Date created:22 January 2002 Last modified: 22 January 2002 Maintained by: John Quiggin John Quiggin
6 December 2001
Note: An arithmetic error has been corrected. As published para 3 referred to a 2.1 per cent decline
Two years ago, when the Australian Bureau of Statistics estimated a mulitfactor productivity growth rate of 2.4 per cent, for the period since the mid-1990s, the rafters rang with acclamation of Australia's 'new' or 'miracle' economy. The estimated growth rate was far better than anything achieved during the 'golden age of the 1960s'.
The data was taken as confirming optimistic estimates of the benefits of microeconomic reform, such as the Industry Commission estimate that 'Hilmer and related reforms' would raise GDP by 5.5 percentage points. Last year, however, the estimate was quietly revised downwards to 1.8 per cent. Estimates for the 1980s were also revised downwards, however, and attention shifted to the apparent improvement from the 1980s to the 1990s, which remained impressive.
The most recent estimates were released during the last week of the election campaign and, having no obvious party-political angle, received little or no media attention. Nevertheless, they are truly startling,. According the ABS estimates, multifactor productivity declined by 1.1 per cent, one of the worst performances in forty years of data.
Let's first look at the most optimistic interpretation of the data. Since 1993-94, productivity growth has averaged abour 1.4 per cent. If we compare this productivity to the average of 0.6 for the period from 1981-2 to 1992-3, we get a net gain of 0.8 per cent per year and a cumulative gain equal to 5.6 per cent of GDP. This just covers the estimated gain from the Hilmer reforms, leaving nothing over for tariff reform, the new tax system, financial deregulation, and so on.
It is now clear, however, that much of the productivity growth since 1993-4 was cyclical and reflected the large stocks of excess capital, such as office buildings, left over from the recession of the early 1990s. As the economy soaked up this excess, capital productivity improved automatically.
This raises a second point. If we ask why the 'recession we had to have' was characterized by such a huge overhang of speculative investment, much of the explanation must relate to the activitiies of the 'entrepreneurs' of the 1980s, such as Holmes a Court, Bond, Elliott and Spalvins.
These entrepreneurs were the products of financial deregulation and, while they appeared successful, were hailed as such by advocates of microeconomic reform. In 1987, for example, an analysis by the Centre for Independent Studies concluded that the activities of 'raiders' such as the Bell Group (controlled by Holmes a Court), Bond Corporation (Bond), Elders (Elliott), and Adelaide Steamship (Spalvins) 'lead to more profitable uses of company assets, and as such they play a vital role in the capital allocation process'.
Third, the measured productivity growth of the 1990s, and to some extent of the 1980s was artificially boosted by the boom in contracting out, and therefore in the "business services' industry As I explain in more detail in the current issue of Agenda, the statistical treatment of business services artificially inflates estimates of total factor productivity growth for the 1990s. The cumulative effect is around 2 percentage points.
Increases in the intensity and pace of work are even more important. It seems reasonable to suppose that on average people are working at least 5 per cent harder for given reported hours than at the beginning of the decade. The loss of two 10 minute teabreaks per day would be sufficient to generate such an increase, and teabreaks are a distant memory in most workplaces.
If work effort has increased by 5 per cent, the growth in labour productivity has been overstated by the same amount. Since labour accounts for about 70 per cent of total inputs, total factor productivity growth has been overstated by 3.5 percentage points. Combining this adjustment with a correction for the treatment of the business services sector wipes out the entire improvement in productivity growth relative to the 1980s and early 1990s.
There is room for debate as to whether increases in measured productivity obtained through increases in work intensity should be regarded as real or illusory. What cannot be denied is that, in the long, this kind of productivity growth is unsustainable, a point emphasised by the most recent figures.
The 'new economy' of the 1990s was, at best, a once-off improvement, offsetting the losses from previous failed instalments of microeconomic reform. At worst, it was a mixture of cyclical recovery and statistical artifact. The idea that the benefits of microeconomic reform can be relied on to insulate us from a world recession is a dangerous illusion.Professor John Quiggin is a Senior Research Fellow of the Australian Research Council, based at the Australian National University and Queensland University of Technology.
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