That’s the headline the Fin gave to an Op-Ed piece by Dean Parham today. This is, as far as I know the first acknowledgement from official sources of the productivity growth slowdown of the last four or five years. It’s significant because Parham is the most prominent advocate of the hypothesis that microeconomic reform has generated a new economy.
It’s subscription only, but I’ve excerpted a bit that gives the flavor.
Australia’s productivity growth in the mid-to-late 1990s was indeed remarkable. At 1.8 per cent a year, multifactor (combined labour and capital) productivity was three times higher than the previous average from the early 1980s.
And it should be remembered that the 1980s rate was not expected to improve. There was widespread pessimism in that period about the outlook for growth in Australia’s productivity and living standards.
While productivity stagnated in many major economies of the Organisation for Economic Co-operation and Development in the 1990s, Australia recorded one of the strongest productivity accelerations. It reversed the pattern over at least the four previous decades in which Australia performed poorly compared with other OECD countries.
Some now think the slower productivity growth in Australia over the past few years signals that our productivity surge is over. But there is evidence the slowdown simply reflects a series of temporary factors not the least of which is drought. In my view, the ABS estimates are likely to show a continuation of strong underlying growth once the effects of the drought cease to play a role.
So why has Australia’s productivity performance improved overall since the mid-1990s?
A few sceptics resist the evidence that microeconomic policy reforms provide a major explanation. One argument is that technology specifically, information and communications technology (ICT) has mattered more. (John Quiggin, AFR Opinion, April 22)
ICT has played a part. But technology, policy and institutional influences are inter-related.
As noted, Parham expects the slowdown to be temporary, mentioning the drought and other (unspecified) temporary factors. I’ll be looking into this as soon as I get time.
For the moment, I’ll just make the observation that if we are going to take out the impact of the drought in the last few years (and I think we should) it’s equally necessary to make a downward adjustment to the productivity growth spurt of the mid-90s which was assisted by a series of relatively good years.
As an aside, it’s important not to treat years of good rainfall as normal and droughts as disasters that should be treated as exceptional. In Australia high and low rainfall years occur as a natural part of the cycle, and policy analysis should always be based on this premise.