|
|
|
| CPDS Home Contact | |
| Introduction + |
Introduction In January 2010 there seemed to be a significant difference of opinion between the Federal Government and the Productivity Commission in relation to the widely-supported goal of raising Australia's economic productivity.
This document will suggest that:
In March 2010, it was suggested that, as Australia was likely to experience a resources boom that was 'bigger, longer and better than most people imagine', so focusing attention of productivity was not really necessary. An outline of, and comments on, that viewpoint are included as an addendum to this document. |
| Beyond Market Liberalization |
Beyond Market Liberalization While the Productivity Commission seems correct in highlighting the impediments to productivity growth through politically driven initiatives such as those Mr Rudd apparently advocates, the Commission's reported view that productivity depends on the activities of individual firms (and the incentive / obstacles that government provides) is too narrow. Liberalization of other other institutions which impact on Australia's economy is also needed (eg empowering civil institutions to accelerate development of market economic systems, and breaking down dysfunctional centralization that affects the public institutions involved in developing infrastructure and encouraging economic development). Accelerating Market-oriented Development of Economic Systems Productivity does not only depend on incentives for competition and the absence of unnecessary government constraints or of interventions to benefit interest groups. The effectiveness (ie level of development) of the entire economic system is important (as illustrated by the literature on industry clusters). The problem with economic reform in Australia over the last two decades (and a likely significant factor in the productivity slowdown over the past decade) is that emphasis has been placed on creating a competitive environment, but not on the systemic requirements for individuals / enterprises to compete successfully in high value-added activities in such an environment (see The Inadequacy of Market Liberalization). For example, innovation is an important method for improving productivity (see Economic Role of Technology), and support for this has been a key aspiration of all governments since the 1980s (eg consider the federal government's 'Backing Australia's Ability' program and similar state efforts). There has for years been widespread recognition by policy analysts of the importance of effective innovation systems (ie complementary support for innovating firms from other entities that contribute research, intellectual property law, appropriate financing, management, marketing, logistics etc). However despite this, innovation systems are not well developed, and in fact have been getting worse - perhaps because of the misguided way governments tried to support them (eg see Political 'Push' on Economic Inputs can Achieve Little). The problem is that boosting 'smart' inputs (eg research, education, training) into economic systems that are not well enough developed to use them productively is not helpful. Rather it is necessary to start by boosting the effectiveness of innovation systems as a whole (which is possible through a market-oriented process to accelerate 'learning' within the real-world embryonic innovation system) so as to increase the economy's ability to productively use, and its demand for, those 'smart' inputs. How this might be achieved in practice, through apolitical institutions, is speculated in A Case for Innovative Economic Leadership. The latter described the need for, and methods to achieve, a sustained community / business based leadership process - rather than a quick fix through government fiscal or regulatory actions, though democratic endorsement of the protocols through which diverse civil institutions could take such a leadership role would seem highly desirable. Leadership can not be undertaken politically, because:
In the absence of such a process to stimulate changes within economic systems as a whole, such development faces a 'chicken and egg' constraint (ie such systemic capabilities are only viable when a large number of firms want to use them, and no individual firm can succeed and start to create that demand until the system as a whole already exists). While this constraint is most severe in regions that are plainly 'under-developed', the fact is that changing market and technological requirements ensure that all regions are likely to benefit from faster adjustment. Rigidity in Institutions Developing Infrastructure The timely and efficient provision of infrastructure (eg transport, urban utilities) is important to the effectiveness of the economy, and yet major limitation in Australia's institutional capacity to deal with this have developed. This issue is considered separately in Infrastructure Constraints on Australia's Economy, which referred to diverse defects such as; fiscal imbalances in Australia's federal system; fragmentation of responsibility; politicisation of public administration; attempts at centralised planning; and increased complexity due to private controls over functions subject to market failures. Motivating State Governments Governments also have an impact on whether a productive modern economy develops - noting the 'development' programs of various sorts that are undertaken). Unfortunately because the Grants Commission equalizes funding on the basis of 'needs' and only a narrow tax base is available to state administrations (which have the leading governmental role in affecting the character of economic development in Australia), the latter do not have an incentive to take this responsibility seriously, and the financial interests of state governments diverge from the economic interests of the community generally. (see Providing Incentives for Effective Economic Development). A broader own-tax base for state governments (ie one linked more to value-added than to economic turnover) seems vital if more productive economic activities are to be officially encouraged (eg see comments on one state's history of adopting ineffective economic development tactics in Queensland's Economic Strategy). |
| Beyond Population Ageing |
More is at Stake than Meeting the Costs of an Ageing Population The Prime Minister has reportedly explained the need for faster productivity improvement in terms of meeting the increased budgetary costs of an ageing population. This point has undoubted validity. However there are other issues at stake. Firstly, Australia is highly dependent on foreign capital inflow, and there was some risk as a result of the global financial crisis that this might have been disrupted. Thus government guarantees of bank deposits were arguably vital at one stage to prevent the spread of a global 'credit crunch' to Australia with disastrous consequences, There is thus a need to increase Australia's savings to reduce dependence on capital inflow, according to Westpac CEO, Gail Kelly (see Cut Government taxes on savings, says Westpac boss Gail Kelly', 4/11/09). Increasing incomes (through lifting productivity) whilst constraining the availability of consumer credit would be likely to increase Australia's savings rate and reduce dependence in future on uncertain capital inflows. Secondly, the global financial crisis may not yet be 'history' (eg see Unresolved Problems and Coming Crises?). Thus it is not realistic to assume that the economic challenge is simply to deal with a new (say China-driven) boom. Rather it is vital to maintain the sort of flexibility and vigour in the economy that will contribute to rising productivity, in order to also best be able to cope (if necessary) with an unstable / unpredictable international economic environment. Thirdly, boosting the productive capabilities of regional economies through a systemic development process is vital to ensure that none are left behind - as socially and politically disruptive outcomes (such as the One Nation phenomenon in the 1990s) may otherwise emerge (see Assessing the Implications of Pauline Hanson's One Nation) |
| Principles |
Philosophical Principles There are probably important philosophical principle at stake. The Prime Minister seems to be implying that major initiatives that will boost productivity can best be determined by 'social democrats', rather than through the market. This is implicit in his reported references to (say) infrastructure; education spending and direct government support for particular innovations as the foundation for lifting productivity. Mr Rudd's perspective on this are presumably based on his suggestions that "neo-liberalism" was to blame for the global financial crisis, so that 'social democrats' now need to save capitalism from itself (see A Social Democratic Alternative to 'Neo-Liberalism'?). Unfortunately, as the latter suggested, Mr Rudd's assessment of the issues involved seemed somewhat simplistic. It would thus be an unwise starting point for defining Australia's future economic strategies. The alternative suggested above is based on what the present writer suspects is a philosophically and practically significant breakthrough in understanding economic development (and the way in which information contributes to economic growth). |
| Addendum A |
Addendum A: The 'Bigger, Longer and Better' Resource Boom Hypothesis In early 2010 many observers noted the potential for a resources boom as a consequence of the rapid growth arising in China and other emerging economies in the wake of (at least the first phase of) the global financial crisis. However there has been a well-established view since the 1980s that Australia needs to diversify it economy away from reliance on commodity exports because of their boom-bust character, their low productivity except duing boom periods (because it is impossible with undifferentiated commodities to create the competitive advantages needed to maintain high margins) and because resources booms tend to hollow-out other industries (eg by raising exchange rates and thus undermining other sectors' competitiveness) - a phenomenon which has been labelled the Dutch Disease. In relation to such concerns it was argued that the emerging resources boom (from which Australia's economy could benefit enormously) would be strong and durable, and that productivity down-turns associated with periods of high investment do not last.
This view does not, unfortunately, take account of structural features that could easily lead to financial crises in emerging economies (especially China) on whose growth the resources boom depends. Thus, for reasons outlined below, it seems that corporate and economic strategies in Australia should be based on the development of the economy and governing institutions generally - rather than giving special emphasis to resource exports.
|
| Addendum B: Seeking a Strategy for Economic Prosperity |
Addendum B: Seeking a Strategy for Economic
Prosperity - email sent 25/8/10
Michael
Stutchbury Re: Prosperity betrayed by reform retreat, The Australian, 21/8/10 Congratulations on this challenging article (outlined below), in which you strongly argued the need to think seriously about how Australia's future economic prosperity might best be ensured. Some additional options that might be of interest are suggested below. They relate to:
Regards John Craig Detailed Comments There is no doubt that the subject matter your article is of critical importance. My interpretation of your article: Australia's economic reform agenda is being betrayed at an historic time of national prosperity. GDP per capita is now world's fifth highest - compared with 16th in 1985. Election campaign has rejected growth agenda - and promoted workforce participation by toughening welfare state. Prosperity was generated by productivity reforms started in 1980s. The resulting flexibility helped digest Australia's China luck and allowed 20 years of growth, a 30% rise in real household income and reasonable equality. BCA has identified Australia's modern paradox as valuing economic achievement - but not seeing stronger economy as benefiting quality of life or financial security. Treasury suggests that mining boom will push economy to full capacity and skilled labour shortages next year. Infrastructure bottlenecks (in transport and utilities) could choke productivity recovery as mining boom shifts to export phase - creating problems because of high foreign debt, housing prices and budget spending geared to China boom. Productivity improvement is needed, but neither party has a policy agenda for this. Bungled mining tax proposals has impeded tax reform, and other junk policies are emerging. NBN involves expensive government monopoly with no business plan. Coalition caved in on labour market reform, and promised to increase company taxes. Both sides have rejected a pro-immigration 'Big Australia'. Coalition attacks will halt some wasteful spending, and both parties promise to restore budget surpluses. However large spending commitments await in future. Throwing money around avoids productivity gains from opening infrastructure (road, rail, electricity and water) to private investment. Privatisation is the solution. Coalition promises more rigorous / less political project assessments - but promises Melbourne-Brisbane rail link without cost-benefit test. Both parties promote participation (rather than infrastructure productivity and big population) as best way for people to benefit from China boom. But there are limits to potential gains from this, and success requires productivity improvement in any case. Needed steps are: (a) Henry review's tax / welfare reforms (eg 35% flat tax for most with $$25,000 tax free threshold) and (b) reversing ALP's industrial relations re-regulation. However, the issue seems more complex than the above article indicated because:
There is a need for a solid assessment of Australia's circumstances before adequate proposals can be developed to promote Australia's future economic prosperity. The complexity of those issues and the community's failure to support institutions that might develop such policies or relieve governments of the need for super-human wisdom are the reasons that Australia's political leaders now can have nothing relevant to say on this subject. Some suggestions about boosting Australia's economic performance are in A Case for Innovative Economic Leadership (2009); Lifting Productivity: Considering the Bigger Picture (2010); and Developing Australia's Economy: The Role of Migration (2010), while speculations about what seems to be needed to re-create a competent system of government are in Australia's Governance Crisis (from 2003). The major constraint on the development of a productive modern economy has been and remains Australia's natural resource wealth, which offers apparent 'easy' wealth and encourages dominance in the world of business and public affairs by those who hope to benefit personally from that natural wealth but provide the community with poor economic leadership (see About the Curse of Natural Resources, 2004). As the latter noted, an inability to get onto a sustainable path to the development of a productive modern economy characterises many resource rich societies, and Australians must perpetually struggle to avoid this fate. Their struggle has been made harder since the 1990s because the politicisation of public services led to their dominance by 'yes men' (rather than by independent professionals) and thus reduced access to practical reform options that are in the interests of the community as a whole. Proposals from those whose seek to exploit natural wealth for their own benefit, or to simply redistribute wealth, have become harder to contest.
|