ACCC Regulation & Competition ConferenceSydney, 25-26 July 2002

Australia’s Productivity Surge:An Outcome of Microeconomic Reforms?

Dean Parham

2

Motivation for this session

■ Strong productivity surge in the 1990s1980s 1990s

Labour productivity growth (%pa) 1.7 3.0Multifactor productivity growth (%pa) 0.7 1.8

■ Productivity growth — the usual suspects! technological change (ICTs)! better use of resources (micro policy reforms)! mismeasurement and misidentification (skills, cyclical effects, work

intensity)

■ What factor(s) promoted Australia’s productivity surge?Have policy reforms played a role? If so, what are the keyfeatures of reforms?

3

Outline

■ Background! An international/historical perspective! Australia’s failure to turn up at the ‘Convergence Club’

■ The 1990s experience! record productivity growth! implications for living standards

■ Who dunnit?! Clues: What has to be explained?! Elimination of some suspects! Investigation of others

■ The case for reforms■ Conclusions

4

Outline

■ Background! An international/historical perspective! Australia’s failure to turn up at the ‘Convergence Club’

■ The 1990s experience! record productivity growth! implications for living standards

■ Who dunnit?! Clues: What has to be explained?! Elimination of some suspects! Investigated of others

■ The case for reforms■ Conclusions

5

Australia was not part of post-war convergence GDP per hour (US$PPP)

0

5

10

15

20

25

30

35

40

45

1940 1950 1960 1970 1980 1990 2000 2010

Australia

USA

6

Australia’s comparative performance(Labour productivity - GDP per hour worked)

200114

83

1990-20002.3

1.6

1.7

1.7

Levels (US$PPP) 1950 1960 1973 1990Australia’s rank 4 5 10 15

% of US level 81 75 74 77

Growth (%pa) 1950-60 1960-73 1973-90Australia 2.74 2.4 1.5

USA 3.5 2.6 1.3

Europe 4.1 5.0 2.4

OECD 3.6 4.4 2.0

7

Why did Australia perform relatively poorly?

■ Symptoms — structural weaknesses! lack of specialisation and scale! manufacturing focus on domestic market with dependence on

agricultural and mining commodities for export earnings! poor investment decisions and excess manning in large areas of

infrastructure! poor work practices, labour relations, management! outdated or inappropriate technologies, combined with low

innovation and skill development! a culture that resisted change rather than rose to meet it.

8

■ Causes — (unintended?) consequences ofdevelopment and redistribution strategies! highly regulated product and capital markets! highly regulated labour markets with centralised bargaining (one

size fits all)! political imperatives impinging on the provision of economic

infrastructure (energy, transport, water, roads)

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Outline

■ Background! An international/historical perspective! Australia’s failure to turn up at the ‘Convergence Club’

■ The 1990s experience! record productivity growth! implications for living standards

■ Who dunnit?! Clues: What has to be explained?! Elimination of some suspects! Investigated of others

■ The case for reforms■ Conclusions

10

Australia’s actual and trend MFP

60

70

80

90

100

1964-65 1969-70 1974-75 1979-80 1984-85 1989-90 1994-95 1999-00

Actual Trend

1968-69

1973-74

1981-821984-85

1988-89

1993-94

1999-00

11

Underlying rates of productivity growth overproductivity cyclesAverage annual rates of growth (per cent)

1.2 1.51.0 0.8

0.4 0.7

1.8

1.31.4

1.4

0.4

1.3

1.2

1.4

0

1

2

3

4

5

1964-65 to1968-69

1968-69 to1973-74

1973-74 to1981-82

1981-82 to1984-85

1984-85 to1988-89

1988-89 to1993-94

1993-94 to1999-00

MFP growth Capital deepening

2.5

2.9

2.42.2

0.8

2.0

3.0

12

0

0.5

1

1.5

2

2.5

-1 -0.5 0 0.5 1

USA 1973-1990

USA 1990-2001

Australia 1973-1990

Australia 1990-2001

Europe 1973-1990

Europe 1990-2001

OECD 1973-1990

OECD 1990-2001

2.5%+

2 - 2.5%

1.5 - 2%

1 - 1.5%

Growth in GDP per capita:

Labour utilisation growth

Labo

ur p

rodu

ctiv

ity g

row

th

The 1990s productivity surge gives Australiacomparatively strong growth in average income

13

Outline

■ Background! An international/historical perspective! Australia’s failure to turn up at the ‘Convergence Club’

■ The 1990s experience! record productivity growth! implications for living standards

■ Who dunnit?! Clues: What has to be explained?! Elimination of some suspects! Investigated of others

■ The case for reforms■ Conclusions

14

Clues: What has to be explained?

■ Record rates of underlying productivity growth■ Longest period (9 years) of continuous increase■ MFP acceleration, rather than increased capital

deepening

15

Acceleration in trend multifactor productivity growth inthe 1990s in OECD countries

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Spain

United Kingdom

Japan

France

Netherlands

Italy

Germany

Belgium

New Zealand

United States

Norway

Denmark

Sweden

Canada

Ireland

Australia

Finland

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Productivity take off around 1992

(1982-83)

(1990-91)

1960s1970s

1980s1990s

40

50

60

70

80

90

100

110

30 40 50 60 70 80 90 100 110

Output per hour worked

Capital-labour ratio

Indexes 1999-2000 = 100

17

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Agricu

lture

Mining

Manufa

cturin

g

Electric

ity, g

as an

d wate

rCom

munica

tions

Constr

uctio

nWho

lesale

trade

Accom

, cafe

s and

resta

urants

Transp

ort an

d stor

age

Financ

e and

insu

rance

1988-89 to 1993-94

Industry MFP growth over last two productivitycyclesAverage annual rates of growth (per cent)

1993-94 to 1999-00

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Clues: What has to be explained?

■ Record rates of underlying productivity growth■ Longest period (9 years) of continuous increase■ MFP acceleration, rather than increased capital

deepening■ Strength of Australia’s surge in the midst of mixed

productivity results elsewhere■ Commencement in the early 1990s■ Acceleration in a new set of service industries■ Why Australia’s catch-up delayed until the 1990s

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Elimination of some suspects

■ Recovery from recession! record continuous rise, peak-to-peak rates

■ Worldwide productivity boom! only few countries with strong acceleration

■ Work intensity! longer hours measured, beyond ‘jobless’ recovery, industry locus

(wholesale etc)

■ Mismeasurement! accelerations (mismeasurements need to get worse), growth in

services → underestimation

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Four remaining explanations

■ Macro policy settings■ Education and skills■ Technology

! information and communications technologies (ICTs)

■ Micro policy reforms

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Education and skills

■ Direct and indirect effects■ Experimental ‘quality-adjusted’ labour input

! gender, educational attainment, potential workforce experience

■ Relative increase in skills in the 1980s! around 0.3 pp of MFP growth

■ But deceleration in the 1990s! around 0.05 pp from 1993-94

■ Suggests no direct effect on the 1990s productivityacceleration, but growth in skills in the 1980s and1990s could still have affected technology absorptionand innovation

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Technology

■ Information and communications technologies (ICTs)■ ICTs in Australia

! low production! high use! from technology laggard (1970s, 1980s) to forefront of uptake

(1990s)

■ Potential productivity gains associated with ICT use! capital deepening (ICT, total)! MFP gains (spillovers, other)

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Contributions of ICT capital deepening to labourproductivity growth in the USA and Australia,1961 to 2001

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1961 1966 1971 1976 1981 1986 1991 1996 2001

USA Australia

(percentage points)

24

0.5 1.0

0.2 -0.1

0.3 0.4

-0.2 -0.5

0.3 1.1

Labour productivity acceleration

USA

(1992-2000 v. 1986-1992)

Australia

(1994-2000 v. 1989-1994)

Capital deepening

- ICT capital

- Other capital

MFP contribution

Contributions to 1990s acceleration in US andAustralian labour productivity growth(percentage point)

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Productivity accelerators

■ Similar industries in USA and Australia! USA : Wholesale, Retail, FIRE, Business services! Australia : Wholesale, Finance & insurance

■ Above-average ICT users

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No strong ICT/MFP link across industries■ Links concentrated in distribution and financial intermediation■ Factors other than ICTs important to productivity growth■ Even in ICT intensive industries, productivity gains depend on

other (complementary) innovations! ICTs as general purpose technologies! platform for other product and process innovation, which are the source

of productivity gains■ Not widespread network spillover effects (yet)

! internalised gains due to disembodied innovations■ In Australia, ICTs part of a more general process of

restructuring and transformation (catch up)■ Examples (banking, wholesaling)

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Outline

■ Background! An international/historical perspective! Australia’s failure to turn up at the ‘Convergence Club’

■ The 1990s experience! record productivity growth! implications for living standards

■ Who dunnit?! Clues: What has to be explained?! Elimination of some suspects! Investigated of others

■ The case for reforms■ Conclusions

28

The case for policy reforms

■ Progressive implementation since the mid-1980s■ Wide-ranging

! capital, labour, trade & investment, government businessenterprises, domestic competition

! aimed at Australia’s structural weaknesses

■ Key influences on productivity growth! sharper competition as an incentive! openness to trade and investment (specialisation, technology)! flexibility to adjust and innovate

■ Underlying drivers and enablers! example — ICT and wholesale

■ Competition, productivity and inflation

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Does the case explain the clues?

Record rate and length of productivity growth (accordwith expectations)

MFP acceleration

Australia-grown explanation

Timing (roughly)

Acceleration in new service industries

Delay in Australia’s catch-up and transition fromtechnology laggard to the forefront of technologyuptake

✔

✔

✔

✔

✔

✔

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Other evidence

■ Case studies■ Trends in ‘proximate’ determinants

! specialisation, increasing trade (including manufactured exports),foreign investment, technology uptake, innovation)

■ Econometric analyses

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Outline

■ Background! An international/historical perspective! Australia’s failure to turn up at the ‘Convergence Club’

■ The 1990s experience! record productivity growth! implications for living standards

■ Who dunnit?! Clues: What has to be explained?! Elimination of some suspects! Investigated of others

■ The case for reforms■ Conclusions

32

Key messages

■ Growth in Australia’s productivity and living standardshad been languishing for decades compared with othercountries

■ Policy reforms were introduced in large part to raiseAustralia’s productivity performance.

■ Productivity growth reached record highs in the 1990s■ This has translated into much stronger growth in

average incomes■ Policy reforms are a major factor in explaining the

improved performance

33

■ Competition, openness and flexibility are key elements■ Reforms, education, ICTs not ‘competing’ explanations

! ICTs part of the ‘dynamic’ effects of reforms! increased education likely to enhance uptake application and

enhancement of technologies

■ There are important gains from reforms and effectivepro-competition regulation

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References

■ Parham, D. 2002, ‘Productivity Growth in Australia: Are weEnjoying a Miracle’?, Paper presented to the Melbourne Instituteand The Australian Conference, Towards Opportunity andProsperity, Melbourne, April.(Available at http://www.pc.gov.au/research/swp/pgia).

■ Parham, D. 2002, ‘Australia’s 1990s Productivity Surge and itsDeterminants’, Paper presented to the NBER 13th Annual East-Asian Seminar on Economics, Melbourne, June. (Available athttp://www.nber.org/~confer/2002/ease02/parham.pdf).