Act on productivity now or see decades of reform go to waste
John Freebairn
Professor, Department of Economics at University of Melbourne
In his address to the Economic and Social Outlook Conference last week, Treasury Secretary Dr Martin Parkinson called for a renewed focus on boosting Australia’s falling productivity to ensure living standards were protected, adding there were opportunities to do much better in the future.
This is a timely debate. Government policy changes are required to provide a better framework and set of incentives and rewards for businesses and individuals to encourage and support productivity growth.
Productivity growth is about adopting methods of production which produce more output with less inputs and of reallocating scarce labour, capital and natural resources from less valuable to more valuable products.
New technology, changes in management and work practices, and changes in the relative prices of different products and inputs provide an endless stream of new opportunities to raise productivity.
Back to the future
A necessary corollary to productivity growth is change.
Productivity growth provides the capacity for higher living standards, better treatment of the disadvantaged and better management of the environment.
The 1980s and 1990s was a period of relatively high productivity growth in Australia, following a set of sweeping microeconomic reforms.
These included replacing a fixed exchange rate with a flexible exchange rate to better respond to economic shocks in both the Australian economy and internationally, with market-determined interest rates allowing savings to be allocated to the most productive investment options.
A shift from centralised negotiations to enterprise level bargaining over conditions of work and payment provided incentives and rewarded productivity improvements and responded to different business and employee needs.
Reductions in protection to specific industries in the form of tariffs, quotas and agricultural marketing schemes saw production moved from a mix of lower productivity to higher productivity goods and services, and consumers gained lower prices.
And for many government-owned utilities, moves to corporate structures and in many cases privatisation, provided more explicit incentives for improved productivity and competition to drive changes.
Finally, we saw more credible fiscal and monetary policies to provide a stable environment of low unemployment and inflation.
Holding onto reforms
It is very important that the reforms of the late 20th century not be reversed.
In particular, governments have to resist the claims of some industries, unions and other lobby groups seeking special assistance to be protected from structural changes driven by the mining boom, new technology and changes in buyer preferences.
Not to respond to these changes will result in a loss of productivity.
Setting future prorities
Looking forward to the next decade or so, there is another set of areas for government policy to facilitate future productivity growth.
The Henry Tax Review proposed sweeping changes to the system of commonwealth, state and local taxes, and to the social security system. The review estimated potential gains in productivity equivalent to real wage increases of between 3% and 5%.
Governments have a very large effect on productivity of the ever-growing education and health industries, both directly via their own funding but also by regulations on private suppliers.
Sorting out the interface between the commonwealth and the states has to be a high priority.
Don’t play the blame game
Currently, each level of government wastes resources on the blame game and rent-seeking rather than improving productivity, and many investments reflect more political than economic criteria.
Greater use of evidence-based research to select among the different preventive and treatment options for health, and similarly of strategies to improve education outcomes – especially for the currently too high level of functionally illiterate and innumerate school-age children – should underlie government outlays and regulations.
Changes in technology seem likely to justify changes in historical patterns of industrial organisation in health and education.
Replacing the current political ranking of infrastructure projects with formal, transparent and public benefit cost assessments, both to rank competing projects and technologies and to assess the aggregate investment level, is long overdue.
Make cost-benefit analyses public
The practice of current governments at all levels and political colours to not make public benefit cost assessments on the grounds of business in confidence and similar excuses is neither necessary or desirable.
Consideration should be given to government deficit funding of investments in productivity-enhancing infrastructure, and of education.
Resist self-interested lobbyists
One of the biggest challenges facing modern governments in pursuing productivity growth will be to resist the self-interested and socially wasteful lobbying by rent-seeking pressure groups.
Recent experiences of the mining industry regarding taxation reform, of irrigators to reform the allocation of water, and of some unions seeking above average wage increases with no productivity offsets, have set a precedent for other rent seekers to invest in wasteful lobbying rather than productivity improvements.
Governments have to take a leading and proactive role in fully explaining the processes of and benefits of policies which support and nurture productive growth for improvements in national wellbeing.
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