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Keeping pace with technological change: The role of capabilities and dynamism

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Speech

21 June 2019

By our Secretary, Dr Heather Smith PSM.

Delivered at OECD Global Forum on Productivity Conference, Sydney.

Welcome

Good morning everyone, and welcome to the fourth OECD Global Forum on Productivity conference. A special welcome for those of you who have travelled long distances to be here – I hope you get the chance to enjoy some of this beautiful city of Sydney.

I am pleased that my department, the Department of Industry, Innovation and Science is co-sponsoring such an important OECD conference with the Australian Treasury, over the next two days.

Before I begin, I would like to acknowledge the Gadigal people of the Eora Nation, the traditional custodians of this land. I would also like to pay my respects to the Elders past, present and emerging and extend that respect to other Aboriginal and Torres Strait Islander people present.

Introduction

It may seem an odd place to start but let me quote this opening paragraph from Singaporean Prime Minister Lee Hsien Loong’s key note address to the Shangri-La Dialogue in late May:

"Our world is at a turning point. Globalisation is under siege. Tensions between the US and China are growing and, like everyone else, we [in Singapore] are anxious. We wonder what the future holds and how countries can collectively find a way forward to maintain peace and prosperity in the world".

Here in Australia we are in our 28th year of continuous economic growth. And like Singapore, we are an open economy dependent on free trade, rapid diffusion of technology and labour mobility.

But the hard truth is that our productivity performance has been mediocre and real wage growth has been modest for a number of years now.

Yet the promise of digital technologies to turbo charge the next surge in productivity levels seems to be tantalisingly just out of reach. When will we hit the inflexion point? What is holding us back? Is it measurement or data? Is it because of differential rates of adoption and diffusion by firms? Is it a focus by business on cost cutting and share-holder value over investment in research, development and innovation?

This conference is very timely. Along with the Australian Treasury we are delighted to host it here in Australia, and to be surrounded by some of the best minds in the world to think hard about these issues. They certainly preoccupy me and my department. And so they should. They go to the heart of the living standards of the current and next generation.

So let me make some observations about these preoccupations drawing on the conference theme ‘Keeping pace with technology change – the role of capabilities and dynamism’.

Pre-occupation #1: Technology

The first is technology itself. As we are seeing play out — technology now has a geo-political dimension as the US and China vie for leadership of the fourth industrial revolution. And just as we know that trade wars are bad for global growth, the same must be true for protectionist policies in technology, although we have to acknowledge there are also strategic drivers to these actions. Yet, unlike other factor inputs to production, the very ubiquity and interoperability of technology makes it hard for governments to control its flows across, and within, borders.

The challenge for governments then lies in getting the balance right between protecting national security interests, regulating for negative consequences, and deploying technology towards social and economic good, while putting in place policies to support affected workers in industries. These trade-off are going to be more difficult, with inevitable implications for growth, productivity and free trade.

Pre-occupation #2: Thriving markets

The second preoccupation goes to competition policy.

It has been a mainstay of OECD economic policy advice to its member states to promote competition. The customary route to this has been through deregulation and opening up economies.

The expectation was that this would result in thriving markets where new entrants challenge incumbents, and market domination would be held in check. We did not see at the time that many new digital technologies had winner-take-all dynamics.

Meanwhile business entry rates have been falling in many OECD countries. Australia has experienced a sharp drop in the business entry rate from 17 per cent in 2002 to just below 11 per cent in 2013, albeit with a slight rebound in recent years.

It is also worrying from an employment perspective. In Australia, small young firms, on average, contribute about 80 per cent of all net job creation. A lower rate of firm entry has negative implications for job creation.

At the same time, market concentration is increasing in many OECD countries. There is a debate in policy circles about whether or not we ought to be worried about this trend. Australia has experienced an increase in market concentration since 2006. This has mostly happened in industries that are already more concentrated, but which are also more export intensive. Average productivity in these industries is rising in tandem with concentration — not a phenomenon we would expect to see under normal circumstances.

Pre-occupation #3: Jobs

New technologies and changing business structures come together in the biggest preoccupation facing governments: the interaction between technology, jobs and the future of work.

We should be rightly sceptical about the extreme predictions of the number of jobs that may be lost to automation, machine learning, and artificial intelligence — the opportunities are profound. But economists are also inclined to think more about aggregates than distributions, and therefore to downplay the differential impact that economic change has upon people and communities.

We have plenty of evidence now that a particularly vulnerable group of society are those whose education has not kept pace with changing technologies, those who don’t finish or don’t advance beyond secondary school.

In the past, full-time work at decent pay was readily available for this group. But buffeted by both new technologies and trade, opportunities for these cohorts have been drying up and they are at risk of becoming increasingly disengaged. Active labour market interventions are required to ensure they can access the opportunities that will be available.

So while the augmentation of jobs – rather than wholesale loss of jobs – seems more likely, greater displacement than we can currently foresee remains possible, especially without a sustained focus on re-skilling and a life-cycle approach to learning.

And just as economists underestimated the impacts of trade liberalisation we should approach the impact of technology on communities with greater humility than we did when discussing the structural adjustment impacts of trade.

I have been impressed by the recent work coming out of the Brookings Institution which seeks to better understand the local dimensions of economic change. In my department we have similar data analytic work underway to better anticipate and respond to the forces of change in regional communities.

The changing role of government

So what should the role of government be in this dynamic environment? Globally, there is a renewed appetite for a stronger and more multi-faceted approach to technology and innovation. In my own department we talk a lot about ‘inclusive innovation and growth’ – ensuring equality of opportunity to a technology-based future that everyone benefits from.

In the past the role of government has been to facilitate and enable animal spirits.

But in today’s environment, this needs to be complemented by a greater focus on transitional policies — spatial, localised, place and people-based approaches with a strong emphasis of re-training and education. And many governments are now pursuing more directed innovation though national missions and identifying sectors with strong growth potential. This, in turn, is giving rise to new forms of public-private partnerships to drive innovation and growth.

Concluding remarks

Let me leave you with two challenges.

First, if you think the solution to these issues is a conversation just between economists, we’re doomed to failure. One of the things we need to do is to confront the fact that we economists have failed to convince the community of the need for change.

Second, what change are we actually talking about? If Australians are to experience the same growth in living standards in the decades ahead that they have become used to over the last 30 years, only one of the three P’s of population, participation and productivity is going to be key.

We know, on current population growth, and employment participation trends, we will need to roughly double the productivity growth rate. Easier said than done. And Australia is not unique in this challenge. So let’s start to discuss what changes would deliver needed outcomes in our economies.

As you consider this issue, I would encourage you to be humble in your deliberations, be open to new ways of understanding the big questions that all governments are grappling with, and to think about how better to engage the broader public. We are, as I mentioned at the beginning, living in very different times to the past.

Thank you.

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