Unless action is taken, Australia’s economy will deteriorate

Extract of Saul Eslake's contribution to CEDA's 2012 EPO publication as published in the Financial Review, 17 February 2012.

The dearth of productivity-enhancing reforms since about 2000 is clearly in part attributable to changes in the political environment. This includes a diminution in the enthusiasm of both major political parties for continuing reforms of the type pursued in the 1980s and early 1990s once the politically easiest reforms (what management consultants typically call the low-hanging fruit) had been accomplished, and once what remained was seen as more politically challenging.

The lack of enthusiasm for productivity-enhancing reforms since about 2000, on the part of both political leaders and the public at large, also seems in part attributable to the more prosperous economic circumstances of the past decade.

This diminished focus on productivity has not been confined to the public policy arena. As the profit share of Australia's national income has increased to unprecedented levels during the past decade (apart from the period immediately after the global financial crisis), businesses have attached less importance to the pursuit of productivity gains at the enterprise or workplace level (which is, after all, where the decisions that lead to higher levels of productivity are formulated and executed, if at all).

One of the reasons for Australia's poor productivity performance over the past decade has been the lack of any real incentives for firms to pursue productivity gains in the absence of compelling reasons to do so.

There are now some indications that the difficulties being encountered by sectors of the economy, which are adversely affected by some of the side effects of the mining boom, in particular the rising exchange rate, are prompting businesses in those sectors to place a much higher priority on productivity-enhancing organisational and other changes at the enterprise or workplace levels, as a matter of survival, without any need for public policy changes.

Many areas of the Australian economy have remained, largely for political reasons, insulated from competitive pressures of the sort that, in other sectors, have acted as strong incentives for the pursuit of productivity-enhancing structural and organisational change - including international aviation, agricultural marketing (other than grains), pharmacies, newsagents, private service professions (such as law, medicine and architecture), and services sectors dominated by public-sector agencies (such as healthcare, education, public transport and law enforcement).

Given the inadvisability of drawing conclusions about productivity from data over relatively short periods, it is not yet possible to make any reliable statistically based inferences about the effects of the present government's changes to workplace relations arrangements on economy-wide productivity growth. Although there does appear to be a growing body of anecdotal evidence that some businesses are seeking to make productivity-enhancing organisational changes in workplaces, they are finding those changes more difficult to implement than might have been the case hitherto.

The Productivity Commission's recent draft report on retailing noted that closing the productivity gap between Australia and countries such as the US "will require greater workplace flexibility so that employers and employees can work co-operatively and creatively together".

The consequences of Australia's poor productivity performance over the past decade have not, as yet, become widely apparent. This is largely because they have been masked by a combination of faster population growth (until recently) and the most sustained upswing in Australia's terms of trade in more than a century.

It may well be that an end to this period of comparatively easy prosperity will prompt a renewed focus, both among policymakers and business leaders, on the objective of raising both the level of productivity and the rate of productivity growth.

If a renewed focus is not prompted, then it is likely that Australia's economic performance after the present resources boom comes to an end will deteriorate significantly - as it did after the end of the last significant commodities boom in the mid-1970s - and that the consequences of that for the living standards of Australia's population will be impossible to disguise.

Extract of Saul Eslake's contribution to CEDA's 2012 EPO publication as published in the Financial Review, 17 February 2012.

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