Why India's development is so strange

Every Aussie who takes an interest in such matters knows how a country goes from being undeveloped to developed. We 've been watching our neighbours do the trick for years. It' s called export-oriented growth and it 's all about building a big manufacturing sector.

You encourage under-employed rural workers to move to the city and take jobs in factories. Because your one big economic advantage is an abundant supply of cheap labour, you start by concentrating on making low-cost, simple, labour-intensive items such as textiles, clothing and footwear.

Since the locals don' t have much capacity to buy this stuff, you focus on exporting it. Foreigners lap it up because to them it' s so cheap.

As the plan works and the country 's income rises, you plough a fair bit back into raising the education level of your workers, which allows you to move to making more elaborate goods and to paying higher wages. You 're on the way to being a developed country.

Over the decades we' ve seen a succession of countries climb this ladder: Japan, Hong Kong, South Korea, Taiwan, China and now even Vietnam and Bangladesh at the bottom. It s like pass-the-parcel: as each country' s labour gets too expensive to be used to produce low-value thongs and T-shirts, some poorer country takes over and starts the climb to prosperity.

That 's the way it s always done. Except for one country: India. Its economy started growing strongly in the 1990s and now it' s the world 's third-biggest (provided you measure it correctly, allowing for differences in purchasing power).

India has got this far without building a big, export-oriented manufacturing sector. It 's done something that' s probably unique: skipped the manufacturing stage and gone straight to the rich-country stage, in which most growth in jobs and production comes from services.

The Indians have done it by being so good with software and other information and communications technology and the things that hang off it, such as call centres. It' s a big export earner.

It' s an impressive effort, and there' s no reason a developing country shouldn' t have a big tech sector. But, even so, the experts are saying India would be a lot better off if it had a bigger, more vibrant manufacturing sector, employing a lot more people who, by Indian standards, would be on good wages.

This is a key theme in the Organisation for Economic Co-operation and Development 's report on the Indian economy, issued this week.

The report offers suggestions on what could be done to encourage the growth of manufacturing, which go a fair way towards explaining why manufacturing never really got going the way it did in other emerging market economies .

First, some basic facts. India has a population of 1250 million and before long it will overtake China 's. About 29 per cent of the population is younger than 15.

Manufacturing accounts for only 13 per cent of India' s gross domestic product, which is low compared with the other BRIICS emerging economies: Brazil, Russia, Indonesia and China, but not South Africa.

Indian manufacturing probably accounts for a slightly smaller share of its total employment. Huh? It 's normally the other way round. You 'd expect it to be quite labour intensive. But "despite abundant, low-skilled and relatively cheap labour, Indian manufacturing is surprisingly capital and skill intensive," the report says.

Almost two-thirds of manufacturing employment is in companies with fewer than 10 employees. That compares with Brazil' s 9 per cent. This tells us the sector' s many small firms mean it isn' t exploiting its potential economies of scale.

And, indeed, its manufacturing productivity is low, with productivity 1.6 times higher in China and and 2.9 times in Brazil.

India' s employment in manufacturing hasn' t grown much over the years, with the sector hardest hit by the economy' s recent slowdown. What new jobs have been created have been " informal" , with workers not covered by social security arrangements.

Manufacturing' s share of India' s merchandise or goods exports (that is, ignoring the big and rapidly growing exports of IT services) fell from 77 per cent to 65 per cent over the decade to 2013.

My guess is an important reason for the sector 's unusual configuration and weak growth is excessive regulation. India has been and still is a highly, and badly, regulated economy. The socialists ' obsession with manufacturing means I wouldn' t be surprised if the newer technology sector has taken over the running because, being outside the Left' s traditional preoccupations, it wasn' t so heavily regulated.

Some regulation has been removed but, particularly as they apply to manufacturing, India 's labour and tax laws, which are tougher on bigger than smaller firms, have inhibited and distorted the industry 's development.

As the report puts it, manufacturing "firms have little incentive to employ and grow, since by staying small they can avoid taxes and complex labour regulations".

A second part of the explanation the report points to is what it calls "structural bottlenecks" . As with all developing countries, the whole Indian economy suffers under inadequate economic and social infrastructure.

But manufacturing is particularly reliant on good transport links - more so than the tech sector - and India 's transport infrastructure is still bad.

Every business needs a reliable electricity supply, but manufacturing probably needs it more than most. A business survey has found that 48 per cent of manufacturing firms experience power cuts for more than five hours a week. About 60 per cent of firms feel that erratic power supply affects their competitiveness and they would be willing to pay more for a more reliable supply.

As usual with developing economies, the list of things that need reform is long. The challenge for governments is to give priority to the ones that would do most to help, even though everything is interconnected.

In the case of Indian manufacturing, however, the OECD' s top recommendation is to introduce simpler and more flexible labour law, which doesn' t discriminate by the size of the enterprise.

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A good deal, but China wins on climate

At last, something to be positive about. Of all the Abbott government's efforts to improve our economic prospects over the year and a bit since its election, none compares with the benefits likely to flow from its remarkable trade agreement with China.

I'm not expecting to see any noticeable gains from the G20 leaders' pledge to increase economic growth by 2 per cent over the four or five years to 2018 - not directly as a result of our government's promised measures, nor indirectly as a result of the other governments' promises.

Those pledged actions don't seem to amount to much. And with Turkey taking over leadership of the G20 next year, it's possible this is the last we'll hear of them.

But the free trade agreement with China is of great substance, with phased reductions in China's tariffs (import duties) against many of our exports and, equally beneficial, in our tariffs against imports of certain manufactures from China.

It's likely to add significantly to our trade with China, increasing our ability to benefit from its growing middle class with ever more Western tastes, and giving us freer access to its ever more sophisticated manufactures. A coup for our tireless Trade Minister, Andrew Robb.

To be truthful, I've never been a great enthusiast for bilateral free trade agreements. They're greatly inferior to multilateral agreements, mainly because they're preferential agreements - you and I favour our mutual trade over trade with other people - contrary to what the term "free trade" implies.

This means they're capable of diverting and distorting trade, as well as generating red tape as rules are established to determine how much of an item that claims to be from China actually is.

But with efforts to achieve another round of multilateral trade improvements having been stalled since 2000, it seems we must accept that a spaghetti bowl of bilateral agreements is the best we're likely to get.

Australia has now negotiated quite a few of these deals, including John Howard's agreement with the United States in 2004 and Robb's agreements with South Korea and Japan earlier this year, but they amount to little compared with the China deal.

That's partly because China is fast becoming the world's biggest economy, partly because China is our largest trading partner - first on imports as well as exports - and partly because our economies are so complementary, but mainly because China is a still-developing country that joined the World Trade Organisation only in 2001 and so has many trade barriers still able to be reduced.

But it's a pity the government's ability to pull off such a good deal with the Chinese is not matched by a willingness to acknowledge the global good news embodied in last week's agreement between the US and China on measures to reduce greenhouse gas emissions after 2020.

This meeting of minds of the two most influential players in the world's efforts to contain global warming has boosted confidence that we may yet be able to limit the industrial-age increase in average temperatures to 2 degrees Celsius and that major progress is possible at the next meeting of countries in Paris next year.

To hear our leaders seeking to avoid short-term embarrassment by denigrating the agreement and misrepresenting China's efforts to limit its own emissions is terribly disappointing. Joe Hockey let himself down with his claim that China will continue increasing its emissions until 2030.

This suggests he's as well briefed on the subject as a radio shock-jock. Should he care to raise his understanding to the level we expect of a federal treasurer, he could read a speech that Professor Ross Garnaut, a noted expert on the topic, gave as long ago as August.

As such a vocal advocate of economic growth, you'd expect Hockey to understand that China is committed to raising its people's material standard of living to a greater fraction of that Australians and people in other rich countries have long enjoyed.

This has inevitably involved much increased use of fossil fuel, with China's rapid economic growth during the noughties meaning it has become the largest contributor to annual growth in the world's greenhouse gas emissions.

But at the meeting in Copenhagen in 2009, China committed itself to reducing the emissions intensity of its economic growth by 40 to 45 per cent between 2005 and 2020. That is, each extra yuan worth of production would involve the emission of less greenhouse gas.

Garnaut points out that, relative to what would otherwise have happened, this represented a larger reduction than any other nation promised. And his calculations imply that the Chinese will achieve their commitment.

They have moved to a new economic strategy in which less of their growth comes from investment in factories and infrastructure and more from consumer spending, especially on services. This should involve less use of energy, particularly from fossil fuels, and so fewer emissions.

Garnaut's projections of China's electricity generation to 2020 - which accounts for most but by no means all of its emissions - suggest that its burning of steaming coal will actually fall a fraction between 2013 and 2020.

So, far from China still increasing its emissions in 2030, Garnaut believes they are likely to have peaked by 2020. You should have known that, Joe.

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University status comes at a high price

Has it occurred to you that universities are fundamentally about the pursuit of status? Almost every aspect of their activities focuses on the acquisition of rank. And Christopher Pyne's proposed "reform" of universities is about harnessing the status drive to help balance the budget.

Ostensibly, unis exist to add to the store of human knowledge and to educate the brightest of the rising generation. All very virtuous.

When you think about it, however, you see that unis are about the pursuit of certification, standing, position and prestige. The main way they earn their revenue is by granting superior status to young people seeking to enter the workforce.

In theory, a degree proves your possession of knowledge in a certain area. Often in practice it certifies little more than that you're smart enough and persistent enough to have passed a lot of exams. Either way, try climbing the employment ladder without one.

This makes universities gatekeepers granting access to the good, well-paying jobs in the economy. Which gives them a kind of monopoly power.

In the old days the government paid them to teach, assess and certify young people; these days the young people are required, to an increasing extent, to buy their qualifications directly, making them customers as much as pupils.

Such is the strength of the unis' monopoly over access to the good jobs that most young people would be prepared to pay huge fees and take on very large debts before they resigned themselves to a lifetime of low socio-economic status.

The status symbols issued by unis are themselves subject to a well-understood system of ranking: doctorates rank above master's degrees, with thesis masters outranking course-work masters. Then come bachelor's degrees, with honours degrees higher than pass degrees and first-class honours higher than second class. Not forgetting the ultimate status symbol: being awarded a university medal.

But uni degrees are subject to a second, informal status ranking: employers (and parents) tend to be more impressed by degrees awarded by the older, bigger "sandstone" universities than those from younger, outer-suburban or regional unis.

While in the public's mind the unis' existence is justified by their teaching, few people become academics because of a burning desire to teach. Academics want to do research and, though some become good teachers and enjoy teaching, for the most part teaching is regarded as an unfortunate distraction.

The unis try to conceal the conflict between their priority (research) and the public's (teaching) by claiming that academics at the forefront of their discipline's research effort make the best teachers.

Students know this is rubbish. It pretends good teaching doesn't require possession of teaching skills and forgets that most undergraduate teaching has little to do with the teacher's super-specialty.

Academics know the fast track to the top comes from the quality and quantity of their research, as evidenced by their publication records. Promotion assessments - moving people up the status ladder from lecturer to full professor - give little weight to teaching, contribution to public debate or even the writing of textbooks.

The universities themselves are driven by their desire to raise their status relative to other unis by increasing the quantity and quality of their research. The government publishes regular rankings of our universities and their faculties, largely determined by their research output.

Universities threaten to sack academics who fail to reach research output quotas. They urge staff to compete for government research grants, granted partly on the basis of previously published research. Staff who win grants are rewarded with money they can use to pay part-timers to take over their teaching obligations.

The quality of published research is determined largely by the reputation of the academic journal that published it. All journals are ranked, with American and British journals scoring many points and Australian journals scoring few points.

(Since international journals are reluctant to publish research into Australian issues, this means our government uses our taxes to fund a universities-designed scheme that discourages our academics from doing empirical research on problems of particular relevance to us.)

In recent years the eight sandstone unis' greatest motivation has been to raise their position on a couple of regular international rankings of universities. To this end they've come increasingly to offer senior positions to American and British academics rather than locals, since the foreigners are more likely to get themselves published in more prestigious journals.

Some unis' drive to lift their international reputation involves a policy of never hiring lecturers whose highest qualification is a PhD they themselves granted. Cultural cringe, anyone?

How does this obsession with status-seeking tie in with the Abbott government's plan to deregulate uni fees? Watch this space.

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No 'reform' could increase jobs in the short term

What do we need to do to get the economy growing properly again? Wait ... for at least a year.

The most recent figures from the Bureau of Statistics confirm the economy has grown at an average annual rate of only 2.5 per cent over the past two financial years. Since it needs to grow at its medium-term trend rate of about 3 per cent just to hold unemployment steady, the jobless rate has been rising slowly over that time.

With the authorities holding out little hope of much improvement before 2016, it is not surprising people are wondering what more we could be doing to get things moving. Some have noted the impending loss of jobs in car making and elsewhere, and are wondering where the new jobs will come from.

At such times there is never a shortage of people peddling solutions. A perennial favourite is "industry policy" - which usually starts as a plan to kick-start some wonderful new industry, but too often ends up using subsidies to prop up industries from which the market has moved away.

Business lobbies perpetually tell us tax reform that lightens the burden on business and high-income earners would do wonders for the economy. But though it is true the tax system could be made more efficient, it is unlikely such reform could make more than a small addition to growth, spread over many years.

While it is true the economy's growth is weak because it is taking us a few years to get things back to normal following the major change in the structure of our economy that left us with a much-expanded mining sector, our growth problem is cyclical - that is, temporary - rather than structural.

Abstracting from the ups and downs of the business cycle, there is nothing fundamentally wrong with the functioning of our economy. While, as always, there are plenty of bits whose efficiency could be improved, there is no reform that could make a big difference in a short time.

Some people imagine the economy grows only to the extent the government is doing things to push it along. It ain't true. What propels the economy, keeping the number of jobs increasing virtually every year, is the material aspirations of business people and households.

All the macro managers do is hold the economy back a bit when it's going too fast, or give it a bit of a shove when it is going too slow. In normal times, the main instrument they use to slow things down or speed 'em up is interest rates.

That is just what is being done now, as an assistant governor of the Reserve Bank, Dr Chris Kent, explained in a speech this week reviewing the state of the economy and its prospects.

He warned that "GDP growth is expected to be below trend for a time before gradually picking up to an above-trend rate by 2016", meaning "the unemployment rate is likely to remain elevated for some time".

Many people devote a lot of time to following the chequered fortunes of the big economies - the United States, Europe, Japan, China - and probably conclude their slow growth will weigh heavily on our own.

If that's you, Kent has news: if you take our major trading partners' growth and weight it according to their share of our exports, it turns out our customers' economies have been growing since 2010 at the relatively stable rate of about 4 per cent a year, close to the long-term average.

The Reserve expects them to continue growing at that rate over this year and next. How is this possible? Simple: over the 13 years to last year, the advanced economies' share of our exports has fallen from 40 per cent to 25 per cent, with the much faster-growing developing Asian economies taking their place.

So the main adverse effects on us from the rest of the world are our still-too-high exchange rate, which is harming the price competitiveness of our export and import-competing industries, and continuing falls in the prices we get for our commodity exports, which reduce our real income.

The other big factor we will have working to keep our growth inadequate is mining investment spending, which "is set to decline more rapidly in the coming year or so than it has since it peaked in mid-2012".

Most of the factors pushing the other way arise from the stimulus provided by our exceptionally low interest rates. These have already led to growth in home building and some uptick in related spending on consumer durables, particularly in NSW and Victoria.

Growth in consumer spending is being constrained by weak growth in household income because growth in employment is so slow and wages are rising so modestly.

Even so, the Reserve is expecting consumer spending to be boosted by a continuation of the modest fall in the rate of household saving we've already seen. If so, this would represent households seeking to smooth the growth in their consumption despite weak income growth, as well as the effect of the rise in share and, particularly, house prices making them feel wealthier.

A separate source of stimulus Kent expects to see is a further fall in our exchange rate. With the American economy's recovery now entrenched, US authorities have ended their "quantitative easing" (creating money) and are expected to start raising their official interest rate in the middle of next year.

Once financial markets are convinced that tightening is on the way, the greenback should appreciate and our dollar depreciate. This would reduce the pressure on our tradeables industries and eventually help produce the long-awaited lift in investment spending by the non-mining sector.

As far as the Reserve is concerned, it has already done what needs to be done to get the economy back to normal. It's sitting tight, waiting for its sweet medicine to work, and thinks we should, too.

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Don't forget our other environmental problems

There's a hidden danger in the ascendancy of climate-change denialism in Canberra. It won't last - denials of reality can never last - but while it does it's an enormous distraction.

The obvious cost is that the longer we leave it to get serious about playing our part in reducing global greenhouse gas emissions, the more expensive and disruptive our efforts will need to be.

But there's also a hidden cost. The more time we spend arguing about climate change, the more our attention is distracted from the many other threats to the economy and our way of life coming from other environmental problems.

We've been conscious of the many other ways economic activity has been degrading our natural environment for decades. We've been working to reduce that degradation for decades, and the need for action has been clear to people on all sides of politics.

What's more, as the Wentworth Group of Concerned Scientists acknowledges in a report published last Thursday, we've made progress in some areas. Air pollution controls have given us much improved air quality in our cities and water pollution controls have created cleaner waterways and restored the health of coastal estuaries.

Controls over land clearing, the creation of additional national parks and investments to manage fire and restore native vegetation on private land have given greater protection to our biodiversity.

New farming practices, such as "minimum till" and landcare, have improved soil structure, increased vegetation and reduced soil erosion.

Overused water resources, such as the Great Artesian Basin, have started to recover following the agreement in 2004 laying the foundation for long-term sustainable management of our freshwater resources.

And incentives to generate renewable energy are driving the transformation of energy markets.

But despite these improvements, the Wentworth Group reminds us that the most recent official survey, the State of the Environment report, in 2011, found other environmental assets are still in poor condition or are getting worse.

Despite all we've done and spent to repair the damage to our land, for instance, the report found the trends for many indicators remain adverse.

On rivers, wetlands and estuaries, many catchments remain in a degraded condition. Within many drainage basins, river condition is still affected by inadequate environmental flows, pollution and changes in ecological processes.

"In Australia's food bowl, the Murray-Darling Basin, 20 of the 23 river systems are in a poor or very poor condition," the group says. And despite the Howard government's appropriation of $10 billion in 2008, the Gillard government's basin plan in 2011 won't restore these rivers to a healthy condition.

The first State of the Environment report in 1996 described the loss of Australia's biodiversity as "perhaps our most serious environmental problem". Since then, the rate of land clearing, a primary driver of species extinction, has slowed.

Even so, land clearing for agriculture, mining, coal seam gas and urban development is continuing to fragment and degrade native vegetation. In the decade to 2010, clearing of native vegetation across Australia still averaged a million hectares a year.

"Clearing of native vegetation, when combined with pollution and over-extraction from waterways, the introduction of weeds and feral animals, and unsustainable fire practices, has resulted in the listing of over 1600 species of native plants and animals as threatened with extinction," the group says.

The condition of the Great Barrier Reef has declined over the past two decades. Since 1986, on average across the reef, hard coral cover has declined by half.

It's surely not saying anything new or controversial that our economy - and our way of life - depend on our preserving a healthy natural environment. Healthy waterways are needed for swimming, fishing, drinking and irrigation, and to allow us to recover from floods and droughts.

Healthy soils store carbon and nutrients, support production of food, fibre and raw materials, store and filter water, and host rich biodiversity.

Healthy native vegetation protects river corridors, filters water, stores carbon, provides wood, protects against erosion, gives people access to nature, manages salinity and provides habitat for plants and animals.

Healthy coasts, estuaries and beaches provide habitat, buffer the effects of storms and give people a place to enjoy nature. Healthy oceans provide food, recreation and habitat for marine plants and animals.

So there's no either/or. If we want the economy to stay healthy we must restore the health of the environment. Should we continue degrading the environment it will rebound on the economy, causing great loss and disruption.

We need to modify our economic activity to reverse the damage we're doing to the environment. This will involve some cost and some frustration for business people who want to be free to make a buck however they please and let others worry about the eventual environmental costs.

But the good news from the Wentworth Group is that if we introduce the right policies the economic cost need not be great. It offers a five-point "blueprint for a healthy environment and a productive economy" on which it will elaborate next year.

The trick is that productivity - how much we make relative to how much we use - is the key to long-term economic growth and a pillar of ecological sustainability. People can create greater value while using less materials and energy, with less impact on the environment.

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Rationalists should stop burying their mistakes

I'm not a great proposer of royal commissions, but maybe such a spotlight is the only way to oblige blinkered economic rationalists to face the many failures of their knee-jerk advocacy of outsourcing, privatisation and deregulation.

Economists aren't as scientific as they claim to be, being prone to what psychologists call "confirmation bias". Whereas the scientific method requires you to seek disproof of your theory, economists - like the rest of us - note all the occasions when it seems to work and quickly forget any times when it didn't.

But, as the troubles of the for-profit trainer Vocation remind us, the instances of ill-considered micro-economic reforms producing dubious outcomes just keep piling up.

One class of reform that sounds fine in theory but often performs badly in practice is the outsourcing of government services. The theory says that just because some service has public-goods characteristics - it can't be provided profitably by the private sector in adequate quantity - and so must be provided at taxpayer expense, that doesn't mean it has to be delivered by public servants.

Why not get the best of both worlds by contracting outsiders to deliver the service on the government's behalf? You can call tenders and so ensure the government discharges its obligations at the keenest price. Often it will be charities and community organisations that are most interested, but why exclude for-profit businesses if they can offer a better price than the not-for-profits?

There's little doubt governments - and businesses, for that matter - have made significant savings by outsourcing particular functions. Sometimes this is because the contractor has access to economies of scale or scope not available to the outsourcer.

But I doubt if many savings arise purely from greater efficiency - especially not when profit margins have to be accommodated. No, usually the savings arise from side-stepping existing staffing levels, wage rates and conditions.

Often, the service is now provided using fewer, less-well remunerated workers, maybe with more casuals.

In which case, the saving may well come at the cost of a loss of quality - one the advocates of outsourcing aren't anxious to know about. The risk is greater if the contractor is also making room for his profit.

The advocates tell you it's all a matter of writing watertight contracts, but sensible people know that's not possible. They also know motivations count for more than legalities.

Why can I think of no thorough-going evaluations of the costs and benefits arising from outsourcing? It's not hard to call to mind a lot of examples where outsourcing to the profit sector has come scandalously unstuck.

Consider all the stuff-ups we've had with public-private partnerships for the construction and operation of infrastructure. The cases where seemingly reputable private consultants have grossly overestimated the number of motorists who'll use a tunnel, bridge or highway.

Even when these partnerships don't blow up, you often find the government has agreed to tie its hands on future road and even public transport options to make the deal attractive to the private partner. A hidden cost.

Consider the disaster when the authorities who'd recommended that private firms be allowed to deliver heavily subsidised childcare sat back as the deluded principal of ABC Learning took over half the nation's childcare centres before everything collapsed.

Consider the many foreign students ripped off by shonky trainers permitted by lax regulators to, in effect, sell the right to become permanent settlers.

Broadening the focus, remember when the Hawke government handed control of the wool reserve price scheme over to the industry, which eventually sent it broke. Remember the trouble when the Kennett government thought it was smart selling power stations for far more than they were worth.

Remember the Keating government privatising our monopoly airports and now, we discover, sweetening the deal by giving the owner of Sydney airport first refusal should a second, potentially competitive airport ever be built.

Remember the way some states sold their monopoly electricity networks, but our price-regulation regime failed utterly to stop the private owners badly overcharging power users.

Note how often customers and taxpayers have had to pay to clean up the mess created by micro-economic reformers who know a lot about theory but far too little about how the profit motive works in practice.

And where's the rationalists' learning curve? Where's the evidence they've learnt from 30 years of cock-ups? When will they learn respect for the terrible power of profits?

When will they learn that when the public sector plays poker with the private sector in a commercial-in-confidence back room, it's almost always the pollies and econocrats who emerge without their shirts?

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Too busy chopping to make spending effective

The federal government spends a lot of money trying to "close the gap" between indigenous Australians and the rest of us. Actually, we've been spending a lot for years without making much headway. So what should we do?

I suspect there are people within Treasury and Finance who think the answer's obvious: if the spending ain't working, give it the chop. Didn't you know we have a deficit problem?

But the gap between us is so wide in so many respects - life expectancy, health, income, employment, victimisation, incarceration and education - we couldn't in all conscience abandon our efforts to reduce it.

So I have a radical suggestion: why don't the people in charge of the government moneybags get off their backsides and put a hell of a lot more effort into ensuring taxpayers' funds are spent more effectively? Instead of wringing their hands, why don't they bring a bit of science to bear?

Last week Dr Rebecca Reeve, a senior research fellow of the Centre for Health Economics Research and Evaluation at the University of Technology, Sydney, outlined to a meeting of the Economic Society the results of her research evaluating the policies aimed at closing the gap.

She used econometric tools to analyse several surveys conducted by the Bureau of Statistics, noting that the nature of indigenous disadvantage and the best solutions to it may depend on where people are located.

It may surprise you that indigenous disadvantage isn't limited to people living in remote areas. And the majority of Aboriginal and Torres Strait islanders don't live in remote areas. Indeed, more live in NSW than other states or territories. Of those who do, 43 per cent live in major cities and another third live in inner regional areas. Reeve's studies focused on people in the major cities of NSW.

She found that rates of poverty were much higher for indigenous people, home ownership was lower, significantly fewer had completed year 12 and rates of employment were lower. The proportions reporting their health to be poor or fair were at least double those for other people. And the proportion who had been victims of assault was a lot higher.

Although indigenous people make up only about 3 per cent of the NSW population, they accounted for 23 per cent of prisoners. Young people are 26 times more likely to be in juvenile detention.

That's the gap. Reeve used sophisticated regression analysis to identify the key drivers of those gaps. She found that having been at school beyond year 10 made you more likely to be employed, as did participating in more than four types of social activity.

Being a lone parent, being a married female with children or being disabled made you significantly less likely to be employed.

The most significant predictors of having been a victim of physical or threatened violence in the past year were being disabled or having suffered stress from drug or alcohol use.

In this context, "disabled" means having a health problem lasting six months or more. Reeve found that by far the most significant predictor of being disabled was having been a victim of assault.

By far the most powerful predictor of being in jail was having been charged with some offence as a child. And by far the most powerful predictor of having been charged as a child was being male.

What these findings demonstrate is the interdependence of the various aspects of indigenous disadvantage. Problems such as involvement with the criminal justice system, long-term ill-health, victimisation and not having a job are all connected.

In a way, this is good news. It means targeting areas that are expected to reduce one or more of these problems should also mean improvements in other problems.

For instance, Reeve finds that an extra year of education should improve someone's employment prospects directly, but also improve them indirectly by reducing the likelihood of the person being in jail.

And get this one: her findings suggest that reducing drug and alcohol problems should reduce victimisation, which should reduce long-term health problems, which should increase employment, which should increase income.

The downside, however, is that failure to generate improvements in the key drivers of disadvantage will hinder progress in many areas.

The Council of Australian Governments' national indigenous reform agreement recognises the significance of interdependency: an improvement in one building block is reliant on improvements in other building blocks.

But though the COAG reform agenda aligns with Reeve's econometric evidence, the "close-the-gap report card" finds that targets have not been achieved in many areas. And in some areas gaps are widening.

A separate study by Reeve and colleagues on factors driving the gap in rates of diabetes also finds that, although programs are targeting the right areas, there's been no reduction in the high prevalence of diabetes among indigenous people.

I'd be surprised if Treasury and Finance have shown any interest in learning from Reeve's research. The usefulness of that research in showing "what works and what doesn't" seems to have been limited by the lack of detail in the existing official surveys it relied upon.

If we're to become better informed about why all the money we're spending isn't delivering better value we probably need to undertake more detailed, even purpose-built surveys, including longitudinal surveys that make it easier to distinguish between cause and effect.

But as we were reminded this week with all the problems the bureau has had with its jobs survey, successive governments have been reducing our statistical effort, not increasing it.

If Treasury and Finance warned the Abbott government that extracting yet more "efficiency dividends" from government agencies has become counterproductive - making government spending more wasteful in the name of making it less wasteful - there's been no whisper of it.

Reminds me of one of my father's sayings: too busy chopping wood to sharpen the axe.

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You were a stranger, so we wouldn't take you in

Do you get the feeling we're becoming a more selfish nation? While other countries were pitching in, we hesitated until this week to send experts to help stem the outbreak of Ebola. Sending people to risk their lives in wars doesn't seem a problem, but to send people for humanitarian reasons is asking too much when their personal safety can't be guaranteed.

This comes on top of our decision to slash the planned increase in official overseas aid. Sorry, but we just can't afford to be so generous. Others may look on Australia as among the richest countries in the world, but they don't understand we have our own problems.

We're running a budget deficit, and will be for many years yet. Borrowing money to cover gifts to poor foreigners hardly makes sense. And don't try telling me there are other, less-deserving people whose assistance could be cut.

As Joe Hockey has explained, our top income-earners are already being taxed too heavily to cover our bloated and unsustainable government spending, so this budget was designed to spare the lifters and require the leaners to bear a fairer share of the burden. And how could we make our own pensioners and sick people tighten their belts while we're being so generous to foreigners?

Hugh Mackay, the social commentator, tells us we've reversed the original meaning of the saying that charity begins at home. It used to mean don't demand charity of others until your own giving is up to scratch, but now it means we shouldn't be helping outsiders while any of our own remain in need.

But nowhere is our lack of charity more evident than in our hard hearts towards boatpeople. How dare they turn up on our doorstep uninvited, expecting us to put them up?

In the past, when asylum seekers were found to be genuine refugees, with a "well-founded fear of persecution" should they return to their own country, they were allowed to stay and included in our annual quota for "humanitarian" immigration.

For years we've discharged our obligation to help with the world's asylum problem by accepting just under 14,000 refugees a year for settlement in Australia. If that sounds like a lot, it represents 0.06 per cent of our population of 23.7 million. It's little more than 7 per cent of our total permanent settler intake of 190,000 a year.

For some reason - troubled conscience, perhaps - the Gillard government upped the humanitarian intake to 20,000 a year in 2012-13, but fortunately the Abbott government has returned it to fewer than 14,000.

Much more affordable. Our loathing of boatpeople is so intense that we tend to think of them as nothing more than a drain on the public purse. And for the first few years that's true.

But in a speech Professor Graeme Hugo, a demographer from the University of Adelaide, delivered to the annual conference of the Kaldor Centre for International Refugee Law in Sydney on Monday, he argued that humanitarian settlers eventually make a significant economic contribution.

Consistent with our more self-interested approach to immigration, these days we favour those who possess the skills - including language skills - of which we're most in need. Compared with these people, refugees are unpromising material for building the economy.

Some may have mental health issues arising from their treatment in their home countries, their experiences in transit or the kindly reception they receive from us. Many have low levels of literacy and limited skills and qualifications; few have great proficiency in English.

Those who do have qualifications will have lost their documentation, or won't have them recognised. They know little about our labour market, they often lack family networks in Australia, their family is split up and they bring no savings with them.

So, yes, in their early years many refugees aren't in the labour force and, among those who are, unemployment is high - higher than for other immigrants. Many of the younger ones you may expect to be working are still in the education system, catching up.

And yet their participation in the labour force rises with the length of time they've been here, converging towards the participation rate of the Australia-born, Hugo says. And their second generation end up having higher participation levels than Australia-born. They're also more highly qualified than Australia-born.

The humanitarian intake has other attractions. Refugees tend to be younger than other migrant groups, with a higher proportion of children, meaning they make a greater contribution to slowing the ageing of the population.

Their fertility is slightly higher. Predictably, their rate of returning home is very low compared with other migrants, and the proportion willing to settle in regional areas - almost 18 per cent - is high and rising.

Personal experience and common sense suggests all migrants who uproot themselves to move to Australia have a fair bit of get-up-and-go, with a determination to make the most of the new opportunities for themselves and, particularly, their kids. Hugo says people who move tend to be among the risk-takers.

Migrants tend to be more entrepreneurial - more likely to start their own businesses - and there's increasing evidence humanitarian settlers contain a disproportionate share of entrepreneurs.

On the BRW Rich List in 2000, five of the eight billionaires came from a refugee background. I wonder how generously they gave to charity.

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Red tape begins at home for business

Having worked all my life in the private sector - mainly for big business, including a big accounting firm - I've long known it's not just the public sector that's bureaucratic. Waste time and money on pointless rules and procedures? Sure.

To imagine otherwise - that the profit motive makes business immune from inefficiency - you'd have to have spent all your life working in the public sector. In the old Treasury, say, or a university.

Even so, private sector inefficiency is not a subject to be raised in public. No, nothing must be said that could undermine the contention that governments and their intervention in markets are the sole source of poor economic performance. That if our rate of productivity improvement is flagging, the only conceivable explanation must be the passing of some law big business didn't like.

This is why I've been waiting for the Australian Enforcers of Right Thinking to start beating up Chris Richardson, of Deloitte Access Economics, the way they tore into some poor sap from Treasury who mentioned in a speech research suggesting Australia's manufacturers were less than perfect.

Richardson has had the temerity to publish a report purporting to show that the cost of self-imposed red tape in the private sector far exceeds the cost of government-created red tape.

In a report titled Get Out of Your Own Way, he urges business to lift its productivity by lifting its game.

My guess is it's a problem limited largely to big business, with inefficiency increasing with the size of the firm. It's one of the diseconomies of scale, such as those that commonly cause company takeovers to be less profit-enhancing than imagined (while still justifying a big pay rise for the surviving chief executive).

Multinational corporations are likely to be worse on red tape than national companies. Companies with monopolies - or access to economic rents, such as the financial services sector - would have the most scope for wastefulness. As had our miners before commodity prices fell.

Richardson suggests the problem has built up over the long period of prosperity since our last big recession, and I don't doubt he's right. Nothing like a recession to subsequently improve productivity (but don't tell the Business Council I said so).

The other Richo's report is so full of uncommon common sense it deserves closer attention. "To be clear," he says, "rules and regulations are vitally necessary.

"They cement the key foundations of our society, protecting the rule of law and a wealth of standards in everything from health to safety and the environment. And they can help businesses to reduce risk and plan for the future."

But our rule-makers - both government and business - often try to achieve the unachievable, the report says. They set rules that are too prescriptive, overreact to momentary crises, let new rules overlap with existing rules, don't listen to those most affected and don't go back later to check how well their rules are working or if they are still required.

"So Australian businesses have bulked up, employing many people whose role is to create and then enforce a whole bunch of rules and regulations. That doesn't just mean some lawyers and accountants. It also includes some people in finance and information technology and human relations functions, as well as in fast-growing governance and security roles."

As a result, there are already more "compliance workers" across Australia than there are people working in construction, manufacturing or education. In fact, one in every 11 employed Australians now works in the compliance sector.

New technologies are delivering a huge dividend but we're not seeing the gains, the report says.
There's been a huge decline in "back-office" workers such as switchboard operators [why have them when you can make your customers deal with some fast-talking, incomprehensible and powerless person in Manila?] mail sorters and library assistants. They have been rapidly shrinking as a share of the workforce, yet those productivity savings have been swallowed up amid the rising cost of Australia's compliance culture.

Corporate Australia has let that culture grow partly because firms overestimate the extent to which they can insulate themselves from costs (a rogue employee, a nasty story in a tabloid, a grumpy customer) and partly because humans are bad at estimating risks, we're told.

Among the many examples of business craziness Richardson and colleagues quote, my favourite is the firm that insisted staff complete an ergonomic checklist and declaration when they moved desks, then introduced "hot-desking" so that everyone spent 20 minutes a day filling out forms.

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The good news about ageing

Politicians and economists have been banging on about the ageing of the population for ages, but how much do we actually know about the likely economic consequences? Not much - until now.

We've been told incessantly that ageing spells bad news for the budget - greatly increased spending on pensions and healthcare - with ageing used to help justify the harsh spending cuts proposed in this year's budget.

In truth, it has suited the powers-that-be to exaggerate ageing's effect on the budget. And oldies are right to resent the way ageing has been presented as nothing but a terrible problem. If the fact that we're living longer, healthier lives is a "problem", it's the best kind of problem to have.

So let's ignore the budget and focus on ageing's other economic consequences, some of which are good. We'll do so with help from a speech given last week by Dr Christopher Kent, an assistant governor of the Reserve Bank.

Kent says population ageing is driven by three factors: the boom in babies in the early years after World War II (1945 to 1960), the subsequent sharp drop in fertility rates that created a baby-boomer bulge, plus rising longevity thanks to decades of prosperity and advances in medical science.

The authorities have been warning about the coming consequences of ageing for so long - and how bad it will be by 2040 - that I suspect many people have given up waiting for it to start.

Well, get this: although it's got a long way to go, it's already started. The baby boomers have been retiring since the turn of the century, thus reducing the share of the population that's of usual working age (15 to 64).

Kent says that, taken by itself, ageing is estimated to have subtracted from the labour force participation rate by between 0.1 and 0.2 percentage points a year over the past decade and a half. This effect has increased a little in recent years as baby boomers have begun reaching 65.

Point is, ageing's biggest and most obvious effect is not on the budget, it's on the labour market. Everyone alive contributes to the demand for labour, but only those of us willing and able to work contribute to its supply.

So ageing constitutes a reduction in the supply of labour relative to the demand. That suggests we can expect it to cause unemployment to be lower than otherwise (which is not to say it won't continue to go up and down with the business cycle).

Since Australians have worried that there aren't enough jobs to go around ever since the middle of Gough Whitlam's reign, that sounds like good news to me. We're in the process of switching from not enough jobs to not enough workers.

(What I wonder is how long it will take for our mentality to shift. The perception that there's never enough jobs is now so deeply ingrained that any shyster with a profit-making scheme he claims will "create jobs" is greeted as a hero and demands that he be showered with subsidies.)

And with demand for labour stronger than supply, this implies upward pressure on wages. Again, sounds like good news to me. Kent adds that the converse of higher wage rates is lower returns to capital.

Kent points out that the pressure on labour supply will be felt most by industries that rely more heavily on labour, mainly service industries. Prominent among those industries will be aged care and healthcare, of course.

But, Kent adds, there's likely to be scope for labour to be reallocated among service industries, with a lower proportion of young people meaning we'll require fewer workers to care for and educate children.

There'll also be relatively less demand for workers to produce goods. That's for several reasons. First, because older people tend to devote less of their spending to goods and more services.

Second, because all of us tend to spend an increasing share of our rising incomes on services. There are limits to our consumption of food, wearing of clothes and how many TVs, fridges and cars we can cram into our house.

Third, because of its greater reliance on machines, the production of goods is more amenable to continuous improvement in labour productivity than is the production of services. As one economist famously observed, you can't improve the productivity of a quartet by reducing the number of players.

All this implies the prices of services are likely to rise relative to those of goods.

But now, gentle reader, if I've trained you well enough you'll have noticed a weakness in my argument so far. I've described only the immediate effects of ageing - what economists call the "first-round effects".

That's where most people's analysis stops, but economic analysis keeps going. One of the most important questions economists ask is: "And then what happens?" It's the second-round and subsequent effects economics is supposed to illuminate.

Seen from an economist's mindset, what I've described is a change in relative prices: the price of (or return on) labour relative to the price of (or return on) capital. The prices of services relative to the prices of goods.

Kent says it's important that these relative price changes not be prevented from occurring. Why? So market forces can go to work on them, adapting to them, modifying them and, to some extent, reversing them.

The higher relative price of labour should encourage more middle-aged people to take jobs and more oldies to delay their full retirement, thus reducing the upward pressure on wages a bit. The higher relative prices of services should encourage more people to acquire the education and training needed to work in the services sector.

And greater longevity should encourage workers to save more for their longer time in retirement.

That's what happens in market economies: things adjust.

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