The big trap

AUSTRALIA now confronts one of the great traps in its modern history - record commodity prices and terms of trade that weaken its resolve for productivity-enhancing reforms that are its only sure path to prosperity.

The nation is at the crossroads. It will either seize the historical moment or squander to varying degrees such opportunity, leading to internal disharmony, division and spite.

Chris Richardson, director of Deloitte Access Economics, says: "Nobody now has lived through anything like this. This is half the world, about three billion people, having an industrial revolution. I fear that Australians don't realise that this is our magic moment. The demand for our coal and iron ore is growing faster than the supply from around the world can possibly grow and the prices and profits are through the roof."

Yet the angst about Australia's ability to exploit this historical moment pervaded the seventh policy conference hosted last week by The Australian and the Melbourne Institute of Applied Economic and Social Research, opened by Victorian Premier Ted Baillieu under the theme: Growth Challenge: Riding the Resources Boom to Lasting Prosperity.

In his robust dinner address new Treasury secretary Martin Parkinson warned of the current moment: "If handled badly, future generations will pay the price for our mistakes, our lack of courage and the short-termism of our vision." He felt the great Asian industrialisation anchored in China and India probably had many years to run. The impact on Australia will be "sustained and profound" but such "opportunity will not fall into our lap" and "there is nothing pre-ordained" about Australia as a beneficiary.

Parkinson's thesis - and the main theme of the conference - was that the boost in living standards from the terms of trade cannot endure unless buttressed by productivity growth. And Australia's productivity growth is now a sad story.

In this sense the prolonged resources boom becomes a giant trap for the nation, a gift that deadens the political and economic drivers for self-improvement.

The conference became a whirlpool of conflicted angst: Wayne Swan insisted Labor had met the challenge; Ross Garnaut struck a note of optimism about the looming carbon pricing deal; the economic class fretted that Australia was dropping the ball; anger was expressed towards a reform-hostile populist media; and a near universal lament was summarised by economist and Reserve Bank board member Warwick McKibbin: "At the moment both sides of politics are missing the key points, the quality of the government is a reflection of the opposition and I think the public policy debate now is as bad as it's ever been."

Parkinson laid the dilemma on the line: Treasury assumed the terms of trade would decline only slightly, by about 20 per cent, during the next 15 years. Yes, that's good news. Now the reality test: "We expect growth in living standards to slow over time unless productivity growth improves."

What are these prospects like? Parkinson said, "There is little reason to believe it [productivity] will improve in the immediate term." Productivity had slumped in the past decade. Part of the explanation "is the fading effort of previous reforms and the lack of significant new productivity-enhancing reforms since the turn of the century". Time lags meant Australians "have not yet felt the consequences of this decline". But they will; it is embedded in the system. The truth, as Parkinson said, is that the poor productivity story "has been offset by a rapid increase in our terms of trade, which has made us wealthier".

His conclusion was the need to embrace reforms and accept, not resist, the harsh structural changes driven by the resources boom.

Summarising the Australian dilemma, Richardson said: "What lasts is productivity. We have had a proud set of achievements around labour market reform, tax reform and National Competition Policy and the like. But where's the Light on the Hill now? I don't see it in the policy agenda. The risk in a hung parliament is that neither side will fight for what is right because they are going to lose votes."

Parkinson lamented the impact of "populist media campaigns such as we have seen recently". Garnaut took the unusual step of criticising The Australian at the conference it co-chaired, slamming the reporting of climate change for distorting the facts and undermining the reform cause. Swan attacked the media for making judgments not on the basis of "what's good for Australia" but "what's bad for the ALP". Richardson came closer to the mark when he said "talkback radio is setting the agenda", a terrifying comment on the failure of government and its political advisers.

The bogy man that many had in mind, Tony Abbott, spoke at the Friday lunch the day after Swan's accusation that under Abbott there had been "a conscious rejection by the Liberal Party of its economic heritage". But Abbott attacked carbon pricing on policy, not political grounds, in his most substantial climate change speech so far. He rejected arguments for putting a "price on carbon", confronted the economic policy wonks and argued people were attracted to the slogan without thinking through the concept. Anybody who believes this debate will roll over in Labor's favour once the legislation is passed is deluded.

Productivity Commission chairman Gary Banks, Parkinson, Richardson and McKibbin offered overlapping ideas for productivity enhancement. The advisers were unforgiving. Banks said the two-speed economy "should be welcomed" as the mechanism to underwrite higher living standards from the terms of trade. This will horrify many businesses as well as rent-seekers.

Banks warned against many proposals now being floated - he said interventions to keep capital and labour in sectors under pressure was folly; efforts to resist so-called de-industrialisation akin to the "Dutch disease" were a mistake and overlooked that manufacturing in The Netherlands had revived and the Dutch, in fact, "benefited greatly from their 'disease'; while applauding the demise of the "cash for clunkers" program, Banks asked the big question about the huge $36 billion for 12 proposed homemade submarines when imports "could be purchased for a fraction of the cost [and risk]"; he reminded the main job losses in manufacturing had come in the car and textile, clothing and footwear sectors, revealing the futility of high industry assistance in the cause of job creation (the decline in manufacturing employment being a 40-year trend while services sector jobs had surged); finally, he warned of the need to terminate high-cost abatement measures when carbon was priced. Virtually every idea Banks proposed for productivity gains confronts intense political resistance.

"The world is begging us to grow faster," Richardson said. "In this situation you have to look where you're spending money. I'm not convinced we're getting the bang for the buck." He nominated middle-class welfare, defence procurement (the submarines), industry welfare (as identified by Banks) and tax breaks for the better-off, notably superannuation, as areas demanding review. Richardson was "a fan of carbon pricing because it helps the world but it doesn't help Australia".

In his overview speech Swan, like Parkinson, highlighted the idea that the real revolution is the middle classing of Asia and this epic event went beyond the mining sector creating new opportunities for Australian industry. Swan saw Labor presiding over three great events - the shift in global economic power to Asia, pricing carbon and population ageing. His message was that Labor is pursuing "some of the toughest reforms in a generation" - the return-to-surplus timetable, ongoing tax reform, the National Broadband Network ("there's no project I'm prouder of") and pricing carbon at a modest cost.

But opposition communications spokesman Malcolm Turnbull, in a withering critique, said no nation in the world had Australia's NBN model, none was spending anything like the funds and that Labor's financial decisions were "malign" in the cause of protecting a government monopoly unable even to offer competitive prices for customers.

Pivotal to the entire reform debate will be the design of the imminent carbon package and its reception. "I think we are heading to a good result with a carbon price being the centrepiece of mitigation efforts with a reasonable level of ambition and strong arrangements for governance," Garnaut told this paper.

Yet the difference between Labor and the Greens, patched over in the coming deal, remains irrevocable and a fracture across Australia's future. This should be remembered when the package is launched. The most extraordinary speech at the conference was given by Greens deputy leader Christine Milne, whospoke of a historical moment, but this was not the same historical moment being discussed by the rest of the conference. Milne spoke as a believer. She said the present generation in the coming decade would decide the future of the planet. The aim by 2040 had to be a decarbonised economy and a 100 per cent shift to renewables.

This was "an ethical question". The task was "to spend money now to harness the wind and the sun". Gas was "not the answer" because it was a fossil fuel. What was required was "a call to arms in this nation". Her message, on the eve of the apparent deal, was that "cowardice and populism is rife in Canberra on this issue".

The real difference between Milne and Labor seems a chasm. Resources Minister Martin Ferguson said future energy growth would be gas and wind as the "mature forms of clean energy". Nuclear should be considered. Swan said Labor envisaged 40 per cent coming from renewables by 2050. And Abbott sent a distinct signal that he was hostile to special deals for renewables at the cost of even higher power prices.

In summary, both Garnaut and McKibbin warned that Australia's position was more fragile than it seemed. McKibbin argued the way to see the world today was in terms of managing risks. There was the possibility of a "slow motion train wreck" from the Greek crisis. The situation in many nations was unsustainable. The euro area was in a crisis that was badly managed. The fiscal adjustment facing both America and Japan, while achievable, would be "very hard". He believed the main risk was high world inflation driven by the emerging economies and loose monetary policy fuelling demand. As a result, Australia had to be prudent and run policy to manage such risks.

The recurring lament at this year's conference was the loss of bipartisan consensus for reform, with much reflection on the achievements of the Hawke, Keating and Howard years. There was a conviction that something had gone wrong with our politics. The truth, however, is that Labor's weakness has fuelled the present political polarisation and consensus for reform is achieved only when one side submits after an election defeat.