Australia Ain’t Nothing but a Quarry – We Need to Support Innovation

Australia Ain’t Nothing but a Quarry – We Need to Support Innovation

Aussies are an insecure bunch.

For starters there’s the tall poppy syndrome that baffles most Americans.

Then put any Aussie in a room with someone from Europe or North America, throw in a couple of beers, and suddenly we start name-dropping our ‘inventions’ we gave to the rest of the world.

‘Yeah, well, we gave the world the hills hoist, the medical use of penicillin, the black box flight recorder, polymer banknotes and the electric drill,’ you’ll often overhear an Aussie say to someone not from around here…

‘Don’t forget the wheelie bin. We did that too,’ Aussie number two will mutter.

Sure, we may have given the world life-altering inventions over the past eight decades.

But the reality is, our innovations lag behind the rest of the world.

According to the Global Innovation Index which ranks the top 20 most innovative countries.

Switzerland takes the top spot.

The Netherlands and Finland take out fourth and sixth respectively.

There’s France in 16th place and Canada in 17th…

…Israel, South Korea, Japan, Singapore, Luxembourg, Norway, Ireland and even Iceland are all among the top 20.

And Australia is nowhere to be found among them.

And according to one Harvard economist, that’s ‘cause we’re stupid.

Famous for selling rocks and tasty animals

For the better part of 200 years, we’ve worked out how to sell our natural resources and animal products to the world.

But according to Ricardo Hausmann from the Harvard Kennedy School Centre for International Development, the Australian economy is on par with Senegal and Pakistan.

That is, our economy is simple compared to other more complex ones.

According to the Australian Financial Review, Hausmann’s research shows:

The Harvard data exposes the paradox of the Australian economy: the eighth-richest nation in the study has the export profile of Angola.

About 70 per cent of products sold to foreign buyers, on a net basis, are minerals and energy. Add in food, alcohol, wool, tourism and metal products, and the figure rises to around 99 per cent.

Notwithstanding the success of CSL, Atlassian and corporate pioneers, Australia sells the world almost nothing, relative to total exports, that requires a degree to make.1

Hausmann points out that the Australian government should create policies that support innovation.

That’s in contrast to our current practice of supporting industries that know where the best rocks for export are.

We might not like the outcome of Hausmann’s data, but it’s a stark warning.

Right now, we’re a bunch of simpletons that sell rocks to China and houses to each other.

This isn’t me just being glib either.

One look at all the tech businesses across Australia will back this up.

There’s roughly 200-something tech companies listed on the ASX.2 A crude count tells me that’s worth about $80 billion.

Put another way, the market cap of all our tech stocks combined, is almost equal to the market cap of ANZ Bank.

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It doesn’t help that the Australian government spends fewer and fewer dollars on research and development each year.

Last year, total Federal spending on R & D was tipped to be $10 billion.3 A miniscule 1.8% of our GDP.

Furthermore, that’s well below the OECD average of 2.38%.

Let’s go back to top 20 innovators like Finland and The Netherlands. Their total federal spending on R & D sits at 2.9% and 2.01% (respectively) of GDP.45

Combine that with private spending and the percentage spent on research and development nearly doubles.6

Simply put, our abundance of natural resources and tasty animals meant we were never forced to get better at selling anything to sustain our economy.

Of course, a couple of Aussies were quick to defend our wealth of soil, with the AFR writing today:

Complexity of exports is no necessary indicator of good terms of trade,” said Geoff Carmody, an Access Economics founder and former Treasury officer. “Trade is a path to riches if we can sell our exports at high prices and import others’ at low prices.”

Although, not everyone pushed back against the Harvard findings.

With the chief economist, Stephen Anthony, of Industry Super Australia noting:

The interesting thing about the data is that it does show that Australia is effectively a quarry and has an underperforming [education] tertiary sector and little else.7

House prices cripple innovation

We might be uncomfortable with the analysis from Harvard, but it’s true.

But we might be looking at this all the wrong way.

While much of the Harvard analysis called for government invention to fund research and development, it didn’t look at other barriers to private innovation.

And I believe that this seriously holds Australia back when it comes to research and development.

That is, the cost of housing.

In spite of the recent falls, Australia still has some of the most expensive housing in the world.

And this misallocation of capital could be holding us back as innovators.

We put so much of our incomes towards ensuring we have shelter, we are incentivised to pay off our debts to the banks.

Money that could be used to create is being funnelled towards reducing debt.

Obviously that’s a sensible move for any individual to do.

The majority of us would rather stick an extra 10 grand on our mortgage, than into an idea that might never materialise.

It’s not that we’re a country that fears innovation.

Sure, we have a government that panders to support dinosaur businesses — car manufacturing subsidies anyone? But governments aren’t responsible for innovation. We are.

Yet the risk of losing money to be innovative is too high a risk compared to ending the burden of our debt.

It’s not that our economy is simple.

It’s the three decades of government policies favouring housing and bank debt have reduced ability to take on the financial risk that comes with being innovative.

And that’s what’s really holding Aussies back.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia