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Senator EGGLESTON: At the conclusion of that session on oil prices at the conference in Perth last May, Kerry Stokes, who was the chairman of that session, got up and said, We must remember that China has many choices. We only have one, and that is China. Senator Wong: This is from a person whose leader says, We shouldnt have a surplus made in China. Senator EGGLESTON: I am just interested in the implications of this. Senator Wong: I am making the point that you cannot have it both ways. You can have a sensible policy discussion about how we need to set ourselves, given what is occurring in China, India and so on, or you can go down the path that, regrettably, some of your senior members seem to choose. Senator EGGLESTON: I am not trying to be political, with respect. Dr Parkinson: I would disagree with the last bit, though, that China has many choices and we only have one. There is a perception that has arisen that somehow Australia is totally dependent on China and that this is different from the past. When you look back over our history, there have been times when our trading relationship has been as dependent on one other country. There were times when it was the UK, there were times when it was the US and there were times when it was Japan. The difference is not the extent of our trading relationship with China, it is actually the emergence of China, the transformation that is wreaking on the world and the fact that when we were in such incredibly close trading relationships with those other countries they themselves were not trying to manage the transformation of their economy. That is the big issue. It is not the fact that we have a trading relationship with China. You will recall what happened during the Asian crisis. Prices of commodities and the exchange rate fell so we redirected to other countries. If there is no change in global supply and the Chinese stop buying from us, that is simply going to shuffle who buys and who sells to which countries. The really important thing is that the prices have gone up so dramatically it was always going to induce two things. Firstly, an expansion of supply, and part of that is occurring in Australia. Hence the $450 billion investment pipeline. And part of it is occurring elsewhereBrazil, Indonesia and Africa. Secondly, as a purchaser, you want to assure yourself that you have diversified supply sources. That does not mean that they are not going to invest in Australia or they are not going to buy Australian product. If you take a more general point, which is that we should always be thinking about our international competitiveness, I agree with you entirely, but just not in the way in which it has been characterised. CHAIR: Thank you. Senator Cameron. Senator CAMERON: I will not pretend to have read your speech yet. Dr Parkinson: As I said earlier, I apologise. It should have been on the website and I do not know why it was not. Senator CAMERON: I just picked up page 1 and I see that you, as a callow youth, were perplexed by the way our economy and society operated. As a callow youth, I had other things on my mind. Senator Wong: I will intervene here. We do not want to know your views on other things in your callow youth you were thinking about. If you want to chat outside and reminisce, that is fine. Senator CAMERON: I think that is why I became a fitter and Dr Parkinson became the Secretary of the Treasury. Dr Parkinson, I woke up to the radio report about your speech last night. I have had a quick look at the Financial Review report headed Treasury slams industry handouts. Dr Parkinson: As you know, we do not write those articles and we particularly do not write those headlines. Senator CAMERON: I accept that and I do not believe anything I read in the papers until it has been checked and double checked. Let me say a couple of things. Firstly, how many people do you have in your senior executive service in the Treasury? Dr Parkinson: Eighty-nine or thereabouts. Senator CAMERON: I would expect the bulk of them are employed and live in Canberra. Dr Parkinson: Yes. Senator CAMERON: Do any of your senior executive service live in Geelong or the western suburbs of Sydney? Dr Parkinson: No, but many of us grew up in country Victoria and Elizabeth, next to the Holden plant. Senator CAMERON: I grew up in Scotland. I do not really know much about it now, because I have been here for a long time, so let me just go down this path. I said that just in case you did not know I grew up in Scotland. You said this morning that there are amazing opportunities for tourism, education and manufacturing and that the prospects are incredibly promising. Sure, there are aspects of that in our economy. But I suppose if ECONOMICS LEGISLATION COMMITTEE

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you are a fitter in Geelong, if you are a production worker in the production line of Ford in Geelong, or you are at GMH, you are not seeing these great opportunities given the strength of the dollar. I suppose if you are on Newstart getting $240 a week welfare and you are relying on charity to keep you afloat, you do not have this great opportunity that is there. There are people who will be neglected and left behind in this so-called transformation of the economy. That brings me to the Treasury wellbeing framework, where you outline five important dimensions for wellbeing. How many people are employed in the SES looking at the wellbeing framework and transposing your wellbeing framework into your analysis such as your speech last night? Dr Parkinson: The wellbeing framework is, in a sense, an analytic construct there so that when Treasury thinks about key issues it is designed to encourage people to think more broadly than just whether it boosts GDP or productivity. It is designed to get people to ask the question: what are the trade-offs here? This particular initiative may be positive for GDP, but does it introduce risk or complexity for individuals that they might not be able to manage or will it be good in an aggregate sense for Australia, but actually have geographic or sectoral implications that need to be thought through? It goes back to what I was alluding to earlier, which is that when you think about policy changes it is not enough simply to think about these in isolation; you also need to think about some of the pathways of adjustment, particularly if there are groups in our society who may be disadvantaged or may not have the skill set to help cope with that adjustment. You need to think about what needs to be done to go hand in hand with that. Senator CAMERON: As I said, I have not read your speech. I will be interested to read your speech to see where your wellbeing framework analytical tool was used. There are five key dimensions. The opportunities available to peoplehow does that reflect for a worker in Geelong or the western suburbs of Sydney? The distribution of those opportunities across the Australian peoplehow does that reflect for workers in the manufacturing industry? The sustainability of opportunities over time, which is an interesting point because I am not sure what the sustainability of the mining boom is. The very fact that it is called a boom would seem to me to suggest that at some time it might have to bust. I have two more to go. There is the sustainability of those opportunities and the overall level in allocation of risk borne by individuals in community. I think you have touched a bit on that, because the allocation of risk would be in the manufacturing industry to a great extent. That is the risk that we have at the moment. Then there is the complexity of choices facing individuals and communities. It is not as simple as looking up some statistic from the RBA, an RBA speech or a Treasury speech and saying, So many fitters have up and moved from Wollongong to Karratha. It is not as simple as that. Life is much more complex. People have families, mortgages and commitments. Some people cannot move. So, the flexibility of labour is not some theoretical position, it is a political and social issue, is it not? Dr Parkinson: Absolutely, but it is all of those dimensions. You would recall that Senator Sinodinos referenced the issues before. We have industry structures that are often geographical concentrated, and so we can identify, for example, where the bulk of people in the motor vehicle industry are working and hence living. Because you have that concentration, one of the experiences out of the adjustment of the 80s and early 90s was that some groups actually got left behind. The point I am making, which I said earlier, is that the key challenge for us in thinking about how we manage these transformations is how we encourage firms and industries to adapt, innovate and become more internationally competitive to deliver high productivity, high wage jobs and at the same time how do we focus in on the workers who are affected to ensure that they are not left behind? I have never saidand you will not find it in this speech and you will not find it in anything that I have ever said; in fact to the contrarythat you leave the workers behind. The focus has always been that the most important thing is to focus on the workers, not so much on the firms or the industries. Senator CAMERON: The government has made some decisions to invest in strategic capabilities. We believe that the vehicle industry is a strategic industry and an important industry for a range of reasons. The focus has been in the press and recently by the Productivity Commission in a speech that basically we should not be doing that. I wanted to draw your attention to the fact that the latest taxation statistics show that the mining industry claimed $6.8 billion in fuel credits over four years; that in 2009-10 alonethis is basically government supportthey claimed $1.9 billion, and at the same time the vehicle industry claimed $1 million. In 2009-10, the mining industry got $2.4 billion in government support. You say it is a mixed economy, and I agree government does play a role in the economy and that is a big role the government plays in mining. Other areas are grain, sheep and cattle, $705 million; and property and business services, $799 million. There is broad government support across this economy, and it is not simply the vehicle industry. I am just wondering why the vehicle industry is the industry that is being singled out for a reduction in support by some in the Treasury and the Productivity Commission?

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Dr Parkinson: Would you like to point to where Treasury said anything in particular about the motor vehicle industry? Senator CAMERON: As I said, I have not read your speech. You said last night, according to the Australian Financial Review, that handouts that protect the car industry from a strong dollar hamper structural changes in the economy. Dr Parkinson: There is no reference to the motor vehicle industry in the speech. Senator CAMERON: Do you agree with that? Dr Parkinson: I think the motor vehicle industry is an issue for Australia. As I said before, the question is: how do we actually manage the transformation into something that is sustainable? It is a broader issue than manufacturing. You made a couple of comments that I want to touch on. It is not just manufacturing that is affected by the structural transformation. You only have to go to Cairns or places like that, which are heavily dependent on tourism, to see some of the impacts. This transformation is having impacts well beyond the motor vehicle industry or any one particular part of manufacturing. The second thing that I would comment on is your caution about the use of the language mining boom is probably very well taken. We have been quite clear in saying that we would anticipate that there are a number of decades of adjustment still to go in China. There are things that happen that can knock that off track, but if that does not happen then it is very hard to see that the terms of trade do not stay very high. If the terms of trade stay very high, even if they are not at the levels that they are at now, then that means that the exchange rate is going to stay very high, which is going to threaten the viability of a whole variety of industries. It is a different matter if we thought this was a shock that was going to last 12 or 24 months. If it is one that we think is going to last 12 or 24 years then we cannot pretend that we can keep things as they were. We have to find ways to help those industries transform. As I said earlier, one of the things that I think is really important for usand people need to be really clear about thisis that no one thinks that Australia is going to lose its manufacturing industry. The question is: what is our manufacturing industry going to look like as we go through this transformation process? To the extent that we can actually bring high-tech, knowledge based manufactures to the fore and improve our competitiveness, we will end up with a very successful manufacturing industry. We have elements of that now. The question is: how do we actually grow that? As you will recall that was very much the thrust of the day after the tax forum when there was the manufacturing forum here in Parliament House. Those were the issues that were very much front and centre in peoples minds. Senator CAMERON: There are judgments being made in the Public Service, especially the Productivity Commission, which is not uninfluential, much to my disgust. Gary Banks made a speech recently. I will quote what he said and would like your comments on this. He stated:
Equally, the transformation of raw data into useful information in insurance, finance, health, the internet and mining exploration (to name a few) through remote sensing, neural network software and complex search enginesall services involves more valuable and complex transformations than those from a sewing needle or lathe.

I think that summarises to me some of the thinking that is going on. I thought to myself, when I saw that, being a fitter and machinist by trade, how good is all of this transformation in the finance and health industry going to be if you are up there on the 27th floor of some high rise when the lift breaks down and you need a lathe to produce a new pinion to put in that lift to make sure it works? What is the value of that? It is absolutely essential. I think that there are these positions being developed that dismiss engineering and manufacturing as old fashioned and not important, and that is typified by the Productivity Commission. Dr Parkinson: Let me defend the Productivity Commission. I think they are a great national institution and they have done huge things to benefit Senator CAMERON: I would disagree with you. CHAIR: Order! Dr Parkinson. Dr Parkinson: Thank you. I am making that comment because I do not think it is appropriate to criticise the commission without them having the opportunity to defend themselves. But let me come back Senator CAMERON: So you are criticising me, are you? Dr Parkinson: Let me come back to the point you were making. In a mixed economy, you are exactly right. There will be people with engineering knowledge. How else do we get high-tech manufacturing unless we have high quality engineering? The caricatures that are being presented in this debate are that somehow the manufacturing sector is going to disappear. In fact, manufacturing as a share of total employment has declined ECONOMICS LEGISLATION COMMITTEE

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consistently for decades. Does that mean the manufacturing sector has disappeared? No, it has not. The challenge for us in a world where we have high exchange rates is how we help those sectors transform. I want to be very clear about this. No one is saying that there is no role for manufacturing; to the contrary. If we want to ensure that we have a healthy and vibrant manufacturing industry then what do we need to do? That is the question. How do we help manufacturing, or other sectors, transform themselves so that they can cope in a world where we have the high exchange range and which can deliver the high-value-add and the high-wage jobs that you are focused on? There is no disagreement between us about the objective. Senator CAMERON: That means that as part of that mixed economy the government may have to play a role in assisting that transformation. Dr Parkinson: Exactly. That is what I was trying to say. The point I was making in the speech was that, in thinking about those transformations, make sure that they are focused on the outcome you want, that they are time limited and define exactly what it is that you are doing. Senator Bishop asked at the outset; if you do not do that we run the risk of that experience that we had in the post-war period which the Hawke-Keating government basically had to confront. CHAIR: One final question. Senator CAMERON: You raised in your opening comments about the business model being challenged, and I assume that is the business model in manufacturing and elsewhere. The business model that I was involved in as the national secretary of the union tried to promote within manufacturing a high-skill, complex industry where productive performance was important, not just labour productivity. Productive performance was a key issue that helped to push export jobs. As you would be well aware, the argument in the business model was that manufacturing had to have an export focus. We were arguing that point. I remember during the Keating-Hawke years going out and arguing with workers that we had to be more productive, that business had to change their model and management systems had to get better so we could export. All of that model that we spent years trying to build is wiped out on the high dollar. How do we transform again from what is a really important area? Dr Parkinson: I recall all of that period and the role you and others played. You are exactly right. We had to get the manufacturing sector externally focused. Also and this is something that is not focused on much todaywe had to push for changes in management practices as well as changes in industrial relations practices. They are still the sorts of issues that have to be confronted if we want a successful, export-oriented, highly productive manufacturing sector. I have no disagreement with you at all about the objective. You asked the question: how can we do it all again? We have always done it all again. We used to be dependent almost entirely on agriculture. We rode on the sheeps back. We then became much more focused on manufacturing and then we became much more focused on services. These evolutions are constant. One of the things that we have not been successful at is explaining that the process of structural change is just that; it is a process. You do not start, run 100 metres and finish. You are constantly doing it. The question for us, as a country, is: do we have policies in place in our education system, in our workplaces, in our management skills, in the way in which we think about building infrastructure and the areas that we focus on as important for the country that will do all of those things? It is not just the productivity improvement you get out of a particular factory; it is whether the workers are sufficiently skilled, whether there is sufficient engineering and science expertise and whether the transport links work so that, if they are able to produce the product, they can get it to the docks, on a ship and overseas. There is not one little bit here that needs to be focused on. All of it needs to be focused on. Senator CAMERON: That is productive performance. Dr Parkinson: That is what I took by your reference. Senator Wong: I can add to that. I think that has been a good discussion from both Senator Sinodinos and Senator Cameron. I would like to make a couple of broad points, if I may. The first is on the Productivity Commission. Senators are entitled to their views about the PCs opinions. I am sure there is a wide range of views in this room, but they are an independent body and they are entitled to put their view. They have made a very significant contribution to public policy over a number of years. Some people may disagree with that contribution, but they are obviously entitled to put that. The second point I would make, and I think Dr Parkinson has traversed this in more detail, is that there is a global transformation that is occurring which will mean changes for the Australian economy. The question has never been: will we or will we not change? It is: how do we change? Fundamentally, there is going to be a set of challenges and opportunities that transformation will bring. What do we have to do to best meet those challenges and exploit those opportunities? People will differ around those views. Obviously the government has taken the ECONOMICS LEGISLATION COMMITTEE