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Grappling with the productivity slowdown



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Grappling with the productivity slowdown

Posted 22/07/2015 by Robert Dolamore

The Productivity Commission (PC) recently released its latest Productivity Update, which

provides a detailed analysis of Australia’s productivity performance in 2013-14. The good

news is that labour productivity and multifactor productivity (MFP) both increased in

2013-14. However, as the PC’s Chairman Peter Harris warns Australia’s current productivity

growth remains well below what is needed to ensure living standards will continue to

increase as quickly as they have in the past. This comes at a time when a number of factors

are weighing on Australia’s growth prospects including an ageing population and structural

adjustment as the mining investment boom recedes. However, among the world’s

economies, Australia has not been alone in facing a productivity slowdown in recent years.

The slowdown in productivity growth over the last decade has been a global phenomenon

and pre-dates the global financial crisis (GFC). Earlier this year The Conference Board, which

compiles and analyses international productivity data, released its Productivity Brief 2015. It

found global labour productivity increased by 2.1 per cent in 2014 and shows no sign of

strengthening back to a pre-crisis average of 2.6 per cent per annum (1999 to 2006). The

results for total factor productivity (a synonym for MFP) were equally worrying:

‘An alarming result from this year’s estimates in The Conference Board Total Economy

Database is that the growth rate of total factor productivity (TFP), which measures the

productivity of labour and capital together, continues to hover around zero for the third year

in a row, compared to an average rate of more than 1 per cent from 1999-2006 and

0.5 per cent from 2007-2012. The challenge on TFP growth is very widespread across the

globe. Most mature economies including the United States, the Euro Area and Japan show

near zero or even negative TFP growth. In China, TFP growth has turned negative, and in

India it is just above zero, at 0.2 per cent. Both in Brazil and Mexico TFP growth continues to

be negative, respectively at -2.3 and -1.7 per cent.’

There is no definitive explanation for the global productivity slowdown. Last year the Banque

De France published an historical analysis of the productivity trends of 13 advanced

economies including Australia from 1890 to 2012. The analysis reveals there have been

general productivity breaks that affect all countries at specific moments (e.g. those caused

by world wars, global supply shocks and global financial crises) and country specific

productivity breaks reflecting both idiosyncratic shocks (e.g. the implementation of

structural reforms) and technological ones (e.g. some countries being ahead of the pack in

exploiting the productivity payoff from new technologies).

Possible explanations of a general nature include a slowdown in innovation (in particular a

tailing off of the gains associated with the ICT revolution); measurement related problems

(including the difficulty of measuring productivity in service industries); the effects of

the GFC (including on growth in the capital stock and the ability of the financial sector to

allocate finance to its most efficient use); weaknesses in relation to education and training

and management; and a more general loss of market dynamism (reflected in institutional

and regulatory impediments to innovation and rent-seeking behaviour).

Differences among the advanced economies in terms of the severity of the productivity

slowdown and the sectors most affected, suggest country-specific factors are also at play

(Carmody ). In a world in which history matters, countries face their own particular

constraints. The range of possible country-specific factors include: the macroeconomic

environment; the extent to which a country’s institutions and regulatory environment

support or impede innovation; the quality of a country’s past investment decisions; and

whether it has the social capability needed to make the most of new knowledge and

technologies.

In Australia’s case the range of possible explanations for the productivity slowdown has

included perverse productivity trends in particular sectors (most notably mining; electricity,

gas, water and waste services; and agriculture); productivity-stifling regulation and

legislation; a sense of complacency about the need for further reform; and skill shortages

and infrastructure bottlenecks (Eslake and Walsh).

At least some of these explanations suggest the slowdown in Australia’s productivity growth

may in part be temporary. More worrying is the possibility of systemic problems such as the

dynamics of innovation in Australia. In its 2014 Australian Innovation System Report the

Department of Industry observed:

‘Despite generally positive business conditions for innovation and evidence of the benefits

of innovation to business performance, the report shows that Australian exporters are, on

average, not high performers of innovation by OECD standards. Our large businesses

account for around 66% of investment in research and development (R&D), 44% of industry

value-added and around 95% of exports. However, Australian large businesses rank 21st

out of 32 OECD countries on the proportion of businesses innovating, and are well below

other less developed resource-exporting countries like Brazil and South Africa.’

In terms of public policy the PC has provided a useful framework for thinking about the

ways governments can influence productivity. This emphasises the importance of incentives

(the external pressures and disciplines on firms to perform well); capabilities (including the

human resources and knowledge systems, institutions and infrastructure needed to

underpin successful innovation) and flexibility (ensuring firms have the scope to make

productivity enhancing changes).