17/02/2011 - 00:00

National productivity needs a boost

17/02/2011 - 00:00

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The mining sector has been blamed for Australia’s falling productivity but the problem is much wider.

‘PRODUCTIVITY’ is what a workplace, a business or government agency, an industry, a region or a nation ‘gets’ by way of goods and services for what it ‘puts in’, in terms of labour, capital and other factors of production.

Economists (and others) have long recognised that productivity growth is the only sustainable source of improvements in a community’s, or a nation’s, material well-being, and that of its citizens in the long run – and that these improvements can help make possible and sustainable improvements in the non-material aspects of individual, community and national well-being.

In Australia’s case, productivity growth can help us to deal with the challenges of demographic change, to reconcile potential conflicts between environmental constraints on economic growth and widely held aspirations for further improvements to living standards, and to assist in coping with some of the side-effects of the current ‘resources boom’.

Australia’s rate of productivity growth accelerated dramatically during the 1990s, playing a vital role in lifting the nation’s macro-economic performance, and Australian standards of living, during that decade and since.

There has been a no less dramatic deterioration in Australia’s productivity performance during the past decade, with the broadest measure of productivity growth actually having turned negative over the past five years.

The consequences of this reversal for Australia’s economic performance, and for Australians’ material living standards, have been obscured by the substantial income gains generated by the rise in our terms of trade over the same period, and by our success in weathering global shocks.

Official explanations of the deterioration in Australia’s productivity performance over the past decade have emphasised the role played by sharp declines in productivity in three sectors of the economy: mining; agriculture; and electricity, gas, water and waste services (which we shall henceforth refer to as ‘utilities’).

The productivity performance of the mining and utilities sectors looks peculiar, to say the least.

The mining sector has been gearing up for a huge expansion in response to the demand for energy and minerals (particularly those associated with steel-making) from China and India. To this end, hours worked in mining have more than doubled over the past decade, while the real value of the sector’s productive capital stock has increased by almost 80 per cent.

Yet, largely reflecting the long lead times entailed in bringing modern mining projects to full production, the output (gross valued added) of the mining sector has risen by only 37 per cent over this period.

As a result, the level of labour productivity has declined at an average annual rate of 6.2 per cent since 2001-02 (or by 41 per cent in total); while the level of multi-factor productivity has fallen at an average annual rate of 4.5 per cent since peaking in 2000-01 (or by 34 per cent in total). Once these projects reach full production, measured labour and multi-factor productivity should rebound strongly, reversing much of their decline of the past decade.

Similarly, during the past decade, electricity and gas businesses have had to invest heavily in response to continued growth in demand, to replace ageing transmission infrastructure, and to meet government-mandated renewable energy targets. Likewise governments have undertaken significant investments in water infrastructure (including desalination plants in five states), with a view to guaranteeing security of supply in drought conditions. This investment has also adversely affected reported productivity.

While productivity clearly has declined sharply in the mining and utilities sectors during the past decade, these two sectors between them accounted for an average of just 11.3 per cent of GDP, and 13.2 per cent of gross value added in industry.

Although the sharp declines in labour productivity in the mining and utilities sectors have detracted from Australia’s overall productivity performance, there has still been a substantial deterioration in overall labour productivity growth even when these two sectors are excluded.

Our estimates strongly suggest that the slow-down in Australian productivity growth has been more broadly based than has been recognised thus far.

This conclusion also implies that it may be dangerously complacent to assume that the decline in productivity growth over the past decade will be ‘automatically’ reversed at some point during the coming decade.

The country’s poor productivity performance is more likely due to the fading of the effects of previous reforms, and the comparative lack of any new productivity enhancing reforms since the turn of the century.

As the Productivity Commission has concluded, ‘the reforms of the latter part of the 1980s and the 1990s’ were the ‘prime candidate’ for the ‘most likely causes of the surge in productivity’ during the 1990s.

By contrast with the late 1980s and early 1990s, there has been relatively little reform directed at further enhancing competition in Australian product or factor markets.

Specific factors include: the increase in productivity stifling regulation and legislation over the same period; the impact of Australia’s ongoing economic success on the appetite for productivity enhancing change among governments, businesses and voters; the effect of capacity constraints as the Australian economy has approached full employment; and some apparent slippage (relative to other countries) in Australia’s take-up of productivity enhancing technologies.

Australia’s economic prospects beyond the end of the current resources boom will deteriorate significantly (as they did in the 1970s and 1980s) if the decline in our productivity growth performance is not reversed.

Reversing the decline in Australia’s productivity performance calls for a re-invigorated economic reform effort, improvements to education and training, improved governance of infrastructure investment, and a heightened innovation effort.

• This is an edited extract from ‘Australia’s Productivity Challenge’, a report by the Grattan Institute’s Saul Eslake and Marcus Walsh.

 

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