Australia’s productivity: what can be done?

Record terms of trade have masked dropping productivity growth - until now. AAP

What is to be done about Australia’s deteriorating productivity performance?

It’s by no means inconceivable that the answer to this question could be “nothing”.

Historical precedent strongly suggests Australians and their politicians will feel no great compulsion to embrace a program of productivity-enhancing economic reforms as long as the mining boom delivers continued growth in incomes and high levels of employment.

It is also possible that the difficulties now being encountered by sectors of the economy adversely affected by some of the side-effects of the mining boom, (in particular the rising exchange rate) will prompt those businesses to prioritise productivity as a matter of survival, without any need for public policy changes.

But if Australian policy-makers were to seek public policy solutions to the problems posed now or for the future by Australia’s deteriorating productivity performance, what might those look like?

At the outset, it is important to keep in mind that productivity improvements occur as the result of decisions taken by and implemented in enterprises and workplaces, not as the direct result of public policy initiatives.

Still, there are a number of ways public policy initiatives can contribute to improving Australia’s productivity performance.

They can increase the incentives for the owners or managers of enterprises (including government agencies themselves) to make productivity-enhancing changes, either to goods and services, or production.

They can increase the ability of owners or managers to implement changes or alternatively, reduce the barriers and obstacles.

Or they can facilitate the movement of factors of production from existing uses to new combinations that result in higher levels of overall productivity – that is, foster innovation.

As Treasury Secretary Martin Parkinson has commented: “we do ourselves, and the nation, a disservice if we target reform efforts only on the same areas as we have in the past”.

Many of those past reforms were, intrinsically, once-offs: tariffs, once reduced to minimal levels, can’t be cut again; government monopolies, once privatised, can’t be privatised again (unless they’ve been re-nationalised in the meantime); markets, once de-regulated, can’t be de-regulated again (unless the de-regulation has been only partial, and there’s a good case for going further).