The quest to determine why Australian productivity growth has been sluggish over the last decade compared to the 1990s has been intensely ideological at times. John Quiggin, for example, has assailed the conventional wisdom of a productivity decline. And the right and business have sought, repeatedly, to blame it all on our rigid industrial relations system despite the repeatedly demonstrated decline in labour productivity (which is merely one element of the broader productivity picture) under WorkChoices and rise again under Labor’s Fair Work Act.

So toxic was this debate at times it became the pretext for attacks on public servants by the right. In 2012, then-Treasury deputy secretary David Gruen gave a paper that noted attacks on workers weren’t helpful for productivity given labour productivity outperforming multifactor productivity — and was attacked as partisan by Peter Reith and one of The Australian’s menagerie of far-right parrots, Judith Sloan. For the right, the mere suggestion that workers weren’t to blame for our poor productivity performance was deeply offensive.

But there remained the stubborn suggestion that it was not workers who were the problem, but business itself. Sloan ended up accepting that there was indeed a problem with Australian business managers when it came to productivity — but they performed poorly because the Fair Work Act wouldn’t let them perform better.

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Since then, according to the Productivity Commission’s most recent productivity update, labour productivity in Australia has continued to improve, while MFP has lifted itself off the canvas and begun improving since 2012. In fact, Australia has one of the developed world’s best productivity performances in recent years, even if it’s been relatively poor compared to the improvements that the Hawke-Keating government’s reform packages delivered in the 1990s.

And in a discussion paper released as part of a broad-brush inquiry into ways to enhance our productivity performance, Monday the PC again returned to the issue of the quality of Australian management — specifically, about how good Australian business is at diffusing good ideas, technological innovation and best practice management. “There is other compelling evidence that a significant share of Australian businesses have poor management practices, and while this is true for all countries, Australia lags behind the leading countries,” the paper — which bears the strong stamp of PC chair Peter Harris — says. It goes on:

“For example, multinational firms tend to have high quality management and to perform better, while businesses run by families and government businesses tend to perform worse (suggesting that the policies of Australian governments should not favour their growth over other businesses). A significant share of the gap in productivity between Australia and the United States appears to be driven by varying management capabilities.”

It’s hard to read that line about governments not favouring the growth of family and government business as anything other than a slap at the Turnbull government, which is pumping hundreds of millions into concessional loan schemes designed to prop up the National Party’s 19th-century fantasy of family-based farming, and tens of billions into building submarines in Australia when they could be purchased far more cheaply offshore.

It’s not merely, or particularly, the quality of Australian management that is a concern to the PC, which uses the paper to call for submissions on economy-wide productivity initiatives that could be realistically delivered. A key issue — and this is the target of another PC inquiry currently underway in education — is the problem of measuring productivity in non-market industries, especially health. Non-market industries currently cover about 20% of the economy — although:

“Unfortunately, an obvious starting point for analysis of the prospects for productivity improvement and their possible origins is unavailable for the non-market sector. The government provides much of these sectors’ outputs at subsidised prices or free of charge. So output estimates for the non-market sector are usually based on the cost of production (that is, the cost of inputs). By definition, this means measured MFP growth is zero — as output growth is determined directly by growth in inputs. It also means that the genuine value of output of the non-market sector is higher than its measured value in the national accounts — so that the non-market sector is even more important relative to other industries than the official statistics suggest.”

But the non-market sector offers potentially significant opportunities for increased productivity growth — a US figure of up to 30% inefficiency is cited. Moreover, “this is also an area readily amenable to policy action because, as purchasers, providers and regulators, governments control most of the levers shaping productivity.” That is, governments can play a far more direct role in driving reform than it normally can in the market economy, where infrastructure, regulation and taxation are the main levers for governments.

Reform, of course, is an increasingly problematic concept for politicians. The paper discusses the concept of the “political market” — “the set of incentives that punish or reward politicians and governments for their choices. Political market failures — such as structures that allow capitulation to vested interests — can limit prosperity.” It’s a neat parallel to the more traditional concept of market failure. Except, when markets fail, there’s a government to intervene. Who intervenes when the political market fails? At the moment, we have to rely on independent, public interest-focused bodies like the PC and others like the Reserve Bank. And their interventions are limited to just words.

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Peter Fray
Peter Fray
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