Understanding productivity: Australia's choice

This report explores Australia’s productivity slowdown and the policy measures that are being proposed to address it. There is increasing recognition and agreement among policy-makers in Australia that productivity is a key driver of growth, competitiveness and living standards. But there is less agreement on the sources and measurement of productivity performance, and consequently on the policies that may contribute to a sustainable improvement in performance. The need for such improvement has been sharpened and made more urgent by two separate but related problems that have recently received considerable public attention. The first problem is the impending fall in Australia’s terms of trade from the heights reached during the commodity boom. The unprecedented rise in our terms of trade as a result of increased commodity prices delivered a massive boost to the growth in our national income in the early 2000s, helped to shield Australia from the worst of the global financial crisis and made our economy the envy of the world. However, it masked a second problem which is the underlying deterioration of Australia’s productivity performance since the 1990s. While this problem could be safely ignored, and was ignored in the past, with rising terms of trade taking up the slack, it is now fully exposed by the turnaround in our terms of trade as the commodity cycle runs its course. There were warning signs but a cyclical event was confused by many policymakers and commentators with structural change. The report finds that just as the slowdown was previously ignored, it is now misinterpreted and exaggerated to justify measures that may have little or no relevance to our future productivity performance, and which may themselves have contributed to the slowdown.