The Productivity Commission's 5-year Productivity Inquiry: Key to Prosperity - Interim report proclaims 'Productivity is the key to prosperity' before commenting
The unevenness of productivity growth — both in its causes and effects (cost, quality and novelty) — makes it is hard to measure. But the evidence suggests that like its global peers, Australia’s productivity growth has slowed in the last two decades.
Recapturing the productivity growth rates of the past could yield large benefits in extra income alongside a reduced working week. But productivity faces some headwinds. One is the gradual but dramatic rise of a predominantly services based economy. Ironically, productivity growth in the production of goods has seen a shift of labour and other resources into services, which have risen to make up 80 per cent of the economy. Many services are delivered in person. Many are government funded and/or delivered. Often it has proven hard to automate aspects of the service, or otherwise economise on the labour input. Hence productivity growth in most services has been slower than traditional sectors like agriculture, manufacturing and mining, where capital has replaced much labour and new technology has driven large gains in overall productivity. Moreover, globally, Australia ranks lower in service sector productivity than we do in the goods sector.
Slower productivity growth in services is a historical pattern. It need not be our future. New approaches, such as digital technologies and the better use of data (through artificial intelligence, for example) hold great promise for broadly based productivity gains, including in services.
This does not mean that we will ignore productivity enablers in traditional industries. Rather, the point is to broaden the policy conversation about productivity to encompass the services sectors that now employ the bulk of the workforce.
The COVID-19 pandemic has forced the take up of technology, including online retail, telehealth and remote work. It forced new realities on the producers and consumers of services — the sector hardest hit by pandemic restrictions. The adaptations forced by the pandemic (including of government regulators) are now opening new possibilities for future productivity growth, if we can grasp them.
But the pattern of productivity growth could look different in services. Perhaps quality improvements will be more salient than cost reductions, making it even harder to accurately measure the gains. Service innovation could be focused less on the invention of new technology and more on its use, particularly for a small open economy like Australia. Getting value from university expertise could be as much about person-to-person connections as commercialising academic IP. A focus on service sector productivity forces a rethink and subtle adjustment of many traditional policy tools.
Global forces are creating their own productivity headwinds. The need to decarbonise the economy is one. Decarbonising represents an effort to reduce costs — specifically the cost of carbon emissions not hitherto counted in firm profits or GDP. It will require global and local innovation, strong partnerships between the public and private sector and significant new investment — partly to replace rather than add to the existing capital stock. Australia’s success in meeting this challenge efficiently will be a key determinant of our overall productivity performance in coming decades.
Heightened geopolitical tensions and supply chain disruptions also pose a challenge. Global trade and investment have been a great benefit to Australia as a small open economy. Building supply chain resilience (and redundancy) might be attractive to some firms, but will almost certainly increase costs, and prices faced by consumers. Any fragmentation of the multilateral rules based order could crimp the benefits to Australia from trade and investment flows.
In response the Commission offers 'areas of policy focus', 'broad enablers, rather than targeted predictions'.
The areas of policy focus are: • Innovation policy and diffusion of new processes and ideas: Policies that foster a business environment that encourages efficiency, innovation and diffusion. • Data policy, digital technology and cyber security: The economy-wide importance of data and the digital technologies that generate and use data, as general purpose technologies that could boost productivity in many areas of the economy, including services. • A productivity-friendly business environment: Limiting impediments to business investment, a flexible workforce, sound regulation and an efficient approach to decarbonising the economy. • A skilled and educated workforce: The importance of education in driving productivity growth through increasing human capital and creating settings conducive to technological breakthroughs and adoption.
Key points are
Productivity growth — producing more outputs, with the same or fewer inputs — is the only sustainable driver of increasing living standards over the long term. While economic growth based solely on physical inputs cannot go on forever, human ingenuity is inexhaustible.
Sustained productivity growth is a relatively recent historical phenomenon. It has ensured that modern life is richer in potentially every sense compared to any time in the past.
• Over the past 200 years, productivity growth has lifted hundreds of millions of people out of poverty and has led to a dramatic increase in living standards for the vast majority of the world’s population.
• Technological developments and inventions — including vaccines, antibiotics and statins — have driven huge increases in the quality and length of life over the past century.
The benefits of productivity growth come in the form of:
• goods and services that cost less, in terms of number of hours employees need to work to afford them
• goods and services whose quality improves over time
• completely new goods and services invented to improve everyday lives.
In practice, novel products, improved quality and reduced cost often blend together.
As goods and services become more affordable, people can work fewer hours and consume more; over the past 120 years, the economic output of the average Australian is up 7-fold, while hours worked have consistently fallen.
While productivity growth is an imperfect measure of rising wellbeing, lifting the rate of productivity growth is an essential element of any policy strategy aimed at increasing the collective welfare of the Australian community. Productivity growth relaxes the constraints of scarcity and opens up opportunities — for individuals, businesses and the general community.
Australian productivity growth is at its lowest rate in 60 years. This broad-based slowdown has been observed across advanced economies.
• Australia’s productivity performance in the goods sector, including mining and agriculture, is consistently strong when compared to global peers. Australia’s services — which employs almost 90 per cent of Australian workers and accounts for about 80 per cent of economic activity — are comparatively less productive.
• Australia has slipped down the productivity rankings recently and has instead maintained its rich country status largely through increasing the share of people in the workforce.
The Australian economy faces challenges bouncing back from its recent poor productivity performance. These include:
• Continuing increase in the size of the services sector, where productivity growth has historically been more difficult to achieve than in the traditional goods sectors (e.g. mining, manufacturing and agriculture).
• A fast growing, government funded and regulated, non-market services sector (e.g. aged care, schools, childcare and disability services), where a lack of competition and contestability can mask underperformance and the freedom to innovate and the sharing of new approaches can be limited.
• Impacts of climate change and the task of decarbonising the Australian economy in line with international commitments.
• Threats to open and flexible international markets for trade, capital and labour — which has benefited Australia enormously in the past — as some countries turn inwards in the face of increasing global tensions.
COVID-19 prompted an acceleration in the uptake of digital technologies across the Australian economy and showed that when governments, businesses and households worked together they could adapt quickly, including to remove long standing productivity bottlenecks.
As the economy evolves in the wake of COVID 19, increased digital capacity could lead to a productivity dividend, particular in the services sector. Taking advantage of the opportunities afforded by digital technology — such as online service delivery, artificial intelligence and data analytics — will require:
• governments and businesses continuing to adopt and adapt innovative business models.
• a suitably skilled workforce (and training infrastructure) adept in non-routine tasks.
• access to data, much of which is collected through businesses reliant on funding or regulation of governments, is not unduly locked down.
Productivity growth relies on the generation and spread of ideas that enable businesses and other product and service providers to deliver more (in quantity, quality or variety), from less. Institutional and policy settings play a key role in providing the frameworks and capabilities that enable and support this process.
Considering the current context and headwinds to productivity growth, this review will focus on the broad cross sectoral enablers to productivity growth — what we must have in place to enable businesses to adapt efficiently in a rapidly changing environment. The policy areas of focus are:
• Innovation and diffusion of new technologies, processes and ideas: including openness to foreign direct investment, ideas and skills; collaborations between businesses and universities and other channels for knowledge transfer; removing unnecessary regulations that discourage the diffusion of new ideas from the global frontier; and aligning incentives for innovation and information sharing in government services.
• Data, digital technology and cyber security: The economy wide importance of data and the digital technologies that generate and use data, as general purpose technologies that could boost productivity in many areas of the economy, including services.
• A productivity friendly business environment: Limiting impediments to employment and investment, including through openness to trade and foreign investment, which is critical for Australia’s relatively small economy; providing policy settings that facilitate efficient emissions reductions and energy security and reliability; sound macroeconomic policy frameworks and competitive and contestable markets
• A skilled and educated workforce: The importance of education in driving productivity growth through increasing human capital and creating settings conducive to technological breakthroughs and adoption.
The inaugural 5 Year Productivity Inquiry released in 2017 — Shifting the Dial — provides a basis for productivity-enhancing reforms that the current Inquiry can build on. Shifting the Dial detailed a blueprint — much of which is still very relevant today — to achieve productivity growth in several sectors of the economy, including within government itself. It focussed on delivering benefits for Australian consumers.
