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Australia’s productivity: what can be done?

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…

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).

Regulatory reform

However, there are many areas of the Australian economy that have, largely for political reasons, remained largely insulated from competitive pressures that in other sectors have acted as strong incentives for productivity-enhancing change.

One of the key obstacles to the pursuit of such reforms is the widespread (and bi-partisan) belief of a linear correlation between the number of people employed in delivering these services and the quality of them, notwithstanding the absence of any empirical evidence in support of that belief.

The Productivity Commission’s recent draft report on retailing noted that closing the productivity gap between Australia and countries such as the US “will require greater workplace flexibility so that employers and employees can work cooperatively and creatively together, to deliver the required productivity improvements”.

The report suggested that “some aspects of the Fair Work system may be inhibiting the adoption of flexibility enhancing provisions” in retailing workplace arrangements, observing that the “workplace flexibility provisions” in the Fair Work system appear to have been used to place “greater emphasis on strategies for developing family-friendly workplaces, rather than productivity”.

Taxation reform

Tax reform could play an important role in improving Australia’s productivity performance.

Australia’s personal and business income tax systems (and state land and payroll tax systems) are littered with exemptions and concessions conferring favourable treatment on particular groups of taxpayers, particular forms of business organisation, or particular types of economic activity at the expense of others.

The Henry Review of Australia’s tax system urged that “Australia should configure its tax and transfer architecture to promote stronger economic growth through participation and productivity”.

Unfortunately, many of the review’s recommendations to that end were promptly ruled out – by both sides of politics – for transparently political reasons.

Skills and infrastructure

Some combination of more and better targeted investment in skills formation and in infrastructure will contribute to improved productivity performance, albeit with lags that are inevitably protracted.

These two areas have been key elements of the current Australian Government’s “broad-ranging and extensive productivity agenda”, according to Treasury.

Yet despite the continuing upward trend in the proportion of the Australian working-age population with formal educational qualifications, it is not at all clear that the quality of Australian “human capital” has increased significantly.

The OECD concluded, earlier in the decade, that “skill upgrading has played, at best, a modest role in GDP growth per employed person” in Australia (and also in the US, Canada, the Netherlands and New Zealand).

An ABS survey undertaken as part of an OECD study of adult literacy and life skills found 46% of Australians aged 15-74 lacked the minimum prose and document literacy skills, 50% lacked the minimum numeracy skills, and fully 70% lacked the “problem-solving” skills “required for individuals to meet the complex demands of everyday life and work in the emerging knowledge-based economy”.

It is widely accepted that Australia’s infrastructure, particularly in transport, is inadequate for many of the requirements of Australia’s growing economic, personal and social needs, and that this is in part due to “under-investment” in infrastructure in the 1980s and 1990s.

However, as the OECD notes, it also reflects “weak co-ordination between public infrastructure and development and fiscal management” and a “lack of co-ordination between the various levels of government, and between jurisdictions at the same level”, so that “infrastructure decisions are frequently taken with no regard for national priorities”.

The solution to these weaknesses is not simply “more spending on infrastructure”, especially if that spending is as uncoordinated and with as little regard for national priorities as in the past.

Better use can be made of existing infrastructure, including through rational pricing regimes, and through avoiding ill-conceived regulation detracting from the efficiency (for example, by “knee-jerk” speed limits on roads, or “security” procedures causing unnecessary delays to goods and passengers through airports).

AAP

Innovation

It is widely accepted, and not just by economists, that “innovation can increase productivity through the creation of higher value products, more efficient production processes, more effective workplace organisation and opening up new markets”.

This is not simply a matter of more generous tax concessions for business research and development expenditures, or higher levels of public expenditure on research and development.

Among the issues here are the extent to which Australia’s competition laws inhibit the kind of industry collaboration which overseas firms experience.

Worth investigating further is the extent the Australian taxation system inhibits the ability of start-up companies to attract and retain talented staff, or to attract institutional investment.

Then there extent that a highly legalistic approach on the part of many Australian universities to intellectual property rights inhibits the transfer of knowledge between those undertaking “pure” or “basic” research in higher education institutions, to innovative entrepreneurs.

Although Australia’s economic performance during the 2000s has been impressive on many dimensions, especially compared with other advanced economies, productivity is not among them.

The consequences of this poor productivity performance have not, as yet, become widely apparent, masked by a combination of faster population growth (until recently) and the most sustained upswing in Australia’s terms of trade in over a century.

But it may well be that an prospective end to this period of comparatively easy prosperity will prompt a renewed focus among policy-makers and business leaders to raise both the level of productivity and the rate of productivity growth.

If not, then it is unlikely that retrospective evaluations of the performance of the Australian economy over the 2010s, or the 2020s, will be as flattering as those of the past two decades.

Read Saul Eslake’s full report here.

This is the second part of this report. Read Part one - Australia’s productivity: what is the true picture behind our lagging growth?

You can read our ongoing coverage of productivity issues here.