Too Late to Be the Clever Country?

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You would have to be living under a rock to have missed the Peter Costello show, now playing on a talkback radio station and broadsheet newspaper near you.

The former Treasurer has been milking every last drop of publicity out of his announcement that he won’t be running for the Liberal leadership, and Melbourne University Press could scarcely be happier with his efforts.

Meanwhile, the wheels of government have rolled on, this week, with the release of another of the many policy reviews commissioned by the Rudd Government on coming to office. This week it was Dr Terry Cutler’s Review of the National Innovation System, a major plank in Kevin Rudd’s policy platform of raising Australia’s flat-lining productivity.

Cutler has long been an influential consultant, business executive and mandarin in a range of arts, telecommunications and research positions. He was a strategist for Telecom Australia, back in the days before it changed its name to Telstra and was sold off in sections by Peter Costello. He turned then to multimedia and dot coms in the 1990s, and then did a number of stints on the boards of high-profile organisations such as the Australia Council, the CSIRO, and several university research groups.

The new report, bearing the rather inelegant title of Venturous Australia, is a comprehensive and insightful policy review of Australia’s complex and sprawling "innovation system", which includes both corporate research and development and public sector research carried out in universities, Cooperative Research Centres and government research agencies like the CSIRO, ANSTO, DSTO and the Anglo-Australian Observatory.

Why is innovation so important? The reason, as Cutler told Lateline Business on Wednesday night, is that research and innovation ultimately drive Australia’s future standards of living. Innovation, Cutler said, is "hugely important because this goes to the heart of our future prosperity as a country. If you look at our scorecard around innovation … over the last decade or more, we’ve been falling further and further behind."

The Cutler Review dissects Australia’s innovation performance over the last decade, and it’s not a pretty sight. In the 1980s and early 90s, there was a huge leap in the number of young women entering our universities, and upon leaving, they and their male peers were using information technology in the workplace that was far in advance of that available only a few years before. Combined with the important Hawke-Keating reforms to open the economy, this triggered a wave of productivity growth that flowed through to Australia’s superior economic performance during the Howard years.

But since the early 2000s, Australia’s productivity has stalled. Partly this was due to the prosperity of the times: mining companies, for instance, employed such huge numbers of low-skilled workers that they had the effect of dragging down the national labour productivity average — when pay rates, skill and technology levels are factored in. But something else was happening too: high-school retention rates, PhD completions and corporate spending on R&D also flat-lined. Federal spending on universities and agencies like the CSIRO tightened under Howard and Costello, while available funds were redirected to tax cuts and private schools. The Commonwealth now spends more on private schools than it does on the university sector. As the report notes, state and Commonwealth public expenditure on education is now below the OECD average, and badly trailing the best performers like Norway and Sweden.

The Review observes that the Howard government also reduced tax incentives for innovation, including the research and development tax offset, which was cut from 150 per cent to 125 per cent early in Howard’s reign, and notes "a significant decline in the level of government support for research as a share of GDP in the past twelve years." The result is that Australian universities now have to subsidise their research activities with revenue from teaching, and the corporate sector finds it difficult to access funds and tax offsets to foster research.

As Cutler said on Wednesday night, "the upshot of this is if we don’t move to invest more aggressively in developing capability for the future as a company to make our firms more competitive in a global world, the standards of living in Australia are just going to decline."

This is one of the hidden legacies of the profligate Howard-Costello years, where windfall tax gains were scattered around the country in loosely targeted electoral bribes while critical national infrastructure like schools, universities and research facilities withered on the vine.

Remedying the situation won’t come cheap. Cutler wants to double our investment in research within 10 years. He proposes a significant increase in federal spending on innovation, to bring Australia’s levels of R&D up to the top quartile of OECD levels. There should be an increase in funding to the Australian Research Council, the premier fund that supports university research, to ensure that university research is fully funded and not forced to cadge funds from other aspects of university activities. The R&D tax offset should be recast as a tax credit, so that start-up companies not yet in tax profit can still access the funds.

Perhaps most interestingly, Cutler argues that the Government itself needs to be much more open to the winds of change. The stuffy, hierarchical nature of government departments and service delivery organisations should be exposed to customer-focused innovation, so that the public sector becomes a leader in serving the public, using open innovation models like wikis and web 2.0.

Cutler also believes the focus on innovation has been unfairly centred around science and technology, when in fact many innovations emerge chaotically and incrementally from small firms in constant contact with customers: perhaps surprisingly, he cites pizza delivery as one such service industry innovation.

This is an important point, because much of Australia’s economy is based around services, not elaborately transformed manufactured goods. In the future, Australia needs to get much better at giving customers, clients and indeed voters what they want, and that too will require innovation.

In the meantime, Peter Costello has finally started doing his bit for the national innovation system. Not only has he written a new book, you might say he has pioneered a bold new way to promote it. Using federal Liberal leadership speculation to generate publicity for your forthcoming memoir? Now that’s innovative.

Ben Eltham

Ben Eltham is New Matilda's National Affairs Correspondent.

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