Wed Nov 13

Jim Chalmers has provided an extra $900 million to boost productivity. But this ‘high priority’ problem is going to need an across the board effort

Written by Roy Green, Emeritus Professor of Innovation, University of Technology Sydney

Productivity is the greatest structural problem in our economy, according to Treasurer Jim Chalmers. He says there is “no higher priority for reform ^[1]”.

Announcing a A$900 million productivity fund to be shared with the states, the treasurer told a meeting of the Australian Business Economists on Wednesday Australia’s productivity challenges would take time to turn around.

The boost comes on top of measures in the ambitious $22.7 billion Future Made in Australia ^[2] initiative announced as part of the federal budget in May.

The new fund is similar to a scheme under the Keating and Howard governments ^[3]. That scheme helped the states launch competition reforms, including introducing national food standards and lifting retail trading restrictions.

Chalmers told Wednesday’s gathering:

Our productivity problem didn’t show up two years ago, it showed up two decades ^[4] ago. And not just in Australia but in almost every comparable country. The Productivity Commission’s five-yearly review of our productivity performance was clear. Growth in the last full decade was the slowest in 60 years.

Stalled productivity growth has translated into real wage stagnation ^[5] and a prolonged cost-of-living crisis.

A A$900 million productivity fund will help, but fixing productivity is going to require some big changes by government, industry, and research and education institutions.

Causes of lower growth and productivity

Much of the drop in productivity growth occurred during the commodity boom ^[6], when a high Australian dollar made our trade-exposed industries less competitive.

Man standing in front of iron ore smelter

Productivity fell during the commodity boom when our high dollar made our trade less competitive. Dean Lewins/AAP ^[7]

This particularly affected manufacturing, which historically had been the major source of increasing productivity. Manufacturing was only just finding its feet in global markets after the tariff reductions of the late 1980s and 90s.

While the slowdown is global, Australia is finding it much harder to deal with due to our dependence on resources, such as iron ore and coal. This is a phenomenon observed across most of the industrialised world. Economists have come up with various explanations.

Have we already done our best innovating?

One line of thinking, associated with US economist Bob Gordon ^[8], is the slowdown can be explained simply by the fact that the most fundamental innovations are behind us.

By this he means such things as urban sanitation, commercial flight and telecommunications. Nothing since compares, and of course he has a point. We could probably live without an iPhone, but not so much without modern dentistry.

Counting the intangibles

Another explanation makes it a measurement issue. Productivity is a measure of the outputs of an enterprise or a country per unit of the inputs required to produce them. Traditionally these outputs have been physical goods.

What happens when the outputs are intangible, such as software or internet services? However unlikely, this could mean we have raging productivity but are not detecting it in the data.

The explanation which has had most influence is that the digital revolution, with the further development of machine learning, robotics and artificial intelligence, has indeed had an impact on productivity.

However, it is concentrated in “frontier firms ^[9],” which drive technological change and innovation.

Why we need more ‘frontier firms’

The extent to which this impact is reflected in national data depends on the share of frontier firms in the economy and the rate of deployment of technologies and skills to the larger group of laggard firms.

Even in the 1980s, just before a decade-long productivity boom, US economist and Nobel laureate Bob Solow ^[10] lamented

You can see the computer age everywhere but in the productivity statistics.

Simply put, the problem in Australia is we have too few frontier firms, too many laggards and too slow a rate of technology adoption.

Lifting productivity more challenging here than overseas

As a result, the productivity slowdown is harder to fix here than in other countries, with Treasury downgrading its forecasts ^[11] from 1.5% growth to 1.2%. Real wage growth not only compares unfavourably with elsewhere but has gone backwards in recent years.

Treasury analysis ^[12] attributes much of the continuing decline in productivity growth to “Australia’s changing mix of industries”. This has seen more people working in services where productivity grows more slowly.

However, the increased role of services is common to most countries. The factors specific to Australia are the low manufacturing share of GDP and the failure of mining to compensate, despite massive resource exports.

In fact, it can be argued Australia’s reliance on unprocessed raw materials is part of the problem. While fuelling consumption at the height of the commodity boom, they reduced our capacity to grow globally competitive, knowledge-intensive industries. We therefore have a less complex, less diverse export mix than any other advanced economy.

Large freighter ship loaded with shipping containers

Australia has a less diverse mix of exports than other advanced economies. Mick Tsikas/AAP ^[13]

Clearly, Chalmers’ proposed measures to strengthen national competition policy and enable the states to update and streamline planning regulations will not fix this problem on their own.

At most, they will help create conditions to set up new frontier firms and scale existing ones to innovate more successfully in global markets.

The government’s major effort to diversify our narrow trade and industrial structure, and in so doing reinvigorate productivity growth, is its new industrial policy framework. This is still taking shape.

It features Future Made in Australia and is a combined commitment to achieve net zero emissions with policies to simultaneously build economic resilience and complexity.

The government is also undertaking a “strategic examination” of its research and development policies ^[14]. These must drive the industrial transformation necessary for both productivity improvement and a sustainable, decarbonised economy. New approaches to collaboration between industry and researchers in “innovation ecosystems”, where Australia has again fallen behind, are needed.

Restoring Australia’s productivity growth is a huge task. It will largely be driven by the development and adoption of new technologies ^[15], as the Technology Council of Australia has argued in a new report. But there is also an important role for “non-technology innovation”, such as business model design and systems integration.

This brings us back to the quality of Australian management, which has been found wanting ^[16], especially in small to medium companies, by comparison with international counterparts. Ultimately, transformational change will depend on managers at the enterprise level, drawing on the talent and creativity of their workforces.

We shall find out soon enough whether we are up for the productivity task, which will benefit from a bipartisan approach and policy continuity across governments. Our future living standards and social cohesion depend on it.