Why Australia is in danger of becoming Asia’s digital banana republic

In 1980 Lee Kuan Yew said we would become the “poor white trash” of Asia if we didn’t reform – if we didn’t open up our economy.

They were words that stuck in the mind of Bob Hawke.

Earlier this year when that maker of modern Singapore died, Hawke said:

“I thought he was right, and his harsh but fair comment helped galvanise my determination to undertake the reforms that would save us from that fate and set us on a better path”.

Six years later in 1986, Paul Keating told John Laws that if we didn’t reform:

“Australia is basically done for. We will just end up being a third rate country…. a banana republic”.

Those words are now part of Australian political history. Seen by many as a turning point.

At last we finally got it. We had to wrench ourselves out of this bog of complacency. We had to strip away all the things we were hiding behind. All the things we were used to. We had to change the way we were doing things. We had to become globally competitive. The result was that Hawke and Keating transformed Australia.

Our economy is now three times the size it was in the 80s. Real wages rose. Living standards have improved. Unemployment is almost half what it was in the early 1980s. Inflation has been squashed.

And perhaps telling of all, in the last 24 years, when other countries around the world have gone into recession, we haven’t. We have continued to grow. It is an extraordinary achievement.

What is the equivalent challenge today?

We tend to spend a lot of time and a lot of column inches on things like tax and industrial relation and fiscal policy.

But we don’t spend anywhere near enough time and energy on the digital transformation of our economy. This is not a boutique debate. It’s the main game. I think it’s just as important to making Australia globally competitive in the 21st century and Hawke and Keating’s reforms were in the late 20th century.

A couple of years ago Marc Andreessen coined the phrase that “software is eating the world”. It’s hard to disagree.

Think about this: just four companies on the west coast of the United States – Apple, Facebook, Google and Amazon – have a combined market cap that’s bigger than the entire Australian Stock Exchange.

When I was a kid you took photos on a camera and then took the Kodak film to the chemist to get printed. It usually took a day. If you paid more you could get it done in an hour. In its heyday Kodak used to employ 145,000 people. Now it doesn’t even exist. Instagram does though. In 2012 it was bought by Facebook it had 13 employees and 30 million users. Facebook paid about $1 billion for it.

It’s a similar story at Blockbuster. At its peak they had 4,800 stores in the US and employed 60,000 people. Now all the company owned stores are gone. There are just 50 franchisees. There are no Netflix stores, but they are in about 44 million American homes and more around the world. According to its 2014 annual report they employ about 2,000 people.

Half the companies on the US Fortune 500 list have disappeared in the last 15 years. Most because of this – a sort of digital Darwinism. Companies have to adapt and respond or they die.

You can see this right across the economy from retail to finance. From the taxi industry to hotels. To education and health.

It’s the same with old government enterprises like Australia Post.

Australia Post is an Australian icon. It’s been providing an essential service in one form or another for over 200 years. Now email is eating its lunch. We send a billion fewer letters today than we did five years. In 10 years it’s likely we won’t send any letters at all. That means Australia Post has to change its business model or it will go the way of Kodak and the dinosaur.

The McKell Institute and UTS have done a lot of work on this. Together they have produced this report – Digital Post: Business transformation and the future sustainability of Australia Post.

It proposes a number of big reforms to help Australia Post survive and thrive. When Malcolm Turnbull was Communications Minister he implemented the first of these reforms. To do that he needed my help. We worked on it together. Both sides of politics, working together.

It’s a template for a much more important challenge that lies ahead.

The same thing that is happening to companies is happening to countries – just on a bigger scale.

The countries that will be the most successful in the next few decades will be the ones that adapt to this new environment the fastest and the best.

The ones that don’t will see jobs and business go overseas. Will see unemployment go up. Disadvantage become more pronounced and more entrenched. Living standards fall. And the division between rich and poor grow.

It’s a 21st century version of Paul Keating’s potassium prophecy. A digital banana republic.
It’s Back To The Future week. In the 1989 classic ‘Back to the Future: Part II’, Michael J Fox’s character Marty McFly lands in Hill Valley on Wednesday, 21 October 2015.

It shows how tricky predicting the future is. They got the flat screen TVs, Skype and smart watches right. But unlike the movie, there are no flying cars or flying skate boards in 2015. Lawyers also haven’t been replaced by data courts, and journalists haven’t been replaced by Compu-Faxes and Hovercams. At least not yet.

Future trends

It’s hard to predict the future. But it’s not hard to see trends.

In the last 25 years, the number of secretarial jobs in Australia has dropped by half a million. The number of labourers has dropped by 400,000. The number of technicians and tradies has dropped by 250,000. And the number of machinery operators has dropped by 100,000.

Conversely, there has been growth in occupations that are either high skill or high touch. There are now 700,000 (54%) more professionals than there were 25 years ago. And 400,000 more community and personal service workers (87%).

Smarter machines are performing more and more human tasks – and that trend will just continue and accelerate.

A number of reports over the last few years have predicted that up to half the jobs we do today will be automated in the next 20 years.

CEDA has done work on this here in Australia. Two Oxford University professors, Dr Carl Frey and Dr Michael Osborne have done similar work looking at the US economy.

They might be right. They might be wrong on the actual percentages. But the trend is clear. And it’s also clear that the new jobs that are being created now, and will be created in the future, are jobs that require STEM (Science, Technology, Engineering and Maths) skills and in particular digital skills.

The other big, obvious trend here is the magnetic influence of globalisation. The globalisation of capital and labour is nothing new. But what is new is the rise of the ‘virtual global worker’.

Today, in our interconnected, online world, if an Australian company can’t find the talent or resources they need here in Australia they can get virtual talent from all around the world.
The Australian company Freelancer is a great example of this. It connects employers to a global marketplace of experts in every technical, professional and creative field, from graphic designers to accountants, to engineers and scientists, from all around the world – all at the click of a button.

Australia tech startups are also increasingly outsourcing software development to countries like the Philippines and Vietnam.

The challenge here, with all of these changes, is the same as it was for Hawke and Keating. We have got to be globally competitive.

Now here is the scary bit. When you compare Australia to other countries there is a fair argument that we are falling behind.

We are not as competitive as we need to be.

Stalling out

Earlier this year Harvard Business Review ranked the digital capacity of different countries. Countries were ranked based on a number of factors and placed in four categories – Stand Out, Watch Out, Break Out and Stall Out.

Australia was described as “Stalling Out”.

Here’s why.

Our broadband infrastructure doesn’t rank well compared with a lot of other countries. Two years ago we were ranked 30th in the world for peak connection speed. We are now ranked 47th.

Singapore is first. Hong Kong is second. South Korea is third. Japan is fourth. The US, Canada and most of Europe are ahead of us. Even Romania, Russia, Slovakia and Poland are ahead. So is New Zealand.

Access to capital is also a problem for a lot of startup digital businesses. Our venture capital industry is small by world standards. In per capita terms it’s about a third the size of the United State’s venture capital industry. More surprisingly it’s almost a quarter the size of Canada’s.

We are also way off the pace in R&D. The amount we currently invest in R&D as a percentage of GDP is behind the OECD average. And the recent cuts to the CSIRO just make this figure worse.

We are also not as good as we need to be at commercialising our good ideas – and getting our universities and industry to work together. We are currently ranked last in the OECD for university and business collaboration. Fewer than 10% of Australian companies involved in innovation currently work with a university or one of our research institutions. We have got to do better here.

The area where we are falling behind the most is skills. We are not producing enough people with STEM skills.

In 2003, 9,093 people graduated with an ICT degree in Australia. In 2013 that figure was 3,446. It’s dropped by two thirds in a decade.

Over the same period the number of people who have graduated in China with a STEM degree has jumped from 500,000 to 3.5 million.

About 16% of Australian university students graduate with a STEM degree. In South Korea it’s double that. In China it’s 41%. In Singapore it’s about 50%. And they are the countries we are competing with.

Finally let me say this. This is not just an economic problem. This forum is all about inclusive growth. I represent Paul Keating’s old seat of Blaxland in south west Sydney. It’s not a rich area. This is a lot of disadvantage. The unemployment rate is almost twice the national average.

Here’s the interesting thing. If you speak English well, your chances of being unemployed in Blaxland are about 5%. But if you don’t speak English or speak it very poorly your chances are more like 25%. How well you speak English has a big impact on your employment and career prospects.

In the world our kids will grow up in it won’t just be English that determines their employability – it will be their digital skills.

The economist Tyler Cowen talks about a future where there are two types of people – those “who are good at working with intelligent machines and those who are replaced by them”.

If that’s right, we need to build a society where everyone has the skills to work with smart machines. If we don’t the lives of a lot of Australians will get a lot harder. And, most probably, we will entrench disadvantage in places where it is already a serious problem.

This is where the real debate in Australia should be. It’s where I am focused. It’s where Labor is focused. Now suddenly we have a new Prime Minister and both sides are talking about it. We have to seize this moment.

If we don’t we risk the words of 30 odd years ago coming back to haunt us.

* Jason Clare is Labor’s shadow minister for communications and the federal member for Blaxland. This speech, titled A digital banana republic? Global competitiveness in the digital age, was delivered today at the McKell Institute at the University of Technology, Sydney.

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