Richard Holden

In his victory speech on election night last September, Prime Minister Tony Abbott declared Australia was “under new management and … once more open for business”.

There were, of course, specific promises such as repealing the carbon and mining taxes, balancing the budget, and building lots of new roads. But the “open for business” line foreshadowed a broad increase in confidence in the economy.

In terms of confidence since then, there has been little good news about the economy – and some bad, especially regarding unemployment. The Westpac-Melbourne Institute consumer sentiment index is 10.8% below its post-election peak.

Treasurer Joe Hockey has told us there is an imminent debt crisis, but can’t persuade parliament to pass all of his budget. Minister for Trade and Investment Andrew Robb has said budget blocking puts Australia’s credit rating in jeopardy.

The confidence of those receiving family tax and other benefits has been shattered, as has the confidence of those of us who are happy to see our tax dollars spent to make real the promise of opportunity for those less fortunate – a promise that has always been at the core of Australia’s social compact.

I get it: the first step to recovery is recognising that you have a problem. But so far the government seems to have scared global financial markets a fair bit, but not scared the Australian public and their representatives enough to do anything about it.

And that’s largely because we don’t have an imminent debt crisis. We have a long-term structural budget problem caused by an ageing population — a problem shared by most OECD countries.

Yet, despite the dramatic rhetoric, nothing has been done to address the structural problems. To say the least, this is not great “expectation management”.

A major election promise was to repeal the carbon tax – legislation that was passed last month. It remains to be seen whether the so-called “direct action” policy on climate change will be implemented, but this is one area where business is certainly happy.

And why not? Under a carbon tax or emissions trading scheme businesses pay if they pollute. Under direct action they get bribed not to pollute. It is, however, clearly bad policy for the economy as a whole — a fact that everyone except hardcore climate change deniers acknowledge.

Abbott aspires to be known as “the infrastructure PM”. But investments of the type Abbott promised take a long time – even to start – so it’s too early to tell whether he will be remembered as he wishes to be in this respect.

If we can glean anything, it comes from the yet-to-be-passed federal budget with nearly A$60 billion in infrastructure projects. Abbott has pledged that these and other projects will be subject to “rigorous cost-benefit analysis”.

If so, that’s exactly why some of them might not happen. As an economist I can hardly be against weighing up costs versus benefits. But costs are usually pretty easy to quantify (how much will it cost to build “X”); benefits, not so much.

Projecting how much traffic flow there will be on a road is not so hard, though tell that to AMP which is suing its consultants over forecasts of Lane Cove Tunnel traffic flows. Projecting the benefits of genuinely new types of infrastructure is much harder.

What’s the economic benefit of really fast internet access? It’s tough for even the most seasoned consultant to know what to put in the line in the spreadsheet that reads “stuff we never even knew it could be used for”.

So, paradoxically, Abbott’s legacy as “the infrastructure PM” may actually involve not being so wedded to standard cost-benefit analysis, but being prepared to take an educated guess about what a country such as Australia will need to face the economic challenges of the coming years.

On the mining tax, unlike many economists, I give the government some credit. Although there are intelligent arguments that those who benefit from digging up Australia’s natural resources should pay a good chunk for it, the mining tax was designed as a “super profits tax”.

If that sounds like the last refuge of banana republics that’s because it basically is. “You foreigners are stealing our future.” That is, at best, a cheap caricature of the Australian mining sector.

I’m still yet to hear a coherent definition of what a “super” profit is and how exactly it differs from an “acceptable” profit. Oh, and the mining tax didn’t raise any money, either. It was a bad idea, poorly executed. It’s good to see the back of it.

The Abbott economy at year one doesn’t look terrible. But it doesn’t look great, either. Unemployment is up, growth is flat, and confidence is down.

For Australia to really be “open for business” at year two will require a year ahead with: less scaremongering about non-existent debt crises; fewer ad hoc taxes such as the so-called debt levy and the 1.5% tax on the top 3000 companies; and no more draconian cuts to lower-income families struggling to raise kids and get ahead.

Richard Holden is a professor of economics at UNSW Australia Business School. A version of this post appeared on The Conversation.

Rafal Chomik and Hazel Bateman

A good proportion of the Financial System Inquiry’s 460-page interim report is dedicated to a discussion of superannuation and, in particular, to making the financial system better at facilitating the conversion of super into retirement income.

Currently, the system does poorly. It does not meet the risk management needs of retirees. They have few options if they want a stable income after retirement that is insured against longevity, investment and inflation risk.

Indeed, existing rules impede the development of such products. It may make sense in principle for a retiree to insure against outliving their savings by buying a “deferred annuity” consisting of an income stream that only starts paying out in 20 years’ time.

But this would not be a wise move if (as is presently the case) the Age Pension means test deems that they are receiving that income in the intervening 20 years, and lowers their interim pension as a result.

The inquiry correctly identifies these issues as part of a wider problem of policy inconsistency: on the one hand, tax-advantaged retirement savings and default fund and portfolio allocations are mandated because we recognise we are subject to under-saving and behavioural biases. The majority never have to interact actively with superannuation during their working lives.

On the other hand, retirement income decisions and risks are left entirely with individuals at the moment of retirement.

The report puts forward four options, some of which are expected to become solid recommendations when the inquiry submits its final report in November 2014.

These range from the full flexibility but limited risk management of the status quo (where individuals use super savings as they see fit, with some improvement in financial information, advice and education) to the limited flexibility but full risk management of compulsion (where some savings must be used to buy a longevity-protected product).

In between these extremes are two other options. The inquiry flags the possibility of incentivising longevity-protected products via tax or the Age Pension means test. But benefits from super are already tax-advantaged so incentivising longevity-protected products may require raising taxes on other income streams and lump sums.

This could tie in with addressing another concern noted by the inquiry: that the tax arrangements within the superannuation system are being used for estate planning rather than for providing retirement incomes. Super taxes may be an area that the government’s proposed tax review will also look at.

Finally, the inquiry opens the door to a full discussion of instituting a default for decumulation of super. A single default would not suit everyone and there are fiduciary concerns about automatically committing individuals to a given decumulation product, but an opt-out would be available and elements tailored to individual circumstances could be included.

Also, only a proportion of savings above a certain threshold may be subject to the longevity-protected product default. These can guide those who are less engaged and offer flexibility to those wanting to make their own decision.

We know from research that defaults have a strong behavioural effect – often more so than financial incentives. A recent online experiment, led by the Centre of Excellence in Population Ageing Research (CEPAR), showed that in a decision to allocate assets between an account-based pension and an immediate annuity, individuals were most likely to choose the default option.

Such products, perhaps combined with a tendering process (seen in countries such as Chile and Singapore) for the most competitively priced, may yet provide value for money with the right mix of flexibility and risk management, regardless of a person’s level of financial capacity, engagement or superannuation balance.

Rafal Chomik is a senior research fellow at CEPAR at the Australian School of Business (ASB). Hazel Batemen is an ASB professor of economics and head of the school of risk and actuarial studies. A version of this post appeared on The Conversation.

Fred Hilmer

Concern that competition might suffer in the current privatisation push by state governments revives an issue we wrestled with in the National Competition Review I led in the early 1990s.

The warning from Australian Competition and Consumer Commission chairman Rod Sims that he would oppose privatisations unless competitive structures and pro-consumer regulations were in place has prompted a robust response from Victoria and NSW, with assurances that appropriate safeguards are being implemented.

But the issues involved are complicated. Almost half of our 1993 National Competition Policy Report dealt with the complex policy responses to monopoly structures, particularly those in public ownership.

There is often genuine confusion between privatisation and competition reform, with an assumption the move from public to private ownership will automatically lead to lower costs and lower prices. But while both head down the lower-cost route, only one – competition reform – delivers lower prices.

We need to treat privatisation and competition reform as separate but related concepts. And I believe we need both.

It is possible to contend there can be an effective competitive structure, such as multiple generators in electricity, or access regimes for ports or rail beds, even where the assets stay in public ownership.

This was our review’s position, but it is one that I have recently argued, on the basis of the past 20 years of experience, is wrong.

While competition matters, so does ownership if productivity gains are to be maximised to the benefit of consumers. The electricity industry in NSW is a case in point. Multiple generators, all in public hands, were not a great success.

The potential for ministerial involvement was always present, despite assurances this would never happen. Management never had the freedom to act, innovate and take the risks that private ownership would allow.

However, the reverse is also true. Ownership matters, but so do market structures and pro-competitive regulations such as access regimes. Otherwise we merely shift the monopoly from public to private.

Certainly privatisation brings benefits. There is the clarity of purpose a commercial board and owner provides. There is the willingness to take risks without concerns that there will be “electoral consequences”.

We have seen governments, subject to electoral pressures, avoid blackouts by overbuilding generating capacity, leading to poor capital productivity. Red tape – convoluted approval processes for key financial and investment decisions – further limits the performance of public entities.

But while private ownership alone may reduce costs and increase operating profit, consumers don’t necessarily benefit. The big winners from private monopolies are the owners, not the public.

Admittedly there is a one-time benefit to the community from the higher price received for a monopoly right. Because the monopoly has value, the state receives a higher price than would be the case if a competitive structure was created. It is argued the higher price, reflecting the present value of the stream of monopoly rents, compensates the public for putting up with monopoly pricing.

There are two problems with this. First, the premium for public monopoly rights should be heavily discounted, as governments can change regulation – a point clearly understood by taxi owners, pharmacists and owners of gaming licences.

Second, the privatisation benefits in terms of efficiency improvements are unlikely to be enjoyed by consumers, unless there is a competitive incentive structure in place. In addition, these efficiency improvements are heavily discounted in setting a bid price for public assets.

Hence, Sims’s point that privatisation and competition reform must go hand in hand. Independently, both can provide economic benefits. But the real gains in productivity and consumer welfare come when both ideas are implemented in a complementary way.

Moreover, it is crucial that competitive arrangements are adopted at the proposal stage, before assets are privatised. Public monopolies can be restructured by parliament. To deal with the negative effects of private monopolies is much harder.

Fred Hilmer is vice-chancellor of UNSW Australia. A version of this post appeared in The Australian Financial Review.

Dale Boccabella

Abolishing the sacred cow of negative gearing – where losses can be used as a deduction against other income – is considered by governments of all persuasions as electorally unpalatable.

But this part of the income tax system is one of the few areas left which confers this highly favourable treatment. In many other important areas of our public finance and income tax system, negative gearing is effectively abolished in favour of quarantining of losses.

Negative gearing is allowed on passive rental property and share investments and for “large” businesses. Both the pros and cons of negative gearing are well-known. Its most immediate advantage is allowing taxpayers to use a loss on one investment as a deduction against a profitable investment, or other source of income. But it is accepted that it undermines the progressive nature of the income tax, does little to increase housing supply stock and is a significant cost to government revenue.

In contrast to negative gearing, quarantining is where the loss on an investment cannot be used in the year it is made, but can be used in future years, against profits from the same investment from which the loss arose. Usually, but not always, if the investment is sold while there are quarantined losses, these can be used to reduce the taxable profit on exiting the investment.

In our tax system, quarantining is used when determining whether a taxpayer is liable to pay the Medicare levy surcharge; for loan repayments under the higher education loan program (HELP); and assessment of income under the child support regime, particularly Family Tax Benefit Part A and B.

Quarantining also applies when the tax office is assessing means-tested concessions such as the dependent (invalid and carer) tax offset, or senior and pensioner tax offsets.

Small businesses that make a tax loss in a non-corporate form are not permitted to use that loss against other profits (so-called non-commercial loss rules). While these measures are in part a response to the ridiculous hobby tax loss claims of the past, these rules apply quarantining to genuine small businesses, including those in the start-up phase. Quarantining also applies to certain boating activities.

In the social security system, quarantining applies where a particular benefit is means tested, such as Seniors Health Care Card, or the parental income test for dependant youth allowance. Like the income tax though, quarantining is not universally applied under this legislation (for example, it does not apply to the income test for aged pensioners). Also, the current paid parental leave scheme also uses quarantining in its relevant income measurement.

So one can see that quarantining applies in numerous areas of our public finance system. The starting point for debate should focus on economic capacity. By allowing negative gearing, the loss is being treated as a genuine signification of reduced economic capacity to either contribute income tax (or other contribution), or to receive welfare assistance. On the other hand, if quarantining applies, the loss is not regarded as signification of reduced economic capacity to either contribute tax or to receive welfare assistance.

Unfortunately, there are credible arguments both ways. And the fact that countries around the world do not take a uniform approach to the issue under their respective income tax systems supports this.

However, our public finance framework ought to be internally consistent so that similar things are treated in a similar manner, unless there is a sound explanation for differential treatment. This should be the case within the social security and income tax system, as well as across both, as the social security system is the mirror of the income tax system, or a negative income tax.

Both systems have economic capacity at their foundation. Those with sufficient economic capacity make an income tax contribution, and those who lack it receive payments (and other non-money benefits) for economic support. Given the shared foundation of the income tax and social security systems, or that they are really one system, it is hard to see why a different measure of economic capacity should be used within each system or across systems.

Another lesser dimension is that tolerating negative gearing in parts of the income tax and social security systems, but not tolerating it in others parts of those systems, adds complexity. Differential treatment of the same thing necessarily adds to administration and compliance costs.

In the end, there is a real argument that negative gearing should either be restored in the areas where it is currently prohibited, or should be scrapped across the board.

Given where the debate is now, I doubt anyone will seriously argue the former. That tends to leave movement towards the latter, because no one would seriously argue that the current differential treatment is a principled position with credibility.

Dale Boccabella is an associate professor in the School of Business Law and Taxation at the Australian School of Business. This post appeared on The Conversation.

http://theconversation.com/why-its-time-to-quarantine-negative-gearing-24265

Tim Harcourt

In Australia the car industry is unique. It has unique Australian characteristics and capabilities, and its closure is a self-inflicted wound.
 
The exit of Toyota from Australia really symbolises the way the Australian economy has now moved on from the days when it was a manufacturer, and it now has more of a dependence on the resources sector.

Toyota has confirmed that it will cease all production in Australia by 2017. Approximately 2,500 jobs are expected to be lost when the Japanese car maker closes its Altona plant in Melbourne.

The exit of Toyota is very sad, and really signals the death knell of car making in Australia. In hindsight we should have focused on export orientation and trade promotion, supporting the free trade agreements, and building on our export success in Asia and the Middle East and emerging markets.

When I was on the Bracks Review, I made it clear the government could intervene with tariffs or support, but despite that changes in the global economy are had a huge impact Australian car industry. One crucial issue was until recently the very high Australian dollar which would have wiped out any impact of a tariff freeze and the protectionist lobby would have only had a pyrrhic victory of a few months.

However in the current debate over the future of the industry there are two extremes hogging the limelight. There’s one camp that says protect the industry no matter what the cost – and indeed protect manufacturing at whatever the cost – and there’s another camp that sees it as a badge of honour to say Australia should not produce cars and they belittle any outcomes by the industry to raise international competitiveness. I recall a former Australian ambassador in Washington, loudly and proudly telling an American audience that the optimal number or car companies in Australia is zero. Fortunately, Bracks, like Button before him, eschewed both extremes and advocated a moderate path of reform for the industry.

This steady reform is what we should have had; instead, we had Ford, GM, and now Toyota falling like dominos. If only GM had gone Ford & Toyota might have just hung on. Alas maintenance of manufacturing and the constant changing of promotional gears as global economic and environmental conditions change was very important.

Australia failed – and to hang out the car industry to dry is very sad.

Tim Harcourt is the JW Nevile Fellow in Economics and an adjunct professor in International Business Strategy, at the Australian School of Business, the University of New South Wales.

Tim Harcourt was also an economic adviser to the Bracks Review of Australia’s Automotive Industry.

Martin C. Jones

In a survey last year of 22,812 people across 22 countries (including Australia), the polling organisation GlobeScan found that environmental concerns had fallen worldwide since 2009, and fewer than one in two people (49%) now viewed climate change as a “very serious” problem. GlobeScan’s chairman, Doug Miller, commented: “Scientists report that evidence of environmental damage is stronger than ever – but our data shows that economic crisis and a lack of political leadership mean that the public are starting to tune out.”

Miller’s comments could have been tailor-made for Australia. The famous “hockey stick graph” of rising temperatures has been confirmed, and atmospheric greenhouse gas concentrations spiked dangerously upward in 2012. The Australian Climate Change Commission found that climate change is already adversely affecting Australians with record-breaking heat, severe bushfires, extreme rainfall, and damaging floods – byproducts of the “Angry Summer”.

Yet with the centrepiece of Australia’s climate policy not even a year old, most Australians are sick of it, or sick of hearing about it – fewer than 13% trust what politicians say about major public issues like climate change. And in the shadow of the Clean Energy Future package (CEF), state and federal governments are quietly letting other climate policies slip.

This “abdication of climate policy”, as Tristan Edis calls it, wouldn’t be so bad if Australia’s climate policy were perfect. But it isn’t; no policy is. The carbon price, while worth having, is a broad, blunt tool that covers two-thirds of Australia’s greenhouse gas emissions. The rest of the CEF fills in some gaps, but there is ample room for further complementary climate policy at a state and federal level.

I wrote last year on this topic, giving reasons why state (or other federal) climate policies could still be worthwhile under the CEF. This would mean innovative approaches such as:

• addressing areas that don’t respond well or rapidly to price changes
• shifting habits, socially-shaped preferences, or intrinsic motivation
• investing in worthwhile programs the private sector is unlikely to fund
• addressing goals other than least-cost abatement, such as improving energy efficiency in disadvantaged households
• making Australia’s climate policy robust; that is, giving it the ability to maintain a minimum level of performance under a range of possible future conditions.

My colleague, Paul Twomey, wrote in a similar vein the year before.

Academics aren’t alone in regarding (some) additional policies positively. Five years ago the federal government received a strategic review of its climate change programs, assessing them for efficiency, effectiveness, appropriateness, and complementarity with the Carbon Pollution Reduction Scheme (CPRS, the forerunner to the current Clean Energy Future package).

Named after its author, the 249-page Wilkins Review formalised criteria that governments could use to assess which climate policies complement a federal carbon price. Reasons for needing complementary policies included market failure, inefficiency, covering sectors that emissions trading can’t, helping people make informed decisions to change their behaviour, social equity, or where the underlying problems of climate change differ across regions. Some of those may sound familiar.

And it’s not as though states have never complemented federal policy, in climate or in other areas. One of the great benefits of federalism is that states can compete with each other to provide better policies, the best of which then (ideally) percolate to the national level. NSW had an emissions trading scheme in 2003, one of the first in the world. Queensland started transitioning to a lower-carbon economy in 2005 with its 13% Gas Scheme. Victoria’s Industry Greenhouse Program to regulate industrial emissions and energy efficiency was another world-leading climate policy.

Indeed, under the constitution, states – and councils – have a duty to act in many areas. They hold powers the federal government doesn’t – education, the environment, or town planning. These are clearly areas where state and local governments should be complementing federal climate policy, as they have not only the power but the best knowledge of the field. They are, quite literally, at the coal-face and on the front line of disaster management.

The need for climate action remains. The scope for complementary policy remains. The duty of governments to act remains. But in many areas, they are going backward. Energy efficiency activities are being scaled back. Construction of renewable energy plants is being cruelled. And electricity price freezes or subsidies are on the cards – as far from a complementary measure to a carbon price as is possible. How you can you make a polluting product more expensive if it’s subject to a price freeze?

These actions make Australia dangerously vulnerable to the fate of its carbon pricing scheme, and there’s no certainty it will last the next term of government. If the CEF is scrapped, or fails, what do we have to replace it? The Coalition’s Direct Action package has a far narrower scope than the current carbon price, and relies on soil carbon measures unproven at the suggested scale and cost. State governments aren’t competing to beat each other or the federal government on climate policy, as they once did.

As the risks of a dangerous climate increase, Australian governments are risking measures needed to ward it off and respond adequately. If GlobeScan polled me, I’d say that’s a very serious problem.

Martin C. Jones is an environmental economist from the Australian School of Business.

Professor Raja Junankar

Calls for reforms of the contentious 457 skilled entry visa – used by the mining industry to bring in long-stay temporary workers – may not work.

Plans to fast track migrants for the mining industries won’t help these industries find workers – because few people using a 457 work in mining. Changing the rules for the 457 visas would be an odd, short-sighted decision.

Over 93,000 overseas skilled workers are currently living and working in Australia on 457 temporary visas. Australian trade unions are pressurising the government to create legally binding agreements that would require employers in the mining industry to advertise jobs to try and find Australian workers and Australian residents before being allowed to recruit international workers to come to Australia on temporary work visas.

If there is really a shortage in workers due to the mining boom, then we should look at bringing in more plumbers and electricians, whereas the 457 visas mainly go to professionals.

 Looking at the data on the ‘class 457’ visas in 2011 72% of class 457 visas went to managers and professionals, and only 21% to trades and technicians. The Australian states that received the vast majority of class 457 visa applicants was in New South Wales – which isn’t known as a big mining area. WA gained 23%, and Victoria 20%. Not Queensland, or the Northern Territory.

 The data for the 457 visas seems to go against what we are told they are for. The 3 main industries getting 457 visas are construction, health services and ‘other services’: nothing connected to mining. Also if we look at where people have come from that get a 457, the list in order is the UK, India, Ireland and then at 4^th, the USA.

Professor Raja Junankar is a Professorial Visiting Fellow in Economics at the Australian School of Business, and an Honorary Professor in the Industrial Relations Research Centre at the University of New South Wales.

Linda Lavarch | CSI Blog

Charities are in Crisis is the opening statement of a new book Driven by Purpose – Charities that make the difference. The authors Stephen Judd, Anne Robinson and Felicity Errington stress that it is not a crisis of money, professionalism or leadership but a crisis of identity. Judd et al look at the ways in which each charity should revisit its purpose to overcome any identity crisis.

But there is an even bigger issue to grapple with. There is only a limited understanding or recognition of where charities sit within the landscape of Australian society. As a society we cherish the work that they do and we want our charities to succeed but we need to figure out how they should be supported and regulated. Having 178 pieces of Federal, State and Territory legislation and 19 separate agencies determining charitable purpose does not begin to demonstrate the regulatory nightmare that some charities endure. It has become beyond ridiculous.  Thankfully a better deal for Charities is about to begin and this reform is broadly supported by the Not-for-profit sector in Australia.

Today, the Government introduced the Australian Charities and Not-for-profits Commission (ACNC) Bill, the Consequential and Transitional Bill, and the Tax Laws Amendment (Special Conditions for Not-for-profit Concessions) Bill to Parliament.

The importance of the ACNC as an independent, statutory regulator for the Not-for-profit sector cannot be understated.  Without the ACNC we leave this important sector which is estimated to represent over 4% of GDP and 8% of the Australian workforce to an incoherent, costly, uncoordinated, complex regulatory regime in which the ATO has assumed the position of default regulator. It is therefore not surprising that Not-for-profits have been calling for an independent regulator like the ACNC for so long. These calls have been supported by no less than six major inquiries since 1995.  All of these inquiries including the significant inquiry undertaken in 2010 by the Productivity Commission, Contribution of the Not-for-profit Sector, have unequivocally called for a ‘one-stop shop’ national regulator for the sector.

It’s not just the Not-for-profit sector that will benefit from the ACNC. While many of us roll our eyes as soon as we hear the words ‘regulatory reform’, we all have an interest in a stronger, more sustainable Not-for-profit sector. There would be very few of us not touched by the work of some 600,000 Not-for-profits that exist in Australia. Whether it is helping to organise meals on wheels, supporting grass roots sport or caring for our natural resources, Not-for-profits are often the glue that holds our communities together. Australians donate around $7 billion in money and $14.6 billion in time each year. The last thing we want is the good works of our charities and the army of volunteers who help them being held back by the current haphazard regulatory environment.

The ACNC Bill follows many months of consultation with Not-for-profits. This consultation resulted in a number of significant changes since the first draft was released in December 2011. This has also led to the Government delaying for 12 months to 1 July 2013, the introduction of the financial reporting and governance standards. A decision welcomed by the sector.

The 2010 National Compact between the Government and Not-for-profits committed both parties to working together on a shared vision to improve Australia’s social, cultural, civic, economic and environmental outcomes.  This shared vision was based on an appreciation of the unique contribution that a strong and vibrant Not- for-profit sector makes to Australian society.

The Not-for-profit sector looks forward to continuing our engagement with Government on standards that strike the right balance between accountability and ensuring that we do not stifle the vibrancy and responsiveness of the sector.  Australia needs a creative and productive Not-for-profit sector that can serve the Australian community into the future.  I am confident the ACNC’s role of ‘light touch’ regulatory oversight combined with education and support will become profoundly important to underpinning civil society in Australia and then we will be in no doubt about the difference charities make.

This post previously appeared in the CSI Blog: From Haphazard to Harmony – Australian Charities and Not-for-profits Commission

From the Knowledge@Wharton today blog.

We’re entering the next big wave of corporate social responsibility. At least that’s how Daniel Korschun, a Drexel University marketing professor, sees it.

The first wave of corporate social responsibility, known as CSR, was embodied in people like Sir Titus Salt, a British textile baron who improved conditions for workers toiling in what were then known as “dark satanic mills,” Korschun noted during a panel at this year’s Wharton Social Impact Conference. Salt brought them out of the economic darkness by providing housing, health care and a better way of life.

The second wave came during the 20^th century with the growing debate in corporate America over whether CSR should be considered an essential piece of good management or just a marketing tool to garner favor from communities, he said.

Today, “the debate is over,” noted Korschun, who acted as moderator of a panel focusing on innovation in corporate CSR. “We’re seeing the third wave of CSR, and companies are trying to incorporate CSR into the business model. That’s putting the onus on companies and management to find ways to innovate. It’s no longer enough to be somewhat engaged.”

Indeed, panelists at the session talked about how deeply involved companies have become with regards to giving back to society, either through philanthropy or sustainability efforts, and how far they still have to go in this effort.

Catherine Potter, a senior associate at consulting and management company Green Order, spoke about the environmental reality check her company has been able to provide to a client roster that includes General Electric, Pfizer and DuPont. GreenOrder focuses on how environmental innovation can actually make businesses more competitive and profitable, she said. “We’ll be the first to tell them, ‘Don’t just go … green for green’s sake.’ It should be rooted in business value.”

Building an enduring and effective sustainability platform, she added, takes many steps, but companies first have to understand what their core business model is, how they make money and how environmental sustainability plays into that. When clients come to GreenOrder, it’s usually the CEO who has bought into the idea of promoting green, “but the rest of the team thinks it’s hooey.” Yet buy-in at all levels is critical for making it work, Potter noted.

One example of a company that’s gone all in, she said, is General Electric, which GreenOrder has been advising since 2004. The multinational conglomerate, a global manufacturer of  everything from lighting to wind turbines, was able to cut more than $130 million in yearly energy costs while reducing greenhouse gas emissions and water usage.

Agencies in the public and private sector are coming to realize that CSR is not just about newfangled technology, but about changing behavior. For example, Potter pointed to utility clients who put in smart meters and devices for consumers to track energy usage. “It’s not going to work if you don’t engage people and figure out how to change their behavior,” she noted, adding that companies need to do more outreach to customers and make sure they have the information needed to form a realistic action plan.

Action is exactly what Chhavi Ghuliani, another speaker during the session, wants from all the players when it comes to environmental and social change. Ghuliani is a manager in advisory services for BSR, a consulting and research firm that works with 300 member companies all over the world to develop sustainable strategies for organizations, including everything from health education programs at a Bangladesh factory to creating green initiatives at a news organization.

In the past, Ghuliani said, companies viewed community investing and philanthropy as more important for brand recognition and boosting employee morale than for figuring into their core business operations. But today, it’s beginning to be seen more holistically. For example, he noted, BSR has completed a project with Bloomberg News to define what sustainability means, and was able to define what types of goods the company should be procuring to keep facilities running properly, while also focusing on what was the most sustainable. “As a result, Bloomberg saved $25 million in costs, but [the effort] also positioned them to be leaders in sustainability,” he added.

Figuring out which organizations are leaders in CSR, and which are falling behind, was another area BSR recently tackled by launching a new data service that compares CSR efforts among companies. Looking at two companies and comparing their energy efficiency is one example of this, noted Ghuliani.

This blog was previously posted in Knowledge@Wharton today blog: Corporate CSR: What It Means to Go ‘All In’

Tim Harcourt

Imagine a country that is inward looking and rarely notices the world beyond its own borders. It’s a country that has double-digit inflation and unemployment and a poor record of industrial disputation.  Industry shelters behind prohibitive tariff walls, the exchange is fixed and ‘overseas’ trade is an afterthought. There are few tourists and not many foreign students on university campuses and few ‘foreign’ restaurants. The country despite its bountiful wealth is at the bottom of the global premiership table in terms of economic performance.

You don’t have to imagine too hard because that country Australia – the Australia of the past. It’s the Australia that farmer Stan Kelly and his son and fellow free trader Bert Kelly (also known as ‘the Modest Member’) railed against because of what the old Australia was doing to farmers, exporters, workers and the whole Australian community.

But whilst Kelly and son fought hard intellectually for the free trade side of the cause (Bert as a lone voice in the Fraser Government) it took three visionaries of the labour movement to open Australia up and lock in the economic prosperity that the lucky country experiences today. Prime Minister Bob Hawke, Treasurer Paul Keating and ACTU Secretary Bill Kelty lead the reform charge and importantly managed its social and industrial impact. The float of the exchange rate, the reduction of tariffs, the introduction of inflation targeting via the prices and incomes Accord were bold, brave reforms but they were coupled with enhancements to the social wage with the introduction of Medicare, superannuation, tax cuts and reforms to the education and training system to enhance skills for affected workers. They were brave reforms and they were bold. I joined the ACTU at the start of 1991, when the March 1991 tariff cuts were implemented in the middle of a recession and with the Industrial Relations Commission still grappling with enterprise bargaining. They were bold reforms but they enabled Australia to open up to Asia and take advantage of the shift in global economic power towards the Asia Pacific region. The Tyranny of Distance has truly become the Power of Proximity and those 1991 reforms enabled Australia to be in the right place at the right time. This time the lucky country made its own luck.

As Australia faces its next challenge in terms of climate change and the possibility of another global financial shock, what are the lessons to be learnt about how Australia opened up its economy? And which lessons are important to whom as debates get ravaged in the 24 hour news cycle?

The first lesson, perhaps for the leaders of the modern labour movement is that on the whole, trade has been good for workers as well as exporters. Some research I did with UNSW shows that on average, exporters pay 60 per cent higher wages provide more job security, equal employment opportunity and better occupational health and safety (OH & S) standards than non-exporters. Exporters are more profitable and achieve higher standards of productivity and therefore can train and reward their workers better, on average, than non-exporters.

The second lesson, to those on the other side of the fence, is that it is not economically desirable to protect markets it is desirable to protect workers. An open economy does not mean we have to dispense with all notions of fairness in the labour market. An individual bargaining one on one with management will in most cases not win out. It doesn’t matter if you are a cleaner, a computer programmer or even a chief economist; you need protection when negotiating with management to produce a fair and economically efficient outcome. In fact, the UNSW research also showed that export sectors, that were highly efficient also were unionised with coverage by collective agreements. After all Australia has a unique system of industrial relations institutions and its one that produces an unemployment rate nearly half that of the US and some of our other northern hemisphere counterparts. In short, labour market deregulation is not a logical extension of trade liberalisation.

The third lesson is to avoid fads in trade and industry policy. Eleven years ago as the Australian dollar plummeted below the US50 cents mark, the head of Hewlett Packard visiting Australian for the Sydney Olympics warned that unless Australia got out of ‘old economy’ industries like mining and farming and exported software and became more ‘new economy’ like Taiwan, the Aussie dollar would be 30 cents by 2010. The chief scientist expressed similar views. This was of course before we saw one of the biggest terms of trade increases in our history as ‘old economy’ prices increased due to the surge in demand from Asia. We also developed so-called ‘new economy’ exporters selling training, software and IT services to ‘old economy’ exporters of rocks and crops. Policy makers and the RBA did well to hold their nerve.

The final lesson is that trade policy has moved well beyond tariffs. Whilst the WTO may not be as dead as a Doha yet, and Craig Emerson’s new initiative shows an innovative way to break the dead lock, most Australian exporters are concerned about behind the border issues and seek off-shore government assistance when trying to understand new business networks and cultures particularly in emerging and frontier markets.

Another Kelly, Paul wrote recently, in reference to events at Qantas, that traditional Australian industrial relations are not compatible with us engaging in the ‘Asian century.’ On the contrary, many people of Asian descent have come to Australia to experience the fairness and freedom in the labour market here that is denied to them in their countries of origin. The Australian model allows us to trade with Asia, but to work and live according to Australian traditions of fairness and flexibility. The ‘Kelly gang’ (Stan, Bert and Paul) got it right in terms of free trade, but it took Hawke, Keating and Kelty to make it work by managing the social and economic impacts in the true Australian tradition

Tim Harcourt is the J.W.Nevile Fellow in Economics at the Australian School of Business UNSW and the author of The Airport Economist: www.theairporteconomist.com. A version of this opinion piece first appeared in the Australian Financial Review 10 November 2011.