Insights Volume 10 November 2011 by The Faculty of Business and Economics, The University of Melbourne

insights Melbourne business and Economics volume 10 november 2011

How shall we protect the wages of the weak?

By William Brown Social inclusion, diversity and the politics of recognition

By Zoe Morrison Changing life trajectories: The Early Years Education Research Project

By Alice Hill, Brigid Jordan, Nichola Coombs, Janet Williams-Smith and Jeff Borland Academics and financial services: Strange bedfellows

By Jeremy Duffield Growth challenge: Riding the resources boom to lasting prosperity

By Deborah Cobb-Clark, John P Haisken-Denew, Paul Jensen, Guyonne Kalb, Felix Leung, Duncan McVicar, Cain Polidano, Chris Ryan, Anthony Scott, Elizabeth Webster and Roger Wilkins Empirical evidence and tax reform: Lessons from the Mirrlees Review

By Richard Blundell Occasional Addresses

Lynne S Williams and Sid Myer

Insights: Melbourne Economics and Commerce ISSN:1834-6154 Editor: Associate-Professor Geoff Burrows Associate Editor: Ms Brooke Young Sub-editor: Ms Rebecca Gleeson

Advisory Board: Professor Kevin Davis Professor Bryan Lukas Professor Ian McDonald Design: Ms Sophie Campbell Illustration: Laura McKellar

insights vol 10 Table of contents 02 Welcome

By Geoff Burrows, Editor

05 How shall we protect the wages of the weak?

By William Brown

Containing the growth of inequality is crucial for the maintenance of the social and political structures worldwide that inhibit overt civil and military conflict

11 Social inclusion, diversity and the politics of recognition

By Zoe Morrison

Due recognition is not just a courtesy, but a vital human need

31 Growth challenge: Riding the resources boom to lasting prosperity

By Deborah Cobb-Clark, John P HaiskenDenew, Paul Jensen, Guyonne Kalb, Felix Leung, Duncan McVicar, Cain Polidano, Chris Ryan, Anthony Scott, Elizabeth Webster and Roger Wilkins

A selective summary of highlights of the 7th Economics and Social Outlook Conference held by the Melbourne Institute and The Australian on 30 June and 1 July 2011

39 Empirical evidence and tax reform: Lessons from the Mirrlees Review

By Richard Blundell

How should evidence be used in the study of tax design? What is the appropriate balance between theory and empirics?

19 Changing life trajectories: The Early Years Education Research Project

By Alice Hill, Brigid Jordan, Nichola Coombs, Janet Williams-Smith and Jeff Borland

Occasional Addresses

It is possible to compensate for the effects of a disadvantaged family background by giving children from those families access to high-quality childcare and supporting their parents to provide a nurturing home environment

By Lynne S Williams

Undergraduate micro- and macro-economics concepts remain important resources for analysing current public-policy dilemmas and controversies

46 The currency of your commerce degree: A passport to the world

25 Academics and financial services: Strange bedfellows

49 Engagement with Asia, philanthropy and future challenges

By Jeremy Duffield

By Sid Myer

The relationship between finance academics and the finance sector has produced great contributions but often disappoints and can be made to work better

The skills that you graduate with are the very skills that help strengthen and build outstanding community organisations

Insights Melbourne Business and Economics

Welcome Insights publishes condensed and edited versions of important public lectures connected with the Faculty of Business and Economics. Its object is to share these lectures with the wider public, especially Alumni. The issues presented and developed generally relate to research findings on public economic and social policy. Insights also constitutes an archival source of an important part of Faculty life. Suggestions and comments from readers on any feature of the journal are welcome. A common theme of the first three contributions, and an important element of the fourth, is how to improve the lot of vulnerable members of society. In the lead article, based on a joint University of Melbourne–Monash University symposium in honour of Joe Isaac, William Brown examines strategies for protecting the wages of low-paid workers in an environment which has seen the collapse of collective bargaining. Vulnerable groups include not just low-paid workers but also the unemployed and those suffering exclusion from broader society. For the latter groups, Zoë Morrison draws attention to the importance of social inclusion as a strategy for augmenting traditional economic approaches to overcoming poverty and disadvantage. Abuse and neglect in early childhood is a major and often intractable source of disadvantage. Alice Hill, Brigid Jordan, Nichola Coombs, Janet WilliamsSmith and Jeff Borland explain the rationale and operations of the Early Years Education Program. The program, being trialled in suburban Melbourne, aims to create a more supportive preschool environment for at-risk children in order to overcome this form of disadvantage.

Welcome

Improving financial services for the world’s poorest is an important element of Jeremy Duffield’s examination of the relationship between ‘town’ and ‘gown’ in relation to financial services. Although academia has profoundly influenced financial services, the link is currently sub-optimal and suggestions are made as to how this relationship might be strengthened. Held every 18 months, the Melbourne Institute– The Australian ‘Outlook’ conference brings together leaders from politics, academia, business and the community to discuss priorities for economic and social reform in Australia. Melbourne Institute director, Deborah Cobb-Clark, and her colleagues provide a summary of contributions made to the mid-2011 Outlook conference in which the focus was on the challenge of ‘riding the resources boom to lasting prosperity’. Modern, open economies continually struggle to adapt tax systems to deal with growth, incentive and redistributive imperatives. In the UK, the Mirrlees Review – headed by Nobel Laureate, Sir James Mirrlees (a regular visitor to the Faculty of Business and Economics) and an initiative of tax researchers and practitioners – recently concluded

a wide-ranging investigation of the UK tax system resulting in a two-volume report. One of the authors, Richard Blundell, outlines the role of empirical evidence in arriving at the Review’s recommendations for reforms to the taxation of earnings. Occasional addresses enable luminaries from the private and public sectors, academia and not-forprofit organisations to reflect on their experience and advise new graduands about the transition from ‘gown’ to ‘town’ and career development more generally. Recent graduands heard senior publicsector economist, Lynne Williams, emphasise the importance of undergraduate micro- and macroeconomics concepts as resources for analysing current public-policy dilemmas and controversies, while Sid Myer’s reflections focused on the importance of engagement with Asia and the dynamics of philanthropy.

and industrial-relations practitioners, Joe worked indefatigably from the first volume in April 2007 to establish Insights as an important archive of public lectures given by Faculty staff and visiting scholars. The number and quality of the contributions testifies to Joe’s determination to preserve these presentations. In many cases their literary polish and accessibility owe much to his editorial activism. All connected with Insights and the Faculty of Business and Economics thank Joe for his efforts and wish him well in his ‘retirement’. Geoff Burrows Editor ghb@unimelb.edu.au

It is appropriate that the lead article was from a symposium honouring Professor Emeritus Joe Isaac, AO. After editing the first eight volumes of Insights, and co-editing the ninth volume, Joe retired from the editorship in April 2011. One of Australia’s most eminent labour economists

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Article heading here

how shall we protect the wages of the weak? Containing the growth of inequality is crucial for the maintenance of the social and political structures worldwide that inhibit overt civil and military conflict by william brown An edited version of an address to the University of Melbourne â&#x20AC;&#x201C; Monash University Joe Isaac Industrial Relations Symposium at Monash University on 4 April 2011.

A fundamental change is forcing a reconsideration of pay fixing in developed economies. The capacity of trade unions to siphon income from the richer to the poorer in society is steadily diminishing. The implications for the coherence of our societies are profound. What has caused the change? Can it be reversed? How far can and should governments become involved? And should we citizens be playing a bigger part as consumers rather than as voters?

The twentieth century world we have lost The historically extraordinary improvements in real pay in developed countries over the past hundred or so years have come from massive increases in productivity. These have been driven by a myriad of innovations in science and technology, impacting erratically and unevenly upon peopleâ&#x20AC;&#x2122;s working lives. How the benefits have been shared out in terms of pay has been no less erratic. The markets for most products are to some degree imperfect. The inclination to share out the resulting profits by those who benefit immediately from them has always been limited. But for much of the twentieth century, trade unions became established in profitable industries and were able to bargain for their members to get a share of those profits. Trade unions in other, less fortunate, sectors then used arguments about comparability to push up their membersâ&#x20AC;&#x2122; pay. And

in countries with minimum wages, comparability was used to prevent the statutory floor falling too far out of sight, thereby giving support to those workers beyond the reach of trade unions. It was an imperfect system, but over decades of phenomenal productivity growth, it spread the benefits across society. Workers in more profitable sectors won a share and, to a greater or lesser extent, bargaining pressures caused these gains to trickle across and down to the less fortunate. The stability of this process owed much to the fact that the markets for the great majority of goods and services were generally confined, at most, to a particular country. This provided the basis for the national, industry-wide pay agreements which characterised collective bargaining for most of Europe. Employers supported this system so long as they were not undercut by competitors offering lower wages. Governments supported it because it offered stability and minimised conflicts that would damage the wider society in what was an unavoidable power relationship between employers and unions. And the consequences were relatively egalitarian. Common standards of decency were promoted across a wide range of private and public employment. This system has fallen apart for most developed countries. Competition has become more intense, more international and more pervasive. For an ever-widening range of jobs, there is the threat Insights Melbourne Business and Economics

that they can be effectively snatched away by less well-paid workers in another part of the planet. Furthermore, the ownership of employing enterprises has become more international and more mobile. There is less employer loyalty to particular workforces in particular countries, and more willingness to relocate to where unit wage costs are lower. Even public sectors, once predictably insulated from normal competitive forces, have been increasingly privatised or exposed to competition with pressures to outsource aspects of their work. There is far less scope for employers to collude with each other at the national level to uphold common labour standards. The consequences have been profound for collective bargaining and, consequently, for workersâ&#x20AC;&#x2122; wages. The British position is not exceptional. In the 30 years since 1980, the coverage of the private sector workforce by collective agreements has fallen from 55 per cent to 18 per cent. The proportion of private sector workers who are members of trade unions has, over the same period, fallen from 57 per cent to 15 per cent. The public sector remains relatively fully covered by trade unions but, because their effectiveness depends so much on what they can bargain on the basis of comparability with their colleagues in the private sector, their achievements have been substantially muted. The causes of the collapse of collective bargaining in the private sector can be clearly demonstrated from regular surveys of workplaces in Britain since the 1980s1. The use of collective bargaining has been more evident in those sectors where competitive pressure has been perceived to be least intense, and where profitability has been highest. The decline of collective bargaining has been greatest in those sectors where profitability has been lowest and where the decline in relative profitability has been greatest. There is no reason to expect a revival of collective bargaining in the private sector because there is no reason to expect its competitive pressures to slacken. They are more likely to intensify. Even in the public sector, where trade unions are likely to retain bargaining rights, the evidence suggests that the extent and impact of bargaining has greatly diminished. 06

How shall we protect the wages of the weak?

A return to state intervention Back in 1896, in the state of Victoria, there was widespread concern at misery and social damage caused by low pay in the clothing, baking, and boot and furniture making industries. The free operation of market forces was not delivering wages that were socially acceptable. The response was to set up wages boards which fixed legally-enforceable minimum wages. It was an example which was to be followed in other developed economies, including Britain in 1909. In Australia the establishment of compulsory arbitration soon took pay-fixing institutions off in a different and unique direction. But in many other countries, as trade unionism spread and collective bargaining became an established way of fixing pay, the statutory regulation of pay became less important. By the third quarter of the twentieth century, although most developed countries had statutory minimum wages of some sort, they were of minor significance by comparison with collective bargaining. It was not until the final quarter of the century that things began to change fast. It was partly because technology and transport contributed to the greater integration of the world economy with consequent tightening of competitive pressures. It was partly because the number of participants in the global economy rose massively as China, India and the old Soviet countries joined in. Collective bargaining retreated and, in a notable echo of a hundred years earlier, concerns emerged about the inadequacy of wages. There were worries in Britain about the consequences for children of wage levels so low that a growing proportion of their families were in poverty. This was a major stimulus to Britainâ&#x20AC;&#x2122;s introduction of a comprehensive National Minimum Wage in 1999. Australia, as part of an extended series of reforms of its compulsory arbitration system, set up its Minimum Wage Panel in 2010. Nor are these concerns confined to the traditional developed world. Minimum wages are currently being seen by the Chinese government to be a precondition of mitigating the threat to social harmony of rapidly deepening inequality. The British minimum wage is widely perceived to have been successful. It has substantially improved the relative pay of the bottom 10 per cent of wage earners. Exhaustive enquiry has failed to find any

significant adverse effects on employment. There is some evidence that it has drawn extra labour into the market and that employers have been motivated to improve productivity by managing their low-paid workers better. A critical factor behind the political acceptability of the minimum wage is that it is fixed by a ‘social partnership’ process in which employers and trade unions are heavily involved. It is independent of government but its advice to government has, with minor exceptions, always been accepted. It has also been important that its work has been based upon an extensive programme of independent research, much of it commissioned from leading academic experts. It is also important for the acceptability of the British minimum wage that it has been energetically enforced by the national tax authority, HM Revenue and Customs. Increasingly the minimum wage has come to exercise a major indirect influence over settlements in low-paying sectors and in small firms across the economy.

Protecting the good employer Minimum wages have their limitations, however. Although a well-enforced minimum wage raises the floor on which a nation’s wages sit, it makes no further inroads into the more profitable sectors. It does not use the leverage of profitable sectors in the way that successful collective bargaining does. There is a limit to what can be achieved by pushing up a floor; the overall bargaining process is more effective if there are higher wages to be used for comparative purposes to pull pay up. Uniform employment rights such as those of a minimum

wage are blind to variations in product markets in ways that collective bargaining is not. Even with a strong minimum wage, the free operation of the labour market will not diffuse the benefits of high productivity and profitability across an economy in the way that a comprehensive system of collective bargaining would. One policy response to this predicament might be to strengthen trade unions in order to restore collective bargaining. But our earlier analysis provides no grounds for optimism. If the principal reason for the decline of collective bargaining has been the intensification and internationalisation of competition, and if there is no prospect of that going into reverse, policies aimed at restoring trade union influence will be sailing into a heavy head wind. Certainly this is the recent British experience. The return of a trade union-backed Labour government in 1997 was accompanied by a range of legal measures to strengthen trade union organisation, including statutory recognition rights. All the evidence is that private-sector trade unionism has continued to decline. Indeed, the pace of retreat of coverage by collective agreements was undiminished. One can debate whether the Blair government might have done more to enhance trade union strength. But one searches in vain through the developed world in the twentyfirst century for examples of the revival of privatesector collective bargaining. An alternative approach is to look to the employers’ side. There are many employers who see the sharing of the benefits of increased productivity and

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profitability with their workers to be a key part of a successful long-term employment strategy. There are many more who consider that keeping up with the wages of comparable firms – quite apart from the often fitful pressures of their local labour market – to be important for the maintenance of goodwill, morale and, consequently, the capacity to improve productivity. They want to be seen to be paying at rates that are in some way socially justifiable – just as industrial collective agreements had provided them with socially legitimated rates in the twentieth century. The big threat in an unregulated, un-bargained free-for-all is that such employers will be undercut and out-competed by employers within their sector, who adopt more short-term strategies of lowering unit wage costs by lowering wages. The question then becomes, how are ‘good’ employers to be protected? How are the good wages not to be driven out by the bad? It would be foolish to pretend that a strategy of protecting good employers would have a comparable effect in redistributing profits to the collective bargaining that characterised many developed countries in the twentieth century. Trade unions were then able to mobilise coercive power of a different order to the sort of ‘soft’ power whereby good employers might be protected from the bad. It is the mobilisation of organisational power to influence market power that will always 08

How shall we protect the wages of the weak?

offer the greatest opportunity for the redistribution of profits. The mobilisation of the supply of labour to this end through trade unionism had historically been notably effective. Any substitute for trade union power is likely to be second best, whether statutory minimum wages or support for good employers. But, given the apparently irreversible decline of private-sector trade unionism, policy makers have to consider viable options.

The rise of consumer campaigns The scope for alternative forms of mobilisation has been changing rapidly. The role of marketing in the generation of profits continues to grow. Reputation and brand names are central to marketing, not only for producers and the suppliers of services, but also for the retailers that distribute them. At the same time, supply chains tend to become more international, and more interconnected, not only because of economies of scale for many operations, but also because of the quest for cheaper sources. Such supply chains often have identifiable ‘choke points’, where there are potentially targetable monopsonist and monopolist links. For many products, it is the end of the supply chain, the retailer, often one of a limited number of worldwide supermarket chains, that is most conspicuous. And at the same time, electronic communication with and between consumers has

become dramatically cheaper and more pervasive. All this means that there is more opportunity than ever before to mobilise consumers to protect the employment conditions of production. The loss of capacity to protect workers by mobilising them in the supply of labour is, to some extent, being substituted by the capacity to protect them by informing and mobilising consumers. There is ever-increasing potential for consumers to protect the good employer. The use and effectiveness of consumer campaigns has increased substantially since the 1990s. While the most common objective has been improving the employment standards of producers, they have also been mobilised for political or environmental objectives, such as the furtherance of sustainable forests, fish stocks, mineral mining, and water use. The success of the Fairtrade movement indicates that at least some consumers are willing (and able) to pay a ‘conscience premium’ in return for some authorised reassurance. Certainly many supplying employers are willing to comply with specific labour standards, such as the avoidance of child labour and the provision of adequate sanitary facilities for employees, if they see a reputational risk in non-compliance. They are even more likely to comply if the retailers who distribute their products make this a precondition of business. There has been a substantial growth in the use of ‘ethical audits’ both by producers and by the big international retailers. In Britain, the Ethical Trading Initiative was established in 1998, with active involvement by the Trades Union Congress and the Confederation of British Industry. It now has 70 corporate institutions (including the major supermarket chains), three trade unions and a dozen charity NGOs in membership. Its coverage of production within Britain is fairly comprehensive. Internationally, the main supermarket chains, including Tesco, Walmart, Aldi, Carrefour and Sainsbury, have been developing the Global Social Compliance Programme since 2006 with a statement of agreed international minimum labour standards for their suppliers. Such is the international reach of these huge retailers that the potential for this developing concordat to protect labour standards is impressive.

The mobilisation of consumer power can never be more than a partial answer. Many consumers are too poor to have the luxury of choice. Many supply chains have no obvious choke points where reputational threats can be effective. Tracing the origin of products down the supply chain is often difficult, so that apparently compliant producers may be tempted to outsource some operations to non-compliant sub-contractors. Even the largest supermarket chains have their influence limited by the fact that they typically take no more than 10 per cent of the product of any one producer. Even if retailer concordats spread this influence, their standards are inevitably those of a rather low common denominator. And when these relate to locally determined standards such as statutory minimum wages, they are susceptible to all the frailties of governments that are open to influence by local employers. Protecting the wages of the weak is important not only for the hundreds of millions of individuals directly involved. Containing the growth of inequality is crucial for the maintenance of the social and political structures worldwide that inhibit overt civil and military conflict. The collapse of collective bargaining outside public employment calls for new means of pressing for and upholding decent labour standards. Whether through state intervention, through consumer mobilisation, or other means, it calls for new forms of collectivism. William Brown is Professor of Industrial Relations, Head of the School of Humanities and Social Sciences and Master of Darwin College, University of Cambridge. 1 Brown, W, Bryson, A, Forth, J and Whitfield, K (eds), 2009, The evolution of the modern workplace, Cambridge University Press, Cambridge.

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Article heading here

social inclusion, diversity, and the politics of recognition Due recognition is not just a courtesy, but a vital human need by zoe morrison

A condensed version of a presentation to the Social Justice Seminar held at the University of Melbourne on 8 March 2011.

Social inclusion (SI) has become the dominant policy paradigm for addressing poverty and disadvantage in Australia. Originating in France in the 1970s, by the 1990s it had become a commonplace term in the EU, and was one of the first policy platforms launched in the UK by the newly elected Blair government in 1997. In Australia, it first emerged as South Australian government policy in 2002, and then rose to prominence federally during the 2007 election campaign and subsequent Labor government, in both cases drawing on the UK model. Despite SI’s widespread popularity, it still lacks a coherent theoretical core. When SI thinking in Australia has had a philosophical foundation, it has been based on Nobel laureate Amartya Sen’s ‘capabilities framework’, with its focus on capacities and freedom to choose and act. But a capabilities approach can be criticised for focusing too much on individual agency, rather than the broader structures encompassing SI. Some have argued that a capabilities approach has caused public policy to focus on reducing inequalities in capabilities, but not inequalities per se. Also, a capabilities approach does not embrace notions of recognition. So it is both timely and useful to explore other philosophical foundations for SI, and their policy implications.

Social inclusion and theories of social justice The body of theoretical work on social justice drawn on here concerns the relationship between economic and cultural aspects of redistribution and recognition. This has particular relevance to the concept of SI which is differentiated from traditional concepts of poverty and disadvantage through a multi-dimensional approach. It is ‘about income… but about more’ as Tony Blair stated, and aims to create ‘joined up solutions to joined up problems’, or, as Julia Gillard put it, ‘national economic and social policies will no longer be working at cross purposes’. The concept also focuses on the processes that produce exclusion and disadvantage, rather than just their unequal outcomes. Political philosopher Nancy Fraser (1995) articulated how economic and cultural factors create injustice together and how social justice requires both redistribution and recognition. For example, the injustices of sexism and racism have both economic and cultural dimensions. Race and gender structure our economy in relation to paid and unpaid labour, determining who undertakes particular jobs and how much they are paid. They also structure our cultural systems of meaning, recognition and value. Social norms privilege traits associated with masculinity, while Eurocentric norms privilege traits associated with whiteness. Even poverty has both economic and cultural Insights Melbourne Business and Economics

dimensions. The economic aspects are obvious – low incomes, an inability to save and afford basic services, and general material deprivation. But people in poverty suffer from cultural harms too: powerlessness, humiliation, disrespect, shame and other indignities. Continually, their worth and particularity go unrecognised, which is damaging to their life trajectories. Debates in political philosophy about the relationship between recognition and redistribution have raged over the relative importance of and degree of interaction between these two concepts, and even whether the categories should exist in the first place. Fraser, for example, felt that certain forms of the politics of recognition interfered with redistribution. Addressing misrecognition by affirming differences clashes with redistribution policies that deem social categories such as gender to be irrelevant, so that women and non-whites are not differentiated in negative ways. Others disagree with Fraser’s diagnosis. Iris Marion Young (1997), for example, created a pluralistic (rather than binary) theory of justice, contending that Fraser’s diagnosis of a clash of remedies is a function of her form of analysis, which reflects false dualisms rather than actual reality. She argues that rather than acting counter to redistribution, recognition is usually the means to ‘the economic, social equality and freedom Fraser calls redistribution’. She illustrates with the US example of the celebration of African-American solidarity: such celebration and organisation in predominantly African-American neighbourhoods not only improves individual and group identity, it also improves the material life of those who live there by providing services and jobs. Australian research shows that Indigenous youth who speak Indigenous languages are significantly more likely to attend school, suggesting that the so-called trade-off between Indigenous rights and socio-economic status is actually ‘over-stated’ and ‘not in fact an issue’ (Hunter, 2008). So we can argue that rather than a politics of recognition distracting from or being in competition with a politics of redistribution, it is instead a complementary or even necessary part of its success. But what form should such a politics of recognition take? 12

Social inclusion, diversity and the politics of recognition

Different aspects of recognition Recognition can be broadly conceived of in two ways: inter-subjectively and institutionally (involving participatory or status recognition). In relation to inter-subjective recognition, Axel Honneth (2001) argued that we become individuals through being recognised by others and that we owe our personal integrity and sense of self to receiving their approval or recognition. When someone is insulted or degraded, they are denied recognition, a form of injury that leads to a negative self-image. Similarly, Charles Taylor states that misrecognition and non-recognition are forms of oppression because they imprison individuals in false, distorted and reduced modes of being. Groups which experience repeated stigmatisation internalise negative self-images. Beyond being simply insulting, stigmatisation can inflict grievous psychological wounds and induce crippling feelings of self-hatred. Thus, due recognition is not just a courtesy, but a vital human need. Fraser’s (2000) reconceptualisation of recognition differentiates it from notions of wounded identity. She argues that: ‘to be misrecognised is not only to be thought ill of, looked down upon or devalued in people’s attitudes, beliefs or representation. It is being denied the status of full partner in social interaction, as a consequence of institutionalised patterns of cultural value that constitute one as comparatively unworthy of respect or esteem’. Hence, misrecognition arises when institutions structure interaction according to cultural norms that impede parity of participation. For example, women cannot participate in the labour market, politics or civil society on equal terms to men because of care responsibilities which are the result of the institutionalised norm that care activities are considered female-only activities. Some argue that Fraser too readily dismisses inter-subjective recognition and its salience to redistribution and social justice. Analysing the politics of better pay for low-paid childcare workers, MacDonald and Merrill (2002) argue that redistribution, institutional recognition and inter-subjective recognition all influence success. In relation to institutional recognition, the childcare workers in their research were mostly

women, often from minority and marginalised ethnic groups who felt their work was frequently de-valued through gendered images which painted it as unskilled, natural and/or easy. Thus their contribution to the greater good is demeaned and misrecognised because their work is defined as unskilled and limited to the private sphere. So any attempt to revalue care work must not only involve appeals to re-distributive justice but also overcome negative aspects of institutional recognition. Inter-subjective recognition is also important in this connection. Interviews with childcare workers found that they experienced significant personal disrespect in relation to their work, including aspects that they most valued themselves, such as their emotional attachment to their charges. Some parents, for example, diminished the significance of their child’s attachment to care-workers, not considering them an important part of their child’s

life. Institutional recognition could not account for how these harms were internalised by the misrecognised parties, who were then prevented from acting in their own ‘best interests’. Childcare pay advocates found that they needed to first convince childcare workers that low wages were driving high workforce turnover and affecting the quality of childcare, before childcare workers would advocate for better pay. The childcare workers would not say ‘we deserve better’ until high turnover was connected with lower-quality care and the welfare of the children themselves. In this way, inter-subjective issues became a barrier to the achievement of institutional recognition and redistribution.

Social justice and social inclusion policy When it comes to relating these ideas to SI policy, discussion to date has focused mostly on Insights Melbourne Business and Economics

redistributive concerns. Many have pointed out, for example, the extent to which SI agendas have departed from traditional anti-poverty agendas. By contrast, little explicit attention has been paid to the politics of recognition and SI policy, which is perhaps surprising given that one of the defining features of SI has been its emphasis on participation. In one of the few works on recognition and SI, Ruth Lister (2004) argues that political participation and democracy are emblematic to SI, which extends the material discourses associated with poverty to the nonmaterial matters of citizenship rights, democracy, inclusivity and respect. Her particular interest lies in how the cultural and political capital of those living in poverty can be strengthened to enable participation in decisions that affect their lives.

Participation and neighbourhood renewal Poverty can rob people of the economic and cultural capital needed for political participation, and these injustices reinforce one another, impeding equity of participation in the making of culture in the public sphere and everyday life. Lister (2004) looks at ways to build the capacity of people who experience poverty to participate directly in relevant decision-making, rather than have their views filtered through the ‘poverty lobby’ dominated

Social inclusion, diversity and the politics of recognition

by ‘middle class professionals’. While this seems to be a clear matter of ‘institutional recognition’, Lister also acknowledges the relevance of intersubjective recognition to political participation. For example, participants in the various projects she discusses found the experience of being listened to and taken seriously unusual. More commonly they were treated with disrespect and were not viewed as ‘humans with the rights and capacities to participate in public debate’. Further analysis emphasises the importance of inter-subjective recognition in the effectiveness of these participatory projects. People who repeatedly experience misrecognition often exclude themselves from political participation and self-advocacy because they have internalised misrecognition. Their lives leave little room for such activities. The projects, and the broader systems of values they gesture to, do not recognise their own values and ways of being. The message of participation has been most significant in relation to place-based SI policy at the local level. In my own research, focusing on neighbourhood renewal and community capacity-building, the small number of local residents involved in framing the policy were the individuals who were usually involved in

community initiatives – they held representative capacities on the estate. Bureaucrats administering the policy lamented that meetings and events were only ever attended by ‘the usual suspects’; they pined to reach ‘the real socially excluded’. But policy mechanisms militated against greater and more diverse local involvement. Developing project bids and participating in project meetings required, as one person put it, ‘a certain expertise at speaking that language’. Even if language didn’t hinder participation, the policy language and constructs it expressed ultimately shaped the content of meetings and the nature and scope of policy action. While there was a theoretical thirst for local participation and devolution of power to local hands, local voices and priorities were likely to be subordinated. Hence, issues of respect and values – common to both institutional recognition and inter-subjective recognition – explained the failure of this policy.

Work-force participation and ‘jobless families’ One of the most prominent aspects of the SI agenda, particularly in Australia, has been to equate SI with workforce participation. According to Julia Gillard, ‘workforce participation is the foundation of SI’. But the route to SI through workforce participation is complex and not necessarily guaranteed, particularly for certain social groups. In-work poverty, insecure employment, sexual and racial harassment, and exploitation in the workforce can all detach SI from employment, and these experiences are more common for certain social groups. Many Indigenous Australians want to work in the mainstream labour market like other Australians, but not all Indigenous Australians feel this way. The latter’s notions of work may differ from mainstream ideas and in some parts of Australia they may make strategic choices to pursue alternative livelihood options. Disabilities can also raise difficulties for workforce participation as a way to SI. All these examples raise doubts about the extent to which paid work itself can ensure SI for all. Paid work is clearly an institutional-recognition issue with culturally-relevant markers such as gender, indigeneity, ethnicity and disability

potentially impeding parity of participation in the workforce. But work also raises inter-subjective recognition issues in relation to how individuals are treated by others in the workplace. Prioritising work, and presuming a strong relationship between work and SI, are not universally shared values and ideas, and can devalue the meaning people may gain, and the contribution they make, through other aspects of life such as caring for others and connecting to country.

Homelessness and domestic violence Homelessness is a paradigmatic SI issue, and domestic violence is now recognised as the largest single cause of homelessness in Australia. But different experiences of violence create different needs and policy solutions. Women and children who are homeless due to recent isolated incidences of domestic violence normally re-establish their lives relatively quickly after escaping the violence, whereas women who have experienced violence throughout their lives usually require longer-term, intensive and diverse support from a range of services if they are not to remain homeless. For this group, the prospect of addressing homelessness through established, stable, long-term accommodation can be fraught with difficulty. For many, stable accommodation is experienced as threatening – they may not have experienced it before, may not know what to expect, or even doubt they ‘deserve’ such a thing. Nuisance complaints, rent arrears, failures to maintain properties and evictions can subsequently follow. Jacobs (2004) ties these problems directly to a sense of self and identity, that is, to inter-subjective recognition: ‘we view this as a direct result of the training these women received from childhood from the perpetrators of abuse. For a lot of these women moving or fleeing a situation is the only way they have of dealing with conflict’. For stable long-term housing to be achieved for this sub-group, the effects of a lifetime experience of violence and related mental health issues must be acknowledged within policy as part of homelessness solutions. Some argue for service delivery that is both ‘trauma informed’ and trauma specific, requiring a vital paradigm shift in the homelessness sector. Insights Melbourne Business and Economics

In social justice terms, inter-personal violence is usually viewed as a purely cultural issue. Domestic violence is certainly an ultimate form of nonrecognition of the other, and the recognition issues relevant to this policy example are clear. There are the effects of violence on the identity and sense of self of the homeless woman (inter-subjective), creating practical problems maintaining housing. In relation to institutional recognition, when homelessness policy does not adequately recognise the effects of domestic violence on housing experience, this impacts most strongly on women and children, who experience the highest rates of violence (thus the policy is gender-biased). But the example also shows that the issue of violence is fundamentally inter-connected with economic and material considerations through the provision

Social inclusion, diversity and the politics of recognition

and maintenance of long-term housing. That is, addressing the inter-subjective and institutional recognition issues associated with the experience of violence is a prerequisite to the success of longterm housing solutions.

Conclusion SIâ&#x20AC;&#x2122;s limited ability to accommodate difference is not perhaps surprising if we recognise that SI has never just been about a new suite of policies, or extending the notion of governance. It is also a vision, a set of values, and a way of seeing the world that is necessarily normative. It defines who and what is at the centre, and who and what is at the margins, creating as well as attempting to address these configurations. So if we are to better encompass diversity and difference within

the conceptualisation of SI and its policies, SI as a normative concept will need to be challenged, stretched, and re-invented. For a stronger philosophical underpinning to SI thinking, and better SI policy, we need a greater appreciation of recognition issues. At its best, SI will grow to take more diverse perspectives into account, and better reflect its multi-dimensional aspirations.

Dr Zoë Morrison is a Senior Manager in the Research and Policy Centre at the Brotherhood of St Laurence, and an Honorary Research Associate of the School of Social and Political Science, Melbourne University.

Macdonald, C & Merrill, D 2002, ‘ “It shouldn’t have to be a trade”: recognition and redistribution in care work advocacy’, Hypatia, vol. 17, no. 2, pp. 67–83. Taylor, C, Appiah, K, Habermas, J, Rockefeller, S, Walzer, M & Wolf, S 1994, Multiculturalism: Examining the politics of recognition, Princeton University Press, Princeton. Young, I M 1997, ‘Unruly categories: a critique of Nancy Fraser’s dual systems theory’, New Left Review, no. 222, March/April, pp. 147–60.

References Fraser, N 2000, ‘Rethinking recognition’, New Left Review, no. 3, May–June, pp. 107–20. Fraser, N & Honneth, A 2003, Redistribution or recognition? A political-philosophical exchange, Verso, London, UK. Honneth, A 2001, ‘Recognition or redistribution? Changing perspectives on the moral order of society’, Theory, Culture & Society, no. 18, pp. 43–55. Hunter, B 2008, ‘Indigenous social exclusion: insights and challenges for the concept of social inclusion’, Brotherhood of St Laurence Social Inclusion Down Under Symposium Proceedings, <www.bsl.org.au>. Jacobs, J 2004, A collaborative approach to working with women who have experienced sexual violence as children, Stepping Out Housing Program, Sydney, viewed 28 April 2009, <http://www. mhcc.org.au/documents/SteppingOut%20 Housing.pdf>. Lister, R 2004, ‘A politics of recognition and respect: involving people with experience of poverty in decision-making that affects their lives’, in J Anderson & B Sim (eds.), The politics of inclusion and empowerment, Palgrave, New York. Insights Melbourne Business and Economics

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changing life trajectories: the early years education research project It is possible to compensate for the effects of a disadvantaged family background by giving children from those families access to high-quality childcare and supporting their parents to provide a nurturing home environment by alice hill, brigid jordan, nichola coombs, janet williams-smith and jeff borland

A condensed version of a presentation to the Social Justice Seminar held at the University of Melbourne on 3 May 2011.

The Early Years Education Program (EYEP) is a new program being offered by the Children’s Protection Society (CPS), a not-for-profit child welfare organisation based in the north-east of Melbourne. EYEP is targeted at children aged up to three years, who have been or are at risk of being abused or neglected. Children who participate in EYEP receive five days per week of high-quality education and care totalling at least 25 hours. Particular features of the program are high staff/child ratios, qualified staff, attachmentbased care, a child-centred curriculum based on the new National Early Years Learning Framework, integration with family support services, and a focus on building alliances with parents to sustain their children’s participation in the program. This participation lasts for three years, or until a child reaches school age. The objective of EYEP is to ensure that children who participate realise their full potential and arrive at school developmentally and educationally equal to their peers. It is now well-established that children’s social, emotional and mental development in their early years is a major predictor of their subsequent life course. From Neurons to Neighbourhoods, a review of research on early childhood development by the US National Research Council and Institute of Medicine

concluded that: ‘virtually every aspect of early human development, from the brain’s evolving circuitry to the child’s capacity for empathy, is affected by the environment and experiences that are encountered in a cumulative fashion, beginning in the parental period and extending throughout the early childhood years’. Early mastery of a range of cognitive, social and emotional competencies lays the foundation for young children’s achievements as learners in school and beyond. Children with deficiencies in their cognitive and non-cognitive skills before the age of five are likely to have these deficiencies persist into later life, forming the basis of problems such as low education attainment, unemployment, teenage pregnancy, and involvement in crime. The skills children acquire before the age of five years depend strongly on family environment and socioeconomic background – for example, such factors as the mother’s marital status, level of education, and health. So it is children from disadvantaged backgrounds who are most likely to fall behind in skill acquisition in their early years, and experience financial and social problems as a result. Those effects are even more pronounced for children who are abused and neglected. For many children living Insights Melbourne Business and Economics

in vulnerable families, multiple risks converge to compromise safety and development. Exposure to trauma such as abuse, neglect or violence affects every dimension of an infant’s psychological and behavioural functioning. CPS’s experience is that these children typically enrol in their prep year with skills two years behind their classmates’, and that they never catch up.

Closing the gap on disadvantage Some good news, however, is that it does seem possible to compensate for the effects of disadvantaged family backgrounds by giving children from those families access to highquality childcare, and by supporting their parents to provide a nurturing home environment. In the US, programs such as the Abecedarian and Perry preschool programs, which have combined intensive preschool education and care with parental mentoring, have found significant improvements in children’s performance on intellectual aptitude tests, their likelihood of requiring special education services, and longterm employment and earnings outcomes. Findings from the Effective Provision of PreSchool Education study in the UK (the largest European longitudinal study of development and learning in children aged from three to seven years) indicate that what parents do is more important than who they are. So, while it may not be possible to change family circumstances such as unemployment and poverty, improved outcomes for children can nevertheless be achieved by supporting families to do things differently. While the benefits of early and sustained education for vulnerable children may be well-established, at-risk children who would benefit the most are least likely to have access to appropriate education and childcare. In Victoria, over 90 per cent of preschool children are enrolled in government-funded kindergarten programs. However, analysis of the CPS 2007 Family Support program found that, of children aged up to five years, only 16 per cent had experienced some form of early childhood education and care services, and only 50 per cent of four-year olds were enrolled in kindergarten programs. CPS has designed EYEP to address both the apparent lack of access to early education by vulnerable 20

Changing life trajectories: The Early Years Education Research Project

children, and evidence of the benefits of intensive childcare and early education for those children. Particular features of EYEP are high staff/child ratios (1:3 for children under three years, and 1:6 for children over three years), qualified staff, a rigorously developed curriculum, and the use of relationship-based pedagogy. The program involves direct intervention with children to address their identified needs, reverse developmental delays, and reduce the impact of risk factors and adverse events. An innovative feature of the program is a transdisciplinary model with an in-house infant mental health consultant, family-support specialist, and early-childhood curriculum consultant. Integration between EYEP and family support services is emphasised, and the program has an active focus on building alliances with parents to sustain their children’s participation in the program. The education model in EYEP is a pedagogicallydriven reflective teaching model that is childfocused and built on the National Early Years Learning Framework of ‘Belonging, Being and Becoming’. Each child has individual learning goals that are defined by the parents in partnership with the educators. The educators plan a curriculum using play-based approaches and intentional teaching to support each child’s learning and development across learning outcomes in the Early Years Learning Framework. Play-based approaches and intentional teaching support children to develop a positive sense of identity as they explore, create, imagine, solve problems, learn communication skills, and develop friendships. It is understood that how children learn is just as important as what they learn. Reflection on practice guides the ongoing planning cycle. Educators document, monitor and assess each child’s learning over time. Central to the program is an attachment-focused, trauma informed, primary-care model which recognises the significance of respectful, responsive relationships for every child’s learning and development. Every child is allocated a key worker who is that child’s primary carer for the purposes of the program. Purposeful, warm greetings and clear ideas of the routines and opportunities of the day are essential components of the model, which help to give children a sense of security,

predictability and consistency. The purpose of the primary care model is to encourage the fostering of significant attachments for children who are likely to be experiencing attachment disorders in their home-care environments.

One boy’s EYEP experience To provide a more concrete feel for what EYEP is doing, what follows is a case study about a boy called Will, who is four years old. He has been excluded from two childcare services because of his challenging behaviour – which includes biting, swearing, spitting and urinating in the playroom. These behaviours may well be viewed as challenging but they also provide great insight into just how insecure and unsettled Will feels. Will’s mother survived three violent relationships and has three children under four years of age, Will being the eldest. Her frustrations with

Will’s behaviour lead her to harsh discipline: she regularly smacks him, locks him outside and yells at him. Will was sexually abused by one of his mother’s partners when he was just three years old. He still wears nappies because he is frightened to use the toilet. Will’s behaviour is the result of trauma and fear, and the way he behaves is entirely understandable given his feelings and what he has experienced. But in less than six months Will is going to have to start school. Will joined EYEP last year as part of the pilot phase of the program. Since then he has experienced the primary carer model and been welcomed into the Centre along with his mother and his brothers. He has been referred to the local child and adolescent mental health service, and together with them a care plan has been designed that involves 25 hours participation in EYEP each week.

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It took Will three months to settle into the program and to begin to trust staff; the same with his mother. He has a good routine and eats three meals a day at the Centre. He has been put in charge of caring for the chickens and collecting the eggs each morning. He has a routine of helping prepare breakfast for himself and the rest of the children and he has flourished in this responsibility of providing.

The trial of EYEP will ultimately involve 45 children who will participate in the program, and another 45 who will be non-participants. By comparing outcomes for these groups it will be possible to estimate how participation in EYEP affects children and their parents. These numbers have been chosen to fit with the capacity of the CPS childcare centre, as well as delivering statistically valid estimates of the effects of EYEP.

Will now understands that his primary carer at the Centre is a consistent figure who accepts him and cares about him and he has built a safe relationship with her. As a result Will has become ready to learn. He explores and experiments and has started to interact with his peers in play activities such as drama, art and music. He can pretend and imagine. He can ask for help and he can tell us when he feels angry and upset. This is the beginning of his recovery. He has a long way to go and is unlikely to be as ‘school ready’ as most of his peers, but with the small amount of time he has had to recover from the trauma of infancy, he is doing well.

To be eligible to participate in EYEP a family must meet several criteria. Most importantly they must have two or more risk factors on the Department of Human Service Best Interest guidelines. Examples of risk factors include: a history of family violence; alcohol or substance abuse problems; or harsh, inconsistent discipline, neglect or abuse in treatment of the child.

EYEP research project Research is currently underway to evaluate the program. From the outset, the CPS Board was concerned not just to introduce EYEP, but also to know whether it worked, and whether it should be extended to similar at-risk children throughout Australia. They decided to test the effects of EYEP using a randomised trial. To implement the trial, CPS have put together a multi-disciplinary team. It includes researchers with expertise in infant mental health and social work, early childhood education, and program evaluation and statistical methods; and staff from the CPS responsible for implementing the program. This multi-disciplinary team has been essential to getting the research project off the ground. Having experts in child health and education has been critical for allowing effective communication with the educationalists who are implementing the program – to understand what their model is and what they are trying to achieve. Having both academics and clinicians involved in the research ensures that it will have academic validity, but also that it works at a practical level. 22

Changing life trajectories: The Early Years Education Research Project

Eligible families in the north-east of Melbourne are being informed by their Family Support case managers of the opportunity to participate in EYEP. Those who express interest proceed to an enrolment interview with CPS where EYEP and the research project are explained. Families that consent to participate are randomly assigned between the ‘treatment’ group that will receive a place in EYEP and the ‘control’ group which will not receive a place and, hence, will have ‘usual care’ arrangements. A pilot of the EYEP project was conducted in 2010, supported by funding from the Commonwealth Department of Education, Employment and Workplace Relations, in order to hone the service model, the survey and measurement methods, and the research process. Recruitment of participants for the full threeyear EYEP trial is now proceeding, with the first 30 children currently being recruited to the trial (of whom 15 will participate in EYEP, and 15 will constitute the control group). The next 30 children will be recruited in the second half of 2011, and then the final 30 in the first half of 2012. Funding for the trial has come from the Victorian Department of Human Services, and from philanthropic sources, including the Sidney Myer Fund, the Ian Potter Foundation and the RE Ross Trust. Results from a one-year impact evaluation should be available in 2013,

with a complete cost-benefit-analysis likely to be finished by 2015. There will be three main parts to the analysis of EYEP. The first is the process evaluation, involving the description and evaluation of how the program was implemented. Second, a variety of impact evaluations will be conducted throughout the research project. These will examine questions such as how participation in EYEP affects children’s ability to sustain their participation in early childhood care and education, their levels of socio-emotional, cognitive and language development, whether they have more secure attachment relationships with their primary care givers, and have better physical and mental health. As a basis for the impact analysis, extensive data is being collected on the children’s cognitive, speech, language and emotional development, their physical and mental health, parent-child attachment relationships, and on the parent’s health and community participation at their time of entry to the trial. This data will also be collected at one-year intervals during the trial. Third, a cost-benefit analysis will quantify the costs and benefits of EYEP to society. This part of the analysis involves translating the net impact of the intervention into an estimated monetary value for each specific benefit and cost, and then aggregating these estimates to calculate the overall benefit/cost ratio. As well as comparing the treatment and control groups of children in the trial, the children will be compared against children with similar characteristics from the Longitudinal Survey of Australian Children (LSAC). In the first instance, this will show where the children in the trial fit into the general population of children in Australia. Ultimately, it will also provide an alternative control group for evaluating the effect of EYEP – which may be important as the control group in the trial may end up accessing more services than would be the case for a similar group not involved in the trial. A reason for this is that the researchers have an ethical obligation to provide information on their children’s development to parents in the control group, and to advise them to discuss any problems with their GPs or Family Support caseworkers.

Conclusion So, why bother to evaluate EYEP, when there have already been evaluations undertaken of similar programs in other countries? This research project is important because the findings from international research cannot automatically be applied to Australia. First, differences in the cultural context, family risk factors, and the family support service system between Australia and other countries may affect how the program works. Second, the best-known programs enrolled participants a long time ago, in the 1960s and 1970s, and were conducted in small cities. The current study will provide up-to-date evidence that is relevant to Australia’s urban environment. Finally, many policy-makers in Australia are sceptical about the efficacy of programs targeted at high-need children beyond existing universal services. The research study will measure the benefits and costs of EYEP to the children who participate, and to the community as a whole. Alice Hill is a CPS Board member; Brigid Jordan is Associate Professor of Paediatric Social Work in the Department of Paediatrics, University of Melbourne, and at the Royal Children’s Hospital; Nichola Coombs is an Occupational Therapist and Child Psychotherapist who has the main role in recruiting trial participants and data collection; Janet Williams-Smith is the Director of EYEP at CPS; and Jeff Borland is Professor of Economics in the Department of Economics, Faculty of Business and Economics, University of Melbourne.

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academics and financial services: strange bedfellows The relationship between finance academics and the finance sector has produced great contributions but often disappoints and can be made to work better by jeremy duffield

An edited version of an address to the Finance Downunder Conference on 11 March 2011.

Today I wish to explore the strange relationship between financial services businesses and financial academia. It’s a good topic for me – I started out wanting be an academic but instead had a 30-year career in financial services at The Vanguard Group (Vanguard). When I was young, I moved to the US with the aim of getting a PhD in economics, becoming a university lecturer and working on economic development issues. But after graduating in 1979 I took a research role at the Federal Reserve Bank of Richmond to gain money and experience before graduate school. My boss had the bright idea of doing research on money market mutual funds, which were then taking off. We wrote several papers that led to a speaking opportunity in New York, where I met the now-legendary Jack Bogle, founder of Vanguard, my soon-to-be employer.

that universities provide. Financial services is the archetypal ‘knowledge worker’ industry, requiring a steady flow of quantitatively astute, finance-savvy workers. Firms pay top dollar for top talent in the search for competitive edge. It’s clear that executives in financial services are heavily influenced by the thinking they are exposed to in academia. I want to focus more on the second and third strands of the academic-practitioner relationship. The second strand is the research that academics do which may influence the finance sector, while the third strand is the collaborative work that academics and financial services firms do – whether through sponsored research, consulting, board memberships or business alliances.

So, academia was spared a possibly average academic and Vanguard gained someone with an academic leaning, if not the full credentials. From that introduction you might understand why I’m interested in the question of how business and academia fit together.

I’m fascinated by how finance academics and businesses and regulators relate, about how research agendas are set and how academics can work most productively with the finance sector. I believe it is an under-optimised relationship, characterised by mutual misunderstanding and miscommunication; one that can produce great contributions but often disappoints. We should work harder to make it work better.

I’d argue there are three vital strands to the relationship between universities and financial services, including the latter’s regulatory elements. Clearly, the first strand is that financial services businesses depend on the education and training

Historically, academia has had a huge impact on financial services, particularly on investment management. Witness the late Peter Bernstein’s excellent Capital Ideas, which traces the influence of Harry Markowitz, Bill Sharpe, James Tobin Insights Melbourne Business and Economics

and others on the development of modern portfolio-management practices. In a chapter suitably called ‘From Gown to Town’ he recounts the impact of academia on financial services firms in the 1960s and early 1970s – particularly the role of academics working with John McQuown at Wells Fargo, which led to new thinking about portfolio construction, the likelihood of success of active managers and the first index fund. Academics working on their own made progress and then were sought out by practitioners to apply that research.

Its development was profoundly influenced by academic work on market efficiency and the poor performance of mutual funds versus the market. Jack credits Paul Samuelson as the author of the first of three key articles which influenced him. Later, Burton Malkiel, famous among other things for A Random Walk Down Wall Street, would become a (28-year) member of the Vanguard board. Finally, Jack’s thinking was also shaped by Bill Sharpe, who revealed the foolishness of expecting the average active fund manager (with high costs) to outperform low-cost index funds.

I want to use a couple of quite distinct examples from my experience and interests, commencing with the influence of academia on Vanguard; and then talk to the contributions of academia to economic development, with a focus on microfinance.

This powerful academic idea has profoundly influenced financial services. Indexing has been described as the greatest financial services innovation of the twentieth century. We based the entire Vanguard Australia business around it when I established Vanguard’s first international office in 1996. Indexing was then a ‘joke’ within the local industry. It now accounts for some 16 per cent of assets in the Australian superannuation industry; Vanguard Australia manages some $80 billion.

Academia and The Vanguard Group Although I no longer work at or speak for Vanguard, I can tell you the academic world has had a profound influence on what is now the largest US mutual fund asset manager. Vanguard is a company built on a foundation of ideas beginning with Jack Bogle’s 1951 senior thesis at Princeton University about the mutual fund business. Jack is probably best known for his focus on lowering costs to investors and for innovation and advocacy in index funds. The importance of low costs was evident to Jack from his understanding of the role of compounding in wealth accumulation, his own work on mutual fund competitor performance and his awareness of the mutual fund studies by academics in the 1960s. Jack was an early student of finance academics and once introduced himself as ‘Beta Bogle, the Data Devil’. Vanguard introduced the first publicly available index fund in 1976 – tied to the S&P 500 index. That fund had an inauspicious beginning, raising just $11 million in a brokerage underwriting amidst a chorus of criticism. Indexing was called ‘un-American’ and the idea of trying to match the market average was confused with being average, when the results were destined to be distinctly above average. That fund and its many descendants now account for over half of Vanguard’s $1.6-plus trillion in assets. 26

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Academia had other significant impacts on Vanguard as well. Some brief examples are listed below.

Quantitative investing While adopting indexing with enthusiasm, Vanguard still felt there was room for active management if costs could be minimised. It believed a quantitative approach might work by taking small bets away from the index, while keeping management costs low and paying careful attention to trading costs. With disciplined management – enabled by computer power and strong data sets – Vanguard would be able to outperform an inefficient market. Beginning in the late 1980s, Vanguard set about building quantitatively-oriented mutual fund products based on ideas gleaned from academia, either indirectly from investment professionals schooled in quantitative ideas, or directly from academics in asset management firms they had constituted to sell advice. Although indexing is a great success of academia in financial services, quantitative investing as a field – within and beyond Vanguard – has had

mixed results, like active investment management in general. What was envisioned in a theoretical world, and tested in the real world, did not always come out as expected. The experience in the Global Financial Crisis (GFC) was particularly acute – so many of the models worked on the same or similar factors, and deleveraging seems to have hit those factors particularly hard.

Behavioural finance and the design of our services The newer field of behavioural finance has already had a significant impact on financial services, not on the way portfolios are run, but rather by influencing the very design of the services that Vanguard and others offer. It encourages a much greater understanding of the way investors actually invest and how their natural biases and inclinations affect their investment activity and choices. Vanguard, particularly in its retirement plan area, used insights from behavioural finance to restructure offerings to clients on such issues as the number of choices offered, the role of lifestyle funds, and approaches to communicating and educating participants about choices. Vanguard worked with Schlomo Benartzi (UCLA) and Dick Thaler (University of Chicago) to develop and implement their innovative ‘save more tomorrow’ plan, which was based on the insight that many participants realise they need to save more, are unwilling to do so today, yet are quite willing to commit to saving more tomorrow (at the time of their next pay rise, say). Vanguard has also collaborated with academics in studying its huge live databases of investor behaviour. For example, Sheen Iyengar at Columbia extended her study of ‘choice overload’ with chocolates and jams into choice within a retirement planning framework. Her findings have impacted on plan design and investment education programs. These examples show how behavioural researchers have alerted financial institutions to the need to understand clients better and not to proceed just on the basis of hackneyed inferences and assumptions.

After-tax investing Papers published by John Shoven and Joel Dickson of Stanford University, on the after-tax performance of mutual funds, are another example of academia impacting Vanguard’s strategy. Vanguard had been aware that the success of low-turnover index funds was understated because performance was always calculated and compared on a pre-tax basis. But these papers really strengthened the case for indexing. Vanguard eventually hired Joel Dickson and continues to advance the case for focusing on what’s left in investors’ pockets after fees and taxes.

Academia and microfinance At the other end of the spectrum to Vanguard’s affluent clients, academia is also improving financial services for the world’s poorest. I’ve always been fascinated by ideas for advancing the interests of the poor at a faster clip. There have been many false starts in trying to accelerate third world development. One idea that is making an important incremental difference is microfinance, a concept fathered by Mohammad Yunus. Yunus, a professor of economics in Bangladesh, returned from training in the US in 1976 and observed that moneylenders had a basic stranglehold on the opportunities for the poor to escape poverty. Usurious debts basically made them indentured servants. From his own pocket he could provide small loans that would break the bond. He discovered that under the right conditions poor borrowers could be excellent credit risks – completely reversing the traditional assumption. Yunus set about building the Grameen Bank to make very small loans to mostly female borrowers, enabling them to start small businesses and escape dire poverty. Grameen today serves some eight million customers. Yunus’s work has inspired a vast microfinance movement around the world. There is a rich literature on the subject. For example, Portfolios of the Poor, by academics from New York and Oxford Universities and consultants working in microfinance, explains how the very poor manage their finances on $1 to $2 per day through a surprisingly complex Insights Melbourne Business and Economics

set of financial interactions which challenge our Western assumptions. The book emphasises the need for well-designed and delivered financial services. As with behavioural finance, there is a significant opportunity for researchers to work with financial services institutions to improve delivery and solutions. I was in India last month investigating microfinance in the field at a time of great controversy – it was coming under intense criticism on the back of some efforts to commercialise the activity. The Bangladeshi government seems to be clumsily attempting to remove and discredit Mohammed Yunus, for what seem like political reasons. While microfinance is no silver bullet for poverty, the poor need access to financial services that meet their needs. Just as academics had a key role in starting microfinance, I believe they have a great opportunity to ensure that the poor have access to intelligently designed and appropriately regulated financial services. In the present controversy about microfinance, academics can bring independence, rationality and evidence to the debate.

Academia’s role in the GFC I hope these stories encourage you to believe that academia can make a great contribution to financial services, the economy and society. However, we should not close the discussion without at least pondering the question of whether academia might also have contributed to the shortcomings of the financial services system. In the mid-1970s, a common question in US social conversation was: ‘Where were you when John F. Kennedy was shot?’ Later the question became: ‘Where were you when John Lennon was shot?’, and of course from 2001: ‘Where were you when the Twin Towers went down?’ For financial services professionals and academics, analogous questions are: ‘Where were you during the GFC?’, ‘What did you think?’, ‘What did you say?’ and ‘What did you do?’ Much has been written about how financial services firms contributed to this unholy mess, but we should also consider the role of academia in the conflagration. There were some notable voices from academia raising concerns about real estate 28

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bubbles: Robert Shiller and Nuriel Roubini (‘Dr Doom’) among others. But we need to remember that while Wall Street is well-resourced to create its own financial engineers, many of those engineers and their bosses were first trained by academics. I’m sure a significant number of academics were consulting to industry, involved in hedge funds or on relevant boards throughout the period. The GFC raises profound questions about our roles and responsibilities as business people and academics, and about the need for ethics training in universities. It also raises a rich trove of research topics – for example, about the nature of systemic risk, incentives and moral hazard – that will give academics, practitioners and regulators much to think about for years to come.

Building a stronger relationship While there are many research opportunities, there is also a great need for closer cooperation and collaboration between the academic finance community and the finance sector. I believe it’s a suboptimal relationship. Universities seem to be driven by the two imperatives of educating finance students – a highly valuable activity to the financial services industry – and working on research, an activity that’s sometimes valuable to industry. Worldwide, there are varying degrees of emphasis by universities on the third strand, working closely with financial services institutions. In some, it’s encouraged as a third stream of income, helpful in keeping the best staff; in others, it’s discouraged as incompatible with the first two strands, particularly the need to develop ‘journalready’ research to build academic reputations. For their part, financial services institutions appreciate the flow of talent developed by universities but have only modest involvement in defining the nature of that education. Financial institutions, to their discredit, often consider university research as ‘ivory tower’ and irrelevant. Too often they don’t devote the time to understand the work or its implications. Instead, they create well-funded in-house research units to work on narrow applications often in conventional fields with limited innovation, but which convey the marketing message of ‘sophisticated thinking’. They often don’t know how to engage with

academics who might bring different dimensions to problems. They perceive universities as opaque and are unable to engage with university staff in a practical manner. Sometimes it’s like watching a line-up of teenagers at dancing class – all awkward and unable to mingle or get started. Sometimes no connection whatsoever is made. Nobel Prize winner James Tobin said that though his advice was good enough for US presidents, the Federal Reserve Board, and the Congressional Budget Office, he was ‘unique in that no real world financial enterprise has ever asked me for any advice whatsoever’. There are striking exceptions to these characterisations. Strong connections exist between business and a number of US universities, for example between financial institutions in Boston, San Francisco and Chicago and the great universities located in these cities. The Universities of Chicago and Wharton have both spawned money-management firms and strong relationships between practitioners and academics. However, in too many cases, the gaps between universities and financial institutions are simply too wide. And, while I appreciate the objectivity of academics and their independence from the grubby, mercenary aspects of financial firms, I see separation as having four key drawbacks. First, who sets the research agenda? I appreciate the desire of individual academics to pursue areas of great interest to them, but how about setting that in a context that will really be valued by a broader audience, including that of practitioners? How about creating a dialogue about where the great opportunities for research lie and what the payoffs are? How about a dialogue between regulators and academics on what’s important? That might have identified systemic risk as a crucial issue before individual return-seeking behaviour led to system chaos during the GFC. Second, how well does the academic community, in isolation, really understand the nuanced and complex ‘real world’ of rapidly changing financial markets and their participants?

and solutions – should work together. Having worked in a team-based business for many years, I believe that, with all due respect to lone geniuses, team approaches to problem solving generally produce better solutions. Teams that involve both academics and non-academics will often produce better answers to better questions more quickly than stand-alone academic or business efforts. Fourth, finance is ultimately an applied field. We need good ideas to be well implemented. If ideas are developed in academia, how are they to be transferred for business implementation? How long does it take? A lot longer if business isn’t at the table, helping to set the agenda and working out appropriate implementation plans. I am very interested in the question of how financial services businesses and regulators can work more productively with the academic community. That is why I recently accepted the role of Chairman of the Australian Centre for Financial Studies. The Centre’s role is to encourage dialogue and interaction between the staff of its consortium universities and industry. Hopefully it will enhance understanding and mutual respect, and lead to well-focused work that strengthens financial services within Australia and beyond as Australia builds its financial relationships offshore.

Conclusion I’ve argued from my own experience at Vanguard and from wider observations that financial academics have had strong and positive influences on the development of financial services, and can make a powerful difference going forward. But we have to find ways to optimise the relationships between academia and the business community. We can do better! Jeremy Duffield is Chairman, Australian Centre for Financial Studies. He was previously Chairman and Founding Managing Director of Vanguard Investments Australia.

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growth challenge: riding the resources boom to lasting prosperity by deborah cobb-clark, john p haisken-denew, paul jensen, guyonne kalb, felix leung, duncan mcvicar, cain polidano, chris ryan, anthony scott, elizabeth webster and roger wilkins

A selective summary of highlights of the 7th Economics and Social Outlook Conference held by the Melbourne Institute and The Australian on 30 June and 1 July 2011. Many of the presentations and recordings of each speech can be found at http://melbourneinstitute.com/miaesr/events/ conferences/conferences_outlook2011_fullprogram.html.

Background For nearly a decade, the Melbourne Institute of Applied Economic and Social Research and The Australian have jointly hosted an annual Economic and Social Outlook Conference, designed to bring together leading policy makers, politicians, academics, community service organisations, and business leaders to discuss the priorities for economic and social reform in Australia. The first conference was held in 2002 against a backdrop of strong economic growth and declining unemployment. In contrast, the sixth conference in 2009 was one year after the GFC plunged much of the world into a deep economic recession. As it seemed clear that Australia would escape the worst of the crisis, conference participants focused on Australia’s road to recovery, identifying sensible strategies for restoring prosperity after the crisis. Since then, Australia has continued to move down the road of economic recovery and shrug off the worst of the crisis. The challenge now is managing an unprecedented resources boom and the highest sustained terms of trade in 140 years. This provides us with an opportunity to set in place policies to entrench widespread prosperity. Yet there are difficulties in managing the adjustment processes triggered by a strong dollar and rising interest rates – both of which squeeze the non-mining sectors

of the economy – and in ensuring that prosperity created by the mining boom is felt by all.

Managing the growth shock After the official opening by the Premier of Victoria, Ted Baillieu MP, the Conference commenced with a discussion on Australia’s growth shock. Warwick McKibbin questioned whether Australia’s terms of trade boom could continue into the future. While global growth would continue, Australia’s terms of trade is likely to fall from its historic highs due to a rise in (non-commodity) inflation and increased supply from other countries. Our optimal response is not to forecast the future but to manage the risks associated with a range of alternative future outcomes. Creating a sovereign wealth fund should be part of this strategy. Gary Banks argued that the terms of trade boom has had little effect on domestic inflation, but that it has been accompanied by structural changes in employment. Job losses have been concentrated in manufacturing while job creation has largely occurred in services. However, output in agriculture and manufacturing continues to rise in absolute terms. Chris Richardson argued that many of the drivers of Australia’s productivity growth are one-off benefits. To get more growth requires a massive overhaul of Commonwealth/ State relations, which is difficult in light of the Insights Melbourne Business and Economics

current minority government in Canberra. This may prevent Australia capitalising on the current opportunities.

Climate change and energy security There was vigorous debate about climate change and energy security. Martin Ferguson MP discussed the issue of energy security against the backdrop of population growth and increasing demand from China. Overseas investment in domestic infrastructure was essential to support the sector, as was skilled migration. With respect to carbon pricing, policy uncertainty may reduce investment and weaken energy security. Senator Christine Milne highlighted the urgency of action on climate change. Resources from the mining boom should be used to invest in a low-carbon economy, as the current decade is critical for action and is an ecological and political turning point. Decisions about climate change require cultural change and need to be made on ethical, rather than efficiency, grounds. Ross Garnaut emphasised some key points from his recent report, in particular that alternative arrangements would increase costs without increasing revenue. Governance arrangements were central to protecting against vested interests and promoting stability.

Growth challenge: Riding the resources boom to lasting prosperity

Three economic challenges The Federal Treasurer, Wayne Swan MP, identified three major challenges facing the Australian economy: (i) the dramatic shift in global economic power from the industrialised West to the developing East, with its burgeoning middle class; (ii) delinking economic growth and carbon emissions, which requires putting a price on carbon; and (iii) the demographic shift to a much older population, necessitating workforce reforms designed to encourage people to extend their working lives. The set of initiatives in the recent Budget and others pursued by the Government addressed aspects of these challenges.

Tackling disadvantage amid the boom There are a number of challenges in ensuring that the opportunities generated by the current boom are widely felt. Jenny Macklin MP discussed the increasing concentration of poverty in society and the often terminal nature of disability pensions. Previously, moving into a disability pension meant exiting the labour market, with receipt times typically about 10 years until full retirement. Much of the increase in disability has been due to identified mental health problems. Currently, younger recipients (35 and under) of disability transfers must be interviewed

to ascertain whether reintegration programs leading to at least eight hours per week of paid employment might be effective. Peter Davidson spoke about the Newstart Allowance, which has many re-employment disincentives. The scheme is thought to be ‘unfair’ and ‘overly complex’ by many recipients. Australia should consider overseas schemes, which place less emphasis on ‘ability’ to work. Ian McDonald addressed the issue of the short- and long-run unemployment rate in a wellbeing/happiness framework and examined the effect of disability support payments, identifying the negative effects of discrimination and disadvantage in early childhood.

Funding the education revolution Funding to improve accessibility and quality of education is an important policy debate. Glyn Davis observed that reforms to allow universities to offer more places to domestic students are being undermined by funding constraints. Recent growth in domestic student numbers was largely funded by a growth in full-fee international students, but is unsustainable due to falling international enrolments. Bill Daniels claimed that existing school funding arrangements based on socio-economic status were well targeted and that the current review should take into account cost-savings from publicly-funded students in non-government schools. Chris Ryan tempered expectations of the review and proposed that the best outcome would be a clear framework for funding private schools.

Big Australia or not? Michael Stuchbury initiated the round-table discussion of population issues by putting the challenges surrounding population policy in the context of the swings in the Government’s stance on population issues. In the early 2000s policy was directed towards increasing population through initiatives such as the baby bonus. However, by the end of the decade, environmental concerns and drought had resulted in calls for a slowing of population growth mainly through reductions in Australia’s immigration policy.

In the lively discussion that followed, Tony Burke MP, Scott Morrison MP, Bob Carr and Jennifer Westacott reflected a range of perspectives on the population challenge facing Australia. While Bob Carr argued strongly for a rejection of the ‘Big Australia’ notion on environmental grounds, Jennifer Westacott argued for a public conversation around a broader population policy that concentrates on infrastructure. Scott Morrison noted that many Australians are concerned about population growth because they feel that it has not been managed particularly well, and that many people in urban areas are experiencing a reduction in the quality of living as a result. Finally, Tony Burke cautioned against using immigration as a lever to deal with Australia’s structural ageing issues.

The need for reform Treasury Secretary Martin Parkinson emphasised the pressing need for a new wave of reform in order to boost productivity and maintain Australian living standards. The mining boom had masked Australia’s poor productivity performance in the past decade, and we would need to rely on productivity growth for any improvements in living standards in the future.

Tax reform waiting to happen Bill Shorten MP overviewed potentially important reforms. One which could profoundly change the lives of disabled Australians is a national disability insurance scheme. One of its flow-on effects might be to help carers to participate in the labour market. Unlike Shorten, who favoured more-or-less seamless State taxes, Joe Hockey MP argued that competition between the States is essential for productivity reform. States need to have the opportunity to raise their own taxes: if they suffer the pain of raising taxes then there will be more careful spending. Greg Smith and Yasser El-Ansary had broader, more long-term views, arguing these long-term plans could be used to design medium- and short-term plans taking into account political and practical constraints. The long-term plans become a blueprint for the future into which all intermediate tax reform should fit. Although there may be a short-term cost to implementation, the long-term vision can Insights Melbourne Business and Economics

be used to explain to voters where the reform is going and why, thus improving the chance of popular acceptance.

Funding an older Australia This session examined options for funding an older Australia against the backdrop of a forthcoming Productivity Commission report on the funding of aged care. David Gruen outlined the options and impacts of compulsory superannuation and national saving. Australia’s gross savings rate is now higher than the OECD average. The issue is whether this is enough to fund an older Australia. Henry Ergas focused on funding aged care through compulsory long-term insurance. Currently, aged care funding is full of distortions because of federal regulation to reduce financial risk and increase the share of costs borne by aged care recipients. There is a high variance in care costs, and it is doubtful whether the introduction of long-term care insurance could cope. He supported the idea of compulsory longterm care insurance as a supplementary product to health insurance. David Cox illustrated issues with new superannuation products and showed that for an average individual there was a 60 per cent chance of income running out before death. He argued for the role of deferred annuities that start when usual pension income runs out.

Getting water policy right Wendy Craik presented preliminary findings from the Parliamentary Committee of Inquiry (PCI) into the urban water sector. The PCI is examining opportunities for efficiency gains in the urbanand waste-water sectors and proposes a program of work for Commonwealth, State and Territory governments and local councils. The Inquiry has found that costs to the community of maintaining water supply in metropolitan areas are considerably higher than necessary. Kerry Schott expressed some dissatisfaction with the PCI’s draft report, arguing that, at least in the case of Sydney Water, many of the recommendations had already been implemented. Good long-term planning requires a ‘portfolio’ of water sources. Contrary to the PCI’s findings, 34

Growth challenge: Riding the resources boom to lasting prosperity

desalination plants are relatively cost-effective sources of water. A study commissioned by Sydney Water found household water demand to be highly inelastic, implying that adaptive pricing would require large swings in prices to produce significant changes in water consumption. Michael Porter argued that the efficiency of Australia’s water use was possibly the ‘least worst’ in the world. Despite 14 very dry years during 1996–2009, the value of national agricultural output had grown over the period. Given that water is the primary agricultural input, this suggested that substantial improvements had been made in the efficiency of rural water use. The water sector was ripe for reform, and the creation of rural water markets would stimulate further improvements in the efficiency of water use. He opposed urban–rural water trading.

How disadvantaged are women in the workforce? Elizabeth Broderick outlined why discrimination in the workforce is an important problem. Organisations need to retain expertise to remain internationally competitive; and women are Australia’s hidden, untapped resource that must be unlocked. Goldman-Sachs has estimated that Australia’s GDP would increase by 11 per cent if women’s labour-force participation increased to that of men. There has been slow improvement in Australia’s situation for women in the workforce over the past 18 months. Deborah Cobb-Clark showed that a wage gap between men and women remains; and Jenny Gordon believes it appears to be widening. CobbClark indicated that there is no relation between the wage gap in the occupation in which the woman works and whether the woman reports the presence of workplace discrimination. This is consistent with other research that finds it is differences in treatment not pay that upsets women: gender bias is about more than pay gaps. Gordon shows that some particularly low-wage, female-dominated, social-service sectors have been growing recently while relative wages in these sectors have been decreasing, thus widening the gender gap. Hitherto, growth in demand has been modest compared to growth in supply in

these sectors. As demand in some of these sectors increases further and supply growth slows down, more pressure starts to build in some of these sectors and the question is what will happen next. Several of these sectors are government monopsonies, which might slow down the adjustment of wages. The recommendation is for competitive wages, but questions remain. How are these wages determined? And can employers/ consumers afford to pay for them?

Economic case against a carbon tax Tony Abbott MP argued that unilateral imposition of a universal carbon tax would place Australia at a competitive disadvantage compared with countries

that do not impose a carbon price. Contrary to the Government’s view that a unilaterally introduced carbon tax is beneficial in the same way that unilateral tariff cuts are beneficial, a carbon tax will reduce employment, real wages and national income. As to an emission trading system, trade in emission permits is different to trade in other goods and services, since it is a market for ‘non-delivery of an invisible product to no-one’. The nature of carbon emissions meant that necessary monitoring costs would be very large, and that the potential for corruption, cheating and government largesse in distributing free permits to favoured firms made high price-volatility likely and, therefore, uncertainty for business would be higher under a carbon trading regime. A ‘direct action’ policy,

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costing $3.2 billion over four years on procuring initiatives to reduce carbon emissions, will deliver a five per cent cut in emissions from 2011 levels by 2020, at a lower cost.

Debating the broadband revolution Rob Oakeshott MP, Malcolm Turnbull MP and John Stanton agreed that Australians should have access to fast broadband but disagreed on whether this is best achieved via the cheaper fibre-to-thenode (and Fixed Wireless) technology or the more expensive fibre-to-the-home (FTH) technology. Turnbull argued that the FTH technology was akin to building a freeway to every farm, while Stanton stated that most Asian countries were adopting this option and that Australia is fast approaching the physical limit to the carrying capacity on the existing spectrum. Stanton argued that the benefits from the current National Broadband Network (NBN) was about $182 billion over 10 years and would more than repay the initial outlay. There would be considerable savings for the transport, health, education and electricity industries. Oakeshott was concerned about how competition between the various arms of the broadband infrastructure would be best enhanced once the NBN was complete.

Health care reform and beyond Rohan Mead identified a workforce challenge in the broader community due to an ageing population, mirrored in the health workforce. Health issues absorb the productive output, such as one’s own labour-force participation, a partner’s time spent on care and healthcare. Whether we use the right output measures when assessing health outcomes is doubtful. Should we focus on how patients feel after treatment rather than on shorter waiting lists? Perhaps we should not ask how much health costs, but whether the money is spent effectively. Outcomes are currently not measured well, with death often measured and a successful outcome ignored. Related to this are Anthony Scott’s comments regarding pay-for-performance, where good outcomes are rewarded. To enable such an approach, good outcome-measures are needed. A weak component in Australia’s health provision is the absence of modern information technology 36

Growth challenge: Riding the resources boom to lasting prosperity

(IT). Adam Powick stressed that IT is crucial to keep Australia’s health system of high quality. Monitoring outcomes and treatments is hard when paper files are still predominantly used to store information. This leads to disconnected pieces of information, hindering efficient and costeffective decision making by health professionals. Proper investment in IT will improve treatment and allow better tracking of what is achieved to ensure available funding is spent most effectively. Scott highlighted the need for research and data collection on, for example, people’s health situations before and after treatment, which would provide some measure of outcome. Health reform should focus on the supply side, which is already continuously making rationing decisions regarding treatment. An approach based on fees-for-service has been shown to drive up costs compared to pay-for-performance.

Finance after the crisis Michael Ullmer noted that the banking sector in Australia has become more concentrated since the GFC, with the takeover of mid-tier banks by the majors. On the other hand, as the G20 member countries gradually implement the Basel III regulatory framework, capital requirements and liquidity standards will tighten, causing offshore funding to become more limited. Ian Harper commented that such regulations, designed to enhance the stability of the global financial system, would result in a higher cost of finance, which he characterised as a tradeoff between financial market efficiency and its stability. Kevin Davis discussed the implications of the recent crisis for finance theory, questioning the relevance of economic notions such as perfect information and complete markets in the financial system, in which imperfect information plays a critical role. Important insights could be gained from the study of financial networks and behavioural finance.

Political options for a boom economy Paul Kelly chaired a panel discussion of how Federal and State governments can break through the policy barriers to meet the growth challenge.

He stressed the importance of the productivity growth agenda and the problems posed for this agenda by the current lack of political consensus. Senator Penny Wong argued that the current lack of political consensus did not reflect the minority government in Canberra but the conflicting positions of the two main parties. The Government was prepared to pay a short-term political price in its efforts to drive longer term reforms such as carbon pricing. Andrew Robb MP mounted a ‘crisis of confidence’ attack on the Government, highlighting policy ‘flip-flopping’ and new taxes, including the carbon price, as threats to economic growth. Ross Garnaut bemoaned the deterioration of Australia’s political culture over the last decade, with increased ‘short-termism’, stronger lobbying by interest groups, commercialisation of economic analysis and unfavourable changes in the media market all playing a role. We need to move on from the damaging carbon pricing debate and focus on a forward-looking program of economic reform. The current boom is more fragile than it looks and there is a danger of continuing ‘the great Australian complacency’. Finally, Arthur Sinodinos contrasted the political consensus supporting the reform agenda of the 1980s and 1990s with the lack of consensus now, and offered a number of suggestions that could help rebuild such consensus, including co-opting interest groups into the policy process. The authors are all staff members of the Melbourne Institute.

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An efficient and fair industrial relations system

empirical evidence and tax reform: lessons from the mirrlees review How should evidence be used in the study of tax design? What is the appropriate balance between theory and empirics? by richard blundell

A condensed version of the 2011 Downing Lecture presented at the University of Melbourne on 22 July 2011.

The Mirrlees Review was an attempt to build a foundation for tax reform based on the large body of economic theory, empirical evidence and practical experience of tax policy built up over the last three decades. It was inspired by the Meade Report (1978) with the idea of reviewing tax design from first principles for modern open economies – particularly the UK. The Review was published in two volumes, Dimensions of Tax Design (Mirrlees et al, 2010), summarising expert evidence across a wide range of aspects of tax reform, and Tax by Design (Mirrlees et al, 2011), outlining the conclusions and recommendations.

– Progressivity: More tax from the better off. The current structure of UK taxes and benefits neither reflects these principles nor works as a coherent system. Welfare benefits, personal taxes and corporate taxes are disjointed. Neutrality is not observed – savings taxes are inconsistent; the corporate tax system favours debt over equity; and there are different tax rates on carbon and failure to price congestion properly. Progressivity is not achieved efficiently – and work incentives are damaged unnecessarily.

Broad principles for reform

The broad proposals in Tax by Design reflect these principles. A single integrated welfare benefit and the alignment of tax-rates across personal and corporate earnings are proposed, with all taxes and benefits being considered, including valueadded, congestion and carbon taxes (not examined in this lecture). The Review authors aimed to achieve progressivity through the direct tax and benefit system, recognising constraints imposed by responses to incentives.

There were three broad principles adopted by the Review:

The role of evidence

One aim of the Review was to bridge the gap between academic research and policy practise – much in the spirit of Dick Downing, after whom this lecture is named. For consistency and coherence, this lecture focuses on the taxation of earnings, although the Review itself concerned all aspects of the tax system.

– System: Consider the tax system as a whole, defining the marginal tax rate as sum of all additional taxes paid when income increases by £1. – Neutrality: Do not discriminate (unnecessarily) between similar activities.

The role of evidence in deriving the recommendations in Tax by Design is loosely organised under five related headings: (i) Key margins of adjustment – particularly establishing empirical facts about key aspects of behaviour on which taxes could impact. Insights Melbourne Business and Economics

(ii) Measurement of effective tax rates – considering the tax system as a whole, including the implicit tax rates in the benefit and tax-credit systems. (iii) The importance of information and complexity – relating to the incentives implicit in the tax and benefit system acting on individuals, households and firms, including the stigmas and hassles endured by those accessing the system. (iv) The size of responses – the core of any rigorous empirical analysis, concerning the robust measurement of the causal impact of tax reforms. The Review used a mix of (quasi-) experimental and structural approaches with the experimental approaches acting as a ‘reality check’ on the structural model. (v) Implications from theory for tax design – linking empirical relationships and design mechanisms from economic theory to determine efficiency costs, overall optimality and improvements to tax design. There are three main ingredients to any optimal tax analysis: accurately measuring response elasticities, establishing the distribution of income, and deciding social welfare weights. The first two are positive and emerge from evidence-based analysis. The last is normative and something about which reasonable people may differ. The aim was to draw broad conclusions using evidence on the first two empirical aspects while making fairly weak assumptions on social welfare weights – basically, that they are declining in some measure of equivalised income. Earnings taxation, the focus here, is ideal for examining the role of evidence in tax design. There are substantial empirical results on laboursupply responses to tax reform for individuals and families. This research highlights the need to distinguish between the intensive and extensive margins of labour supply – respectively, between the decisions of whether to work or not and how much to work. Research has also shown clear differences in responses by age, gender and family composition. Additionally, tax-return information provides evidence on taxable income elasticities relevant to the design of earnings taxation. This 40

Empirical evidence and tax reform: Lessons from the Mirrlees Review

evidence naturally supplements and extends work on the responses of employment and hours of work to tax reform. That is not to say the taxation of earnings should stand separately from the design of the rest of the tax system. Indeed, the taxation of earnings will need to adjust for the level of redistribution and work incentives induced by other tax-reform elements. Nonetheless, we can derive overall directions for the taxation of earnings, while the precise tax-rate schedule will depend on the shape of the whole tax system.

Key margins of adjustment Recent labour market history demonstrates three central trends which also point to the three key margins where responses to tax reform are most likely to occur: declining male employment, especially among older men; a strong rise in employment and total hours of work for women; and a decline in employment among those in their late teens and early twenties, reflecting increasing educational attainments. Although both extensive and intensive margins of labour-supply matter in explaining the broad changes in total hours over the last three decades in the UK, France and the US, in recent work with Guy Laroque and Antoine Bozio I have shown that they matter in different ways for different age and demographic groups. This empirical evidence was highly influential in the Review. For men, variations in the extensive margin of labour supply occur mainly at the start and finish of their working lives. Figure 1 provides a broad view of (pre-recession) employment rates by age for the UK, France and the US in 2007. The strikingly similar average rates for men aged 30-54 in these three economies suggest that differences in employment are concentrated at early and later points in working lives, indicating the importance of the extensive margin at these life-cycle points. Figure 2 demonstrates that differences in hours, conditional on employment, matter for men across their working life. Although it is unlikely that tax and benefit systems alone explain all these differences, it would seem unwise to play down the intensive margin.

Figure 1: Male employment in France, the UK and the US, 2007

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Figure 4: Female total hours worked in France, the UK and the US, 2007

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For women, Figures 3 and 4 show that hours and employment itself, both vary across working lives. As with men, average employment rates in 2007 were surprisingly close at ages between the late 20s and early 50s. Again it is at the early and later periods of working lives that extensive-margin choices become important.

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For women with younger children it is not usually just an employment decision that is important, but also whether to work part- or full-time, influenced by specific elements of the tax and benefit system. In the UK there still remains a dip in hours of work around child-bearing ages. Indeed, underneath these broad figures, there are also important variations at the extensive margin for mothers with pre-school children and lower levels of education. Optimising the balance between the extensive and intensive margins is crucial to understanding responses to reform. Overall, those with schoolage children or aged 55-70 are most responsive at the extensive margin. To understand how taxes and benefits might affect labour supply choices, we need to measure the effective work incentives implicit in the tax and benefit system.

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Figure 3: Female employment in France, the UK and the US, 2007 Percentage employed in reference week

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Perhaps the main (perceived) defects in current welfare/benefit systems are that participation tax rates at the bottom remain very high. In the UK for example, effective marginal tax rates are well over 80 per cent for some low-income working families, mainly due to interaction between taxes, means-tested benefits and tax credits. But high implicit tax rates at low incomes can be optimal for welfare functions that prioritise redistribution. The key to good tax policy design is to avoid high work-disincentives where responses to taxes are likely to be high while maintaining a desired level of redistribution. Insights Melbourne Business and Economics

Consider a typical budget constraint for a low earning family. A complete analysis of the effective tax rate will combine the implicit tax rates in the benefit, tax-credit and income tax systems. Figure 5 provides such a case study for a single mother in the UK, assuming all applicable benefits are accessed. Figure 5: The interaction between taxes and benefits in the UK £350

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The tax-credit system is an increasingly important part of the effective tax system facing low-income earning families in many countries. Taken together with income support and other benefits, lowincome earners in the UK can face a complex rate schedule with relatively high effective tax rates. Indeed, families in receipt of other benefits gain less from the working tax credit (WTC) than otherwise equivalent families not receiving these benefits. In this respect, there are two summary measures that are usefully documented in Tax by Design: the effective marginal tax rate (EMTR) – that is the proportion of a small increase in earnings taken in tax and withdrawn benefits; and the participation tax rates (PTR) – the incentive to be in paid work at all, defined by the proportion of total earnings taken in tax and withdrawn benefits. The overall distribution of these tax rates by income and family type in the UK is presented in Figures 6 and 7. Importantly, it is the PTR that is relevant for the employment margin, and the EMTR for the effort margin. The EMTRs and the PTRs can be negative as well as positive, but they are typically positive and often high at lower incomes. The effective tax rates in these Figures indicate the relatively strong redistribution towards low-income families with children in the current UK tax system. Indeed, 42

Not surprisingly, tax schedules can easily possess the feature of high EMTRs at low earnings. It is simply the result of means-testing which is the flip-side of targeted redistribution. Whether it is optimal or not will depend on the responsiveness of labour supply to these implicit tax rates, on the distribution of income and on the desire to redistribute to low-income families of a particular composition. Figure 6: Effective marginal tax rates in the UK 70%

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the more the tax system targets low incomes, the higher EMTRs on low earnings are likely to be.

Empirical evidence and tax reform: Lessons from the Mirrlees Review

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The importance of information and complexity The EMTRs and PTRs in the last section are just (local) averages at each gross earnings level. In the UK and elsewhere, multiple benefits with an array of overlapping means tests can create EMTRs of over 90 per cent. This degree of complexity can

leave some individuals unwilling and/or unable to access all the benefits and tax credits to which they are eligible.

problem and the budget constraint inevitably requires assumptions based on weaker empirical foundations.

A useful way to formalise some of the issues surrounding information and complexity in earnings taxation is to allow eligible individuals not to ‘take up’ certain benefits and tax credits. This reflects the idea that individuals may not understand the system, or may find the stigma or hassle costs of accessing benefits or tax credits too high to be worthwhile.

Deriving convincing response effects from structural models is the key to reliable tax-design analysis. At a minimum, quasi-experimental analyses of policy reforms should be used to validate structural models. Inevitably, the more comprehensive and robust the empirical evidence, the better we can address the tax design problem.

Typically, take-up is an increasing function of the eligible amount of benefit or tax credit but full take-up is rarely achieved. Rates of take-up can be quite low, especially for families eligible for minimal benefits. These observations provide some insight into the importance of modelling take-up decisions when engaging in tax and benefit reform.

Evidence on the size of responses Although for many workers, employment and hours margins are the key measures of their labour supply, for others it is the level of effort for any hour of work that they can use to respond to tax incentives. For yet others there will be exemptions and deductions which will allow them to change their taxable incomes with little change in their overall earnings. Accordingly, the next section uses the impact of taxation on taxable income to examine tax-rate reform for top earnings. There are three dominant empirical approaches to the measurement of responses: the ‘experimental’ approach using randomised control trials, the ‘quasi-experimental’ approach using historic reforms and the ‘structural’ approach based on a formal optimisation model of individual and family choices. There are many comprehensive reviews of quasi-experimental approaches. There are also some influential control-trial experiments on labour supply. It is difficult to envisage a full-fledged tax reform analysis that does not draw on a structural model. Policy simulation, and understanding the impact of particular rate structures, requires a model of decision-making and of the budget constraint. However, to fully specify the choice

Overall, the evidence suggests a key role for labour-supply responses at the extensive and intensive margins. Both matter but differ by gender, age, education and family composition. There are larger extensive responses by families with school-age children and older workers in ‘pre-retirement’ years.

Implications for tax design Once individuals are allowed to respond to changes in a tax schedule by deciding whether or not to work, as well as how hard to work, then the optimal tax schedule can change dramatically. Optimal marginal tax rates can be lower (perhaps even negative) for those with low earnings capacities. Hence, in contrast to a purely intensive model, acknowledging responses at the extensive margin of labour supply can imply that earnings subsidies or work-contingent credits (such as the earned income tax credit or the WTC) should be part of an optimal tax system. A key lesson from recent tax-design research is that a ‘large’ extensive elasticity can ‘turn around’ the impact of declining social weights, implying both higher transfers to low-wage workers than to the unemployed and a role for earned-income tax credits. Finally, the past three decades have seen expanding earnings inequalities and a change in the nature of earnings risks. The redistributive element of the earnings tax and benefit system acts, in part, as insurance against earnings risks. As the nature of these risks changes, and as underlying inequalities grow, inequality and work incentives become harder to balance. Designing an efficient structure for the earnings tax and benefit system – such that it achieves desirable distributional objectives – becomes ever more salient. Insights Melbourne Business and Economics

We assume that the government seeks to maximise social welfare subject to revenue constraint. As an illustration consider the tax design for low-income single mothers, suppose we want to redistribute ‘£R’ to this group. Our aim will be to recover an optimal tax/credit schedule in terms of earnings. There are two related approaches. The first is to use the Diamond-Saez approximation in terms of extensive and intensive elasticities at different earnings. Second, a ‘complete’ Mirrlees optimal tax computation requiring a complete specification of choices and constraints. The first approach uses usefully intuitive expressions for the optimal tax-rate schedule in terms of the extensive and intensive elasticities, simple summary measures of the distribution of earnings and the social welfare weights. This approach has been spearheaded by Emmanual Saez at Berkeley and Raj Chetty at Harvard. The simple formulae though are only approximate and assume away income effects. Income effects are likely to be important for some individuals, especially parents with young children. However as a guide to setting earnings tax rates they are extremely informative. The second approach is appropriately labelled the structural micro-econometric approach to tax design. Effectively a stochastic mechanism design problem, the optimal tax model is the labour supply model. Consequently all of the assumptions concerning behaviour are also required for this analysis. The distribution of earnings, fixed costs of work, childcare, demographic differences and unobserved heterogeneity (described in the previous section) all influence choice of tax-rate schedule. The objective is to find robust tax-rate schedules for fairly general social-welfare weights. Given the structural parameter estimates, we can solve optimal schedules. In recent work with Andrew Shephard at Princeton we found that marginal rates are broadly increasing in earnings for all groups. This research, used in the Review, also recommended a shift out of work-support towards families with younger children, pointing to an optimal tax schedule with tagging according to age 44

Empirical evidence and tax reform: Lessons from the Mirrlees Review

of children. These findings imply pure tax credits but only at low earnings and for those with schoolage children. The analysis also suggested placing hours bonuses at full-time hours. Typically, parttime hours rules were sub-optimal.

Top tax rates and taxable income elasticities At the top of the income distribution we focus particularly on the tax base. The greater the opportunities for exemptions and deductions and associating remuneration with lower-tax jurisdictions, the more difficult it is to raise revenue from top earners. High tax rates on narrow tax bases generate incentives to shift businesses to corporate forms, increase charitable giving, and orientate compensation packages towards taxpreferred capital gains. Consequently, we require a more general elasticity measure that captures these other phenomena. The taxable income elasticity does just that. The responsiveness of taxable income to the tax rate will be affected by the tax base. The broader the tax base, the larger the elasticity is expected to be. Given the need to capture all these margins, and with effort difficult to quantify, the behavioural effect will require a different kind of measurement from that used to gauge hours and employment responses. Figure 8: The Pareto distribution and the taxable income distribution at the top Pareto distribution

0.0100

Probability density (log scale)

Tax design for low-income workers

Actual income distribution 0.0010

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0.0000 £100,000

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Consider an ‘optimal’ top tax rate and suppose the welfare weight on top bracket incomes is negligible. The optimal rate – the Laffer rate – will be the revenue-maximising rate. When e is the taxable income elasticity and a is the Pareto parameter, the revenue-maximising rate is given by: t =1/(1+a e)

This assumes that the top of the taxable-income distribution is well-approximated by a Pareto distribution. Figure 8 shows this to be the case for the UK, where a is estimated at 1.67. To estimate e reliably is harder – a differencein-difference methodology is typically used. Applying this approach to past changes in tax rates among the top 1 per cent in the UK, using the 2–5 per cent group as a control, suggests a preferred estimate of e of 0.46 with a standard error of 0.13. Exploring various formulations of the differencesin-differences specification for the UK, the estimate of e remains in the 0.35–0.55 range with a central around 0.45, but is clearly quite fragile. An estimate of this magnitude would suggest the optimal top 1 per cent bracket rate of around 57 per cent, close to the current top rate. This analysis suggests little room for any further raising of the top rate in the UK without changes to the tax base for earned income itself.

Summary and conclusions In developing its recommendations in Tax by Design, the authors of the Review drew on empirical evidence across a wide range of fields. Here, as an illustration, I have focussed on recommendations for the reform of earnings taxation. Overall, the evidence points to a key role for labour-supply responses at the extensive and intensive margins. Both matter but differ by gender, age, education and family composition. Labour-supply responses for families with children vary by age of the youngest child. We also found different responses for older workers in ‘pre-retirement’ years. The implications for tax reform are quite radical. They point to lower marginal rates at the bottom of the earnings distribution. They also point to less-aggressive means testing for some key groups and tax credits better targeted to lower incomes and to families where labour supply is most responsive. We particularly stress reforms for lone parents, married parents, and older workers pre-retirement, and ‘tagging’ tax rates by age of (youngest) child for mothers/parents and also at pre-retirement ages.

In summary, the reform agenda for earnings taxation can be interpreted through a lifetime view of taxation, implying a ‘lifecycle’ rearrangement of tax incentives and welfare payments to match elasticities and early-years investments – effectively redistributing across the lifecycle, distinguishing by age of (youngest) child for mothers/parents and at pre-retirement ages. The simulation results reported in Tax by Design suggest significant employment and earnings increases from such a reform package. For top incomes, tax reforms are better directed towards base-broadening to address antiavoidance and revenue shifting. Accordingly, in Tax by Design we recommend an alignment of personal and corporate tax rates to equalise tax treatments of income derived from employment, self-employment and running small companies. Richard Blundell, CBE, is David Ricardo Professor of Political Economy at University College London and Research Director of the Institute for Fiscal Studies. He is one of the authors of the Mirrlees Review.

References Mirrlees, J, Adam, S, Besley, T, Blundell, R, Bond, S, Chote, R, Gammie, M, Johnson, P, Myles, G and Poterba, J (eds) 2010, Dimensions of Tax Design: The Mirrlees Review, Oxford University Press for Institute for Fiscal Studies, Oxford. Mirrlees, J, Adam, S, Besley, T, Blundell, R, Bond, S, Chote, R, Gammie, M, Johnson, P, Myles, G and Poterba, J (eds) 2011, Tax by Design: The Mirrlees Review, Oxford University Press for Institute for Fiscal Studies, Oxford.

Insights Melbourne Business and Economics

occasional address

the currency of your commerce degree: a passport to the world Undergraduate micro- and macro-economics concepts remain important resources for analysing current public-policy dilemmas and controversies by lynne s williams

An edited version of her Occasional Address given at Wilson Hall, the University of Melbourne, on 10 August 2011.

Today is a very important occasion for all of you: the graduates who are about to be formally admitted to their degrees (though I suspect the day you got your final results was pretty important too), and to all your family and friends here today who have no doubt played vital roles in helping you get these pieces of paper (testamures). I still remember how nervous and proud I was many years ago as I had my 30 seconds on stage, but also how proud my parents were as I sought eye contact with them in this illustrious hall. You have every right to be proud: you will be graduates of the University of Melbourne, a university that enjoys a pre-eminent reputation both here in Australia and overseas. Congratulations in particular on getting some form of Commerce degree, be it at bachelor or postgraduate level. You are about to hold a passport to many career opportunities in both the private and public sectors in Australia and overseas. Commerce has many disciplines: some of you have specialised in finance, others in accounting or development economics. Some may even have developed a passion for econometrics or newer disciplines like behavioural economics or experimental economics. My overall point is this: Commerce is an extremely 46

The currency of your commerce degree: A passport to the world

valuable generic degree. The basics you learn in a Commerce degree (Economics A and Economics B in my day, but basically just micro- and macroeconomics) are transferable across a range of occupations. It is much easier than some other professions to get a job overseas, as your economics ‘toolkit’ is international. I graduated from this University in the 1970s then studied in London at the LSE and finally at Monash University. Since then I have used my basic training in a variety of research and public sector jobs. I would describe myself as a public sector economist with a passion for good public policy. I didn’t know that is where I would end up when I walked down these stairs all those years ago, trying my best not to trip when really I was very excited indeed. I did know that I liked the ‘people’ side of economics, and I subsequently did my PhD on an aspect of the labour market. My career to date has basically had two parts: first I spent many years working in a variety of government research agencies. Just some of the issues I looked at included the value of older workers in the labour market, the economic impacts of immigration, work arrangements in particular industries, the benefits of an emissions trading scheme compared

with a carbon tax and so on. I guess I was really a researcher but not at a university. The important difference, however, was that I was involved in looking at issues where policy-makers needed to know what the evidence said, and maybe our work was then influencing their decisions and, so, all of our lives. The other interesting thing I’ve noticed over the years is that the areas of policy focus seem to repeat themselves. Take the example of the economics of immigration. Policy-makers are always interested in the impacts of immigrants on a variety of economic measures such as overall growth, the labour market and the environment. Immigrants include those selected for their skills, joining their families or arriving as refugees. However, my experience is that once you take into account demand and supply effects and the impacts over time, the overall impact is usually slightly positive. Research showed this to be the case in the 1980s, the 1990s and now today. Another way of describing the early part of my ‘research’ career is as an applied economist. Note that the issues I listed are still important policy questions today: that’s not to say that these issues are never solved, just that economics deals with a changing world, so each issue and its relationship with other issues, needs to be continually reevaluated to ensure it is still fit for purpose. New and revised data keeps arriving and our analytical tools are being continually refined. Some of the changes that need to be part of any policy considerations today compared with 30 years ago include the rise of China and India as developing countries in our part of the world and other changing world orders, the increased consciousness and evidence around the impact of climate change, and the change in the industrial composition of Australia, especially in terms of its exports. Returning to the immigration example, today the debate is around the labour market, and the shortage of skills in those states growing rapidly due to the demand from China and India for iron ore and coal. Our basic tools of cost benefit analysis – ensuring we think about and take account of all the stakeholders in any particular issue (this overarching approach is a key to the economist’s framework), maximising

subject to constraints, thinking through the risks (i.e. what might go wrong as opposed to right, and how to guard against an undesirable outcome) and examining how markets can do most of the work for us – are applicable no matter what the policy issue or challenge. In the last 10 years, the second part of my career, I worked for the Victorian Government mostly in the Departments of Treasury and Finance, and Premier and Cabinet. These agencies advise government on the ‘pointy end’ of policy making. They provide advice to the senior members of Parliament, the Premier and Treasurer. I would describe this work as repositioning yourself on the information chain: what you brief on one week at work often becomes headline news the next. I would never claim that bureaucrats’ advice is always taken, but it is both fascinating and humbling to be part of the policymaking chain. Over the last couple of years, some of the issues I have been fortunate enough to be part of include: advising on national reform, especially in terms of financial flows between the Commonwealth and the States; the appropriate actions of a State in responding to the GFC; similarly, the role of States in policies related to climate-change mitigation and adaptation; and the process of preparing briefings for an incoming government. For a public-policy junkie it would be hard to define a better, more challenging job description! The tools I learnt way back in my first economics degree, albeit combined with work and life experiences since, continue to allow me to bring focus to whatever policy issue is at hand: what is the problem, what are we trying to do, what options do we have, how will each affect the various groups involved? I’m talking about evidence-based policy advice based on those basic macro- and micro-economics lectures, and a few other classes, I sat through all those years ago. Enough about me, save to say that my Commerce degree has been a passport to a wide range of aspects of public policy. While the issues and influences may change, I continue to benefit from the training I received here at the University of Melbourne in the (then) Faculty of Economics and Commerce. Insights Melbourne Business and Economics

Before I move away from the value of your Commerce degree, I should also mention that it is useful to those who for whatever reason want to work part time. I know of many colleagues in the broader economics ‘profession’ who have at times worked part time for a variety of reasons ranging from combining work and study, to working part time while children are young and even at the other end of working life when transitioning to retirement. I myself worked part time until our two children finished primary school, and now I’m working part time as I reconfigure my work/ leisure (or should that read travel) balance. University gives you much more than technical skills. A senior school environment is relatively constrained. You have set timetables that occupy most of your day; you have small classes of about 30; and you are in a year group and class where teachers know your name and have some responsibility for you. At university, you decide whether you go to lectures and what to do in your non-lecture time. The lectures and tutorials are large and you are lucky if one or two members of staff know your name. What you achieve is up to you: selfdiscipline is harsh, but clearly you all learnt fast or you wouldn’t be here today getting your degrees. Generic skills such as writing and communicating will always be valuable, as will that most important skill: the ability to think logically. You have just enjoyed more freedom than you will have for a long time. Once you start work, people will be very interested in what you are up to, you will be expected to turn up on time and so on. The discipline you learnt at university will stand you in good stead – though the alarm clock going off at 7 a.m. may test you at times! One of the most valuable assets I hope you have acquired in your years here is your friendships. Given the wide range of directions a Commerce degree can take you, these friendships may also turn into valuable contacts in your working lives. So, be rightfully proud of the degree you received today. Be proud that you can now say you have a degree from the University of Melbourne, and especially proud that it is from the Faculty of Business and Economics. It is your passport to a wide range of careers. 48

The currency of your commerce degree: A passport to the world

Until recently, Dr Lynne S Williams was Under-Secretary, Victorian Department of Treasury and Finance. She also serves on the Business and Economics Board.

engagement with asia, philanthropy and future challenges The skills that you graduate with are the very skills that help strengthen and build outstanding community organisations by sid myer An edited version of his Occasional Address delivered at Wilson Hall, University of Melbourne, on 11 August 2011.

My congratulations to all the graduands here tonight, and to those who are unable to be with us. Your fine achievement is noted by your teachers, your professors, and your University peers. Importantly, your achievement is also noted more widely by those who have supported you, helped you, and worked with you to get to this day. I also encourage you to acknowledge your colleagues and friends here tonight. As the graduating year of 2011, if my experience is anything to go by, you’ll be amazed at how often you ‘bump into each other’ later in life: in business, in the community, at sporting activities, even at children’s schools. For tonight’s Address, I have generously been given a pretty free reign. In thinking what to say, I sought counsel from a number of sources including: – Reading a number of previous addresses. Perhaps not surprisingly, there were a few common themes; and – Speaking to my family. Here I got less help. My daughter said, ‘Oh dad, that’s so embarrassing’, my sons said, ‘For heaven’s sake dad, don’t preach’, and my wife said, ‘Don’t make it long, they all want to go and celebrate’. After some thought, I have elected to speak about three things that are important to me now – because in some way they may be, or may become, important to you too.

– First, I wanted to note the growing importance of Australia’s engagement with Asia; – Second, I wanted to speak of the role that philanthropy can have in your future lives; and – Last, I thought I’d attempt to position some of your future challenges in context.

Australia Asia engagement I spend a considerable amount of my time working for Asialink, and many of its affiliated organisations such as the Asia Education Foundation, the Australia Asia Mental Health Alliance, and the Asia Society in Australia. These organisations have, for some 20 years, sought to build Australia’s engagement in Asia. Pleasingly, they have made a contribution, some say considerable contribution, to this country’s position in Asia. So, why is this important? Well, it is interesting to note the strong relationship that Australia has with the US and many of the countries of the European Union. It is multi-generational, multi-dimensional and resident at all levels of the community. Do we have this sort of relationship with the nations of Asia? Do we want that sort of relationship? If we do, what will it take to get it? Some of you will be aware that we are entering what is being called ‘the Asian Century’. Others like Professor Ross Garnaut remind us that we are simply reverting to the norm – after all, around the end of the seventeenth century, China and India accounted for some 50 per cent of world GDP. It Insights Melbourne Business and Economics

is relevant because the children entering primary school in 2012 will be entering universities like this one when, some predict, China will have regained its previous position as the largest economy in the world.

My point is that building your Asian language skills, and/or your Asian cultural literacy – or leveraging the skills you have now – will not only position you well for your chosen career, it is also what today’s employers are seeking.

What’s the definition of largest in this context? Well, China may again become the largest economic and financial power. With that will come political and military strength, and stronger cultural influence. We hear often of economic, financial and political power, but less often of cultural and military power.

Philanthropy in your future lives

So, what would it take for Australia to have the depth and quality of relationship with China that it does with the US? Would we support China in the field of war? What if China were attacked? Would we defend China? Or, if China were to launch an offensive against an oppressive regime, and called for our help, would we support them? As we all know, Australia has been quick to support the US in the field of war over many generations. These are important issues, and it is your generation that will be on the front line when it comes to addressing them. This is one of many reasons why it is important now to be building Australia’s engagement in Asia. An engaged Australia will be better placed to address these and other issues, to be part of the solution, to contribute to better outcomes for Australia and the Asian nations, and take advantage of the many opportunities that will arise. As you move into your chosen careers, know that you will engage with Asia somehow. In some cases, it will be with the Asian community here in Australia. We should not be surprised – at last December’s address, Fazal Rizvi noted that, ‘given the global flows of people and ideas, we can no longer assume cultural homogeneity will be the natural condition’. So, are we ready to deal with Asia? According to Asialink’s latest data, only 54 per cent of Australian businesses with significant dealings in Asia have senior staff with Asian experience. There is a significant opportunity not only for those born in Asia, or from Asian families, but for all the graduands here tonight. 50

Engagement with Asia, philanthropy and future challenges

An increasing amount is said and written about contributing to the community or not-for-profit sector. Contributions to this sector are now quite commonly referred to as philanthropy. It is regrettable to me that the word philanthropy is increasingly linked to wealth – that is to say, to be a philanthropist you need to be wealthy. I don’t buy this one bit! Indeed, it concerns me that this is increasingly the default setting for philanthropy, by those who write about it, and those who promote it. The fact is, on average, people with lower incomes give a larger percentage of their income to charity – let alone their time volunteering. So, what does it take to be philanthropic? I think there are three, often interconnected, ways to be a philanthropist, namely: – The giving of your time and influence; – The giving of your talent; and – The giving of your treasure. Time, talent and treasure. It’s not all about money! Australians are generous in these three dimensions. Young Australians are increasingly generous with the giving of their time and their talent. Here, I would like to make two points. First, I am a firm believer in the notion of ‘no profit means no philanthropy’. I encourage those of you who wish to enter the private sector, to do so courageously, to do so vigorously, and to seek success and your fortunes. Growing philanthropy in Australia relies on entrepreneurs and business people creating wealth for themselves and others. So, make a lot of money and be generous with it when you do. Sidney Myer, my grandfather, did this, and in so doing created a legacy which I, and other members of my family, now administer. Pleasingly, there

exists a strong, now intergenerational bond between the philanthropy of Sidney Myer, many family members, and this University, and indeed this Faculty. There are many examples of this, but no better example tonight than the Sidney Myer Chair of Commerce held by Professor Margaret Abernethy.

The message here is don’t be a passenger – especially now. Now is the time, in the words of the famous English Biologist Thomas Huxley, to ‘learn something about everything, and everything about something’. I encourage you to keep learning, be inquisitive, and ask more questions than you answer.

Second, ‘not-for-profit does not equal for-loss’. In time, you may be asked to join community organisations in either executive or non-executive roles. The skills that you graduate with this evening should not be ‘checked at the door’ as you examine opportunities to join a community organisation. In fact, it’s these very skills that help strengthen and build outstanding community organisations.

It is possible, indeed probable, that the next stage of your lives will present you with significant challenges. Last year the US Secretary of State, Hillary Clinton, visited the University. Some of you may have been there. During her question and answer session, she was asked:

So, as you move into the next stages of your careers, I encourage you to blaze new trails in philanthropy by contributing your time, your influence, your talent and what you have learnt in the last three years, and then, in time, your treasure.

Her answer was interesting, and you’ll be able to pick it up on the Asia Society website. She said, and here I paraphrase rather than quoting directly:

Putting it all in context You are at ‘the end of the beginning’. You should be feeling a considerable sense of achievement, and I hope some sense of gratitude for having had the opportunity to study at the University of Melbourne. Gaining a University of Melbourne degree carries with it some expectation that you will, later in life, assume a leadership position somewhere. Here, let me be cautious about the word leadership. Personally, I think the fixation at all levels of schooling, in business, and the community with the word leadership needs to be carefully considered. Leaders of the future, and here I mean you, will come in many forms, and all will make a contribution: leaders in the government sector, the business sector, the not-for-profit sector, within families, or sporting teams. In 1910, President Theodore Roosevelt gave his famous speech at the Sorbonne in Paris which distinguished between people who stand on the sidelines often interconnected – the passengers of life – and those who step in to make a difference.

‘Madam Secretary, how do you deal with the very significant challenges in your job at the moment?’

– She didn’t see it that way; – She loved her job. She was qualified to do it. It is what she does, and was trained to do. Some say she is quite good at it; – She considered that you all face greater challenges. In your next years you’ll probably have to: decide on a job and then a career, you will possibly have to decide on a partner and whether or not to marry, if you marry what name will you carry, how many children and so on. You’ll need to decide where to live, whether or not to get a mortgage and if so, how much; and – These are difficult decisions, most of which you will need to make without much practice. I took away her point that the challenges you face are more difficult than the challenges facing her as US Secretary of State. I encourage you to visit the Asia Society website and form your own view. So, what’s the point here? Standing on the sidelines is unlikely to equip you with what’s needed to deal with the challenges in front of you. Take these next years head on; get into it; build experiences. Experience is what’s needed to meet all the challenges in front of you – challenges in your careers and your own personal challenges. Insights Melbourne Business and Economics

Finally, again I offer congratulations to the class of 2011 on your achievement in graduating from the University of Melbourne with a degree from the Faculty of Business and Commerce. Take your future head on, and I wish you luck and good fortune. Sidney Hordern Myer, AM, is chief executive officer of the Yuligbar Group of Companies, chairs Asialink and is a board member of a range of non-listed businesses and not-for-profit organisations with a particular focus on Asia. He is also a trustee of the Sydney Myer Fund.

Article heading Engagement withhere Asia, philanthropy and future challenges

Mailing Address: The Faculty of Business and Economics The University of Melbourne Victoria 3010 Australia Telephone: +61 3 8344 2166 Email: byoung@unimelb.edu.au Internet: http://insights.unimelb.edu.au Published by the Faculty of Business and Economics, November 2011 ÂŠ The University of Melbourne Disclaimer Insights is published by the University of Melbourne for the Faculty of Business and Economics. Opinions published are not necessarily those of the publisher, printers or editors. The University of Melbourne does not accept responsibility for the accuracy of information contained in this journal. No part of this journal may be reproduced without the permission of the editors.