The Reserve Bank of Australia has slammed claims that a recession is the only way for the Australian economy to improve, saying recessions engender “destructive destruction”.
Speaking at an event in Melbourne last week, assistant RBA governor Luci Ellis said Australia does not need to wait for an external trigger to kick-start the economy. Nor is there a need for “an identifiable engine of growth” like mining or housing.
“The ‘engine of growth’ mindset also seems to divide industries into the worthy and the unworthy. Only ‘good growth’, we are told, is truly sustainable. And ‘good growth’, I can't help noticing, always seems to be defined as ‘goods growth’. Services don't count,” she said.
However, she argued that health and education can promote sustainable growth as long as investing in those sectors translates into “better outcomes”.
The growth engines will be fuelled by all the sectors that lagged as mining took off, she added while pointing to the fact that tourism and manufacturing suffered as the exchange rate appreciated.
As for productivity and innovation – or lack of, as commentators including wealth management firm Koda Capital’s CIO Brigette Leckie claim – Mr Ellis said the “drivers of creativity … are hard to pin down”.
“But the literature does provide some pointers to them,” she continued. “First and perhaps most important is simply to grow: growth is more conducive to innovation than recession is.
“Recessions do not engender ‘creative destruction’; they produce liquidations, which are destructive destruction.”
She said that plentiful labour means “not much incentive” to invest in technology designed to promote productivity, nor is there incentive to invest when sales are weak.
“There is nothing quite like a tight labour market to make firms think about how to do things more efficiently.”
The ability for start-ups to enter the market and the likelihood of existing companies to adopt new business practices and technologies are also factors where Australia’s innovation will come from.
Acknowledging this, Ms Ellis contended that Australia “can become more prosperous without identifiable external triggers”, through growth in innovation and productivity fuelled by competition.
“So next time somebody asks you: ‘Where’s the growth going to come from?’ You can answer: ‘From all of us, trying new things, and gradually getting a bit better at what we do.’ We don't need to wait for something external to make it happen,” she added.
Ms Ellis’ comments are in contrast with those made by Ms Leckie, who said: “The only time you get decent policy change is when your back is against the wall.
“We escaped the last two global recessions for a lot of well-known, documented reasons but in order to get genuine, real, reformist policy out of Canberra, we need to have a fully fledged recession.”
Part of the problem, Ms Leckie explained, is that Australia is “way behind” in the science, technology, engineering and mathematics fields (STEM) and worse: “That’s really where the future is whether we like it or not.”
This area needs reform because all jobs in the future will have a (STEM) element, she said, arguing that “the whole education debate is going the wrong way”.
“My view is that in the next global recession Australia will not be immune, I think we’ll really come unstuck.”