours to get to work. There are very tractable issues there that the state governments are not well designed to deal with, local governments have little traction on, and the federal government is just starting to get involved in for a reason I should not address.

Skills are critical. I think this is a point that doesn’t need to be laboured, but it’s an element of the demographic picture. Australia, as a member of the OECD, is still relatively ordinary.  In terms of formal qualifications, percentage of post-school qualifications as a percentage of our total workforce, we are behind a number of comparable countries.

Finally, and in my opinion, the most important question that faces us demographically – size of population. The vast bulk of what Keith (Suter) said, I agree with. I think numbers are meaningless. Numbers are meaningless because it is numbers, together with imprint. So it is environmental imprint. It is a total calculation. Because technology could change, it is impossible to predict what the world will look like in 10 or 20 years’ time. Therefore, to say that Australia should have a population of X by the year dot and that, if it doesn’t, there’s something wrong, is ludicrous, because the big variable numbers can predict that intermediated effect of technology. The way we live impacts on our own lifestyle, but also on our environment.

I think there is a wider strategic question here that we are not well versed to look at in this country. The ‘Australia is small’ brigade. The ‘we need put up shutters brigade’ frankly are off the planet. If you look around the rest of the world, and look through their eyes at us, and ask ‘how does it look to the rest of the world when we say we are full?’ The answer is, they laugh at us. They laugh at us because it is ludicrous.

The population density in the United States is something approaching 15 times our population density. True, we’ve got a fair bit more desert than they’ve got. It may come as a surprise to some, but there are quite a lot of people around the world living in inhospitable circumstances that are roughly equivalent to our inhospitable circumstances.

We have developed nations in Europe and in Asia, like Korea, with much higher population densities than ours and critically without the same natural resource endowment. So for Australia to stand up in front of the rest of the world and say, we have got the world’s best and biggest minerals and resources endowment, we have got a small population with a lot of wealth and a tiny population density. Thank you very much. We’re sitting on it and you can all get nicked. That is an unsustainable position.

We no longer have a single globally dominant big brother that we are closely related to – it was the UK in the 19th century, the US in the 20th. In that world, which is much more complex, with different power forces and not all of them necessarily to our advantage, that is an entirely unsustainable position. The reason we have population pressures in this country, the reason we have congestion, the reason we have all of these issues that people connect with numbers, is that we have been unbelievably bad managers because we have not had any pressure to manage intelligently. We’ve had these infinite open spaces. We’ve had nice climate, endless resources. No pressure, so why should we bother? Well, we are now hitting those pressures and we now have to deal with those issues.

To conclude, where do these demographic points take us on policy? As I said, I don’t wish to put out specific policy descriptions. A lot of these things are infinitely debatable and there are so many different elements that there is no right or wrong, no correct answer. But to me, these are the issues that should be on our national agenda. We should be thinking about them and trying to engage the wider community in a serious adult discussion. I know adult discussions are in short supply in contemporary Australia, but we should do our best to try and engender some.

Our population is going to grow. We have some influence over the speed of that growth, but we shouldn’t be frightened of it. We have to manage for it. We should also understand that our legitimacy as the custodians of this nation that, let’s face it, we stole a couple of hundred years ago, in part depends on our ability to integrate with the widening regional community and to not send out signals that are akin to saying it’s ours, you can all get nicked.

The odds are we’re probably never going to be invaded, not in the foreseeable future. So those old amateurs of populate or perish, they are as antiquated as they sound. What our neighbours think of us, how we relate to them, and how the rest of the world relates to us, matters a great deal to our future prosperity and security. Therefore, it is critical for Australia to be part of our region and to understand who we are, to understand how unbelievably well-off we are as a nation.

One of the amusing things about the climate change debate, is the notion that we – one of the wealthiest, if not the wealthiest country on earth – can sit back and say, we’re not doing anything until all these nice little Indians and Chinese move. Now that is ridiculous. How does that look to somebody who’s Chinese or Indian? It is a joke. It is literally an invitation to them not to do anything because, if we can’t move how on earth can you expect countries that are so much poorer, with so much less natural advantages, so many more challenges, to be the people who take the lead?

The one thing I take issue with Keith (Suter) on is his comparison with Norway, Switzerland and Singapore. He’s quite right that there is not an automatic connection between having 200 million people and having a really strong economy. The countries he cites are good examples of that. Two out of the three have negligible natural resources. Norway has one natural resource. It’s done very well in exporting and managing that. But the critical difference is that all three of them are at the heart of big dominant markets. We’re on the fringes. All three of them have small populations and really small land areas. We’ve got a relatively small population and a vast land and vast resources. So there are a lot of critical differences.

The second imperative policy discussion is fixing our cities. As I indicated before, that is a discussion about the location of work and economic activity and the drivers of structural change. We have barely begun that discussion. It is all very well just to talk about more land release as a solution to our housing problems. In certain circumstances, there probably is a case for that. But, if the people who are buying houses out of western Sydney still have to travel ridiculous distances to go to work, you haven’t solved the problem.

One of the key things that ought to be happening is the Commonwealth should sell its land at Badgerys Creek, if it’s not going to be an airport, with the aim of that becoming a giant employment hub for that region. But there are other things of that kind. Where are the jobs going to be located? How do we, without intervening unduly on market forces, manipulate the wider settings to try and get a better match between residents and employment location? Those are the key challenges with cities.

The next issue is private investment and infrastructure. The private sector’s always financed infrastructure in Australia. Who was it who bought the government bonds? It’s just that we had, in the old days, a very undifferentiated, vanilla one-size-fits-all mechanism for financing infrastructure. Ultimately it produced good outcomes in an aggregate sense. We actually built some roads and power-stations but often at an increasing cost of economic deficiency.

Why do we now have public private partnerships (PPPs), which are a good thing, although there’s been some mistakes and some learning? Why do we now have them? The answer – computers. The reason we have PPPs is because we now have computers. We now have the capacity, at minimal cost, to clinically disaggregate risk and to dissect these incredibly complex transactions and to parcel out risk and contribution of various roles in a way that was theoretically possible 30 years ago, but in practice the cost of doing it was out of all proportion to the benefit. That’s changed because technology’s changed what we can do. So, the way that private sector invests in infrastructure is changing. That is a good thing. We need to both enhance that, strengthen it, learn from the early mistakes, of which there have been more in this state than most jurisdictions, and to understand that somebody has to pay.

Unfortunately, again there’s a lack of an adult conversation. Most politics proceeds on the assumption that you’re not paying. Father Christmas is coming. He’s coming regularly to your door and somebody else is paying for the presents. Now, I understand, as a former politician how hard it is to tell people that, if they want something good, they might have to pay for it. But, in this area, as in some of the areas, that is essential.

Also, education reform and further reform of the way we develop skills is also important. We have done some good things. I think this is an area where we can look back and say some significant improvements have occurred. It’s not hard to find other parts of the developed world that have perhaps failed to work out some pretty basic things here.

But, I’ve said for years that the critical problem in Australian education is not the usual suspects, not teachers or bureaucrats. The critical problem in Australian education is parents. They are the core problem but not the only problem. There is still a very substantial proportion of our society that thinks education doesn’t add very much, tacitly regards schools as giant child-minding centres, doesn’t really make any contribution or put any effort into assisting a child to learn, and doesn’t create a pro-learning environment in the home. A lot of it is embedded in our national culture.

One of the great things about Asian immigration to this country – that’s a phrase you don’t hear so much these days. Isn’t it fantastic? Now it’s the Muslims getting a beating. It used to be the Asians. Very soon it will be the Laotians. We’ve got to have somebody to pick on. But one of the great things about Asian immigration is the injection of a pro-learning culture into our schools. If you have had kids, like I’ve had, at schools with lots of Indian, Chinese, Sri Lankan kids, it stands out that these kids have grown up in an environment where learning’s valued and encouraged, rather than seen as a sort of pointy-headed wanker thing that people do. That is a really positive force for change in this country.

We have to continue to pursue all these superannuation reforms that are underway. Again, there’s a list of things there that are necessary. We should have, as our number one foreign policy objective, for Australia to become a fully-fledged member of ASEAN. That is our natural family. That is where our future lies. We would like to think it shouldn’t at the moment. We like to kind of be Asian when it suits us, but then go off and be Anglo-European when that suits us. You cannot be both.

From my point of view, it is critical for Australia’s long-term security and prosperity to just unashamedly say our natural family is Indonesia, Malaysia, Singapore, Philippines, Thailand, Vietnam, Cambodia, etc. That’s where we belong. We see ourselves as the rich kid of the family, as having a strong interest in helping other members of the family because that helps us. That should be our core foreign policy objective, without taking away from our close relationship and alliance with the United States, or our historic ties to the UK.

I’ve referred to regions and regional development. There are issues there we need to pursue, but probably the critical thing is to stop wasting money. That’s an ex-finance minister speaking! The endless array of announceables in regional Australia are a giant waste of money. They are essentially extremely expensive political advertising. I’d be happy to spend that money on something intelligent.

One of the things governments can do here is tweak the basis points equation. That’s one of the things I now understand in the business world is just how everything is dominated by how many basis points you have to think of. We’ll tweak that and we’ll say, if you set up a fund that is purely to invest in private activity that has its location in the following areas, we will subsidise the return of that fund by X basis points. So in other words, we’ll tweak the risk of alteration. If you go out and find things to invest in, all you’re doing is making money. What we’re doing is giving you an incentive to invest somewhere other than the CBD Sydney and Melbourne, and ultimately the private market will determine the dynamics of how this unfolds. That would be infinitely better than thousands of historic railways and cheese factories, and all the endless boom dollars they’ve received over the years.

Finally, we need to think more about risk-taking entrepreneurship and how to incubate that culturally. Not hand-outs, not the lazy middle-management more tax-breaks kind of mentality, but just the implicit self-starter get-up-and-have-a-go thing. This is where Australia’s actually not bad. Our core national vision can be summed up in the phrase ‘have a go’. That’s ultimately the kind of test we apply to ourselves in the job. So we could get serious about it in that world of entrepreneurship, allowing people to take risks and fail.

I won’t start on our appalling media because they are central to this problem. The price of failure in the public or private sector is magnified out of all proportion by the media’s need to sell schadenfreude. Basically most of the media now is a business to make money out of other people’s misery. It does it very well. But the wider social and economic consequences of that are extremely pernicious. I’m not sure what to do about it.

The Hon. Lindsay Tanner practised as a lawyer then served as Victorian Secretary of the Federated Clerks Union before entering Federal Parliament in 1993. He held a variety of front-bench portfolio responsibilities, including Transport, Finance and Communications before serving as the Federal Minister for Finance and Deregulation from 2007 to 2010. As well as a successful political career, Lindsay Tanner has written on economic and political issues, including four published books. He is the inaugural Vice-Chancellor’s Fellow at Victoria University and is an Adjunct Professor at the University. He is currently employed as special advisor at Lazard.