Tackling the root of Australia’s productivity problem to unlock prosperity

Over the past several years, CEOs have come and gone at an increasing rate. Firms are replacing under-performing executives with those that can “do more with less” in a tough economic climate [1]. But what does it take to lift productivity? Do leaders in business and government really have a handle on the matter given the persistence of the productivity problem in Australia?

Key Takeaways
• Sustained productivity growth is essential for improving living standards and ensuring economic prosperity in Australia.
• Addressing root causes and underlying beliefs is crucial to overcoming the persistent productivity problem.
• Immediate, actionable steps for businesses can lead to significant improvements in productivity and resilience.

What is productivity?

Productivity is a measure of the efficiency by which inputs (like labour and machinery) are used to produce outputs (goods and services). It measures the amount of output produced per unit of input. Productivity growth enables more or better-quality goods and services to be produced with the same level of inputs, boosting economic growth.

The two key measures of productivity in Australia. The first, labour productivity, is output per hour worked. There is a strong long-term relationship between labour productivity and wage growth. The second is multi-factor productivity, which is output per unit of labour and capital. Multi-factor productivity gives a better sense of efficiency improvements achieved by the adoption of technology.

Low productivity growth has eroded our prosperity

Productivity is a key driver of living standards and prosperity. Unfortunately, Australia hasn’t enjoyed sustained growth in productivity for the better part of a decade.

Over the past 20 years, labour productivity growth averaged just 1.2% per annum. Compare this with the annualised growth rate of 2.1% in the 1990s to mid-2000s. This loss of productivity means Australia’s GDP per capita is roughly 20% less than might otherwise have been the case [2,3].

Thus, implementing productivity-enhancing reforms across the public and private sectors remains a top economic priority for Australia.

Poor productivity puts our economic transition at risk

As a raft of new technologies emerge, and the transition is made to clean energy, economies are being transformed. Locally and globally, supply chains are evolving.

To remain relevant, productive and competitive, public and private organisations must embrace new technologies and reskill their workforces. Those that move quickly are likely to gain a competitive advantage and reap the rewards.

Adopting new technologies and skills requires upfront investment. To fund this transition at least cost, organisations and the economy must be highly productive.

Slower productivity growth limits businesses’ ability to invest and increase profits and wages without raising prices, thus reducing competitiveness.

Low productivity growth also constrains economic growth, reducing tax revenue relative to GDP. This places further pressure on the public purse at a time when defence, education, health and welfare services need greater investment and the political capital to make tough decisions is in short supply.

In short, failing to improve the productivity of the Australian economy puts our short and longer-term prosperity at risk.

We’ve admired the productivity problem for years…

Over the past decade, much time and effort has been spent admiring the productivity problem. The institutionalisation of productivity inquiries and increasing data collection has fuelled the debate.

Several substantial and worthy reports have been issued in recent years, key among them:

• The Productivity Commission’s “5-year Productivity Inquiry: Advancing Prosperity” (2023)
• Reserve Bank of Australia’s “Doing Less, with Less: Capital Misallocation, Investment and the Productivity Slowdown in Australia” (2023)
• Business Council of Australia’s “Seize the moment: A plan to secure Australia’s economic future” (2023), and
• “Understanding productivity in Australia and the global slowdown” (2022) from the federal Treasury.

Six factors are routinely cited as the cause of declining productivity growth in Australia, including:

1. Declining business competition and dynamism (i.e. rate of business creation, growth, adaption, exit)
2. Weak business investment in research, development (R&D) and innovation
3. Slower diffusion of innovation and technology adoption
4. The shift toward a service-based economy in which productivity uplift is harder to achieve
5. An increasing regulatory burden and bureaucratisation
6. Declining terms of trade following the end of the (2003-2013) mining boom

Yet, the reasons for persistence of the problem remain a source of debate, as do the solutions.

The reasons for our weak productivity – particularly over past three years – are not well understood and have left many economists puzzled. (CEDA, 2024)

…while threats to productivity growth continue to accumulate

Business and consumer confidence is critical to investment. So, it’s not surprising that ongoing policy uncertainty and political partisanship coupled with higher interest rates and trade disputes have undermined the investment required to improve productivity.

Furthermore, geopolitical tensions and supply chain issues put trade at risk, threatening access to productivity-enhancing machinery, which is a major component of Australia’s imports [7].
Growing cyber threats and measures to mitigate climate change also divert resources from more productive pursuits.

Solutions to our productivity problem have been identified

Clearly, businesses and governments both have important roles to play in improving productivity growth. The generally agreed endeavours to resolve the productivity problem are outlined in Table 1, although few have been effectively implemented [6,8,9].

Many recommendations involve multiple levels of government and support from the private sector. Thus far, political, structural, and coordination challenges appear to be hindering implementation of many reforms [6]. And business investment has slowed since the global financial crisis (GFC) despite growth in total corporate profits (particularly within the mining sector) [10].

Only recently has there been some reallocation of investment towards intangible assets (knowledge and skills) and a broadening of innovation beyond traditional R&D [5] reflecting the centrality of knowledge-based assets in the emerging economy.

But are we tackling the wrong problem?

With low productivity growth persisting over many years, we should ask, “Are we tackling the wrong problem?” Have we really got to the heart of the problem?

Delving more deeply into the causes of low productivity growth gets us closer to the root causes (as illustrated from left-to-right in Figure 1). Note that most of the current “solutions” tend to address the more symptomatic (rather than causal) features of the productivity problem. Typically, such solutions are unlikely to stick or deliver enduring benefits because the root causes of the problem have not been resolved.

We find that biases in favour of the status quo and short-termism are plausible root causes. Notably, CEDA [11] reports that “firms are generally too tied up with business-as- usual to lift their eyes and focus on longer-term objectives of building capabilities and comparative advantage”.

Deep beliefs about our economy must evolve

But wait! The real root causes of our productivity problem are not yet revealed. Only by delving into the fundamental ideas and beliefs that underpin organisational choices, structures, and actions can we fully understand the cause of our productivity problem.

Table 2 outlines some of the core beliefs that are likely to underpin the root causes in Figure 1.

It’s important to recognise that these core beliefs have been central to past success and the exceptional growth we have enjoyed over the past 50? Years. But it can also be true that these beliefs are no longer useful, are under threat, and may even be impeding future prosperity.

For example, the belief in the value of global trade and economic inter-dependence is now coming under scrutiny with trade weaponisation and reducing prosperity of the middle class in developed countries. Some revision of this belief may be necessary and useful to fuelling investment and productivity growth.

So, it’s time to reflect, recalibrate, and articulate the ideas that will underpin the emerging economy and future we all want to create.

We are a lucky country but don’t take decisive action. We need to reverse the malaise and Australians do not have a second to waste (BCA, 2023)

Charting a productive path forward

We can’t reasonably expect to resolve the persistent problem of low productivity growth without tackling the root causes and belief structures. So, in the near term, there appear to be two productive courses of action that could be taken.

The first is talking openly and maturely about the beliefs that sustain the productivity problem (recognising that often these beliefs are hidden or subconscious). This could take the form of a national dialogue jointly enabled by government and peak bodies representing business and community interests. The dialogue would extend to address:

• a shared vision and agenda for productivity in Australia,
• the urgency for a ‘team Australia’ effort to improve productivity growth,
• measures of productivity that are more relevant and representative to the emerging economy,
• the role of government and business in an outcome-driven innovation and R&D agenda,
• the route the more expansive sharing of de-identified data (“the new oil”), and
• acknowledgement that shifting ideas are a normal and healthy part of an evolving society and economy.

The second course of action offers immediate benefits to business productivity and resilience. While relevant to all organisations, those in the least productive and vulnerable sectors should be a focus. The actions include:

• Recognition by business leaders of the centrality of new ideas to future growth
• Improvement of strategy, problem-solving and change skills, particularly in the C-suite
• Greater information sharing and collaboration with stakeholders in industry ecosystems
• Fast identification and efficient adoption and integration of new technologies
• Attention to real-time and adaptive learning, especially in “capital light” and service sectors
• Relentless simplification of organisational structures and processes to improve productivity and adaptability, enabling reallocation and recombination of resources to address emerging opportunities.

Conclusion

Addressing Australia’s productivity problem requires a shift from superficial fixes to tackling the deeper, root causes of low productivity. By fostering a national dialogue on the beliefs and ideas that underpin our economic choices and committing to immediate, actionable steps for businesses, Australia can pave the way for sustainable productivity growth. This will not only enhance our economic resilience but also ensure long-term prosperity for all Australians.

---

References

[1] Euan Black (2024) Why underperforming executives need to be worried, Australian Financial Review, 1 July.

[2] Reserve Bank of Australia, Bulletin, September 2023.

[3] Productivity Commission Annual Productivity Bulletin 2024.

[4] Angelina Bruno, Jessica Dunphy and Fiona Georgiakakis (2023) Recent Trends in Australian Productivity, Bulletin – September 2023 Australian Economy, Reserve Bank of Australia, Sydney.

[5] CEDA (2024) Boosting Dynamism: What Australia can learn from other nations, Committee for Economic Development of Australia, Melbourne.

[6] Productivity Commission (2023) 5-year Productivity Inquiry: Advancing Prosperity, Commonwealth of Australia, Canberra.

[7] Based on ABS trade data on DFAT STARS database and ABS catalogues International Trade in Goods (Sep-2023), Balance of Payments and International Investment Position, Australia (Sep Qtr 2023) & Australian National Accounts: Tourism Satellite Account

[8] John Daley (2021) Gridlock: removing barriers to policy reform, Grattan Institute, Melbourne.

[9] Gary Banks (2024) So-called ‘reform’ is working against the productivity objective, Australian Financial Review, 17 April.

[10] Ronald Mizen (2022) How record mining profits skew the wage debate, Australian Financial Review, 26 July.

[11] Melissa Wilson, Renu Agarwal, Wen Li, Christopher Bajada (2023) Dynamic capabilities: how Australian firms can survive and thrive in uncertain times, Committee for Economic Development of Australia (CEDA), Melbourne.

[12] BCA (2023) Seize the moment: A plan to secure Australia’s economic future, Business Council of Australia, Melbourne.