#23 March 2009 - Melbourne Institute News

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Melbourne Institute News March 2009 ISSN 1442-9500 (print)

ISSN 1442-9519 (online)

Print Post Approved PP381667/01204

Issue 23

Let’s Not Panic: Director’s Opinion

PricewaterhouseCoopers Melbourne Institute Asialink Index 2008

PricewaterhouseCoopers Melbourne Institute Asialink Index 2008 Australia’s first comprehensive index of AustralianAsian engagement, the PricewaterhouseCoopers Melbourne Institute Asialink Index, was launched in February. Page 3

Profile of the Melbourne Institute’s Health Economics Research Program This article outlines the current activities and plans of the Melbourne Institute’s Health Economics Research Program. Page 4

Review of the Australian Economy 2008–09: Recessions, Retrenchments and Risks

This is a summary of an article appearing in the March Australian Economic Review. It reviews the Australian economy as it grapples with the implications of the global financial crisis and the decline in commodity prices and world growth. Page 6

Policy makers and forecasters have been unpleasantly and powerfully surprised several times as the global financial crisis has unfolded. But downturns don’t last forever and history suggests that policy makers can also be surprised on the upside. For example, shifts in consumer, business or financial market sentiment can be difficult to predict but work powerfully to accentuate both the economic slide and the recovery. In dealing with the still-evolving crisis we would be wise not to lock ourselves into policy positions that cannot be quickly reversed, if necessary, or which are inconsistent with longer term needs. This is true even though growth has turned negative. There is no doubt that the United States, Japan and much of Europe are facing recession or worse. In some cases there is a real risk of deflation, an insidious condition that is difficult to counteract. World demand and the growth of world trade are faltering and access to credit has become constrained. Australia is heavily (and usually beneficially) reliant on world markets to buy and sell goods and services and for access to capital. Consequently Australia’s growth rate has slowed. But the household debt problems are not as deep-seated in Australia, and our financial system is fundamentally much stronger than that of many countries. Provided the world’s markets for goods, services and credit remain open for business (that is, that policy abroad succeeds in stopping the rot), Australia will most likely recover earlier and possibly faster than those countries whose circumstances define the nature of the crisis. Australian authorities have rightly attempted to restore credit flows, sustain domestic demand and moderate the rise in unemployment. Although the next few quarters will no doubt look and feel nasty, economic growth will recover in Australia, and when it does, the policy challenges that existed prior to the crisis will remain. Our Continued on page 2

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Let’s Not Panic: Director’s Opinion (continued) population will still be aging and we’ll need to maximise workforce participation. Inflation will have subsided but some forecasts suggest that it will fall less here than in other countries and may remain towards the top of the RBA’s target range. We will still have a large (probably larger, relative to GDP) current account deficit and therefore will need to remain an attractive haven for foreign capital and credit flows. The government has taken commendable steps to restore credit to credit-worthy Australian borrowers. These include government guarantees (for a fee) for certain international interbank borrowings. These measures prevented collapse of the interbank market but they should be withdrawn as soon as possible. Progressively raising the government’s guarantee fees to entice private players back into the market would be a good first step. Regulatory changes are necessary in many countries to shore up the financial system to reduce the risks of a recurrence of a financial meltdown. But those changes need to be well designed and address the right issues. For example, one cause of the crisis is that the risks embedded in some novel and complex financial instruments were not well enough understood. Since you cannot force Boards and managements to accurately assess risk and exercise good judgement by regulation, there is a risk that some will seek instead to devise regulations that simply shift management accountability towards process compliance, as occurred after the Enron scandal. That would be a mistake, especially if it fostered excessive risk aversion. Banks and other financial institutions exist to take risk. But they need to prudently and adequately capitalise in line with their actual risk profile. On the fiscal front, the government has funded stimulus equivalent to about 2 per cent of GDP for two years. Commendably, almost the entire discretionary element has comprised one-off payments. A substantial fiscal package was justified initially to capture attention and positively affect confidence and behaviour — as one of the biggest risks is unwarranted pessimism. However, the government does not totally control the timing of ultimate expenditure. For example, some households that have initially saved their windfalls may later spend them once they perceive that their jobs are safe. The Treasurer has foreshadowed more fiscal measures with a focus on infrastructure provision. And the government’s response to the Pensions Review is

expected shortly. Any new fiscal measures and tax/ transfer changes should be well chosen and have a modest fiscal impact. We are a capital-scarce country. We can’t afford to waste it on white elephants, even in the name of short-term jobs creation. Moreover, reform of pensions and benefits still needs to be driven by the longer term needs of the economy: income support to the unemployed and for the low paid, for example, needs to be consistent with maximising workforce participation, including participation by secondary wage earners. In many respects monetary policy is easier to reverse than fiscal policy or tax and transfer arrangements. The RBA has dramatically cut interest rates and pumped liquidity into banks to ensure access to credit and to promote spending in rate-sensitive sectors like housing. There are tentative signs that this stimulus (together with increased grants for first home owners) is beginning to work with demand for housing rising, albeit from low levels. Indeed the RBA has noted that the monetary transmission mechanism is still effective in Australia, unlike some other countries, because our banks are well regulated, well capitalised and not subject to as intense balance sheet pressures as counterparts abroad. This gives some hope that interest rates rises can help to manage the eventual upturn well. But we would be wise not to become overly reliant on this. Interest-sensitive sectors, like housing, are already fragile and there is little sense in creating unnecessary stress for householders and others newly encouraged back into the market. Confidence is likely to be fragile until the recovery is very well established, and it can turn viciously against recovery if a sufficiently negative surprise occurs. Getting the timing right for this phase of monetary policy will be crucial. If the recovery is unexpectedly fast, especially if inflation remains stubbornly high, early monetary tightening might be required. Since the labour market usually lags, it is possible that unemployment will still be rising when the RBA has to make this call. It is to be hoped that by this stage, however, monetary and fiscal policy will not be working against each other, which suggests that a cautious approach to fiscal policy is best at this stage. Stephen Sedgwick Director, Melbourne Institute

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PricewaterhouseCoopers Melbourne Institute Asialink Index 2008 Australia’s first comprehensive index of Australian-Asian engagement, the PricewaterhouseCoopers Melbourne Institute Asialink Index, was launched on 13 February by the Australian Minister for Trade, The Hon Simon Crean. The Index was a major collaborative effort between PricewaterhouseCoopers, the Melbourne Institute of Applied Economic and Social Research, and Asialink at the University of Melbourne. Melbourne Institute staff working on the Index were Associate Professor Elizabeth Webster, Dr Paul Jensen and Mr Andreas Stierwald. The Index measures changes across a range of areas, including trade, investment, tourism, education, migration, business development and humanitarian assistance, between Australia and 25 Asian economies in the period 1990–2007. The Index reveals that Australia’s regional relationships with Asia are growing much faster than the country’s traditional alliances in Europe and the United States. The Index shows that the volume of trade between Australia and Asia has been greater than that with the rest of the world since 2004. Australia’s engagement with Asia quadrupled since 1990, while our engagement with the rest of the world only tripled. According to Associate Professor Beth Webster, “Asia’s importance to Australia’s future is clear. For the first time, this index enables us to objectively quantify which form of engagement — be it trade, education, tourism, research or humanitarian assistance — is growing fastest and which countries are forging stronger ties over time”. Timely updates of the Index will be particularly important because they will enable us to keep track of developments in our financial and trade relationships with Asia. At the launch of the Index, Professor Stephen Sedgwick, Director of the Melbourne Institute, outlined that what happens in Asia, and Australia’s engagement with Asia, are very important contributors to Australia’s prospects for economic growth, living standards and employment levels. “As the new index demonstrates well, this has been true for some time, especially but not only, because of growing linkages through trade”, said Professor Sedgwick.

Professor Stephen Sedgwick

“Importantly for Australia, the financially strong Asian economies, like China, have considerable scope and strong incentives to pursue internal policies which quickly lift their domestic demand. Such policies will help to underpin the volume of Australia’s commodity exports even as commodity prices soften, which will provide valuable support to economic activity and employment in Australia as we weather the global crisis over the next few years”, said Professor Sedgwick. “Beyond issues of trade, the next few years present some intriguing possibilities regarding financial flows, including those within our region. If our economic growth can be maintained at higher levels than abroad (partly because of links to Asia) Australia’s current account deficit will tend to widen over the next few years. We will need to attract capital from abroad sufficient to fund a higher deficit (or experience sustained downwards pressure on our currency). “In the past, a high proportion of financial flows from the surplus countries of Asia to borrowers like Australia may have occurred indirectly – in other words, Asian saving may have arrived here via the financial markets of Europe or the United States. “However, the world financial order may look different in future, including because of recent events. And it will be interesting to observe whether, over time, there is an increase in direct financial flows to Australia from the surplus economies of Asia”, said Professor Sedgwick. The PricewaterhouseCoopers Melbourne Institute Asialink Index is available to download from the Melbourne Institute website: <www.melbourneinstitute.com/pwc-mi-asialink/ default.html>.

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Profile of the Melbourne Institute’s Health Economics Research Program These are the views of Tony Scott, Professorial Research Fellow of the Melbourne Institute, who leads the Health Economics Research Program. The Health Economics Research Program was formally established in January 2008. The aim of this piece is to outline current activities and plans in the coming years. The aim of the program is to conduct high quality and policy-relevant research across a number of areas of applied health economics. The program is based in the Melbourne Institute (6.4 full-time equivalent staff in 2009) and has 19 other associates from across the University of Melbourne. The group includes other economists conducting academic research in health and health care. This is a ‘virtual’ group which convenes an annual health economics workshop to share research ideas and results. Our research is funded through NHMRC and ARC, and we conduct contract research for government and other organisations. A number of enduring national policy issues help determine the type and scope of research conducted in the program, which is matched to the skills and expertise of our researchers. The recent interim report of the National Health and Hospitals Reform Commission, and reports expected in the middle of 2009 from the National Primary Care Strategy and the National Preventive Health Strategy, are likely to help shape our research

agenda in the years to come. These will provide specific opportunities to evaluate policy changes and to contribute to debate about health system reform. The main focus of our research concerns the best ways to organise and finance the health care system, including the optimal use of incentives for health care providers and health professionals in both acute and primary care settings. A particular focus at the moment is to determine the best use of the health workforce. The first wave of the MABEL (Medicine in Australia: Balancing Employment and Life) longitudinal survey of doctors was completed by over 10,000 doctors in 2008. Wave 2 is due to commence in June 2009. MABEL is one of the largest surveys of its kind in the world and is funded by a $2.1 million Health Services Research grant from NHMRC. The survey is being conducted in collaboration with Professor John Humphries and Dr Catherine Joyce from Monash University, and Associate Professor Guyonne Kalb from the Melbourne Institute. We are surveying GPs, medical specialists and doctors in training, and the Wave 1 respondents are representative of all Australian doctors in terms of age, gender, doctor type, and geographic location. De-identified MABEL data will be made available from the middle of 2009 for interested researchers and others to use. Initial issues to be examined include the determinants of job satisfaction and hours worked by doctors. The surveys also include a discrete choice experiment which will be used to examine rural/urban job choices of GPs,

Melbourne Institute Economics Forums, March 2009: Getting the Skills Australia Needs The March 2009 Melbourne Institute Economics Forums, ‘Getting the Skills Australia Needs’, address the vocational education and training system in Australia, and explore questions of how well it develops the skills of our labour force and how successfully it matches skills to jobs, to satisfy the needs of our economy. The Forums will also address what more needs to be done to ensure that Australia’s skills-base can be developed to support the future needs of Australia, and what are the implications of the global financial crisis for training policy and delivery. The National Centre for Vocational Education Research (NCVER) is involved with these March Forums and is funding a report on overskilling, currently being prepared by Professor Kostas Mavromaras of the Melbourne Institute, which will be released in 2009.

The Melbourne Institute Public Economics Forum in Canberra on Thursday 19 March 2009 includes the following speakers: Dr Chris Ryan, The Australian National University; Ms Megan Lilly, Australian Industry Group; and Professor Kostas Mavromaras, Melbourne Institute. The Melbourne Institute Economics Forum in Melbourne on Wednesday 25 March 2009 includes the following speakers: Dr Tom Karmel, National Centre for Vocational Education Research; Mr Patrick Coleman, Business Council of Australia; and Professor Kostas Mavromaras, Melbourne Institute. Further information about the Melbourne Institute Economics Forums can be found at <www.melbourneinstitute.com/forums/>.

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The Collaboration partners are the Australian Health Workforce Institute and PricewaterhouseCoopers. The partnership will conduct a number of key health workforce planning projects, as well as developing the methods underpinning workforce planning models. Key areas of health workforce innovation will also be examined within the partnership. Health Economics Research Team

the speciality choices of doctors in training, and public/ private sector choices of specialists. Two new PhD students, one based at Monash University and another at the Melbourne Institute, are also starting work on MABEL in 2009. MABEL is the largest project in the health program at the moment, and most members of the health economics team are involved in some way. Our research on the health workforce also includes a survey of nurses in Victoria and the data will be analysed during 2009. This is funded by an ARC Linkage grant with the Victorian Department of Human Services, and focuses on similar issues to MABEL. We are also conducting a literature review on the role of financial incentives in improving quality of primary health care. This review is funded by the Australian Primary Health Care Research Institute, and will examine incentive schemes in various countries and will also include a Cochrane systematic review. We also intend to extend our research on the levels of payment doctors receive, through further empirical analysis of Australian data, including MABEL. Tony Scott is also Director of Research for the new National Health Workforce Planning and Research Collaboration, funded by the National Health Workforce Taskforce for $3 million over three years.

A key aspect of our past and proposed future research focuses on the hospital sector. A recently completed ARC Linkage grant with the Department of Human Services (DHS) examined a number of issues around hospital quality and efficiency using unit record administrative data from Victorian hospitals. We are in the process of publishing the results. We plan to extend this research using newly developed measures of quality as well as richer data on hospital characteristics. The proposed rollout of activity-based (case-mix) funding across Australia in the next few years will also provide opportunities to use our expertise to evaluate the impact of this major payment reform on hospital costs and quality of care. Our future plans also include expansion into the important area of the social and economic determinants of health. We are already conducting work on obesity and water fluoridation as part of two new ARC Linkage grants starting in 2009 with VicHealth and DHS respectively. The Health Economics Research Program now has a critical-mass of researchers and collaborations to take it confidently into the future. Members of the program already have a solid international academic reputation, and the reputation of the program is steadily growing within Australia.

Membership to the Melbourne Institute Economics Forums The Melbourne Institute offers membership to the Economics Forums in both Melbourne and Canberra, which is open to private companies, public sector agencies, individuals and other organisations. The main benefit of membership of the Melbourne Institute Economics Forums is complimentary invitations to the quarterly luncheons held in both Canberra and Melbourne. These Melbourne Institute Economics Forums attract a wide range of respected speakers who are leading authorities in their areas of expertise. In addition to researchers from the Melbourne Institute, speakers are selected from government, business and academia. The Melbourne Institute Economics Forums provide access to authoritative and independent economic research and analysis, as well as discussion of contemporary policy issues facing the economy. The Forums also provide an opportunity to ask questions and take part in discussion. There are three levels of membership: Gold, Associate and Individual. Your membership may be packaged to suit the needs of your organisation or personal situation and, depending on the level, can include discounted subscriptions to Melbourne Institute publications and conferences. For information about becoming a member of the Melbourne Institute Economics Forums, please contact Penny Hope (03 8344 2151 or p.hope@unimelb.edu.au) or visit the Melbourne Institute website <www.melbourneinstitute.com>. Melbourne Institute of Applied Economic and Social Research - Page 5


Review of the Australian Economy 2008–09: Recessions, Retrenchments and Risks … From 3 P’s to 3 R’s …

… Retrenchments to be expected in a slowing economy …

In 2007, monetary policy was concerned with bringing inflation down, fiscal policy tended to focus on how best to use the budget surplus, and macroeconomic discussion in general revolved around the need to boost labour supply to tackle the problems associated with an aging population. The 3 P’s — Population, Productivity and Participation — were the main themes which occupied the minds of many macroeconomists.

... Risk of inflation …

Job losses are inevitable when growth slows. The retrenchments are likely to be spread across all states, and are likely to be concentrated in the manufacturing, finance and service industries. Incipient inflationary tendency from stimulus packages may prolong the process of inflation falling to the Reserve Bank’s 2 to 3 per cent target range.

Within the space of a year, the landscape of macroeconomics changed and the 3P’s have been supplanted by the 3R’s – Recessions, Retrenchments and Risks! Monetary policy is now about providing liquidity to prevent further financial collapses. A return to budget deficits is also possible as federal and state governments seek to implement various fiscal stimulus packages. In this article, we provide a brief review of the Australian economy as it grapples with the implications of the global financial crisis and the decline in commodity prices and world growth. The article looks at leading indicators of activity to assess the probability of a recession; it examines job prospects to gauge the states and industries most likely to face severe retrenchments; and it examines the risk of inflation from loose monetary policy in conjunction with an expansionary fiscal policy. … Recession possible but is it probable? … Domestically, the loosening in monetary policy and the series of fiscal stimulus packages are likely to steer the economy away from a recession.

Probability of a Contraction

Source: Melbourne Institute. This is a summary of the article written by Professor Guay C. Lim, Dr Chew Lian Chua, Dr Edda Claus and Dr Sarantis Tsiaplias, from the Applied Macroeconomics Research Program, Melbourne Institute. The full article appears in the March 2009 issue of the Australian Economic Review.

Australian Economic Review – March Issue The latest issue of the Melbourne Institute’s quarterly Australian Economic Review (vol. 42, no. 1) will be released in March. A timely lead article in the Australian Economic Review (as outlined above) is ‘Review of the Australian Economy 2008–09: Recessions, Retrenchments and Risks’, by Guay Lim, Chew Lian Chua, Edda Claus and Sarantis Tsiaplias, from the Applied Macroeconomics Research Program at the Melbourne Institute. Contributed articles in the March issue also include: ‘The Economic Impacts of a New Dam in South-East Queensland’, by Glyn Wittwer; ‘A Structural Model of Australia as a Small Open Economy’, by Kristoffer P. Nimark; ‘The Influences of Institution Attended and Field of Study on Graduates’ Starting Salaries’, by Elisa Rose Birch, Ian Li and Paul W. Miller; and ‘Emissions Trading, Wealth Transfers and the Wounded Bull Scenario in Power Generation’, by Paul Simshauser and Thao Doan. The Policy Forum section of this issue focuses on ‘Enhancing the National Innovation System’. In the ‘For the Student’ section, Guay Lim has contributed an article on ‘Inflation Targeting’. More information on the Australian Economic Review can be found on the Melbourne Institute’s website at <www. melbourneinstitute.com>. Page 6 - Melbourne Institute of Applied Economic and Social Research


Did Australia’s Baby Bonus Increase the Fertility Rate? This study analyses the effects of the Australian government’s Baby Bonus on fertility intentions and ultimately births. Fertility intentions rose after the announcement of the Baby Bonus, and the birth rate is estimated to have risen modestly as a result. “Our analysis of mothers’ intentions to have a child and subsequent births suggested that the baby bonus increased the fertility rate by 3.2 per cent”, said co-author of the study Mark Wooden, Professorial Research Fellow and Deputy Director of the Melbourne Institute. That growth closely aligns with the increase in Australian fertility rates from 1.76 in 2004, when 254,246 children were born, to 1.82 in 2006, when 265,949 were born. The study identified that the modest effect on birth rate yields a marginal cost per additional birth of at least A$124,000. This figure may seem high to some, though according to Professor Wooden that depends on how much value we attach to new children. “Whether $124,000 is too much depends on the economic value

we attach to additional children. In years to come, those additional children are going to be future taxpayers”, he said. The Rudd Government is currently considering a Productivity Commission draft recommendation to extend the Baby Bonus, now worth $5000 per child, into a wider scheme for paid maternity. The study methodology used household panel data from the Household, Income and Labour Dynamics in Australia (HILDA) Survey (sample size 14,932). The HILDA Survey Project was initiated and is funded by the Australian Government Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA) and is managed by the Melbourne Institute. This Working Paper was written by Robert Drago, Pennsylvania State University; Katina Sawyer, Pennsylvania State University; Karina Sheffler, Oklahoma State University; Diana Warren and Mark Wooden, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne. The full Working Paper is available at <www.melbourneinstitute. com/publications/working/wp2009.cfm>.

Registrations Are Now Open for the 2009 HILDA Survey Research Conference The 2009 HILDA Survey Research Conference will be held on Thursday 16 to Friday 17 July 2009, at the University of Melbourne. The aim of the conference is to provide a forum for the discussion of research based on the Household, Income and Labour Dynamics in Australia Survey (HILDA). Attendance at the conference is open to all, but should be of special interest to both users of the HILDA Survey data and persons with an interest in the outcomes from longitudinal survey research in the broad field of economic and social policy. The cost of the conference is $260 for two days. There are also discounts available for early-bird registrations and students. The conference dinner on Thursday 16 July is open to all delegates, and guests are also welcome. The dinner, which is $75 per head, will be held at University House at the University of Melbourne. HILDA Data User Training will take place on the three days before the conference (13, 14 and 15 July) at the University of Melbourne. Registration for the training can be obtained by using the conference registration form, and more details on the training can be obtained from the HILDA website. The Melbourne Institute website will be updated regularly in the lead-up to the conference. For enquiries contact Penny Hope, Functions Manager, Melbourne Institute, on 03 8344 2151, or by email <p.hope@ unimelb.edu.au>, or visit the Melbourne Institute website <www.melbourneinstitute.com>.

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Recent 2009 Melbourne Institute Working Papers 2/09 1/09

‘Sequential Linking of Computable General Equilibrium and Microsimulation Models’ Nicolas Hérault ‘Did Australia’s Baby Bonus Increase the Fertility Rate?’ Robert Drago, Katina Sawyer, Karina Sheffler, Diana Warren and Mark Wooden

Working Papers can be downloaded for free from <www.melbourneinstitute.com>.

Ha Vu, Melbourne Institute PhD Student Ms Ha Vu joined the Melbourne Institute in January 2003 as a Research Officer in the Labour Economics and Social Policy Research Program. She has worked on a number of the Labour Economics projects and her primary role has been to analyse data under the supervision of senior research members. “This experience has greatly helped me to develop my analytical and econometric skills, and has helped me decide on an academic career”, said Ha. In 2004 Ha enrolled as a part-time PhD student in the Faculty of Economics and Commerce. Her thesis is on the dynamics of income support receipt in Australia — a subject related to her work at the Melbourne Institute. In 2007, Ha was awarded a Melbourne Research Scholarship, which enabled her to fully concentrate on her thesis. Under the supervision of Professors Jeff Borland, John Creedy and Dr Lixin Cai, Ha is now close to completing her thesis. “Thanks to the excellent supervisors and the valuable research skills that I gained from working at the Melbourne Institute, my PhD journey has been a rewarding and positive experience”, said Ha. Upon finishing her PhD, Ha’s intention is to return to the Melbourne Institute to further her academic research on labour economics and other related areas.

Staff Matters In 2009 the Melbourne Institute welcomed two new PhD students who were each awarded a Melbourne Research Scholarship. The students are Michelle McIsaac in the Health Economics Research Program, and Sui Lay Tan in the Applied Macroeconomics Research Program. Economist and Climate Change Review Chair Professor Ross Garnaut has been appointed a Vice-Chancellor’s Fellow at the University of Melbourne, and a Professorial Fellow in the University’s Faculty of Economics and Commerce. Professor Garnaut will be attached to the Department of Economics and the Melbourne Institute of Applied Economic and Social Research. Professor Stephen Sedgwick, Director of the Melbourne Institute, welcomes Professor Garnaut and said, “Ross has made an outstanding contribution to public policy development across a very wide range of fronts and over many years. I very much look forward to working with him again.”

Melbourne Institute News Views expressed by the contributors to Melbourne Institute News are not necessarily endorsed or approved by the Melbourne Institute. Neither the Melbourne Institute nor the Editor of Melbourne Institute News accepts any responsibility for the content or accuracy of information contained in this publication. Editor: Cliff Howard tel: 03 8344 2154, fax: 03 8344 2111, email: howardc@unimelb.edu.au. Sub-Editor: Nellie Lentini. Contributors: Ms Penny Hope, Dr Paul Jensen, Professor Guay Lim, Professor Tony Scott, Professor Stephen Sedgwick, Associate Professor Beth Webster, Professor Mark Wooden

Level 7, Alan Gilbert Building, The University of Melbourne P: (613) 8344 2100 F: (613) 8344 2111 www.melbourneinstitute.com


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