For more than 50 years, the Australian economy has gone from luck to luck, rather than from strength to strength.
Over time, our GDP grew steadily but one thing remained the same – our complacency.
We can’t rest on our laurels when faced with disruption – including technology, climate change, geopolitical tension and a pandemic. It’s time to become more economically sophisticated and secure our future prosperity.
So, how can we move beyond the Lucky Country? We need to actively build our resilience, unlock new growth opportunities and realise our true economic potential.
A new lens on Australia’s economy Australia is one of the planet’s richest countries. Our GDP per capita is the 11th highest in the world, on par with the economies of the United States, Denmark and Sweden. But what does this really tell us about our future economic growth or opportunities in the global marketplace? Traditional economics is built on the assumption that the world is an ordered place, which moves in a predictable pattern. But we know this isn’t the case: people don’t always act rationally, the landscape of the economy is constantly evolving, and we’re increasingly facing new disruptions which are inherently complex. This means that we need a new lens, new tools and new methods to solve our challenges. Complexity economics provides this framework. Despite the name, complexity is not about things being more complicated. Instead, it’s about understanding and increasing the levels of sophistication in an economy. For Australia, becoming more sophisticated will help us to transform and compete on the global stage. Our measure of economic complexity looks at the value added to goods and services and how connected the industries that make these are to the rest of the world.
Australia’s luck has come at a cost
The Australian economy has changed over the past 50 years, growing in both scope and scale. We have performed well and defied expectations: impacts from global and domestic shocks have been minimal, and our bank account has kept on growing. But, success breeds complacency.
Where we think we are
Australia’s GDP per capita sits among the highest in the developed world, on par with a select group of advanced and rich economies such as the United States, Denmark, Singapore, Sweden and the Netherlands. Before the COVID-19 pandemic, we enjoyed 28 years of uninterrupted economic growth. However, the very ingredients of our success have made us complacent and vulnerable.
Where we actually are
Our economy is less robust than we think. Ranked 37th of 63 countries, it’s clear Australia’s prosperity has come at the cost of investing in and enhancing its productive and adaptive capabilities. In fact, our ranking on the Sophistication Index is similar to Latvia, Brazil and Greece – not countries we think of as economic powerhouses. We need to invest more for the future. A good example is our abundant, but unprocessed, natural resources. By exporting raw materials which are usually processed or developed overseas we find ourselves at the start of the global value chain rather than deeply embedded within it.
The Economic Sophistication Index How this is calculated Our Sophistication Index models the global economy, tracking over 100 million flows of goods and services between each industry and country around the world. Two key measures underpin it: Connectedness – which measures how embedded a country and its industries are within the global economy. It considers not only the importance of each country’s value chains, but also the importance of the value chains they’re connected to. The more embedded a country, the more resilient it is to economic shocks. Value added – which measures the sophistication of production within global value chains. Countries that can add greater value to these chains hold competitive and comparative advantages. By combining connectedness and value added, the Index gives an insight into countries’ economic sophistication and resilience – and provides a framework for businesses and governments to plan for the future.
How sophisticated are Australia’s industries? Australia’s most successful industries are not necessarily our most sophisticated. They have lower value add and weaker connectedness overseas compared to other high-income countries. In fact, nearly 60% of Australian production occurs at a sophistication level lower than the global average. By not focusing on the areas in the economy which can bring us continuing value, we are risking our future prosperity. Click on each industry to find out how it can become more sophisticated When we look at the sophistication of Australia’s industries in this quadrant, mining and tourism stand out because they perform above the global average. These industries are highly connected into the global economy and this is driving their overall sophistication. Industries need to:
continually innovate to be world leading and lift their value, therefore lifting their overall levels of sophistication. They can support this by taking a performance view for the long term, rewarding calculated risk-taking and experimenting with new business or operating models to build resilience.
These industries are well connected to the global economy and are relatively strong in value add. But they are performing below their economic potential, with global counterparts showing there is much more these industries can do. The choice is there – strive for greatness or allow complacency to erode current levels of sophistication. Industries need to:
become adaptive by shifting their operating models and management philosophies to support agility and continuous improvement, and realigning focus on inputs to outcomes. By investing in internal efficiencies and new sources of value add, these industries can go from good to great.
Industries such as wholesale and retail trade, financial services and health care are sophisticated, but they are performing well below their global counterparts on both value add and connectedness. Australia needs to elevate its ambitions on the role services can play in boosting future economic growth. Industries need to:
overcome their real drawback – lack of connectedness to global value chains. To help address this, they can build on their strong fundamentals domestically to become more sophisticated by seeking opportunities beyond Australia’s borders. Competing on the global stage will drive innovation and productivity that will inject a much-needed spark into these industries.
These Australian industries struggle to compete with the world, such as manufacturing and agriculture; we’re not only producing at lower levels of sophistication relative to other industries, we’re doing so well below the global average. These industries are the least connected to the global economy and have some of the lowest levels of value add. They are fundamental to Australia’s economic identity, but we’ve got a lot of work to do to be competitive on the global stage. Industries need to:
identify their comparative advantages and make bold, strategic choices about where to play and how to drive value creation. They also need to connect to adjacent ecosystems – at home and abroad – to unlock new opportunities for growth.
Leading the field
When we look at the sophistication of Australia’s industries in this quadrant, mining and tourism stand out because they perform above the global average. These industries are highly connected into the global economy and this is driving their overall sophistication. Industries need to:
continually innovate to be world leading and lift their value, therefore lifting their overall levels of sophistication. They can support this by taking a performance view for the long term, rewarding calculated risk-taking and experimenting with new business or operating models to build resilience.
At a crossroads
These industries are well connected in the global economy and are relatively strong in value add. But they are performing below their economic potential, with global counterparts showing there is much more these industries can do. The choice is there – strive for greatness or allow complacency to erode current levels of sophistication. Industries need to:
become adaptive by shifting their operating models and management philosophies to support agility and continuous improvement, and realigning focus on inputs to outcomes. By investing in internal efficiencies and new sources of value add, these industries can go from good to great.
Elevate our ambitions
Industries such as wholesale and retail trade, financial services and health care are sophisticated, but they are performing well below their global counterparts on both value add and connectedness. Australia needs to elevate its ambitions on the role services can play in boosting future economic growth. Industries need to:
overcome their real drawback – lack of connectedness to global value chains. To help address this, they can build on their strong fundamentals domestically to become more sophisticated by seeking opportunities beyond Australia’s borders. Competing on the global stage will drive innovation and productivity that will inject a much-needed spark into these industries.
Most work required
These Australian industries struggle to compete with the world, such as manufacturing and agriculture; we’re not only producing at lower levels of sophistication relative to other industries, we’re doing so well below the global average. These industries are the least connected to the global economy and have some of the lowest levels of value add. They are fundamental to Australia’s economic identity, but we’ve got a lot of work to do to be competitive on the global stage. Industries need to:
identify their comparative advantages and make bold, strategic choices about where to play and how to drive value creation. They also need to connect to adjacent ecosystems – at home and abroad – to unlock new opportunities for growth.
What does this mean for Australia?
The natural resources, agriculture and tourism industries – known colloquially as ‘rocks, crops and cameras’ – have brought about great wealth for our economy over the past three decades. They underpin our geographically dispersed population, exports and labour market, as well as other industries such as construction, transport, manufacturing and retail trade. But our most successful industries are not our most sophisticated. We have lower value add and weaker connectedness compared to other high-income countries. In contrast, the countries at the top of the index – Western European economies and the United States – are service economies. They have strong value add in production and are highly connected to global networks. globe-image Recently, the global pandemic could have spelled the end of Australia’s sustained economic performance. But a combination of a timely policy response and ‘luck’ – the strength of iron ore prices and China’s demand – meant Australia fared better than anticipated. But we’ve placed all our eggs in one basket, rather than developing sophisticated global supply links. By relying on our luck and taking China’s relentless demand for Australia’s natural resources as a given, our economy is increasingly fragile. temp-tab-image While Australia has been focusing its efforts in areas where we make money, global networks and value chains have been evolving and growing more knowledge intensive around us. The best performing countries focus on areas of their economic activity which deliver greater value add and higher sophistication. However in Australia, we’ve focused our efforts on agriculture and tourism which are not our most productive industries nor where the greatest share of production sits. The cost of this neglect is that we’ve traded income for economic sophistication. temp-tab-image Australia has strong connections to important global value chains through mining and resources. However, these connections are few and fragile in the context of the geopolitical environment, and too limited to ensure the overall resilience of the Australian economy. Compared to other countries, Australia sits on the fringe of global networks. We have very few industries connected to global networks and very few connections to other countries. By limiting our connections, our economy is less prepared for and less able to capitalise on unexpected events. temp-tab-image Globalisation benefited Australia by opening our access to global trade markets, but it also highlighted how expensive trade is due to the tyranny of distance. A shift to digital in the trade of goods and services and our proximity to the economic growth in Asia saw much of this disadvantage dissipate. But then COVID-19 hit. Deglobalisation and nationalism has once again reinforced Australia’s isolation. Australia’s geographic isolation from world markets, and our lack of attention paid to the now burgeoning region of Asia, hampers our participation in global value chains. We need to refocus on the Asia Pacific region to improve our economic sophistication. temp-tab-image
The natural resources, agriculture and tourism industries – known colloquially as ‘rocks, crops and cameras’ – have brought about great wealth for our economy over the past three decades. They underpin our geographically dispersed population, exports and labour market, as well as other industries such as construction, transport, manufacturing and retail trade. But our most successful industries are not our most sophisticated. We have lower value add and weaker connectedness compared to other high-income countries. In contrast, the countries at the top of the index – Western European economies and the United States – are service economies. They have strong value add in production and are highly connected to global networks. globe-image Recently, the global pandemic could have spelled the end of Australia’s sustained economic performance. But a combination of a timely policy response and ‘luck’ – the strength of iron ore prices and China’s demand – meant Australia fared better than anticipated.  But we’ve placed all our eggs in one basket, rather than developing sophisticated global supply links. By relying on our luck and taking China’s relentless demand for Australia’s natural resources as a given, our economy is increasingly fragile. temp-tab-image While Australia has been focusing its efforts in areas where we make money, global networks and value chains have been evolving and growing more knowledge intensive around us. The best performing countries focus on areas of their economic activity which deliver greater value add and higher sophistication. However in Australia, we’ve focused our efforts on agriculture and tourism which are not our most productive industries nor where the greatest share of production sits. The cost of this neglect is that we’ve traded income for economic sophistication. temp-tab-image Australia has strong connections to important global value chains through mining and resources. However, these connections are few and fragile in the context of the geopolitical environment, and too limited to ensure the overall resilience of the Australian economy. Compared to other countries, Australia sits on the fringe of global networks. We have very few industries connected to global networks and very few connections to other countries. By limiting our connections, our economy is less prepared for and less able to capitalise on unexpected events. temp-tab-image Globalisation benefited Australia by opening our access to global trade markets, but it also highlighted how expensive trade is due to the tyranny of distance. A shift to digital in the trade of goods and services and our proximity to the economic growth in Asia saw much of this disadvantage dissipate. But then COVID-19 hit. Deglobalisation and nationalism has once again reinforced Australia’s isolation. Australia’s geographic isolation from world markets, and our lack of attention paid to the now burgeoning region of Asia, hampers our participation in global value chains. We need to refocus on the Asia Pacific region to improve our economic sophistication. temp-tab-image
Building our resilience Australia has reached a critical inflection point. We know the sophistication of an economy drives resilience and growth, but how do we build this in our businesses? Our analysis considers resilience to be a function of preparedness, innovation and the establishment of the right incentives to navigate through uncertainty, the capabilities to drive change and the elevation of the central role of connections in strategy. Boards and executives can focus on the four levers of the Resilience Framework to build greater resilience into their organisations and position for future growth.
Resilience Framework
Lessons on complexity Questions executives and boards should ask to become more resilient and grow. Is how we think about strategy too rigid or traditional? How does our sensing system operate and how does it inform decision making? Are we continually assessing and learning – and adjusting our strategic choices accordingly? How have our customers been disrupted? Do we know how their expectations, tastes and preferences have changed or are likely to change? Do we understand how disruption has accelerated changes in the employer-worker relationship? Are we ready for how it might evolve further? Do we understand our purpose and its importance to our employees? Are we considering the worker of the future, digital workers and work reinvention? How well do we understand the needs of our investors and shareholders? Are underlying investment views shifting in our favour or against? How do we encourage innovation from within while accepting disruption from outside? Do we have the right incentives in place at an organisational, sector and whole of economy level? How robust are our business performance metrics? How dynamic are they? Do we have a performance view for the long term? Do we reward calculated risk-taking and reward failure with learning as well as success? Are we innovating enough? Is our innovation focused and disciplined? Are we experimenting with new business or operating models? Are we innovating with our ecosystem rather than in isolation? Do we have an organisational learning culture or capability? How are we seeking to become an adaptive organisation? Are we shifting our operating model and management philosophy to one that supports enterprise agility? Are we hiring differently or more of the same? Are we encouraging diversity of thinking and experimentation? In the face of constant change, is our technology play optimal? How can we use new technologies (such as AI) to transform our operations, create new sources of value or disrupt incumbents including ourselves? Are we investing enough in technology? Are we using these new technologies to stay ahead or just keep pace with the field? Which ecosystems do we want to play a part in and for what purpose? How will we connect into them to unlock opportunity? Do we have connections with and across adjacent sectors? What are we doing with these connections to enhance our competitive advantage and create value? Are we playing a long game in our connections, building relationships for 2030 and beyond? How is volatility and complacency playing out in our supply chain? Do we have the right relationships and are they strong, weak or simple? Do we have options or alternatives? Seven unique ecosystem opportunities Connectivity, capability, collaboration – together these can build an Australian economy fit for the modern world. Our analysis points to seven key ecosystems which will matter in the years ahead. These will draw on Australia’s unique strengths, resources and capabilities to meet global demands. Click on each ecosystem to find out what Australia must do Australia – better, stronger and faster If nothing else, the pandemic has provided Australia with a burning platform for economic change. For Australia to build a country fit for disruption, we need to meet the challenges of disruption head on. By embracing dynamism, we can navigate changing circumstances and continue to prosper. For Australia to build a country fit for growth, we need to recognise we are part of a complex, global economy. No business, industry or country works in isolation. It takes a joined up or ecosystem view to identify where to move next. For Australia to build a country fit for the future, we need to elevate our ambitions above natural resources, agriculture and tourism. We need to increase our appetite for risk and support that by investing in the capabilities that will drive our future prosperity.
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Feed the world Demand for Australian food is strong, driven by our product quality. Yet, the core industries involved in Australian food production – agriculture, forestry and fishing – are among our least sophisticated, with low value add compared to global competitors and limited export markets. To unlock more value, we need to challenge the traditional linear supply chain and think in a more circular way about primary inputs, knowledge, innovation and technologies. To bring this to life, Australia must: Understand end consumer expectations, particularly in relation to the personalisation of wants and needs, to inform capital investment and production processes Utilise novel technologies across sectors and innovation across production processes to drive smart farming in reaction to changing consumer preferences, environmental challenges and new technology Move away from relying on dominant single markets and connect to new markets (e.g., Southeast Asia) with a high demand for quality nutrition and luxury products Increase resilience to climate variability by using technologies, new processes, scenarios and data analytics to inform decisions. Decarbonise the world With our competitive advantage in rich natural resources, technologies and energy, Australia can take part in the move to global decarbonisation. We have an opportunity to climb the Economic Sophistication Index by producing new sustainable energy – as well as using it in the manufacture of goods. To bring this to life, Australia must: Align energy and industrial policy settings and regulation across all levels of government and industry, with a specific focus on long-term transformation Focus on new energy generation, the production of minerals processing, the manufacture of metals, abatement technologies and the creation of markets for carbon farming and offsets Develop technology that accelerates a transition from traditional energy generation and distribution to drive networked energy systems (more localised energy generation) and new market development Drive the development and attraction of green finance to power investment in all industries and build better connections between fintech and energy tech Partner with other economies that are seeking to invest in green technologies but lack Australia’s natural advantages (e.g., green hydrogen). Shape the future of health The focus of health is shifting from treatment to wellness using digital and virtual technology as enablers. Australia can create new value by turning our world-class health research into implementable health and wellbeing solutions and by adoptin1g new technology to improve everyone’s health. Unlocking this value requires new relationships between our health system, universities, entrepreneurs and fund managers, and global collaborations across manufacturing, technology and research. To bring this to life, Australia must: Drive a focus on world-class, innovative health education and research Invest in digital platforms, analytics and AI to drive personalisation of health care treatment and outcomes along with new payment and operating models Move from a reactive to preventative health model utilising technology and data to improve virtual health care access and early diagnosis and intervention Invest in building world-class health manufacturing capabilities in Australia with a clear focus on commercialising research through the use of venture capital strategies Implement population health strategies underpinned by data sharing and interoperability to make Australia the home for clinical trials and research. Look to the
sky (and beyond)
Australia is globally competitive and has a strong emerging track record in the areas of the space industry we have chosen to play in. But to mature this ecosystem, Australia needs to grow its capabilities from niche research and manufacturing to the delivery of end-to-end products and services (e.g., moving from specific satellite components to Australian-made satellites launched on Australian rockets). To bring this to life, Australia must: Collaborate locally to compete globally, developing the critical mass and demonstrated flight experience required to supply the global market Focus on where Australia can add the most value in the global ecosystem, particularly in the manufacture and launch of satellites and rockets (and associated components) Increase connections between the upstream space industry and the end users of space-enabled data such as agriculture, aviation and mining to increase economic dividends Capitalise on existing industries and commercial opportunities such as security and defence expenditure Commercialise the significant research undertaken in universities to create new offerings and fill gaps in the local supply chain.
Satisfy the senses There is no ecosystem more agile and ever-changing than one that follows the demands of its consumers, including travel, fashion, restaurants and cafés, hotels, retail, arts and cultural experiences, and on-demand content. Australian organisations need to continue to be responsive and innovative by co-designing products, services and experiences with consumers seeking to satisfy their senses at home and away. To bring this to life, Australia must: Use digital platforms to build feedback loops with consumers to gather insights, innovate and address their wants, needs and expectations Use technology to build a better understanding of the customer and provide personalisation while maintaining customer privacy Meet customer expectations on ethical trading, sourcing and sustainability Embrace ‘phygital’ – connected customer experiences across both physical and digital platforms. Manufacture the future To play a greater role in global manufacturing, Australia should have a clear focus on moving up the value chain by connecting advanced manufacturing with the areas of greatest economic opportunity. To do this, Australian manufacturers need to improve competitiveness and sophistication, scale up and build more resilient supply chains. To bring this to life, Australia must: Develop and connect manufacturing hubs into Australia’s strengths in resources, green energy, agriculture, health and space to drive ecosystem development Focus on scaling start-ups and small businesses and connecting them to global supply chains Drive new product innovations through advanced manufacturing technologies such as 3D printing Leverage data and feedback systems to drive customer insights into faster and more focused product and services development. Service the world’s businesses A significant opportunity exists to export B2B services such as engineering, telecommunications, professional services and financial and insurance services to markets in our region. More economically sophisticated countries such as the United Kingdom and the United States have done this to great effect. Advances in virtual and digital technology create opportunities for Australian companies to export their know-how to meet the increasingly sophisticated needs of clients with tailored services, both in Australia and abroad. To bring this to life, Australia must: Capitalise on its strengths in professional services, technical services, insurance, telecommunications and information technology and sell these services into the global market, particularly Asia Double down and commercialise intellectual property Rethink organisational design for greater agility and reinvent value propositions for a highly mobile knowledge-economy workforce Invest in the workforce, internal capabilities and employee experience to lead the war on talent Ensure ‘virtual work’ done remotely is considered in future tax treaties.
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Thank you Thank you for downloading our latest Building the Lucky Country analysis.
Thank you for your interest in Australia remade: A country fit for the age of disruption. Please complete your details and we will send you a copy of the report.
Thank you Thank you for downloading our latest Building the Lucky Country report.
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
Thanks for your interest in Australia remade: A country fit for the age of disruption. Please complete your details to receive related thought leadership in the future.
Thank you for your interest
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