Productivity (of Lack Of It) …. Everyone Is Talking About It!.

Productivity (of lack of it) …. Everyone is talking about it!.

Is it pure coincidence?

Yesterday (10/8/11) at an American Chamber of Commerce sponsored event in Sydney, the key note speaker, the Chairman of BHP Billiton, Mr Jacques Nasser AO, spoke at length of the need for Australia to lift its productivity. He expanded significantly on how Australia has been falling behind in productivity, most importantly in Labour Productivity and made a very strong link of the need for higher levels of productivity and higher standards of living.

Unrelated but to add some of his broader views, he was not short when asked by the audience about the NBN and the carbon tax. He questioned the upside of the NBN project and he leaned towards the downsides at this point in time. In terms of the carbon tax, he suggested to slow down its introduction because no many others are at this point doing much about it.

At another recent event the Chief Economist (Australia and New Zealand) for HSBC, Mr Paul Bloxham, also expressed concerns about the slow down on the national levels of productivity. He expanded quite a bit on his explanations about the issue and he also indicated that the standard of living that we enjoy today is at risk due to the weakening of our levels of productivity.

The Productivity Commission (PC) has raised the issue in a number of reports, including the study on the retail sector.

The latest newsletter from the PC (update of August 2011) presents a good and simple introduction to the subject and tried to explain their views as to why productivity Is declining and the long term effects of it.

The PC update, like the ABS site and many others, clearly confirms that “Productivity is a measure of how efficiently an economy (or any other defined economic entity) is operating, and growth in productivity is a key determinant of long-term economic growth and hence also income growth. As such, Australia’s prospective productivity performance will affect its future prosperity and its capacity to fund initiatives designed to address various longer-term challenges including population ageing and climate change.”

The PC Update clearly acknowledges the fall in productivity and explains it as:

“Average annual MFP growth in the 12 industry market sector fell from 2.1 per cent in the 1990s surge, to 1.1 per cent over the 1998-99 to 2003-04 productivity cycle, and then to minus 0.2 per cent over the 2003-04 to 2007-08 cycle – a fall of 1.0 percentage point followed by a further fall of 1.3 percentage points. The first decline was largely expected, but not the second. However, Commission analysis has indicated that almost 80 per cent of the 1.3 percentage point fall was accounted for by three industries: agriculture, forestry and fishing; mining; and the utilities (electricity, gas, water and waste services).

The Augusts 2011 PC update goes a bit further explaining some of the reasons for the drop of productivity however it also makes some comments on the Gratten Institute report, in part saying:

“Data and timing matter

In February this year the Grattan Institute released its report: Australia’s Productivity Challenge. That report, authorsed by Saul Eslake and Marcus Walsh, focuses largely on developments in labour productivity, rather than MFP. It also considers a newly expanded market sector (released by the ABS in early 2011) consisting of 16 industry sectors – in addition to some classification changes to the original 12 industries making up the market sector, four new industries not previously included in the market sector aggregate have been added: rental, hiring and real estate services; professional, scientific and technical services; administrative and support services; and other services. The Grattan report also focuses on recent labour productivity performance relative to the peak performance of the 1990s rather than using ABS productivity cycles and long term average productivity growth as a benchmark.”

My interpretation of the Grattan Institute report is that it explains the drop in productivity due to:

· Policies of regulation and inflexibility (they call it: “productivity-stifling regulation and legislation”)

· The paradoxical ‘downside’ of economic success

A lessening in the take-up of ICT (on my next article I will expand on this one a lot more)

Marco A. Tapia