The Productivity Commission has cast doubt on the effectiveness of greater ‘sovereign capability’ in boosting productivity and has advocated for increased liberalisation of trade to boost innovation diffusion.
A call to “pursue economic resilience and the benefits of open trade and foreign investment” to boost innovation diffusion is one of the 29 reform directives included in the Productivity Commission’s (PC) five-yearly productivity inquiry, published on Friday.
“While supply-chain issues need to be dealt with, businesses generally have the incentives and capacity to do so efficiently. The need for resilience must not veil revitalised protectionism or selective industry policy, given the inefficiency and rent-seeking they bring,” volume three of the report reads.
It later adds that “while businesses and governments are reconsidering how to manage the risks associated with supply chain disruptions, there is a danger that calls for ‘sovereign capability’ can encourage rent seeking, which would entail significant economic costs”.
Volume five of the PC’s review includes a focus on boosting Australian productivity through innovation diffusion – incremental adoption of both widely available innovations, like accounting software, as well as cutting ‘edge-technologies’, like artificial intelligence.
It also highlights that Australia’s relative size means “it is not optimal for us to invent everything domestically” and that “many ideas and technologies will come to Australia from overseas”.
As Australia is a small open economy it “has a comparative advantage as an importer and adapter of advanced technologies and other productivity enhancing innovations”, according to the PC. It argues that “increased global linkages are likely to be the best way for Australia to build resilience to deal with global uncertainties”.
“Trade enables Australian firms to access information and ideas about innovation from the global frontier, via their suppliers and customers. Imports are an important source of diffusion of intangible technology, with the value of Australia’s imports of foreign intellectual property far exceeding intellectual property sales,” the report reads.
“And for exporters, selling to overseas customers and competing with overseas firms provides exposure to new ideas and incentivises the adoption of product and process improvements.”
As such, the PC recommends that Australia should unilaterally eliminate statutory import tariffs which are already “responsible for a negligible amount of revenue and would offer relatively little protection to domestic producers”.
Associated compliance costs from Australia’s system of tariffs, concessions, and trade preferences in 2019-20 is estimated to result in $0.60 to $1.55 in lost economic activity per $1 raised in tariff revenue.
The report notes that Australia should also progressively remove “anti-dumping and countervailing measures and subject any new measures to an economy-wide cost benefit test”.
Accepting more product standards adopted in “other leading economies as ‘deemed to comply’”, particularly for pharmaceuticals and MedTech, should also be pursued to support innovation diffusion so long as the option for transparent reviews where significant safety risks are identified remains.
According to the Australian Bureau of statistics, almost 80 per cent of Australian businesses did not introduce any ‘significant’ new good or service, with more than 98 per cent of businesses not introducing any goods or services that were new to the world.
Regarding Defence procurement in particular, the PC highlights in volume five of the report that in many contexts, buying proven technology from overseas rather than providing industry assistance for domestic production “is likely to be optimal”.
“A sophisticated domestic capability to use, store and maintain equipment would still be required regardless of where it was sourced from but would involve lower costs than domestic production and assembly,” the PC report reads.
It also notes that in some instances, large defence procurement projects have an effective rate of assistance for domestic production of up to 300 per cent, far above any other industry, where assistance broadly sits between 0 to 5 per cent.
Citing the “extraordinary complexity of much defence equipment, systems, and software” which often requires “sophisticated manufacturing, information technologies and a highly skilled workforce”, the report reiterates “it is not feasible for Australia to develop expertise or domestic capabilities for all such equipment and software”.
Further, it argues that undertaking multiple defence projects will slow down production on any single project, hence lowering productivity.
It also warns of complications from being an early adopter of complex equipment as design and production flaws may only arise after production has commenced. If equipment is already being produced overseas, delaying local production may produce “learning economies” as early complications are encountered elsewhere as production ramps up.
The PC also argues that innovation diffusion could be improved through the reduction of barriers to foreign direct (FDI) investment. In particular, it suggests that “encouraging FDI may increase investment in R&D from overseas sources that bring the potential for innovation diffusion”.
Prime Minister Anthony Albanese has argued that one of the key lessons from the supply chain disruptions during the COVID-19 pandemic is that growing domestic manufacturing will enable Australia “to be more resilient, to take more advantage, to stand on our own two feet” since before he was elected.
More recently, the Prime Minister has noted that the $15 billion National Reconstruction Fund’s aim to increase domestic manufacturing is “about national security through economic sovereignty”.
Industry and Science minister Ed Husic has also noted that the fund would be key to local Defence industries by supporting “enabling capabilities” like quantum, AI and robotics.
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After listening to Minister Husic speak at the National Press Club today, I hope he does a close read of the Productivity Commission Report. Someone appears to be wearing rose-tinted glasses.