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Addressing extreme disadvantage through investment capability development: closing keynote address to the Australian Institute of Health and Welfare Conference: "Australia's Welfare 2007", Canberra.



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ADDRESSING EXTREME DISADVANTAGE THROUGH INVESTMENT IN CAPABILITY DEVELOPMENT

CLOSING KEYNOTE ADDRESS TO THE AUSTRALIAN INSTITUTE OF HEALTH AND WELFARE CONFERENCE “AUSTRALIA’S WELFARE 2007”

CANBERRA

6 DECEMBER 2007

KEN HENRY

SECRETARY TO THE TREASURY

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ADDRESSING EXTREME DISADVANTAGE THROUGH INVESTMENT IN CAPABILITY DEVELOPMENT1

Foreshadowing the content of my speech this afternoon, I would like to

begin by acknowledging the traditional owners of the country on which we

meet - and I pay my respect to their elders and ancestors.

Thank you to the Australian Institute of Health and Welfare (AIHW), and

to Dr Penny Allbon in particular, for organising this conference and

inviting me to speak. The AIHW’s report ‘Australia’s welfare 2007’2 is

the eighth in a long standing biennial series published by the AIHW but is

the first under the stewardship of Dr Allbon.

Reflecting the conference theme ‘diversity and disadvantage’, I want to

take the opportunity today to talk to you about how policy advisers might

conceptualise disadvantage and the means of addressing it. In particular,

today I would like to look at the situation of Indigenous people because,

without doubt, this is the group of Australians who have experienced the

highest levels of disadvantage, however measured, over the longest period

of time.

I note that to commemorate the 40 year anniversary of 1967 referendum,

each chapter in ‘Australia’s welfare 2007’ provides Indigenous statistics,

where available, which illustrate the depth of disadvantage. I am sure

these statistics have been highlighted in your discussions throughout the

course of today, so I will not repeat them here.

1 I would like to thank a number of my Treasury colleagues, especially Meredith Baker and Peter Robinson, for their help in the drafting of this paper.

2 AIHW 2007, Australia’s welfare 2007, Cat No. AUS 93, AIHW, Canberra.

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If I were to identify two fundamental roles for government they would be

these. First, to provide sustainable macroeconomic growth, with low and

stable inflation and unemployment, through sound macroeconomic

frameworks and the maintenance of well functioning markets. And

second, to ensure that all Australians share in the nation’s prosperity.

From the Treasury perspective, there is far more to sharing prosperity than

simply ensuring that income is redistributed in a way that avoids inequality

widening over time beyond some arbitrary level. To our minds, the

distributional goals of government must relate to a much broader concept

of prosperity, or wellbeing; one that goes well beyond standard inequality

measures, or poverty line constructs, based on crude statistical measures of

dispersion around mean or median income. These traditional income

based measures of poverty and disadvantage are just too simplistic for the

task. The dispersion of money income is of consequence, to be sure, but it

is not enough.

Some of you would know that I am generally quite favourably disposed to

Amartya Sen’s concept of disadvantage as capability deprivation.3 Sen4

emphasises what he refers to as ‘substantive freedoms’ — including

political and civil liberty, social inclusion, literacy and economic security

— that, of themselves, form ‘constituent components’ of development.

Among the capabilities of importance to poverty analysis, Sen5 identifies

3 Henry and O’Brien 2003 ‘Globalisation, Poverty and Inequality: Friends, Foes or Strangers?’, Australian Economic Review, 36(1), pp 3-21.

4 Sen, A. 1999, Development as Freedom, Oxford University Press, Oxford.

5 Sen, A 1983, ‘Poor, relatively speaking’, Oxford Economic Papers, 35, pp 153-69.

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one subset including such things as the capability ‘to meet nutritional

requirements, to escape avoidable disease, to be sheltered, to be clothed, to

be able to travel, and to be educated’. Poverty lines, defined in income

terms for example, that captured these capabilities would not vary much

from one community to another and would not, for the same reason, vary

much over time. In other words, they might provide the basis for an

absolute poverty line measure.

But Sen also notes that a second subset of other relevant capabilities of

considerable interest to the classical economists — such as the capability

to live without shame, the capability to participate in the activities of the

community, and the capability of enjoying self-respect — provides a basis

for relative poverty comparisons.

Of course, including all of these elements in an all-encompassing measure

of poverty (or disadvantage) — built on a person’s endowment of

capabilities, rather than their command over commodities — would be

quite a challenge. It’s not surprising that, despite an increasing interest in

such a broad measure of disadvantage, no universally accepted measure

has been developed. There are, however, many examples of broad

conceptualisations of wellbeing and disadvantage being used for various

analytical purposes.

For example, we in the Treasury have developed a wellbeing framework6

as a descriptive tool to provide context for public policy advice. It is built

on elements of Sen’s capabilities framework within the context of a

6 Treasury 2004 ‘Policy advice and Treasury’s wellbeing framework’, Economic Roundup, Winter, pp 1-20.

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generalised-utilitarian framework. This quite broad conceptual framework

anchors the objective and thorough analysis of policy options that is

central to the Treasury’s role.

Another pertinent example is the material contained in the final chapter of

AIHW’s ‘Australia’s welfare 2007’. While acknowledging that welfare,

in its broadest sense, refers to the wellbeing of people and society,

AIHW’s primary focus in its Australia’s welfare series is concerned with

the system of welfare services and assistance (including specific targeted

cash transfers) now operating in Australia, and the people who receive

those services and assistance. To give context to the discussion on specific

welfare services sectors, summary indicators of wellbeing have been added

in recent volumes of the series7. The conceptual framework underpinning

these indicators has three components: healthy living; autonomy and

participation; and social cohesion.

The Australian Bureau of Statistics (ABS) has been moving along a

similar path, especially with their 2001 publication Measuring wellbeing:

Frameworks for social statistics and the series entitled Measuring

Australia’s progress.8

7 See chapter 8 in the volume.

8 Australian Bureau of Statistics (ABS) 2001, Measuring Wellbeing: Frameworks for social statistics, Cat No. 4160.0, ABS, Canberra and ABS 2006, Measuring Australia’s progress, Cat. No. 1370.0, ABS, Canberra.

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And several social policy analysts have also expanded the traditional focus

on poverty measurement to develop indicators of deprivation and social

exclusion.9

Some quite recent work has served to remind us that most measures of

disadvantage that are based either at a point in time or on a time-series of

cross-sectional data suffer from not being capable of revealing who

remains in a situation of disadvantage over time. Nor, generally speaking,

do these measures identify the factors that determine whether somebody

exits from, or remains in, a position of disadvantage. Increasingly,

longitudinal (or panel) data are being used to examine the extent of intra-generational mobility out of poverty.

Significantly, the findings from the first four waves of the Household,

Income and Labour Dynamics in Australia (HILDA) survey show that,

despite there being consistent levels of income poverty across all

households in each year, observing the same households over time shows

that income poverty persisted in only a small percentage of households.10

These findings are consistent with results from other high income

countries: the majority of households enter income poverty only

temporarily and are able to improve their standard of living over time,

while a smaller number of households are at risk of long-term income

poverty. As more HILDA data become available we will be able to

9 See for example, Daly, A. 2006, ‘Social Inclusion and Exclusion among Australia’s Children: A Review of the Literature’, NATSEM Discussion Paper No. 62, December; and Saunders, P. and Adelman, L 2006, ‘Income Poverty, Deprivation and Exclusion: A Comparative Study of Australia and Britain’, Journal of Social Policy, 35, pp 559-84.

10 See Buddelmey, H. and Verick, S., 2007, ‘Understanding the Drivers of Poverty Dynamics in Australian Households’, IZA Discussion Paper No. 2827, June. This paper defines a household as being in poverty if the equivalised household income is below 50% of the median.

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develop a clearer picture of the determinants of those at risk of long-term

poverty, as well as the effects on those who experience shorter durations of

poverty.

In addition, inter-generational analyses on the transmission of

disadvantage, measured in a number of dimensions, are also being

undertaken.11 The general theme that appears to be emerging from these

types of studies is that caution is warranted before assuming that income

transfers might be an effective means of breaking the generational cycle of

disadvantage. Instead, the evidence points toward the need to design

income support programmes and policies in a way that encourages, or at

least does not discourage, active labour market participation; and, in

addition, to the importance of a human capital investment strategy, broadly

defined to include not only education but also physical and mental health

and social development. The focus on human capital development is

particularly important for disadvantaged children early in life - a point that

justifies a public policy focus on equality of access to capability

development opportunities.

Miles Corak has argued, persuasively, that ‘the capacity of children to

become self-sufficient and successful adults is compromised not only by

monetary poverty, but by poverty of experience, influence and

expectation’12. In other words, there are important, though often subtle,

11 See for example, Corak, M. 2006, ‘Do poor children become poor adults? Lessons from a cross-country comparison of generational earnings mobility’ in Creedy, J. and Kalb, G. (eds) Dynamics of Inequality and Poverty, Research on Economic Inequality, Volume 13, Elsevier Ltd., pp 143-88; and d’Addio A.C. 2007, ‘Intergenerational transmission of disadvantage: mobility or immobility across generations? A review of the evidence for OECD countries’, OECD Social, Employment and Migration Working Papers No. 52;

12 Corak 2006, op cit, p 171.

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non-monetary factors that determine the outcomes of children within

families as well as, arguably, the outcomes of adults within communities.

These non-monetary factors include the influence of dysfunctional cultural

norms; the demoralising impact of passive welfare and labour market

exclusion; and the influence on the cognitive development of children of

maternal smoking, alcohol abuse and poor nutrition during pregnancy.13

Several of the multiple causes of disadvantage draw policy makers into

difficult areas of social and labour market policy.

Nobody imagines that social policy interventions should seek equality of

outcomes. That is just as well, because social policy couldn’t hope to have

such potency. No matter how expansive, and expensive, the policy

interventions, we will always observe a considerable dispersion in the

‘wellbeing’ outcomes for individuals, both at a point in time and over time,

including across generations. Individuals may be provided with true

equality of access to materially rewarding opportunities but might choose

not to access those opportunities and to live their lives in what would be

considered by others in society as a condition of relative poverty, at least

in terms of income.14 In my (normative) judgement, policy makers

shouldn’t be too concerned by that. Instead, policy makers should be

concerned with opportunities. Specifically, they should be concerned to

ensure that individuals are endowed with capabilities that allow them the

freedom to choose to live their lives in ways that have real meaning and

real value.

13 See also Waldfogel, J 2006, What children need, Harvard University Press and chapter 2 in d’Addio 2007.

14 See Corak 2006 and d’Addio 2007, op cit, for some other reasons.

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I endorse strongly Amartya Sen’s view that people who are deprived of

such capability endowments may be described as impoverished; as being

in poverty.

Addressing Indigenous disadvantage

Measuring the policy effort against that benchmark, Indigenous

Australians are entitled to feel especially disadvantaged.

In June this year, in an address to the Cape York Policy Institute’s Strong

Foundations conference,15 I argued there were three key interdependent

foundations to Indigenous disadvantage: poor economic and social

incentives; the underdevelopment of human capital and capability in

general; and an absence of the effective engagement of Indigenous

Australians in the design of policy frameworks that might improve those

incentives and capabilities.

In relation to poor economic and social incentives, I argued that perverse

incentives — those that encourage undesirable behaviours — are having a

negative impact on many Indigenous communities; reducing self-reliance,

self-development, aspiration and responsibility, including — in some cases

— the commitment to caring for families and communities. In particular, I

noted the deleterious effect of the combined incentives in the welfare

system, which have resulted in disengagement in some cases and, in many

cases, a passive reliance on welfare payments; and which have also done

little to encourage Indigenous Australians to invest in education and to

15 Henry, K 2007, ‘Creating the right incentives for Indigenous development’, address to the Cape York Institute Conference “Strong Foundations — Rebuilding Social Norms in Indigenous Communities”, 26 June. http://www.treasury.gov.au/contentitem.asp?NavId=008&ContentID=1275

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participate in employment. And I noted also the resultant breakdown of

foundational social norms in many Indigenous communities, as the effects

of passive welfare have become entrenched.

Indigenous disadvantage is a regrettable example of income enhancement,

in the form of combined welfare payments, not having led to material

gains in wellbeing.

Not all welfare is passive. But some is. If we are to make progress,

passive welfare, in all its forms, must be addressed.

While incentives are important, they will not be effective in the absence of

the human capital — in particular, good health and education — that is

needed to take advantage of positive incentives; and to place Indigenous

Australians in a position of being able to opt for, indeed demand, the life

choices open to non-Indigenous Australians. So a second key component

of addressing Indigenous disadvantage involves human capital

development.

In my Cape York Policy Institute speech I argued that the third major

reason for continuing Indigenous disadvantage has been the limited

engagement of, and opportunities for, Indigenous people to shape policies

that affect their destiny. A considerable body of international literature

suggests that Indigenous engagement in policy development is key to

achieving better results — in itself, it reduces the ‘passivity’ of solutions,

creating ownership of both the problem and the solution. And it is

fundamental to Indigenous self-esteem. Active participation in the

decision-making that affects one’s community can be a powerful source of

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identity, even of pride. 16 And it is an obvious means of recognising

inspirational role models. Indigenous engagement at the grass roots level

has to become the norm.

For all who are engaged in Indigenous policy development, it is not a

question of choosing which of these three foundations of disadvantage

should be the focus — they must all be addressed, and at the same time.

And yet, as a practical matter, one has to start somewhere. Where should

that be?

Today I want to float an idea that addresses specifically the second of

these foundations: the underdevelopment of human capital and of

capability in general. You will see that, even with that focus, we will

quickly get into considerations affecting economic and social incentives

and Indigenous engagement in policy development.

Human capital development and the key role of education

Human capital is a term economists talk about quite a bit. Essentially, it

refers to the intangible knowledge-based assets people develop that help

them become productive members of society. High levels of education

and physical and mental health are the hallmarks of strong human capital.

Education can help transform social and economic opportunities, with

particularly strong gains for those from disadvantaged backgrounds.

People who are better educated are better placed to participate in the

16 The link between identity and behaviour has been explored by many researchers. In the present context, the work of Dr Michael Chandler of the University of British Columbia is especially relevant.

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labour market and earn higher incomes. Higher levels of education are

also associated with lower rates of incarceration and increased engagement

in civic life. In short, education is the key to better life opportunities and

choices.

As highlighted in chapter 8 of ‘Australia’s welfare 2007’17, the proportion

of Indigenous students meeting the benchmarks for reading, writing and

numeracy in 2005 were significantly lower than the national rates, in each

grade. Moreover, the gap between Indigenous and non-Indigenous

students appears to have remained static between 2001 and 2005. The

latest OECD Programme for International Student Assessment (PISA)

survey results for 2006 confirm there has been virtually no change in

Indigenous students' performance across a range of outcomes since 2000.18

Indigenous education is an important ‘means’ of securing individual and

community development. It links so fundamentally to other aspects of

community life that educational gains stand a very good chance of leading

to improvements in other areas that are also hallmarks of disadvantage.

But, as Sen has suggested, education is not only an instrumental freedom -

that is, a means to an end; it is also a substantive freedom - a constituent

component of development. People who are educated have greater

freedom to choose lives of real meaning and real value. Indigenous

education is, therefore, important for its own sake; a valuable ‘end’ in

itself. It should be seen as a key component of Indigenous development.

17 AIHW 2007, op cit, pp. 373-4.

18 OECD 2007, PISA 2006: Science competencies for tomorrow’s world, volumes 1 & 2, OECD. Paris.

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This dual role that is played by education warrants an explicit policy focus

on a sustained increase in educational attainment by Indigenous

Australians. And in this context, I note the Government has a number of

specific targets it has set out to achieve for Indigenous people, including a

halving of the gap in reading, writing and numeracy achievement within a

decade.

But there is another reason for focussing on Indigenous education - a

reason that is both strategic and pragmatic: It provides a clear focus for

multiple interventions.

Australian public service leaders have given some thought to the value in

approaching Indigenous development in precisely these terms.19 They

have come to the view that enhanced Indigenous educational attainment is

unlikely to be achieved without seven development platforms being in

place.

First, and fundamentally, there must be basic protective security from

violence for Indigenous parents and children. Incidentally, Amartya Sen

also stresses that the removal of major sources of ‘unfreedom’ - and he

specifically instances the lack of effective institutions to deal with crime

and violence - are a fundamental pre-condition for development.

Second, there is strong international evidence, to which I referred earlier,

that early childhood development interventions, coupled with parental

support to develop appropriate at-home learning environments, provide a

19 Secretaries Group on Indigenous Affairs, chaired by the Secretary of the Department of the Prime Minister and Cabinet, Dr Peter Shergold. The work was initiated and supported by the Treasury and the Department of Families, Community Services and Indigenous Affairs.

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critical foundational base for young children — especially those from

disadvantaged backgrounds — from pre-birth to school.

Third, the home environment needs to be conducive to regular patterns of

sleep and study, free from overcrowding and distraction.

Fourth, there needs to be ready access to suitable primary health service

infrastructure. In Sen’s terminology, the avoidance of deprivations like

starvation and premature mortality are ‘substantive’ freedoms and

constituent components of development. But they also play an

instrumental role: Healthier individuals are physically and mentally more

energetic and robust and, as a result, more likely to be active in all areas of

life. Healthier children, in particular, are more likely to attend school, and

are better able to learn once they are there. Importantly, the instrumental

relationship between education and health runs in both directions: Better

educated mothers are less likely to engage in behaviours that cause low

birth weight, putting their babies at greater lifetime risk of a range of

diseases, including type II diabetes.

Fifth, particularly in an environment where real jobs are not currently the

norm, incentives in the welfare system cannot be allowed to work against

the promotion of investment in human capital, particularly of children

through the provision of safe and healthy living environments and their

attendance at school. Nor can those incentives be allowed to work against

the active participation of parents and other role models in communities.

Sixth, there must be a realistic prospect of an educated Indigenous person

securing a real job, with the support of appropriate employment services.

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It is worth observing that almost three quarters of Indigenous Australians

live in cities and regional centres, the vast bulk of which have thriving

labour markets. In other places, there is scope for modest and incremental

steps towards developing opportunities based on retail and service

activities in the local community and, in some places, much bolder steps

that would harness genuine commercial opportunities in art, mining,

agriculture and tourism, for example. In yet other places it is difficult to

avoid confronting the need for mobility. Where remote locations simply

cannot produce sufficient job opportunities for local people, there is no

point in relying on miracles. A better strategy is to ensure that people have

the opportunity to move to take up work if that is what they want to do.

Seventh, governance systems have to support the ‘political freedom’ and

‘social opportunities’ of local Indigenous people (both men and women) to

be engaged in policy development.

These seven platforms necessary to support the goal of a sustained

increase in educational attainment shouldn’t surprise anyone; they dovetail

quite closely with the strategic areas for action and associated indicators

contained in the well-known Overcoming Indigenous Disadvantage20

indicator framework.

The first four platforms recognise the importance of tackling problems at

source and of thinking in causal pathways; points that have been made

eloquently, for many years now, by Professor Fiona Stanley.

20 See Steering Committee for the Review of Government Service Provision 2007, Overcoming Indigenous Disadvantage: Key Indicators 2007, Productivity Commission, Canberra, especially figure 2.2.1 in chapter 2.

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I am emphasising here the instrumental role played by each of the seven

platforms in supporting decent educational outcomes. But it is also the

case that each of these platforms, in its own right, tackles an element of

disadvantage that we see in many Indigenous communities. So a focus on

education would mean addressing the many sources of Indigenous

disadvantage. And, as I have noted on the way through, several of the

platforms can be viewed as being constitutive components of

development; that is, being of more than instrumental significance.

Targeting educational outcomes, therefore, means embracing a holistic

Indigenous development strategy.

Policy strategies are one thing; their delivery, on the ground, is another. In

recent years we’ve learned quite a lot about models of Indigenous program

delivery. No doubt, we have a lot more to learn. However, I reckon we do

know this much: that program delivery must be targeted to local needs,

integrated and delivered in a cost effective and non-threatening way. This

is important for the proper functioning of government; but it is equally

vital for those people for whom the programs exist — Indigenous people

themselves. As policy makers and administrators, we understand this at a

conceptual level. But we haven’t been very good at allowing that

understanding to affect the way in which we implement things. Critically,

in our understandable focus on compliance and accountability we have a

tendency to insist on paperwork of Himalayan grandeur. And to what

end? I have witnessed first hand, in several Indigenous communities, how

the mountains of red tape simply bury the limited administrative resources

available at the local level.

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Concluding remarks

The thought on which I would like to conclude — more by way of a

question than an answer — is whether the framework I have outlined as an

approach to Indigenous disadvantage has value when considering

disadvantage more broadly in Australian society.

I suspect that it does.

Education and the seven platforms required to support it should be seen as

capabilities that are critical to development; several of them in a

constitutive way.

An individual deprived of these capabilities experiences poverty in a very

real and meaningful sense. Certainly, we can say that such an individual is

severely disadvantaged. And hopefully, we can agree that such severe

disadvantage is unacceptable - whether it manifests itself in a remote

Indigenous community, or on the streets of one of our major cities.

Disadvantage is more obvious in remote Australia where it can pervade

entire Indigenous communities. In some remote communities, not one of

the seven platforms exists. In the cities, if we look hard enough, we see

pockets of disadvantage; several of the seven platforms may be mostly in

place, with others less developed. There is disadvantage none-the-less.

I have argued here that while poverty assessments based on crude

statistical measures of dispersion around mean or median levels of money

income are not overly useful, especially because such measures lack a

temporal dimension, poverty should, nevertheless, be conceptualised in

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terms of disadvantage; and, in particular, in terms of capability

deprivation. Disadvantage and capability deprivation are concepts that

have both absolute and relative meanings. I have argued that education

should be accorded special status by policy makers concerned to build

capability, and have outlined seven platforms of development that will

need to be constructed to support that work. Some of those platforms will

be susceptible to measurement; others not so. But whether they can ever

be reduced to meaningful quantifiable indicators or not, policy makers

cannot be permitted the view that the task of constructing these platforms

is too great a challenge. The development of Australia depends upon it.

Thank you for having me here today.