Building better productivity to power a dynamic business environment

When it comes to the importance of productivity, US economist Paul Krugman is often cited: “Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” 

Less-noted is the context in which he wrote this. In his book, The Age of Diminished Expectations, he worried that as a society the US had, by the 1990s, accepted lower rates of growth and was reluctant to take on ambitious policy change. 

This anxiety will be familiar to anyone who has observed the Australian economy over the past decade. Productivity growth in Australia averaged just 1.2 per cent over the 2010s and the post-pandemic performance has been even worse. Real wages have stagnated and we have fallen behind international peers in our adoption of new technology, according to Treasury research. 

The AICD’s latest Director Sentiment Index, released last month, revealed that productivity growth as a concern has risen sharply for AICD members over the past year.

As a nation, we have enjoyed the tailwinds of strong commodity prices and favourable terms of trade to maintain our living standards. But we can’t rely on high commodity prices forever. 

As Treasury’s latest Intergenerational Report showed, we have to raise expectations for our productivity performance if we are to prosper in the future. 

A team sport 

Improving the national productivity performance should be seen as a team sport with both the government and private sector having a role to play. 

As Productivity Commissioner Danielle Wood said in these pages, while there is “no silver bullet”, there is “a series of things governments can do to make it easier and faster for businesses to adopt new technologies when they come, to have the enablers in place around training, and the skilled workforce, and to ensure we don’t have too many regulatory barriers”. 

Creating an environment that encourages sensible risk-taking and investment is particularly important from the perspective of business. 

The Productivity Commissioner pointed to the regulatory burden as a particular problem. “Regulation has a purpose, but you get a layering effect and it can feel overwhelming... You must keep talking to businesses, finding out which [regulations] are excessively burdensome or unnecessary — and trying to pull things off the books where they no longer make sense.” 

Regulation — in particular, new regulation — can be a barrier to productivity growth and many directors feel the regulatory burden is increasing. 

In the latest Director Sentiment Index, 57 per cent of directors say it is the main factor affecting their board’s risk appetite. To their credit, both sides of politics have recognised the critical importance of productivity growth to national welfare. 

Productivity growth is not a zero-sum game. Productivity gains have historically translated into broad economic and social benefits. The focus should be on crafting a productivity agenda that transcends interest groups, benefiting society as a whole. 

In addition, the short and variable election cycle at the federal level makes it difficult for governments to set their sights on the long term, which is key to a productivity-enhancing agenda. While the appetite for constitutional change may be low now, a bipartisan discussion around fixed four-year terms to enhance our national governance would be a step in the right direction.