It’s time to overcome complacency and remake Australia’s economy (before our luck runs out)

In a world where new rules are being created at an ever faster pace, the time is now for Australia to modernise its economy and pursue a more economically sophisticated path to define a resilient and globally competitive post-pandemic future.

A new Deloitte report – Australia remade: a country fit for the age of disruption, the latest in the firm’s Building the Lucky Country series – presents a new way to make sense of change and disruption, and allow policy makers and business leaders to take the necessary steps to pursue growth and shape the future of Australia by becoming more economically sophisticated and sustainable.

The report is based on:

  • The Deloitte Economic Sophistication Index – a new economic lens through which to view the Australian economy compared to others around the world (Australia sits at a less than satisfactory 37th)
  • Critical ecosystems – areas of opportunity that can spur Australia’s next wave of economic growth
  • Future scenarios – how would Australia fare if China turned off or turned down the export tap, or if global momentum for meaningful action on climate change caught Australia off-guard, or if Australia took deliberate action to improve its economic sophistication?
  • A resilience framework – a strategy tool for policy makers and businesses that considers four levers – preparedness, innovation, capabilities and connections – to equip them to become more resilient and adaptable.

Deloitte Australia CEO, Adam Powick, said: “There’s no doubt that Australia’s economy has defied expectations for a long time, and before the COVID pandemic, we had experienced 28 years of uninterrupted GDP growth.

“That growth wave we’ve ridden has turned the phrase ‘the lucky country’ into shorthand for our success. But this isn’t guaranteed for the next 50 years. Particularly as we bounce back from COVID, it will be more important than ever for our policy makers and business leaders to understand structural changes underway and how we can effectively compete in a more complex and fragmented world.

“Out of uncertainty and volatility, we have the opportunity to shape a new future for Australia – one where we prioritise long-term sustainable success over short-termism, where we embrace risk and foster greater innovation and commercialisation, where we add as much value as possible along the supply chain, and where we strengthen our connections with key trading partners in a deliberate and mutually beneficial way.

“We really do have a once in a lifetime opportunity here. Getting this right – and the size of our ambition and appetite for reform will be critical – can create a more economically sophisticated, sustainable and prosperous nation.”

Deloitte Access Economics leader, and principal report author, Dr Pradeep Philip, said: “We live in a world surrounded by uncertainty and structural shifts, including technological advances, climate change, an aging demographic, evolving geopolitical tensions, and a devastating pandemic.

“In this environment, Australia’s economic performance has been historically strong, but our economy has also become inherently fragile. Even as we’re facing new challenges that are highly complex, we’ve also become complacent. And that’s a big problem. Complacency poisons investing in the new. Letting the good times roll has come at a cost when we haven’t built the capabilities and capacity to ensure the resilience of our economy.

“We have many of the building blocks to deliver future growth and prosperity – from access to strategic minerals and renewable energy assets, to proximity to Asia and good education infrastructure. But with a shifting global economic and geopolitical landscape, we need a new economic lens, new tools, and new methods to address disruptions and challenges, and target the areas where tomorrow’s opportunities lie.

“This is a once-in-a-lifetime chance to remake our economy and be more than one described in terms of rocks, crops, and cameras. Australia must modernise its economy, shifting from the complicated to sophisticated, building value add and creating deeper connections in the global economy, to be fit for purpose in the decades ahead.”

Shifting from complicated to sophisticated

The new research uses ‘economic complexity’ to provide insight into these opportunities – not complexity in terms of being more complicated, but in terms of understanding and increasing the levels of sophistication in an economy.

“Becoming more sophisticated means to build productive knowledge, innovation, adaptability and diversity into our economy – the key to building the resilience to weather change,” Philip said. “And we need to transform and boost our economic sophistication and invest to unlock new growth and compete globally.”

The analysis looks to address Australia’s particular complexity challenges :

  1. We’re not as successful an economy as we think we are. While GDP is high, Australia’s economy is not very complex – in fact, it’s quite fragile
  2. We’ve relied on luck and it’s created complacency. Due to the stellar economic run over the past 30 years, too little thought has been given to greater economic diversification, and many opportunities have been missed as a result
  3. We’ve neglected sectors with the greatest future potential. Rather than taking a long-term view, Australia has focused on sectors like mineral resources and agriculture that provided historical wealth
  4. We’re not well connected to the rest of the world. This makes it more challenging to improve economic complexity, especially with the rise of Asia on Australia’s doorstep
  5. We’re at risk of the ‘tyranny of distance’ – again. With the world looking locally for supply chains, Australia is at risk because it isn’t engaging enough in the Asia Pacific region.

Central to the report is a new Deloitte Economic Sophistication Index that ranks countries and their economies based on two measures: the value added to the goods and services an economy currently produces; and how well connected the industries that make these products and services are in global supply chains.

“Countries have different mixes of skills, ideas, technologies, equipment and materials that can be used to produce a different mix of goods and services,” Philip said. “These factors – the productive knowledge or productive capabilities – determine the frontiers of what an economy can produce and how much it can grow.”

Countries that rank high on the Sophistication Index – and Germany sits on top – are those that perform well across both value added and connectedness.

Ranked 37th on the other hand, Australia‘s prosperity has come at the cost of investing in and enhancing the productive and adaptable capabilities in its economy.

“It’s a shock to realise we aren’t doing as well as we think we are. We can, we need to, do so much better,” Philip said. “With half a century of hindsight, it’s little surprise that we have an economy characterised by low manufacturing capabilities and missed opportunities from not commercialising our strong research. We haven’t built the business or structural foundations required for a diversified, resilient economy.

“Instead, we’ve been complacent with our success, and our lower value add and weaker connectedness with the global economy compared to our high-income peers is a serious issue for our future prosperity.”

Critical ecosystems…and unlocking opportunity

“The good news is that we have many comparative and competitive advantages that we can amplify and build on as we become more diverse, more sustainable and more connected, and more sophisticated, as an economy,” Philip said.

“Our analysis points to seven ‘critical ecosystems’ that will matter for Australia in the years ahead. These will build on our existing strengths, create new competitive advantage and produce what the world needs. Some will allow us to amplify our natural advantages and build upon the foundations we know so well, while others will move us beyond these, to be more relevant, to be more connected and to find new opportunities for future growth.”

A more complex, more sophisticated, economy can deliver genuine opportunity, and see Australia at the forefront of:

  1. Feeding the world – demand for Australian food is strong, but the core industries involved in Australian food production – agriculture, forestry, and fishing – are among the least sophisticated
  2. Decarbonising the world – with competitive advantage in natural resources, technologies, and energy, Australia can really take part in the move to global decarbonisation, by producing new sustainable energy
  3. Shaping the future of health – Australia can create new value by using technology to turn its world-class health research into implementable health and wellbeing solutions
  4. Looking to the sky (and beyond) – Australia has a strong track record in the areas we have chosen to play in space, but also needs to grow its capabilities from niche research and manufacturing to end-to-end products and services
  5. Manufacturing the future – to play a greater role in global manufacturing, Australia should have a clear focus on moving up the value chain by connecting advanced manufacturing into areas of greatest economic opportunity
  6. Satisfying the senses – there is no ecosystem more agile and ever-changing than one that follows consumer demands. Australian organisations need to continue to be responsive and innovative by co-designing products and services
  7. Servicing the world’s businesses – using virtual and digital technology, a significant opportunity exists to export B2B services such as engineering, telecommunications, professional services, and financial and insurance services.
What if China turns off the tap? Or Australia fails in its climate change transition? What if we acted to improve our sophistication?

In a world where uncertainty is certain, the report also examines a series of scenarios, and what a ‘business as usual’ approach compared to pursuing greater economic complexity might mean for Australia’s Economic Sophistication Index ranking and, by extension, its future prosperity.

“What if geopolitical tensions with China worsen? Or global momentum for meaningful action on climate change catches Australia off-guard?” Philip said.

“China turning off the tap would significantly impact Australia’s economic sophistication, and would run much deeper than the impact on headline economic statistics. Our future economic capability and resilience to shocks would be at significant risk, and our Index ranking would drop further – to 42nd in the global economy.

“And if Australia’s action on climate change continues to lag and, in response, overseas governments introduce limits on our high emission intensity production flows? This too would be devastating for the Australian economy. The world would no longer want what we have, and our Index ranking would drop.

“But taking a more optimistic view of the future, what if Australia improved its level of economic sophistication? How would the economy look and how would Australia benefit where we lift our productive ability to the best performing country in each industry, ensuring our value add becomes world-leading?

“If we were successful, our Index score could more than double, placing Australia above even the highest performers today. But this would require a drastic shift in the structure of our economy. We would increase our business services sectors, build greater balance and diversity in our trade relationships. And if we were successful, we’d see our incomes rise and vulnerability to shocks fall. We’d be more nimble and better prepared to make the most of new opportunities.”