Jcipp Forum - The hon christian porter - All the talk about a two speed economy

>> The JCIPP is very pleased to be hosting today's public policy forum and it's particularly pleasing to have people from across the industry, government, the community sector as well as universities as today's topic of two-speed economy is surely one which affects all sectors. We're living through fairly extraordinary times in the states' economic development and so it's important to get a perspective on the kind of developments from the people who are right at the centre of decision making about our economic future and who happen to deal with some pretty important global, national and local challenges brought about these increasing prices and global demand for our resources. And so, of course, one of those people right at the centre is the State Treasurer, Christian Porter. And we're delighted to welcome him back as a speaker to our JCIPP Breakfast Forum. I'd like to introduce the Vice Chancellor of Curtin University, Jeanette Hackett to introduce Mr. Porter, Jeannette. >> I understand today that we have some tables of staff and students from the economics department of three of our universities: University of WA, Murdock and, of course, Curtin University. So welcome. We are particularly delighted to have the students. You got up so early for this intellectual nourishment and we wish you well with your exams and we hope that you will take the opportunity to try out the treasurer on some of your policy questions. It's also a pleasure to welcome this morning Professor Jeffrey Petchey who is the head of the School of Economics and Finance at Curtin University in the Curtin Business School. And we are all absolutely delighted to hear recently of his appointment to the Commonwealth Grants Commission. And he's the first Western Australian to be appointed to the Commonwealth Grants Commission since 1965. So, congratulations Jeff. We are delighted that there will be a West Australian perspective brought to the Grants Commission. The Grants Commission is an independent body that makes recommendations on the distribution of GST revenue amongst the states and territories and it aims to ensure that funding is able to deliver broadly equivalent services in key areas such as health and education. And you'd obviously be aware that it's probably quite a difficult job and at sometimes extremely controversial and certainly not for the faint-hearted. Commissioners are appointed for a five year period and typically have an extensive background in Federal and State financial matters and Jeff's no exception to this. He's researched and published widely in this area. I assume that I speak of the State Treasurer may well refer to the Grants Commission in his speech or in his questions and answers later on. So, I won't say anymore about the Commission here except to say it's great to have Jeff on the Commission. And we at Curtin are particularly proud of this appointment and delighted to have you as one of our staff. Curtin has a great deal of expertise in Federalism related research through Professor Petchey and also through the John Curtin Institute of Public Policy. We also have expertise in the same area in the minerals and energy economic space through our Centre for Research in Energy and Mineral Economics led by Professor Ron Ripple. All areas are closely related to the topic of the two-speed economy to be discussed today by Minister Porter. Minister Christian Porter entered politics as a member for Murdock at bi-election in February of 2008. After the state election in 2008, Mr. Porter was appointed Attorney General and Minister for Corrective Services and in December was last years appointed WA Treasurer while attaining the Attorney General portfolio. He holds a Bachelor of Economics Degree, a Bachelor of Arts with first class honours in political science and he has a graduate law degree from the University of Western Australia. He also holds a Master's Degree in political theory from the London School of Economics. He had experience in both the public and private practice of law working first at the National Centre with Clayton Utz, then as a legal advisor the Federal Justice Minister in 2001, before joining the Office of Director of Public Prosecution for Western Australia in 2002 where he was promoted to the position of Senior State Prosecutor. Prior to his election to the State Parliament he was a senior lecturer at the Law School of the University of Western Australia. Having seen Christian give a presentation once before to JCIPP Breakfast Forum, I'm sure that you'll be interested in the presentation. I'm sure it will be well researched and detailed and certainly the last presentation we received was a very interesting presentation indeed. So, ladies and gentlemen, please welcome Minister Christian Porter. Thank you. [applause] >> Thank you very Jeanette for that introduction. I'd also like to acknowledge the traditional custodians of the land on which we now meet. Also, I'd like to acknowledge Peter Tinley, MLA. It's a very nice thing when the only other Parliamentarian who comes down to see the treasurer of the opposition. So, I'll owe you one Peter. I'll return the favour. >> All support [inaudible] >> Excellent, excellent. Let me say that it would be a little bit of detail in this speech, so I hope I can keep you awake through it. But last week I endured the Commonwealth Government's Tax Forum. There's no need to feel sorry for me. I'm a politician. No one feels sorry for me. I'm resigned to the fact that those are things that you have to do as a politician and you have to go to them even if they are unlikely to bring about any kind of meaningful or real reform. But I have to confess to you that I left feeling very frustrated and there were several reasons for that. One of them was the wild overuse of the term two-speed economy. I mean it was said hundreds and hundreds of times. In fact, as state treasurer, if I'd have had a dollar for every time someone at the tax forum had used the phrase two-speed economy, I probably would have been able to put down more than 100 million dollar payment on the stadium. But, that's a debate for another time, although I might just engage you with one very quick anecdotal story. We had a meeting recently with Andrew DeMetriou and it was in essence to argue about how much the IFL should contribute to the stadium. And, of course, they would rather they contribute less and we would rather that they contribute more. And in arguing that they should contribute less, Andrew was putting the great benefits of football tourism to me as treasurer and how we really might not have made that much money from the IFL, because we'd make the money out of away games for [inaudible] in people coming here. I did say respectfully to Andrew that [inaudible] playing a game in Perth was definitely tourism. Collingwood was probably more like a crime life, but in any event it wasn't just the endless repetition of that two-speed economy term that I found frustrating. What was very frustrating is that every time the phrase was used it seemed to be used to mean something a little different than the time it was used previously depending on who was making the observation and in what context. And this is perhaps it struck me because the two-speed economy phrase itself is used in a way which sees it express simultaneously both an observation about the factual state of the Australian economy as well as one or more policy positions about what should be done about the observed state. As an observation about the Australian economy. The idea of two-speed economy in my view is at best a hopeless over-simplification. The idea of the Australian economy being centrally characterised by a fast lane, the resources industry and a slow lane manufacturing and tourism and some others denies first of all the enormous multiplicity of economic sectors and activities in the Australian economy. It also ignores the very blurry edges between those sectors and their various degrees of interdependence. In fact, sometimes that very obvious oversimplification that resides inside the term two-speed economy is sought to be overcome by people using the term, by substituting the term for phrases like multi-speed economy or patchwork economy. And I think those descriptions are a little better, but they are largely uninstructive because all economies everywhere are patchwork economies or multi-speed economies and those sort of terms to me are about as enlightening as identifying a multicoloured peacock. I mean it just is what it is and you're not telling us anything about it by describing it in that way. Whatever term is used, the idea that the Australian economy is constituted by a fast lane and a slow lane, is at best in my view only a very, very trivial truth. But the trivialities of the reason why sensible economic policymakers should be very wary of the term two-speed economy, the real problem is that the two-speed economy has a descriptive term, is near valueless but an even bigger problem is that those persons who use the term two-speed economy or often patchwork economy move breathlessly and thoughtlessly from what is quite a trivial unenlightening observation about the economy to a very broad set of policy solutions that they say will fix the problem. Now the two-speed economy concept as I've said is not just a descriptive concept. It has now become an agenda. It has become a term which now encapsulates an identifiable set of policy positions. Now the first thing I'd like to do is give you my view as to what those policy positions are. I think there are two basic policy positions which dwell inside the concept and they were both very widely on display at the tax forum. The first is the idea that government should put the brakes on the fast lane to benefit the slow lane. I'll call that the transfer of growth idea. The second and closely related idea is that government should move toward finding better industries to supersede and replace the resources sector. I will call that the replacement idea. Now these notions are presently gaining some very serious currency in Federal Public Policy circles, particularly those outside of Queensland and Western Australia. And as well as gaining an influence they are notable to me at least as being rather an old-fashioned 1970's approach to economic management. And they are also unfortunately in my view seriously wrong-headed, which is in effect what I want to put to you today. The transfer of growth idea reflects a view that government should intervene predominantly by the tax system to rebalance the Australian two-speed economy. The tax system is the mechanism predominantly sited as best suited to achieve this rebalancing effect, but other mechanisms are sought to be used as well. The rebalancing appears to contemplate a transfer of profit or rent from the private sector, notably successful resources industries companies, i.e. through a mining tax or a super profit's tax. This then goes into Commonwealth consolidated revenue to be spent by the Commonwealth government in some way to assist industries that are facing difficulties. That transfer of growth idea is not just confined to targeting private company profits. I would argue the GST distribution and the principle of interstate horizontal fiscal equalisation is another means of achieving in effect a slowing down in one part of the national economy. And in the present circumstances it's the entire WA and Queensland economies that are being subject to the slowing down. Through the taking of large amounts of GST monies which is then used to buttress government spending in other state economies. I am not the only person who thinks that this is what sits inside the two-speed economy. Steve Volk is an economist with J.P. Morgan has described the idea in crisp and simple terms. He said, "The booming mining companies are being slowed down by our new tax and then the government tends to use the proceeds from the tax to boost growth in less fortunate parts of the economy." Now to me what is immediately concerning about this transfer of growth idea is it's incredible underlying vagueness. Whether such a transfer of wealth could-- should occur, I would add opinions in large part on whether it can ever actually be effective. Exactly how massive transfers of private profit or state government revenue can occur and leave the growth of the productive sectors of that state, all those companies undamaged, and at the same time be expended in a way that ensures the growth of presently less productive sectors of the national economy, or in fact whether such improvement in those productive sectors is possible at all is a really serious question. And it is never particularly well articulated by those advocating this very large transfer of wealth or growth idea. But that's an issue that I'll return to soon. But it's useful to note here that what often seems to dominate the transfer of growth idea is the notion that somehow the resources industry growth is not just a source of funds to expend on struggling industries, but that it is also somehow a substantive cause in and of itself of the difficulties itself being experienced in other industry sectors such as manufacturing and tourism. So, that's the transfer of growth idea. The replacement idea just by way of course summary here I think asserts that the Australian resource industries are not as important to the Australian economy as is commonly assumed and again, this idea is often underpinned by the notion that the resources industries are somehow counterproductive to America's longer term prosperity in that they are causing damage to other industry sectors, which is somehow purportedly more important. Now this replacement idea by extinction holds that vision regovernments should be seeking to slow down the resources sector growth and ultimately replace the resources industries with alternative economic growth sectors as soon as is reasonably possibly. So, I'll just give you a quote here from a very well known writer and economist, Ross Gittins. "Most of the clean, highly skilled, well paid and intellectually satisfying jobs are in the services sector; doctors, lawyers, bankers, architects, engineers, managers, clergy, accountants, journalists, actors, media personalities, academics." Oh you'd be happy to hear that, many of you here. "Teachers and many more. Take away mining and we may not be quite as rich as we are, but most of the economy would look much the same as it does." That to me is an interesting statement. Another quick one I'll show you. This is from a very landmark speech the Prime Minister gave. "With courage and imagination we can build a high skilled, high tech low pollution economy that will succeed independent of our mineral worth." Now just imagine for a moment Frank Sinatra's parents spending the entire of his juvenile years encouraging the great singer to try and financially succeed independent of his musical ability in some high skilled profession like being a doctor, because well singing is all a bit low brown. Now, presumably they had more sense. I don't know much about Frank Sinatra's parents, but when you look at what is happening at top echelons of the policy thinking in Australia, the idea of moving past our great comparative advantage as quickly as possible has many very powerful advocates. So, an initial summary I can see that the two-speed economy idea has moved a benign economic description if it ever was that. And it has become a rallying point, usually quite explicitly for two public policy ideas: the transfer of growth idea and the replacement idea. For the purposes of today's address I will collectively refer to those as the transfer and replace policy position, transfer and replace. And I just want to put to you four propositions or questions if you like, which I think serve to highlight some of the serious problems with the transfer and replace position. The first is this, would we or would we not substantially miss the growth being provided by the resources sector. Now the transfer and replace position was put very forthrightly for anyone who cares to read it in a recent publication by the Australia institute entitled, "Mining the Truth." And the central thesis of that report echoed very much that statement of Mr. Gittins, i.e. "That the economy would look much the same as it does without the resources industries." Now the report argued that this would be the case largely based on the fact that the mining industry is not as important as is commonly believed because it only directly employs about nine percent of the population. Now the idea that little would change if the resources industry were not with us, I do not think stands up to even the most level of scrutiny. First of all, nine percent of total employment is actually quite significant. But simply measuring importance of the resources industry to the Australian economy by the percentage of workers it directly employs is a narrow and highly instructive piece of analysis. For every worker directly employed by a resources company, the employment of many others rests upon the present and future growth of the resources sector. The resources in this effect, in this sense has a very welcome and quite heroic multiplier effect throughout the Australian economy. What is often overlooked is that the indirect jobs supported by the resources sector exist in a vast array of fields; technology, communications, manufacturing, fabrication, construction and, of course, a wide variety of service industry positions. So, growth in the resources industry should not just be measured by profit growth or direct employment growth. It is also commonly measured by the massive pipeline of projects that it gives rise to. And recently the Deloitte's Investment Monitor, which looked at present projects underway, projects committed to and likely potential projects, that monitor, the Deloitte's Investment Monitor, valued the projects in WA at a quarter of a trillion dollars, yeah. That's over 250,000 billion dollars worth of projects. And those projects will generate employment across a vast array of disciplines and professions and skills. So, the question I ask in response to Mr. Gittins statements is who and what will the lawyers, bankers, architects, engineers, managers and accountants be providing their future services to if you take the resources industry and that quarter of a trillion dollars out of the mix? Now presumably the lawyers will be serving exclusively the clergy, journalists, actors and media personalities and academics. But if there are any lawyers in the audience, just a word of warning to my colleagues, the clergy do not generate as much work or pay as well as the resources sector. So you need to be very careful I think about the Gittins line of thinking. Now it's also the case that direct and indirect employment is only part of the picture which illustrates the importance of the resources industry to the Australian nation. The resources industries are in short already producing a huge amount of the revenue that supports the entire Australian economy. State and Federal Government's ability to deliver services at present levels, which is no matter what criticism you might have as State or Federal governments by international standards comparatively very high, that ability to deliver services in Australia is underpinned by growth in the resources industries. And you can look at this phenomenon just from the data applicable to WA and it's resources driven economy to illustrate the point. First, more than 20 percent of the national company tax revenue, which obviously underpins government service delivery comes from WA with just 10 percent of the population, 20 percent of the company tax take. In the year to April 2011 WA's expert merchandise totalled over 110 billion which represents about 45 percent of Australia's total merchandise trade by value. Again 45 percent of the trade merchandise generated by 10 percent of the population. Just to give you a scale of this I visited China recently. And one of the things I became aware of was that President Obama had recently announced the result of about a 30 percent increase in the total U.S. exports to China and this was heralded in the United States as very, very significant and welcome news. That meant that the total of U.S. exports to China was valued at about 91 billion dollars. Now that's from a country of about 270 plus million people. WA's exports to China now value 41 billion dollars. So two million west Australians are exporting almost half the value of goods to China as the entire United States of America. I think that gives you some concept of the scale of what we're experiencing in WA. The effect of all this was that in 09-10 WA had a trade surplus of 54 billion. In the same year Australia had a trade surplus of two billion, which means that if you take WA's contribution out of the national trade surplus, you turn a two billion surplus into a 52 billion dollar trade deficit. Western Australia is now a significant net donor of GST revenue to the rest of Australia and over the next four year budgetary period WA will donate 12.3 billion dollars of its GST revenue to the other states and territories. The blue line is what our grants from GST would total if we got our population share of the GST pot. The red line is predicting where we're going, which is a return if you like of 33 cents for every GST dollar taken. Now I have learned that one way to lose an audience straightaway is try and explain the formula applied by the Grants Commission and the process about bringing HFE. Jeff I'll leave that to you at another lecture. But, for brevity sake here the point is this, the more royalty income WA earns the more GST WA loses. Without royalty revenue there would be little or no GST money in actual fact donated by the state. You see that's the royalties earned previous by WA and Victoria, that's the royalties kept or received post year's distribution by WA and Victoria, which one I think is quite a good deal for Victoria. Of course, Victoria doesn't pay any money for the infrastructure ports, roads, [inaudible] electricity facing our nation that we have to expend as a state government to keep that wealth being generated. Now I think the idea that the Australian economy would be much the same as it is without the resources industry is the most utter pieced of nonsense, just plain and simple. I can't actually believe that makes national media. The second question is to ask this. Are we in Australia suffering from Dutch disease. So, another proposition that's now being put as part of the transfer and replace position is that the resources industry growth is somehow a substantive or root cause of the difficulties experienced in other industry sectors such as manufacturing and tourism. So, a recent flyer for the Australian institute, which advertised that report said this, "Increasing world demand for our resources has driven down demand for tourism, made mortgages more expenses, expensive, and made achieving greenhouse gas emission reduction targets that much harder. Okay, so in this sense the transfer and replace policy seems at times to conceive of Australia as a two-speed economy which involves a very strict zero sum game whereby growth in the resources industry lane is either the sole or substantive course of decline in the manufacturing industry lane. Now if you subscribe to that view, it's not even necessary to explain how wealth and growth can be usefully transferred from one sector to another. Because if you believe that you can slow down one sector and that will automatically without more cause an immediate then effort to flow to tourism and manufacturing. And that on its face seems attractive in a way, but it has to be true and I don't think it is. This idea now being put with great regularity detail-- gives detail-- this idea is now being put with great regularity, but what is not being put with any regularity is any detailed explanation of how this economic zero sum game of cause and effect actually works. The closest that the modern explanation has come to logic is the argument that demand for resources has increased the value of the dollar and increased wages in some other cost, which effects tourism and exporting industries including many manufacturers negatively. Now if you like, this is a theory that Australia right here and now are suffering from Dutch disease. The idea that damage is being done to the non-mining manufacturing type industries because of increased costs and a high real exchange rate caused substantively by resources and industry growth. And that term was coined in the 70s by the economists to describe the decline of manufacturing in the Netherlands over a decade after the discovery of a natural gas field in that country off the shore of that country in 1959. Now, like all economic theories you have to be a little bit careful. Not every resources surge gives rise to Dutch disease. And whether Dutch disease happens at all or what it's overall effects are, i.e. should you do anything about it depends on the particular economy in question and the circumstances that you are looking at. There has been examples of Dutch disease in Australia. So, between 1850 and 1853 during the 1950's Gold Rush in Victoria, shepherds' wages doubled in Australia creating great difficulty for the wool industry and wool exports grew at much reduced rates during that period. It was also during that period a slight evidence of decline or evidence of slight decline in Victorian manufacturing in the 1850's. That fact is drawn from a very excellent article if you get a chance to read it written by Reserve Bank Deputy Governor, Mr. Ric Battellino. He makes the point in that article though, that even in the context of what could be identified as Dutch disease in the 1850's the overall impact was outstandingly positive for the Victorian and entire colonial economy of Australian colonies at the time. I won't read that to you, but when you read his article he makes the point of the overall outcome, even though Dutch disease was outstandingly positive. Now the first point to note is that things are a little more complicated in the modern Australian economy than 1850's Victoria or even 1960's Netherlands. And one of the reasons that manufacturing may be having some difficulties may well be high wage costs and other costs. But the other idea that east coast's manufacturing comparative high wage costs, visa vie its international competitors is because of the WA resources industry creating a labor shortage in New South Wales and Victoria is nothing short of ridiculous. And it surprises me that this sort of thinking occurs. The public and private sector complexity of the modern Australian economy naturally mitigates against Dutch disease. Floating exchange rates, labor market mobility, very soundly based monitoring and fiscal policy [inaudible] all mitigate against Dutch Disease and all better accommodate surges in resources activity. The truth about the difficulties facing Australian manufacturers is far more complex I would argue than the notion that a winning resources is causing a loss in manufacturing. Explanations which lay the blame for decline in parts of Australian manufacturing at the feet of a growing resources sector simply because that country-- that the resources sector contributes to some unknown extent to upward pressure on the Australian dollar, monocausal explanations. They belie the range of complicated internal and external factors imposing themselves on the Australian manufacturing industry and on the Australian dollar for that matter. Blaming the resources industry is an approach which makes no mention of the underlying intensity of international competition that has been faced by Australian manufacturing and tourism over the last decade. Those views notwithstanding, the tendency to blame the resource industry was on rapid radical and repetitive display at the tax forum. The resources industry was having the finger pointed at it as the bad guy. I would argue that Australian manufacturing needs public policy attention to be absolutely sure it does. But blaming the success of the resources sector is a gross and inaccurate oversimplification of a very complicated area. It also has the unfortunate effect of creating a scapegoat out of a dynamic wealth generating Australian industry sector. Now a cynic might conclude that it's convenient for government and the Commonwealth Government in particular that has in truth not engaged in nearly enough real reform around regulatory and tax burdens, increased labor market flexibility, the sorts of reforms that actually could enhance Australia's manufacturing industries capabilities to face international competition. And indeed, there's one very interesting piece of evidence that I'll return to shortly, which seems to strongly suggest that Australia is not suffering from Dutch disease and that is that the resources industry is at its strongest in WA. Wages are at their highest in WA, cost pressures are at their highest in WA and WA is the only place in Australia over the last decade where manufacturing employment has actually increased. Third, is it actually possible to redirect wealth and growth simply and effectively from one sector to another to achieve a net positive effect? And the point I want to make here is when you try and slow down the growth sectors of your economy, whatever form they might take, you run a very significant risk and that risk is that you might be successful. The same analysis by Mr. Battellino looked at all the mining booms in Australia that took place over 160 years and as I said, it did identify some instances of Dutch disease at some point in that some industries went into decline and there may have been a link to the inflationary pressure caused by growth in resources industries. But the ultimate conclusion that Mr. Battellino reached, looking at every resources industry boom or surge over 160 years was that the overall impact of each boom was to strengthen the economy, increased investment in mining, hiring come from mining activities and the made for increased infrastructure to services, to service the mines or worked in this direction; each and every single mining boom in Australia's history. So, the dangers in policy designed to slow down growth in any economy is that you minimise rather than maximise the growth periods, which growth periods have a very considerable net positive effect on the overall economy. Now, unfortunately the replacement view spawns policy, which damages the growth engine of the Australian economy. This government would argue that taking a potential 70 percent of Western Australia's GST receipts, which this government would otherwise use to prevent infrastructure bottlenecks and to build the things that keeps the wealth being generated, doing that and at the same time giving us a carbon tax, super profits notions, rate taxes on mining, not properly contributing for the proper extinguishment of native title, where native title landowners agree to that, doing that does put the brakes on this economy. Now those types of policies might make some sense if you consider that the resources sector could be easily done without. They might make some sense if you could show it would actually benefit manufacturing to slow down the resources sector. It might make some sense that the only way to help manufacturing were to transfer wealth from the resources sector to be spent in some as yet undefined way on manufacturing, or if you thought the resources sector should be replaced as swiftly as possible by some unnominated alternative. But the view I want to put you today is unfortunately those slowdown policies make very little sense in the real economic environment that Australia is presently. The fourth point what is it that should supersede the resources industries? I just want to consider here again that statement from the Prime Minister that we should use all our courage and imagination to find high tech clean industries which will operate completely independent of our mineral wealth. Now, an irresistible inference of the Prime Minister's statement is that the resources economy is low skilled, low tech and high pollution. And a kind of commodities cringe existence in Australia, particularly on the East Coast and that's part of the Australian political and economic psyche, largely because I think resources industry growth is mistakenly seen as the result of pure good luck. And the resources industry itself is conceived of being little more than digging in pits. And I find this particularly unfortunate when, in fact, the exact opposite is true. Anyone who has witnessed the production chain of our country's most productive industries would find the suggestion that they are low skilled and low technology absolutely absurd. But many of the people who think this way have never seen it. The resources economy is rivalled perhaps only by certain parts of the military. It's people are incredibly diverse and well skilled. Its operations are subject to the most rigorous environment or standards that exist anywhere in the world. The operations room, for anyone who's interested, I'm sure if you as Sam [inaudible] the operations room for Rio Tinto for example, which controls the entire [inaudible] production for that massive company and shipping chain for that company exists at Perth Airport some 1700 kilometres away from the action. And I've seen it and it makes the command room on an aircraft carrier look low tech. The transfer and replace view is most fundamentally misinformed because it ignores the essential feature of the resources sector in WA and Queensland and which is now growing in New South Wales and northern territory and south Australia. And that is the breadth and depth of the resources sector. To properly understand the resources sector I think you have to conceive of the fact that it's not just a few companies or one industry type. It's not simply VHP, Rio, Extrada, Chevron, Shell. In WA, for example, the first tier of the resources sector is about 540 commercial mining, petroleum and gas projects producing over 50 products. The second tier of the resources sector is thousands of allied enterprises growing and specialising and employing in support of those 540 ventures. And those thousands of enterprises that cluster around the 540 big projects are like the projects themselves, high skill, high tech and most importantly they are incredibly diverse. So, the true picture is one of thousands of enterprises supplying a range of goods and services in communications, planning, technology, construction and many others. And very importantly the enterprises which are part of the resources cluster also include manufacturing and fabrication, which point leads to I think the true problem and misconception inherent in the replacement view. The single greatest failing of the transfer and replace policy position is that it simultaneously believes that the manufacturing and tourism sector can be directly benefited from slowing down the highest growth sectors in this [inaudible] economy and at the same time it ignores the fact that the resources sector itself supports a variety of manufacturing and fabricating processes and businesses. And let me just show you this next slide, where employment in manufacturing has fallen in Australia over the last decade. So, it's percentage share of total employment has fallen. The only place that it has actually increased is WA. And manufacturing is under intense pressure in Australia, but where mining and resources and [inaudible] and our economy is at its strongest because of those things. We have actually been able to buck up the trend as not just and Australian trend, as in a trend in many modern western economies and we have actually grown, albeit modestly, manufacturing share of total employment in this state. I think that the transfer and replace position is the type of thinking which is old fashioned, uniquely east coast industry policy type mindset. It mistakes the Australian manufacturing sector as being constituted by geographically concentrated east coast food, clothing and textile industry. And what the resources sector demonstrates is that manufacturing is not just food processing, shoes and cars; it's not just that. And the future of Australian manufacturing will unlikely be those things. That brings me to the conclusion. I think the final problem with the replacement view is that it never quite gets to the final point of nominating what's going to replace the immensely productive resources sector. The notion that there's something cleaner, greener, higher tech but equally capable as a resources sector to generate national wealth and employment, I think is more fantasy than vision. Statements about governments being able to plan the Australian economy's way into new industry sectors that are as productive as the resources sector but are cleaner and greener and more sustainable have all the hallmarks of feel good platitudes that pertain to be visionary but they're so ill-informed they have no regard to economic reality and in my view just simply aren't true. What other industry is going to allow one state to contribute 54 billion dollars to the national accounts with only 10 percent of the population? What other industry is going to allow a 12.3 billion dollar donation from one state to the national accounts? What is the emergent but as yet unseen non-resources based economic behaviour. I've never had an answer to that question. What is curious is that no one in the transfer and replace policy camp can nominate what the great saviour industries are going to be. But everyone who advocates for their eminent arrival can nominate exactly what they will be like. They are going to be non-mining, non-resources, they're going to be plain-grained service-based high tech and, of course, immensely productive and internationally competitive. That sounds good but I ask the question every time I go to a forum and I've not yet had a sensible answer. I would argue that what governments can best do with comparative advantage such as that which Australia presently enjoys in resources wealth and extractive skills is to nurture the industries that most immediately utilise that advantage. Growth in the resources industry is causing growth in other allied enterprises and delivering wealth across the nation. These are not inferior industries to be superseded. They are superior industries to be engraced and growing. Successful governments do not devote their energies to slowing down growth and replacing their great comparative advantage, rather they say to build on comparative advantage and through that comparative advantage create more diverse competitive edges in their economy. Australia's future technology and communications and service industries, those that may well go on to employ more people and compete internationally are highly unlikely to emerge from the minds and wishes of individual members of government. They are likely to emerge out of a cluster of enterprises that now grow around the resources sector. So, today Houston, for instance, is an international provider of services, skills, technology and products in oil and gas around the world. Not because it's own reserves of those commodities remain of any particular global significance, but because it developed that enterprises that facilitated core industries and flow on industries to the point where those industries now serve as global resources growth. And already I think the good news is this same type of thing is starting to happen in western Australia. So, for example, in WA 132 WA mining companies are involved in mineral exploration, developing and mining services in 415 individual projects spread across 42 African nations. And when I put this fact to someone recently, I said, "Well why are we helping our competitors?" But, of course, that's the wrong way to look at it. These projects in Africa literally are worth hundreds of millions, billions of dollars. One example, a very large WA company called Ausdrill, 2000 employees in Australia and 2400 employees in Africa. But the African work keeps the Australian employees employed. Part of the future of the WA resources industry is in continuing that type of role as a dominant offshore player in the development of African resources and in times to come in other places. So, to end today's address I'd simply say that the future in my view at least does not depend on finding something entirely new or protecting something comparatively old. It depends on making the absolute most of the comparative advantage we know have and allowing that advantage to spill over into a vast network of enterprises, which because of the lessons that we are now learning at home, we'll be able to compete on an international scale. I should also say thank you very much for your kind invitation to speak today. Thank you. [ Applause ] I understand the theory of super profits and greater than normal whether they're monopoly rinks or whatever they are. I just don't think that theory translated particularly well to the reality because capital in this industry is so mobile. And having been recently in China and looked at the [inaudible] steel plant, they've got massive stock piles of iron ore. At the moment 70 percent of it comes from WA, but that may not necessarily be their preferred supplier in the future. And if we do not resolve infrastructure bottlenecks to ensure that the costs of our production chain are low, but I do agree with you that with whatever you call it, tackling problems of underemployment and industry decline where they are occurring is a very difficult problem. But what absolutely gobsmacked me after two days of tax forum is that there was exclusive focus on how you move wealth and growth from here to here and no focus whatsoever on how you move labor from there to here, where we need it. And the point that I raise trying to highlight that was that there still exists a zone or tax rebate in Australia which started up in 19, well before the 1970's and it hasn't been reindexed or recalibrated since the 1970's. And it used to be that if you lived in Zone A for the tax rebate, you'd get a rebate, which was fairly substantial, like several weeks of your yearly salary. There's a check at the end of the year for living and working in [inaudible] or Port Headland or Windamere Dam. Now the rebate that you get for Zone is .04 percent of a weekly wage. Like this system costs more to administer, wildly more to administer than any economic benefit that comes from it. So, again the manufacturing mindset on the east coast has to also start thinking about later market mobility. I was very simply looking at some iron ore mines run by BHP and we were traveling with Ian Ashby and it was the same time that the [inaudible] issue was occurring. He offered jobs to each and every single one of those workers had found themselves redundant [inaudible] and I said, "How many do you think will come over?" And he said, 13 to 30, if that. And somehow we've gotten ourselves into a position of inflexible labor market or too inflexible internal rigidities and not enough incentives for people to move to where the work is. And again, if we don't get workers to work then we put in jeopardy the [inaudible] we could otherwise have. So, I agree with you there are problems. I just think the approach is all one way and not the other. >> Can I ask one of my team while I'm waiting? >> Yep. >> Often talked about in the major courses of the Norway model you know the idea of stashing away some of the good times now, but for the future, because on different things about the mineral sector is it is at least theoretically temporary because once you dig them up that's it. So, have you got any thoughts about that, any idea of the Norwegian, sort of stashing away some of the funds into a fund? >> I think that southern wealth funds are certainly working best again. I would say at the moment that I'm modestly in favour of one being created in due course in Australia and it may be also something that a state government can do. But if it were done on a national basis then it's quite obvious you need to determine where the contributions will come from and particularly how the fund or its revenue interest is going to actually be used and you have to very careful that you make sure that people can't dip into the capital of the fund depending on what government or emergent crisis is there at the time. But I think there's very-- there's a good argument for it and what's interesting about those that support a southern wealth fund is that by no means unanimity on the idea, but unionists and conservative politicians you will find many in both camps who actually agree with it. So, I think that there's definitely room to consider that. But again, there's not a lot of very creative thinking on a national level in Australia about those things. I'm not quite sure why that is. >> Well the basic point of your question is this. Royalties and state based royalty regimes the best way to extract revenue from mining companies who might be earning a large profit. I think that the international literature is not absolutely unanimous on the view that they are a poor way of doing it. There was a rather interesting speech recently given by the Federal Treasurer that said that the problem with royalties isn't a retired growth in the sector. It think that he meant because you don't get enough money to spend on infrastructure. Well I have no confidence that any money extracted from the mining industry is going to be spent in this state on infrastructure. You can forget that for a start. But, the fact is that we've had a very sensible stable low sovereign royalty risk regime, which has been part of the foundation along with state agreements and significant investment by state government that has caused very strong, rapid, profitable growth in the industry and you've got the multiplier effect. The view that mining companies could pay a little bit more I think there is a degree of coalescence around that view. The premiere of this state had indicated that he thought that if the Federal Government wanted to extract more money from mining companies the simplest and most elegant way of doing it was to charge them a surcharge on company tax by identifying those companies engaged in the enterprises. I think the problem with the super profits tax was that it was too much and it did create sovereign risk and asked mining companies to pay more than their fair share. I think the problem with the MRIT is that extraordinarily it was designed by getting in the three biggest potential tax pies and saying how would you like this tax structured? What do you think you're going to get, which is why Andrew Farce and others complained that the three majors are going to pay not their fair share and the mid level miners and others will be paying more than their fair share. So, if there is some coalescence of view that mining companies could pile a bit more, then the question becomes how? One way is royalties, but we've never been approached by the Federal Government on that issue as to how royalties might be increased and shared throughout the nation. The Federal Government went its own way and frankly I think I botched it up. And even on a Federal level there are more elegant, simpler ways of doing this, one of which the premiere has suggested. So, you know like everything in politics there are good ideas and good academic ideas and how you actually institute those ideas is sometimes quite difficult. But, that's the job of politics but I think it could have been done a lot better. >> Working backwards, yes I would share your views that there needs to be a broader strategic planning approach on population both internal and the issue of migration. How do you increase labor liability? We appropriately I think have a generous system of-- on any international measure, a generous system of welfare and safety net in this country and that naturally provides distance of welfare and safety net in this country and that naturally provides a distance to [inaudible] mobility. I don't suggest that you need to change that a great deal, but what you do need to do is look around at ways to decrease the intercept, the disincentives so I get rid of the disincentives to interstate migration and increase the incentives. [inaudible] we don't necessarily want to fly in and fly out work as a craft, but we want to build a population. Decreasing the disincentives in a place like Karratha is about making it into a proper functioning normal community. Make it look more like [inaudible] or you know New Castle. And we were trying desperately to do that to the first high rises going up in Karratha. We're trying to make them attractive places. I mean we visited Port Headland recently. That town has probably contributed per capita to the national wealth than any other single place in Australia over the last 15 years. And there were times that kids couldn't play outside because the dust from the iron ore was so bad and there was nowhere for moms to have a coffee. So we have to try and invest in those towns to make them attractive places to live. And one of the points that I try and make when I'm on the east coast is that we as a state you know we're finding that very difficult to do on our own. And particularly with the situation with losing GST revenues. So you need to get rid of the disincentives or slim them down as much as possible, create new incentives and try and have that migration, interstate migration happening. And I think there should be a much broader, calmer, sensible debate on international migration to Australia. The use of visas is different in different geographical regions in Australia and indifferent industry sectors and what the education industries have recently faced I think was appalling and it has damaged your industry. But that wasn't anything other than bad decision making and again, the debate in WA is a little bit different out of Sydney. You know there's probably a different view about the necessity and desirability of migration in four, five, seven visas here than there is in [inaudible] But we need to try and have this debate on a calm, national basis and I don't think it was a particularly edifying spectacle at the last Federal election, having both sides of politics run as far away from the idea of a big Australia as possible because I thought there was some electoral disadvantage for them. You know in some states, in some areas in Australia it's just a debate we need to have. >> I don't want to be the brave politician that goes out to make selection on a policy of low wages for all. I think that-- we didn't arrange it. Wages are what they are in Australia, but we are going to have to debate in certain industry sectors at certain periods of time. And the debate we're now having with respect to Qantas is that I understand it an average pilot in the United States gets paid about 150,000 a year. And the same pilot in Australia employed by Qantas gets paid 250,000 to 350,000. And Qantas cost structures are I think 20 odd percent higher than the carriers now competing against it in this marketplace, which market we as a nation opened up international competition. So, every industry sector is going to have to make its own decisions about how it competes. It skills up or uses technology you know and Qantas has had some other problems. They are waiting for a fleet of airplanes that were going to decrease their fuel burn by 25 percent, which from factors outside their control hasn't happened as soon as I would like. Each industry sector is going to have to make its own decisions and there's going to have to be a high level of cooperation between management and labor to try and maintain competitiveness. It's a very, very difficult area. But I just suggest that-- what I'm suggesting is that all of that jumps ahead of a very fundamental problem, which is that we've got-- we have got a growth sector and we are neglecting it at the moment. And we're going to do so in our peril and that [inaudible] that was mentioned earlier is another great article. There are other voices in the marketplace of ideas that are put in this point and I probably also would have through the tax forum and sort of went wow, what-- you guys don't get it. So, I don't think that fundamental change in the live market system is likely to be the answer simply because it's the art of the possible. And if anything about post-war Australian political history has taught us, that's a very hard task. >> Yeah, I agree with you. I'm not a macro economist either. My law degree was better than my undergraduate degree in economics I'd have to say, but it seems to me that looking at that actual analysis that tort economists did about the situation in Netherlands, that that's come under some very heavy scrutiny, even with respect to Netherlands which was in the [inaudible] after 1959. And modern economies don't seem to suffer from Dutch disease in the way that those two economists defined. And the best examples you can find are usually quite closed historical economies. And before the term was even coined, particularly examples of colonial Australia and quite closed economies like Victoria in the 19-- in the 1850's and about as close as you actually get. Well I think that the theories we are sending, I think it's happening in Australia. >> I agree with you absolutely that the real problems that are being suffered by manufacturing have very little to do with growth sectors of the economy. And they are embedded structural problems again about you're right labor market flexibility, range of overregulation in Australia, lack of incentives in the tax system for investment and R&D, a whole range of things. But what's happened is that they aren't hard things for any Federal Government to tackle and purport work choices. And so it's very easy to scapegoat other sectors of the economy; unhealthful but easy. So, I agree with you and I might have a chat with you afterwards and get my reading list. >> Okay, I'll use my prerogative again, but one of my last questions, you mentioned at the very beginning of your question and answer session about the local content issue. And, of course, when you mentioned it you were talking about the two-speed economy today. It's no so much talked about in the national press, but certainly Western Australia is often the discussion of the two-speed economy within Western Australia as well. And it was one of the challenges there and as you said, how do we use the spoils. So, I know there is a couple people in the audience from the manufacturing side of things within Western Australia although its grown by one percent compared to the mild 70's and the rest of Australia could argue that's not been a huge amount compared to when you see what the increase in the resources sector has been. So, good but could do better. So, I'm just wondering what's the answer to this [inaudible] within Western Australia as opposed to west east side, you know. >> Yeah, but that one, 1.1 percent increases, a modest increase. Any government would like to see that higher, but the debate becomes about how the government's improved that. What I don't and this is something that even I don't think that legislative response is the best approach. I don't think that you can mandate the flaw and a fix. You can create economic environments that are as flexible as possible to have as much of the that flaw in effect. And manufacturing a fabrication should be our focus here. But there are segments of the WA economy which are very, very flat and housing for instance. The unfortunate fact is there is very little if anything that a state indeed or a Federal Government can do to improve that situation, which is largely I think about confidence and the psychology of the marketplace. And it's been put to me recently well the government should step in and change stamp duty thresholds or increase the first homeowner's amount to try and stimulate the housing market in WA. Last financial year there was a significant underspin on the first homeowner's amount. There's something else going on there but it's complicated, which is why I don't favour legislative solutions, but there is definitely more that the government could be doing, but I think that that revolves around trying to create as low regulation and high flexible economy as you can so that you're creating opportunities for people to become involved in the growth parts of the economy. >> Well look on behalf of the audience I'm sure we've been A impressed, but also entertained and educated all at the same time. So, I'm going to say on behalf of everybody here thank you very much for the time you've put into the presentation, the questions and answers. >> Oh thank you. [ Applause ] [ Music ] [ Silence ]