Current Business Issues in Australia

Australia’s Productivity growth has been on a steady decline over the past decade - Current Business Issues in Australia introduction. Part of Australia’s productivity prosperity is not assured. While the mining sector is expected to continues to thrive for the foreseeable future, many other sectors as well struggling to improve upon the productivity growth in Australia. In the report I highlighted the alternate source for the decline in productivity which has resulted in no real answers as to what is best way forward.

Despite being a simple concepts there is no unique measure of productivity growth being the three most important the demographic, economic and social which are faced over the decade, nevertheless the decline over the last decade broadly in line with the productivity performance. The labour productivity growth over the period of 1989 -90 to 2002 -03 had an average of around 2. 0 per cent but slowed to around 0. 7 per cent in the subsequent period to 2008-09.

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The multifactor productivity performance growth in the last decade has been most the mining, utilities industries and investment where most of the slowdown in Australia’s productivity performance is concentrated. The agriculture, forestry and fishing sectors accounts for almost 80 per cent of the decline in Multifactor production growth between 1998-99 and 2007 -08. However the decline in productivity in the mining and utilities industries account for an important part of the slowdown in accumulated market sector productivity growth between the 1990s and hindmost part of the 2000s.

The growth in labour productivity has been dragged down by weaker multifactor productivity growth. Although Australia’s economic performance during the 2000s has been impressive on many dimensions, especially compared with other advanced economies, productivity is not among them. The consequences of this poor productivity performance have not, become widely apparent masked by a combination of faster population growth (until recently) and most sustained upswing in Australia’s terms of trade in over a century.

In conclusion the sustainability in the higher productivity and faster productivity should provide an ongoing improvement in the standard of living and the quality of life. The growth in productivity will determine the growth in real income progressing to a sustained change in the term of trade that real income growth per hours work can divagate from productivity growth for a period of time. A decline in productivity in Australia over the last decade Page 2 1. INTRODUCTION (Eslaske, 15th August, 2011) Productivity is the simplest measure of how effectively or efficiently a work place, a business or a government agency.

The definition and measurement of productivity have been the topic of research for a variety of disciplines, including accountancy, economics, engineering and operation research. A region or a nation as a whole uses the resource at its disposal to produce goods and services which are in turn valve in the economic growth, in some way by those who consume or use them. At the level of individual workplaces or firms, productivity measure are often expressed in terms of output per unit of a single factor of production, such as land or livestock, some measure of labour input such as a person-hours.

At economy-wide levels, productivity is usually expressed as a measure of value added either per unit of labour input or per unit of labour and capital services inputs. While, conceivably, other factors of production could be included in measure of multifactor productivity which includes environmental factors such as water or energy. To date these have been extremely rare, but they may become more widely used as the policy focus on the use of finite natural resource. (Krugman, 1992) A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.

(Steven, 2009) the sentiment has been echoed more recently by Australia’s most senior policy-maker and adviser to identify productivity as the only real basis for optimism about future income and more recently there is only one source of ongoing higher rate of growth of real per capital incomes and that is higher rates of growth of productivity while observed that in the long run, productivity growth –producing more from the same inputs –is the only sustainable way for the future generations to enjoy higher living standards .

A decline in productivity in Australia over the last decade Page 3 2. PRODUCTION GROWTH ISSUES In Australia, productivity growth helped with the challenges of demographic change, to reconcile potential conflicts between environmental constraints on economic growth and widely-held aspiration for further improvements in living standard and to assist in coping with some of the side-effects of the current issues.

The production in Australia deals with three of the most important demographic, economic and social challenges which are faced over the decades. First is the demographic change which involves the population age contributing to the population growth and participation in employment to which has inevitably decline the rate of economic growth in Australia. Secondly, the potential conflict between environmental and ecological constraints on economic growth associating with mitigating or adapting to climate change.

This growth prospects are constrained by limited supplies of finite natural resources; higher productivity by defining means producing more goods and services from smaller quantity of inputs which intend offers a means of reducing the adverse impacts on economic growth and material living standards. Thirdly, the businesses and jobs sector of the economic have a potential factor on the economy as well.

Although social resources will provide substantial income and wealth for Australia, it is likely to result in a higher exchange rate for Australia dollar which undermine the competitiveness of trade exposed sectors of the economy such as manufacturing, tourism, higher education and agricultural sector. Many retailers are also facing heightened competition from online retailers located in other countries. There is not a great deal that public policy can or should do directly to shelter these sector from the pressure arising from

the stronger Australian dollar. The stronger the currency which is part of the adjustment required to accommodate the expansion of the resource sector can be achieved in a non-inflationary way. The best way that these sectors can cope with these pressures is by achieving higher productivity, so that they can remain viable while making fewer factor inputs and these issues has affected the productivity in Australia and has lead to the decline in the productivity. A decline in productivity in Australia over the last decade

Page 4 3. PRODUCTIVITY PERFORMANCE IN THE LAST DECADE When analysing development in productivity growth in Australia it is well established with mining industry. The implication from monetary policy, changes to the trend rate of productivity growth is most relevant. In this report I will abstract from short-term volatility looking at average growth rate over the productivity growth cycles identified by the Australia Bureau of Statistics (ABS), includes data covering part of an incomplete productivity growth cycle.

Although using an incomplete cycle risk including some cyclical element in the estimates of trend growth, looking at the nature of monetary policy means that it is necessary to attempt to update estimates of the trend in real time. (ABS, 2008b) The 1990s report was used to refer to the period covering the two ABS growth cycle between 1993/94 and 2003/04 refers to the between 2003/04 and 2010/11. The labour productivity for the Australian economy grew at an average annual rate of 1. 5 per cent over the ten years to 2009/10 compared with 2.

1 per cent per annum over the ten years to 1999/2000, 1. 4 per cent annum over the ten years to 1989/90 and 2. 8 per cent per annum over the ten years to 1979/80. The Multifactor productivity of the Australian economy as a whole was unchanged over the course of the 2000s but declined at a 0. 2 per cent average annual rate, compared with growth averaging of 1. 6 per cent per annum in the 1990s. 0. 7 per cent annum in the 1980s and 1. 5 per cent per annum in the 1970s. The latest series of ABS estimates of multifactor productivity (ABS 2010a)

goes back only to 1994/95. Hence, the rates of multifactor productivity growth cited for the 1990s, 1980s and 1970s have been derived from ABS (2008b, Table 13). A decline in productivity in Australia over the last decade Page 5 Australia’s productivity growth slowed in the 2000’s compared with the very strong productivity growth of the 1990s (Table 1). The slowdown is evident of the economy, but it was most appropriate focused on the market sector, which accounts for around two-thirds of total output.

Inputs and outputs in the market sector independently measure so that productivity outcomes can be calculated directly. But, for the non-market sector, including large parts of the health and education industries, there are no market transactions for output, making it difficult to measure output and therefore productivity- independently of inputs. Growth in labour productivity is typically higher than multifactor productivity because it includes the additional labour productivity generated by capital deepening as the capital labour ratio grows over time.

Decomposing labour productivity growth into capital deepening the multifactor productivity growth indicates that the slowdown in labour productivity growth has been a result of slower growth in multifactor productivity. The contribution of capital deepening to labour productivity growth was somewhat larger in the 2000’s than in the 1990s. This is because investment and capital accumulation were quite strong in the 2000s, largely reflecting the increase in the share of resources used by the rapidly expanding and capital-intensive mining and utilities industries.

However, despite the high level of investment in these two industries, capitals deepening within these industries were suspended during the period because there was also a very large increase in labour inputs. Outside of these industries, the pace of capital deepening was around the same as in A decline in productivity in Australia over the last decade Page 6 the earlier periods with the slowdown in labour productivity growth entirely due to the slowing in the multifactor productivity growth; vice versa labour and productions were both a major factor in dominant industries.

The deterioration in multifactor productivity growth has been most in the mining, utilities industries, with both industries experiencing a large fall in the level of multifactor productivity (table 1). Most of the slowdown in Australia’s productivity performance is concentrated in these sectors: mining; and electricity, gas, water and waste services (Figure 1). The Productivity Commission (2010,p 68) estimates that these sectors and the agriculture, forestry and fishing sectors accounted for almost 80 per cent of the decline in Multifactor Production growth between 1998–99 and 2007–08.

Multifactor Production growth in agriculture has remained positive (Treasury, 2009, pp. 51-52). 3. 1 MINING In the mining industry, the fall in productivity is partly a natural consequence of the rapid run-up in commodity prices, which has increased the profitability of more marginal deposits. Higher commodity prices justify more difficult and costly extraction of previously undeveloped resources, which becomes necessary over time as developed deposits are depleted. The very rapid pick-up in A decline in productivity in Australia over the last decade Page 7

commodity prices has also justified an unprecedented increase in capital investment in the industry. This growth in measured capital inputs has detracted from measured productivity owing to the interval (of some years) between the initial investments, the completion of projects and the utilisation of all the new capacity. In effect, the productivity developments in the mining industry are best characterised as a movement up the industry’s supply curve, rather than an exogenous shift in the supply curve related to some fundamental change in underlying productivity.

(Figure 2) present the indexed of trend over the 1990s and 2000s for capital productivity, labour productivity and the multi factor productivity in the Australian mining sector. Labour productivity, capital productivity and the multifactor productivity growth rates fell by -5. 6,-4. 1 and -4. 5 per cent a year respectively over the period 2000 -01 to 2009- 10 Over the 2000s the use of labour and capital increased at the rate of 6 and 5 percent a year respectively. However, output only grew at about half the growth rate of the inputs or by less than 3 percent a year.

As a result, multifactor productivity, labour productivity and capital productivity all declined over the decade. An important reason why mining output did not increase as fast is the inputs of the lags in output associated with capital investments. This can be seen in (figure 3), which traces the trends in the labour, capital and output indexes with two years decrease to both inputs. This figure shows that output as measured by gross valued added and decreased capital grew steadily and in an apparently stable relationship over the period 1990-91 to 2009 -10 A decline in productivity in Australia over the last decade

Page 8 A second reason why mining output may not fully respond to input growth is that mining is based on the size and quality of ore bodies. When mineral prices are high, as they have been in the past few years, mineral companies are profitably able to extract lower grades ores and ores that are more costly to extract. For example, when the easily accessed resources are depleted, extraction of resources that are harder to access is required to maintain or increase production. To extract these less accessible resources without reducing production levels requires more labour and capital inputs. 3. 2 UTILITIES

There has been investment to improve the reliability of supply in the electricity and water industries, which has only made a marginal contribution in terms of additional measured output. The recent investment in desalination plants with the return to high rainfall in recent years are not currently being utilised fully, but will provide a source of fresh water in the event of future droughts into providing a source of water for inhabitant in the some part of Australia. Similarly, some of the investment in the electricity sector has been associated with the need to meet an increase in peak demand relative to base-load demand.

The environmental considerations have required new investments in waste treatment and low carbon emission electricity generation; while these investments provide environmental benefits, they also decrease measured productivity and increase the unit costs of production. In other words, some of the decline in productivity in the utilities sector can be attributed to measurement issues; the environmental benefits and more reliable supply are not measured as part of the industry’s output, but considerable resources are allocated to producing them.

A decline in productivity in Australia over the last decade Page 9 3. 3 INVESTMENT The fall in the level of productivity in the utilities industry is also related to large investments, which have been necessary to deal with some of the fundamental structural challenges facing the industry, but these investments have not necessarily resulted in higher quantities of measured output. (Treasury, pp.

47-66) Part of the surge in investment over recent years reflects a significant catch-up that has required rapid growth in utilities’ workforces after a period in the 1990s when investment and employment in the industry were falling, to emphasise the contribution of especially sharp declines in productivity performance have tended to economy: agriculture, forestry and fishing, mining and electricity, gas water and waste service estimates that these sectors account for almost 80 precent of the decline in multifactor productivity growth between the 1998/99 to 2003/04 and 2003/04 to 2007/08 growth cycles.

A decline in productivity in Australia over the last decade Page 10 4. 0 THE DECLINE IN PRODUCTIVITY The decline in productivity in the mining and utilities industries account for a significant part of the slowdown in aggregate market sector productivity growth between the 1990s and the latter part of the 2000s. However, almost all remaining industries have also experienced a slowing in productivity growth.

Although not as pronounced as the decline in productivity growth for the market sector as a whole, the slowdown in productivity growth excluding mining and utilities is nevertheless notable, with average labour and multifactor productivity growth around 1? percentage points lower than in the 1990s. There is no denying that both labour and multifactor productivity have fallen sharply in the mining and utilities sector over the past decade. The mining sector has gearing up for a huge expansion in response to the demand for energy and minerals.

To this very end, hours worked in the mining industry have more than doubled over the past decade, while the production capital stock had an increase of 80 per cent. Yet the largely reflecting the long lead time entailed in bringing modern mineral projects to full production, the output of the mining sector has risen by 37 per cent over this period 4. 1 GROWTH IN THE LAST DECADE The surge in sales in recent years has been concentrated in the mining and utilities industries, investment outside of these industries was also strong over most of the 2000s.

The growth in labour productivity has been dragged down by weaker multifactor productivity growth. This suggests the general slowdown in productivity growth cannot be attributed to weak investment, but to be associated with a slowdown in the pace of adoption of productivity-enhancing technological innovations or less rapid improvement in the efficiency with which capital and labour are employed. Moreover, the broad-based slowing in multifactor productivity growth within most industries suggests that much of the slowing is likely to be associated with general developments affecting all industries (Graph 3).

A decline in productivity in Australia over the last decade Page 11 Sources: ABS (2010b, 2011b); Eslake and Walsh (2011) 4. 2 TECHNOLOGY An important driver in the growth of production is technology. Technology improvements may be needed from overseas or develop domestic through innovation. In both cases firms will typical need to undertake investment in purchases new capital goods and knowledge or undertake research and development in order to achieve productivity improvement.

Technology quantity improvement should be accounted for industry in Australia. The introduction of new technology associated with some fundamental reorganisation of production process or development of a genuinely new technology can benefit greater than the research cost required to build it. That productivity growth has slowed across a large number of developed economies in the 2000s provides some indication that there may have been a slowing in the pace at which the technological frontier is expanding.

Data on productivity growth for members of the Organisation for Economic Co-operation and Development (OECD) indicate a fairly universal slowing in productivity growth in the 2000s compared with the 1990s, with 19 of 25 countries experiencing a slowdown in productivity growth, but it suggests that part of the slowdown may be related to common global factors, such as the pace of technological innovation and adoption.

The apparent slower expansion of the technological frontier does not seem sufficient to explain all of the slowing in Australia’s productivity performance. An indication of this is that the slowdown in Australia’s productivity growth in the past decade has been greater than the average slowdown in OECD countries, representing the global productivity frontier, has seen a slowdown in productivity growth over the decade. A decline in productivity in Australia over the last decade Page 12 4. 3 INNOVATION

The introduction of new good and service, new ways of producing or distributing existing goods and services or new ways of managing existing processes for producing or distributing good and services has been recognised as a critically important source of productivity growth. (Cutler, 2008)The Cutler review of Australia’s National Innovation System concluded that the rate of improvement in Australia’s innovation effort had stalled over the past decade and some indicators suggest that there has been an absolute decline recently.

However, Australia’s stalling innovation effort will not necessarily be revived simply by the provision of more tax breaks or other subsidies for research and development expenditure. (Dodgson, December 2009)As has been argued, modern innovation policy has to recognise, explicitly, that market mechanism can be used effectively as device that permit flexibility, section and change in a complex evolutionary economic systems. It is widely recognised that the weakest link in Australia’s innovation chain is the commercialization stage.

It may be a direct result of the low level of collaboration among Australian firms, something that could in turn be an unintended consequence of Australia’s trade practices Laws and which may be made worse by proposed legislation against price signalling but investigation of the potential for public policy reforms to improve Australia’s innovation effort. 4. 4 EDUCATION There appear to be significant potential for productivity gains from improvements to Australia’s education and training systems.

(Treasury, 210a, pp. 4-48) A more highly educated workforce is likely to be more productive and to adapt to changing circumstances something which requires not increasing the number of people with higher level qualification but also ensuring that all Australian have foundation skills. (Treasury, 2008) there hasn’t been evidence of that happening. Australia’s upper secondary attainment rates are lower than several other OECD countries. (OECD, 2010b, p.

139) It been recognised for some time that younger Australian from lower socio-economic backgrounds tends to lag at least one year behind the Australian average and more than two years behind students in the highest socio-economic quartile. (Jensen, 2010, p. 12) The results from the latest OECD program for international student Assessment (PISA) suggest that the performance of Australian 15 year’s old student has declined significantly over the past decade despite a 33% real increase in public expenditure and 54% real increases in private expenditure, on education during this period.

A decline in productivity in Australia over the last decade Page 13 5. CONCLUSION, RECCOMMENDATION & IMPLEMENTATION I strongly believe that higher productivity and faster productivity growth, provide the most sustainable means of delivery ongoing improvement in standard of living and the quality of life and represent at least part of the solution to some of the more important medium to longer-term challenges confronting Australia today, it is not the intention to suggest that the goal of attaining faster productivity growth should override all economic and social objectives.

This is because productivity is defined as real gross domestic product per unit of inputs of factor of production (labour and capital) and that GDP is an inadequate and incomplete measure of wellbeing in its broadest sense. Although Australia economic performance during the 2000s has been impressive on many dimensions, especially by comparisons with other advanced economies, productivity is not among them. The

inevitable result of what has now been the longest period of more-or-less uninterrupted economic growth in more than a century, accompanied by falling unemployment, rising real incomes and rising personal wealth, the sense that sustaining high rates of productivity growth is an important objective for Australia and for individual businesses . For sectors of Australia economy that are adversely affected by some of the side effects of the mining boom or by the more frugal behaviour of Australian household and possibly for the broader Australian economy.

If the global economy enters a renewed downturn with limited means on the part of economic policy-makers in the major advanced economics to ameliorate using the tools that have become customary over the past 70 years – will prompt a renewed focus both among policy-makers and business leaders on the objective of raising both the level of productivity and the rate of productivity growth. The consequences of this poor productivity performance have not, as yet, become widely apparent, because they have been masked by a combination of faster population growth and the most sustained upswing in Australia terms of trade in over a century.

In the nutshell, the growth in productivity is the major determinant of growth in real income, but sustained changes in the terms of trade mean that real income growth per hours worked can diverge from productivity growth for a period of time over the 1990’s strong growth in productivity was the primary source of increases in real incomes. A decline in productivity in Australia over the last decade Page 14 BIBLIOGRAPHY ABS. (2008b). Australian system of National Accounts. ABS Cat No 5204. 0. ABS. (2010a). Australian System of National Accounts, 2000-10.

ABS Cat No 5304. 0. ABS. (2010b). Experimental Esimate of Industry Multifactor Production, 2009-10. ABS Cat No5260. 055. 002. Cutler, T. (2008). Venturous Australia: building Strength in Innovation. Melbourne: Culter & Company. Dodgson, M. J. (December 2009). System Thinking, Market Failure and the Development of Innovation Policy : The Case of Australia. In working Paper No. 397. University of Cambridge for Business Research. Eslaske, S. (15th August, 2011). Productivity : The lost Decade. Jensen, B. (2010).

Future Compromised by failures in Education System. The Australian. Krugman, P. (1992). The age of Dminished Expectations. US Economic policy in the 1980s, paperback edn, The MIT press, Cambridge. OECD. (2010b). OECD Economic Surveys: Australia 2010. Paris: OECD Publishing. Statistics), A. (. (2010). Research and Experimental Development. All Sector Summary. Steven, G. (2009). Challenges For Economic Policy. Address to the Anika foundation Luncheon supported by Australian Business Economists and Macquarie Bank,Sydney, 28 July. Topp V, L. S.

(December 2008). Productivity in the Minng Industry : Measuremnt and Interpretation. Productivity Commission Staff Working Paper. Treasury, A. (2008). Boosting Australia’s Productive Capacity: the role of Infrastructure and Skills. Canberra: Budget Strategy and Outlook. Treasury, A. (2009). Rasing the Level of Productivity Growth in the Australia Economy. Economic Roundup. Treasury, A. (210a). Australia to 2050, Future challenges, Commonwealth of Australi. Canberra. A decline in productivity in Australia over the last decade Page 15 APPENDIX

Graph 1: Five years rolling average of labour productivity of Multifactor productivity Table 1: Decomposition of Trend Productivity Growth Figure 1: MFP (Multifactor Productivity) growth in Australia selected sectors, average annual growth, 1985-86 to 2009-10 Figure 2: Labour productivity, capital productivity and Multifactor Productivity in the Australia mining sector 1990-91 to 2009-10 Figure 3: GVA (current year), labour (lagged two years) and capital services (lagged two years) in the Australia mining sector, 1990-91 to 2009-10 A decline in productivity in Australia over the last decade Page 16

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