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PC Productivity Update 2016

3 Comparing Australia's productivity performance

International data from the Conference Board's Total Economy Database indicate that MFP growth in Australia was -0.9 per cent in 20141,2. This was comparable with Singapore (also -0.9 per cent), higher than New Zealand (-1.5 per cent), Norway (-1.2 per cent) and Japan (also -1.2 per cent), but lower than the rest of the countries and regions presented in figure 3.1.

In recent years, negative MFP growth was not unique to Australia (figure 3.1). In 2014, world average MFP growth was -0.2 per cent and most countries in Europe and Asia-Pacific regions recorded a fall in productivity. The exception was North America where both the United States and Canada reported positive MFP growth.

Since 2008 Australia, New Zealand and European countries experienced a prolonged period of negative MFP growth. The Conference Board suggested that for some economies this may reflect a difficult process of recovering from the 2008 Global Financial Crisis and the productivity performance in 2014 is just a continuation of the process. But other research indicates that the trend is of longer duration so this is not a clear nor comprehensive answer (see for example, Byrne et al 2016). The persistent decline of MFP across developed economies remains of serious research interest.

  • Figure 3.1 MFP growth in selected countries and regions
    Averages of yearly growth rates and annual growth rates, per cent

    Text alternative of table follows

    Text alternative for the table in Figure 3.1

    Figure 3.1 MFP growth in selected countries and regions
    Averages of yearly growth rates and annual growth rates, per cent
    1998 to 2007 2008 to 2012 2013 2014
    World 1.1 0.2 0.0 -0.2
    France 0.5 -0.6 -0.4 -0.6
    Germany 0.9 -0.1 -0.5 -0.3
    Ireland 0.5 -0.8 -2.6 2.3
    Norway -0.4 -2.1 -1.9 -1.2
    Sweden 1.4 -1.1 -0.2 -0.2
    United Kingdom 0.6 -1.1 -0.4 -0.1
    Europe 0.6 -0.6 -0.4 -0.3
    Canada 0.0 -0.5 0.1 0.2
    United States 0.8 0.3 0.6 0.1
    Australia 0.1 -0.9 -1.5 -0.9
    New Zealand 0.0 -0.7 -0.9 -1.5
    China 3.7 1.7 0.1 -0.1
    India 1.7 2.5 -0.5 0.2
    Japan 0.5 0.0 1.0 -1.2
    Singapore 2.1 -0.1 0.1 -0.9
    South Korea 2.7 1.6 0.6 0.6

    Source: The Conference Board Total Economy Database, May 2015, http://www.conference-board.org/data/economydatabase/

Productivity and Australia's relative economic wealth

In recent years, despite comparatively low MFP growth, Australia has maintained its position in the rank of per capita GDP relative to other developed economies. In 2014, the Australian economy was ranked 5th in per capita GDP among OECD countries, behind Luxemburg, the United States, Iceland and Norway (figure 3.2).

Australia held similar positions in the 1950s but its ranking slipped over the following two and a half decades. It dropped to 15th in 1983 and again in 1991 and 1992.

Since then Australia's international ranking has risen. This improvement has been linked to sustained economic reforms during the 1980s and 1990s, including: the opening up of trade and capital markets to competition; partial deregulation, commercialisation and privatisation of state owned enterprises; labour market reforms that reformed the centralized wage fixing system; and National Competition Policy reforms (PC 1999). These resulted in better utilisation of labour and capital by business and enabled the Australian economy to innovate, taking advantage of newly developed information and communication technologies. As a result, Australia's MFP increased by 1.8 per cent a year between 1993-94 and 2003-04 and its ranking in per capita GDP was lifted to 8th by 2003.

The Global Financial Crisis in 2008 had a widespread impact across the world but its impact on Australia was moderate. Since then, Australia's per capita GDP ranking improved further and has remained among the top 5 in nearly all the years since 2008.

Figure 3.2 also suggests that Australia's international per capita GDP ranking has been somewhat related to movements in the terms of trade.3 The terms of trade are an index of Australia's export prices relative to import prices. Global demand for iron ore and other mining products rose in the 2000s driving up the prices of Australian mining exports. The resulting investment boom in mining contributed to the Australian dollar strengthening, which reduced the cost of Australian imports. Combined, this resulted in very rapid growth in the terms of trade, which contributed to the rise in Australian GDP during the recent 'resource boom'.4

Since 2012, Australia's per capita GDP has been falling with the terms of trade. Without a lift in productivity to counteract the fall in the terms of trade, slower per capita GDP growth is likely to prevail in the years to come, relative to the growth that occurred in the period 2000-2010.

  • Figure 3.2 Australia's economic ranking and terms of trade
    Real GDP per capita in 1990 US$ (converted at Geary Khamis PPPs), OECD countries

    This figure shows Australia’s ranking of real GDP per capita among OECD countries in each year between 1950 and 2015. In recent years, despite comparatively low MFP growth, Australia has maintained its position in the rank relative to the other economies. In 2014, Australian economy was ranked fifth in per capita GDP amongst the OECD countries (behind Luxemburg, the United States, Iceland and Norway) and, in 2015, it was forth. These were among Australia’s highest ranking since 1950.

    Source: The Conference Board Total Economy Database, May 2015, http://www.conference-board.org/data/economydatabase/; ABS (Australian System of National Accounts, 2014-15, Cat. no. 5204.0, October 2015).

References

  • Byrne D., Fernald, J. and Reinsdorf, M. 2016. Does the United States have a Productivity Slowdown or a Measurement Problem? Brookings Papers on Economic Activity, March.
  • PC (Productivity Commission) 1999, Microeconomic Reforms and Australian Productivity: Exploring the Links, Commission Research Paper, AusInfo, Canberra.
  • PC (Productivity Commission) 2009, Submission to the House of Representatives Standing Committee on Economics: Inquiry into Raising the Level of Productivity growth in Australia, September.
  • PC (Productivity Commission) 2013, PC Productivity Update, May.
  • PC (Productivity Commission) 2015, PC Productivity Update, July.
  • Thompson, G., Murray, T and Jomini P. 2012. Trade, Employment and Structural Change: The Australian Experience. In: OECD, Policy Priorities for International Trade and Jobs, Paris
  • Topp, V., Soames, L., Parham, D. and Bloch, L. 2008, Productivity in the Mining Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper, December.
  • Topp, V. and Kulys T. 2012, Productivity in Electricity, Gas and Water: Measurement and Interpretation, Productivity Commission Staff Working Paper, Canberra.

Footnotes

  • 1 In order to ensure comparability of international productivity estimates, the Conference Board applied certain modifications to the estimation methods. As a result, the productivity estimates for Australia in this section differ somewhat from ABS estimates. Return to footnote 1
  • 2 In this edition of PC Productivity Update, the reference year of international productivity estimates is 2014. The Conference Board will not publish international productivity data for 2015 until May 2016. Return to footnote 2
  • 3 Changes in Australia's per capita GDP can deviate from changes in the terms of trade. Since 1960, significant deviations happened in three periods: from mid-1970s to early 1980s, between late 1980s and early 1990s and the years leading to the GFC. Return to footnote 3
  • 4 Thompson et al. (2012) observed that, between 2000 and 2010, the combined increase in demand for Australian exports and decrease in the cost of Australian imports - has been a major source of change in the structure of prices for Australian producers and consumers: the price of exports increased nearly 20 per cent, and the price of imports fell nearly 10 per cent (adding up to a 30 per cent improvement in the terms of trade). Return to footnote 4

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