Wake-up calls on Asia century

THE signs multiply of a growing malaise in Australian governance with politicians keen to tackle fashionable causes yet reluctant to address necessary causes -- witness the debates about productivity, climate change and education.

This week the Reserve Bank governor, Glenn Stevens, cut through the fog that obscures the productivity issue by stating the obvious at Julia Gillard's economic forum.

Having declared that productivity was the big challenge before us, Stevens said: "I think the best answer is we have a body called the Productivity Commission. They've got a long list of things to do. My answer to what we can do about productivity is go get the list and do them."

This sounds like old-fashioned Australian common sense. But it won't happen. In private, many ALP figures bag the commission for being impractical. Its reform list is no secret. It is in commission reports and the speeches of its chairman, Gary Banks, over many years. Stevens knows the problem because he said "they're not popular; they're politically very difficult; it's grinding work."

This is the conflict now embedded at the heart of Western democracy -- between higher living standards via enhanced productivity and the political heartburn that makes such reforms too unpalatable. Western democracies are trapped with political systems unable to adjust enough to meet the challenges facing their nations.

What is the Productivity Commission's reform script? It warns that much of the $9.8 billion in annual industry assistance is ineffective. It warns against excessive subsidies to the car industry, saying bankrolling uncompetitive manufacturing is a waste that does not ultimately save jobs. Banks attacks keeping capital and labour in low-growth, low-productivity industries; he has questioned the huge $36bn to build 12 homemade submarines; he warns against high-cost carbon abatement measures; he says industrial relations is "the most crucial to get right" and advocates a more flexible IR system; he has consistently pushed for a more competitive economic framework.

Virtually every idea Banks proposes to boost productivity meets political resistance. It is true that Labor has used the Productivity Commission, but more for social than economic objectives -- witness the National Disability Insurance Scheme.

Recall, however, that Kevin Rudd was elected on an ambitious productivity platform. "Education is the engine of the economy," Rudd said upon becoming ALP leader. He devised a Labor productivity agenda -- more human capital investment, more infrastructure, a hi-tech National Broadband Network and a greater investment in skills and health policy. While Labor's productivity strategy overlapped at points with that of the Productivity Commission, there is a cardinal difference -- Labor backed by the trade unions thinks government is the key to progress, while Banks thinks markets are the key.

The manifest frustration this week at Gillard's forum was because many delegates want action, not talk. As Stevens said, the reports are on the table, so what's the problem? The Business Council's Jennifer Westacott said "how" was the hard part. Business wants more action on tax reform but there is no joy on that front. Westacott lamented that outside fiscal policy, there was precious little bipartisan support for reform.

Wayne Swan said Labor had been "working on productivity from day one" but it was more complex than flicking a switch. Indeed, the productivity story is mixed. The Treasurer admits productivity has been in "long-term decline" for over a decade. He agrees this must be reversed and says there is "no reason" why Australia cannot aspire to be within the top 10 nations over time. Swan locates this challenge squarely within the opportunity opening for Australia in the exploding Asian middle class.

Yet public awareness of this is almost non-existent. The term "Asian century" has no policy meaning for the public -- let alone the sense of a vast national challenge that will decide Australia's future living standards.

The bottom line remains: Labor's political "no-go" areas on productivity reforms throw the government into guaranteed conflict with the market-based reform advocates in the business and policy communities. It is rarely said but Australia is a divided polity over productivity.

A dose of shock therapy came this week from the chief of the Australian Chamber of Commerce, Peter Anderson, who warned of the obstacles to Asian investment in this country -- we are too small in scale, sometimes not capital-friendly and our labour costs are too high.

After visiting China, Anderson said the message hit him "like a baseball bat". He had been told by Shanghai investment authorities that our employers are too limited in their ability to act against poorly performing workers. It means doubts about our IR system have penetrated Chinese investors. Australians had better get used to it -- China, as a creditor power, is going to be passing judgments on our domestic performance. To succeed in the Asian century we need to be smarter, tougher and leaner. That's the point.

This leads directly to education policy. One of our deepest orthodoxies is that more education investment means higher productivity. This drove Labor's Education Revolution but such thinking is a trap. It's not that simple.

Earlier this year the think tank, the Grattan Institute, produced a report, significantly called Catching Up, about how Australia can learn from superior East Asian school systems.

The results are stark: over the 2000-2009 decade we boosted real spending on education by a hefty 44 per cent (plus increased private schools fees by 25 per cent) yet we suffered a significant decrease in scores and a decline compared with East Asia.

There is a disconnect between policy and results. We are spending more but falling further behind. "The world's best school systems are rarely the world's biggest spenders," the report said. For Australia, classroom reform requires deeper cultural and institutional change.

This is an immense challenge for governance since it goes to ideology and vested interests. It is another wake-up call about what success in the Asian century means in practice as distinct from mouthing the slogan.

This week an Auditor-General's report assessing a literacy and numeracy national partnership launched by Labor found no improvement in student outcomes despite a $322 million spend. Starting in 2009 the program based on reward payments aimed to achieve ambitious improvements in literacy and numeracy. Yet the audit report found it was "yet to make a statistically significant improvement in any state".

There are several qualifications. The Prime Minister rejected the Auditor-General's report and said the program was working for the students involved. She may be right. Yet there must be grounds for concern.

When the Gonski report recently recommended an extra $5bn for school education it was alive to the pivotal question: will the funds actually mean better outcomes?

The Grattan report looked at schools in Hong Kong, Shanghai, South Korea and Singapore and their proven ability to get dramatic classroom results. Despite the talk and money, this eludes Australia. In Shanghai the average 15-year-old maths student performs at a level two to three years above Australian counterparts.

The lesson is that education reform requires drilling into classroom dynamics, a far more daunting task for governance than we admit.

Meanwhile, a more immediate test of governance has arrived -- the start of carbon pricing on July 1 designed to ensure Australia's 5 per cent emissions reduction target by 2020. This policy has made and broken successive leaders and governments.

A bizarre fate has befallen the carbon tax. It is de-coupled from its purpose. Debate about emissions reduction targets and saving the planet has slipped from the radar. When Gillard appeared on the ABC's Q&A last Monday she was quizzed about the carbon tax but not climate change. Three years ago climate change would have been the main issue. Now it is about a tax-cash payment policy with Climate Change Minister Greg Combet boasting nine out of 10 households will be better off.

The political transformation is obvious: because people will no longer pay higher prices to reduce greenhouse gas emissions, the policy has turned into a net tax-transfer bonus that stands and is justified in its own right.

There are two problems with this. First, despite compensation, high power prices are an ongoing reality driven by network costs and an array of green schemes. There is no escape, ultimately, from the cost impact and, because that is identified by the regulator, it will remain a political issue.

This week the NSW regulator announced an average price rise of 18 per cent, half due to the carbon price. The regulator kindly provided data that green schemes would contribute $316 on average to electricity bills. This divides between $170 for the carbon tax and $102 for Renewable Energy Target schemes known for their inefficiency. In the bigger picture the carbon tax is modest; it is, however, enough to perpetuate Labor's persecution in political terms.

The second problem is daunting. It lies in the wisdom of a government at a time of global financial turmoil imposing a carbon price, high by world standards, on homes and business in the conviction that Australia's actions are necessary and proportionate in making a tangible contribution to global greenhouse gas reductions. That is a very big call. It goes to the judgment and priorities of our masters and a public verdict at an election will be called forth.