Productivity, Not Complacency

Last Updated Jul 4, 2011 4:07 PM EDT

Last week, in an address to the Melbourne Institute, Treasury Secretary Dr Martin Parkinson called on Australians to embrace productivity reforms. He said there was a danger of complacency, with half the working population having never experienced a major downturn. Further, he said, we are already starting to see a drop in living standards. He's right that Australia has been through an exceptional period of growth, thanks to wise capital investment. Our capital spending has grown faster than most in the OECD and, as a result, we've also experienced the fastest growth in GDP per capita.

There's still plenty of room for growth, of course. In 2009 our GDP per capita was US$32,273, one of the highest in the OECD, but still a long way short of the US (US$36,693) or Norway (US$39,017).

Investment in capital is only part of the road to productivity. If you buy a machine you have to get someone to use it to the best advantage. You'd assume a lot of the capital invested in mining is for equipment that is relatively automatic. Other industries, where there's not such a steady pipeline of activity, might have to work harder to make their capital investments resources contribute to higher productivity.

This is where we need to adapt --- to lift multi-factor productivity (a combination of labour efficiency and capital investment). It's been on the slide for the last decade in Australia. Labour productivity --- measured as GDP per hour worked --- has seen a slight rise, but a 1.1 percent rise between 2001 and 2009 is quite a bit below the OECED average, despite all the shiny new equipment we've been buying.

Perhaps the real issue rests with innovation. You can't improve productivity if you keep doing the same old thing, the same old way. Government policy needs to ensure innovation is encouraged. Some experts, including economist Nicholas Gruen, argue that our current approach to R&D support is not working. Almost three-quarters of R&D spending eligible for tax concessions comes from big business. He says a fairer scheme would encourage innovation across a broader range of businesses.

Put simply, it looks like, lately, most of Australia's productivity gain has been driven by capital investment. We might be a hard-working nation putting in lots of hours, but the truth is we now need to work smarter. That needs an environment that encourages investment and a focus on training and education. You don't tend to get either of those two things when complacency reigns. So Parkinson was right to start ringing the alarm bells.

GDP and productivity data from OECD StatExtracts.

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Read more By The Numbers articles by Phil Dobbie here.