My piece in today’s Fin is about the productivity blip – I posted an extract a couple of days ago, and now you can read the whole thing, over the fold.
One of the enduring myths of the Australian public policy debate has been the claim that the micro-economic reforms of the 1980s and 1990s generated a surge of productivity growth. This claim is constantly used as a basis for suggesting that, whatever the problem, the answer is that more reform is needed.
Claims of a productivity surge were first generated in 1998 when the Australian Bureau of Statistics published experimental estimates of multifactor productivity growth (the term â€˜multifactorâ€™ refers to the fact that capital as well as labour inputs are taken into account) showing a stunning productivity growth rate of 2.4 per cent for the period after 1993-94, around double the historical average.
Not surprisingly, these estimates were greeted with enthusiasm. Commentators claimed that microeconomic reform was transforming Australia into a â€˜New Economyâ€™.
The initial ABS estimates were subsequently revised downward to yield a productivity growth rate of 1.8 per cent for the period 1993-94 to 1998-99, compared to a historical average rate of 1.2 per cent. This increase could have been explained as a once-off cyclical recovery from the very low productivity growth rates of the preceding years, encompassing the â€˜recession we had to haveâ€™. However, such a prosaic explanation was rejected, particularly by the Productivity Commission, which staked its case for microeconomic reform on the â€˜New Economyâ€™ thesis.
Another possible explanation was that the increase in measured productivity reflected the increase in work pressure and work intensity that was obvious to all in the mid-1990s. This claim was also dismissed.
Although productivity growth slowed from 1998-99 onwards, the decline was explained away as the result of a variety of temporary factors, from drought to the disruptions associated with the introduction of the GST. These would, it was claimed, work themselves out over the course of a productivity cycle.
The latest National Accounts, released on Monday, should settle the question once and for all. ABS now identifies the period from 1998-99 to 2003-04 as a complete productivity cycle and reports that â€˜During the most recent MFP growth cycle (1998-99 to 2003-04) MFP grew annually, on average, by 1.0% â€“ slightly lower than the long term average between 1964-65 to 2003-04 of 1.2%.â€™ The acceleration of productivity growth in the mid-1990s was not sustained.
The results for 2004-05 are even worse. Productivity actually declined 1.7 percentage points. For the entire period since 1993-94, when the productivity surge supposedly began, the average rate of productivity growth has been 1.2 per cent, the same as for the entire period since 1965. The â€˜productivity surgeâ€™ of the mid-1990s was, at best, a temporary blip.
It might be argued that the period since 1993-94 has at least seen a reversal of the declining productivity trend that had prevailed until then. But, as a plea in defence of micro-economic reform, this is rather like the man accused of killing his parents, who pleaded for leniency on the grounds that he was an orphan.
The low point for productivity growth was the period from 1984-5 to 1993-4, when micro-economic reform was well under way, and when substantial benefits were already being claimed. In 1989, Paul Keating observed that if you went into a pet shop, the parrots would be squawking about micro-economic reform, and claimed to be â€˜bringing home the baconâ€™ from that process.
If productivity growth generated by microeconomic reform does not explain the generally strong performance of the economy over the past decade, what does explain it? Thanks to a combination of good luck and good management, Australia has not suffered a recession since 1991 (unlike New Zealand, where monetary policy was bungled at the time of the Asian crisis). The idea that, to enjoy strong growth, we should try to avoid recessions, may seem obvious, but that does not make it wrong.
In the last couple of years, another factor has come into play. Thanks to strong demand from China for mineral exports, our terms of trade have improved dramatically, to levels unparalleled since the commodity boom of the early 1970s. As a result, the value of output per worker has improved much more than physical productivity. This favourable shock may or may not persist, but either way it has nothing to do with microeconomic reform.
Particular instances of microeconomic reform should be assessed on their merits. The claim that microeconomic reform is a primary source of productivity growth has been tested empirically, and shown to be false.