Chapter 4 Productivity in other nations
4.1
In assessing the productivity performance of other nations, a
distinction should be drawn between the aggregate productivity level and
the aggregate productivity growth rate. There are lessons for Australian
policy makers when looking at both.
International trends in developed countries
4.2
Productivity has grown significantly since it began to be closely
monitored as an economic measure in the 1960s. However, MFP growth has
deteriorated over the last decade in the major OECD economies, with potential
impacts on the real economy over and above the impacts of the Global Financial
Crisis.[1]
4.3
The figure overleaf illustrates average MFP growth among major OECD
nations in recent years.
Figure 4.1 MFP growth in selected OECD countries(a),
1985-2007(b)
Average
annual growth rate
Source Productivity
Commission, Submission no. 20, p. 12. Original data source: OECD Stat
(database)
(a) Selected countries
are those for which data are available (b) closest available years. To 2006 for
Italy,
Japan
and Sweden, to 2005 for Denmark, Finland, Netherlands and the United Kingdom, to
2004 for Belgium, 1989-2006 for New Zealand, 1990-2006 for Spain.
International productivity leaders this century
4.4
A number of countries stand out for their exceptional productivity
levels, or exceptional productivity growth. Unique features of these economies
are explained below.
The United States of America
4.5
The United States became the world’s ‘productivity leader’ early in the
20th century. It achieved and maintained this position:
…as resources shifted away from its less-productive
agricultural sector and as it accumulated knowledge and capabilities that led
to the development and diffusion of major technological, management and
organisational advances.[2]
4.6
It can still be considered as the productivity leader on an aggregate
level, despite being overtaken by countries such as Norway. The countries which
have overtaken the United States have done so due to industry mix or employment
policies, rather than through technological factors.[3]
Professor Quiggin told the inquiry that the United States is still the frontier
country:
It is important to remember that the US is not, in terms of
these productivity measures, the highest measured country in output per hour.
Some European countries are significantly higher. To my mind, I do not think
that says that those countries are for example technologically ahead of the US.
It is just a reminder that that productivity data, especially in the context of
international comparisons, needs to be taken with a grain of salt.[4]
4.7
A Productivity Commission (PC) Staff Working Paper projected that
Australia is unlikely to reach the productivity levels of the United States in
the coming decades.[5] This is due mainly to
productivity improvements associated with ICT manufacturing, which Australia is
not substantially engaged in; the additional human capital advantages enjoyed
by Americans due to their higher average levels of education; and constraints
associated with our remoteness from world markets.
Figure 4.2 Australia chasing the productivity frontier
Australian labour productivity as a percentage of the United
States level, 1950 to 2008
Source Productivity
Commission, Submission no. 20, p. 13.
Norway
4.8
Norway has been at the front of the productivity frontier since 1991,
but it has natural endowments in gas reserves, with mining (based on extraction
of oil) contributing around 20 per cent of total output.[6]
This has created a high productivity climate without significant government
intervention.
4.9
However, such an industry mix and policies constraining employment mean
that Norway’s high productivity has been achieved with low labour utilisation,
that is, the number of hours worked per head of population is relatively low.
Finland
4.10
As shown in Figure 4.1, Finland had the highest MFP growth of selected
OECD countries between 1985 and 2007.
4.11
Finland has made significant investments in human capital, which as the Department
of Education, Employment and Workplace Relations noted, has led to very strong
results in standardised international students tests.[7]
4.12
The strength of the outcomes produced by the Finish education system was
shown by a McKinsey study in 2009. It argued that had America closed the gap in
achievement in its schools with countries like Finland and South Korea between
1983 and 1998, GDP would be 9 to 16 per cent higher.[8]
Singapore
4.13
Singapore has high rates of economic growth and productivity, which Professors
Kuruvilla, Erickson and Hwang attribute to the success of the Singapore Skills
Development System (SSDS).[9]
4.14
The SSDS is described in Chapter 6.
4.15
Mr Michael Rice gave evidence to the committee at a public hearing about
Singapore’s focus on education to allow it to bridge the productivity gap in
manufacturing:
…my colleague Dr Brian Lloyd and I visited Singapore, and we
had the opportunity to meet the secretariat for the minister for industry,
technology, and trade… Because of my interest in engineering supply and demand,
I said, ‘What are you doing about engineering graduations? This was quite some
years ago. He said, ‘We are going to increase them to a level where two per
cent of our workforce have engineering qualifications.’ I said, ‘Why?’ and he
said, ‘Because that is where Germany is, that is where America and Japan are,
and we want to be there too. Then I said, ‘Are you going to achieve that?’ and
he said, ‘Yes.’ And they did—by the year 2000.[10]
France
4.16
Figure 4.1 shows that France has achieved sound MFP growth. However,
labour utilisation dropped dramatically in the 1970s.[11]
The OECD recently stated that France has one of the highest minimum costs of
labour among OECD countries, as well as employment legislation which
discourages older workers from staying in the workforce. Both contributed to
the low labour utilisation outcome.[12]
4.17
Low labour utilisation brings about undesirable social consequences;
this is unlikely to be a successful means of raising productivity in a country
like Australia.
Productivity in developing economies
4.18
Labour productivity in the emerging economies of Brazil, India, Indonesia,
China and South Africa has been estimated to be substantially below the levels
in the upper-half of the OECD countries. The productivity gap varies from 55
per cent (South Africa) to 90 per cent (India) lower than the richest OECD countries.[13]
The OECD has suggested that this productivity shortfall can be explained
primarily by human capital and physical infrastructure shortfalls.[14]
4.19
It should be borne in mind that productivity statistics for developing
countries are difficult to find, and with measurement methodologies varying
widely, results may be questionable. Accordingly, drawing comparisons is
difficult.
China and India
4.20
The OECD estimates that total factor productivity in China grew at 4.4
per cent in the period 2005 – 2008.[15] Future productivity
growth will be spurred by the trend shift from the low-productivity
agricultural sector and improving education levels.[16]
4.21
The OECD cited a study by Bosworth and Collins (2007) which showed that average
total factor productivity growth in India increased from 1.1 per cent from
1978 – 1993 to 2.3 per cent from 1993 – 2004. Poor infrastructure support from
government, low educational attainment and inflexible labour markets are
identified as the impediments to Indian productivity growth.[17]
4.22
China and India are still experiencing large-scale industrialisation and
as such have the ‘benefit of backwardness’; that is, it is easier for an
economy to grow fast if it is catching up than if it is near the technological
frontier.[18]
Problems with international comparisons
4.23
Drawing conclusions from comparing Australian productivity levels with
other countries is problematic for two reasons: differences in measurement
methodology; and economic differences: in economic structures, industry
composition, comparative advances, regulatory settings, and cultural and social
factors.
4.24
The PC submitted that useful comparisons can only be drawn with the
United States:
These comparability issues mean that cross time comparisons
are best made with the labour productivity 'frontier' country alone. The United
States is widely regarded as representing the frontier.[19]
Differences in measurement
4.25
Unlike GDP measurement, the methodologies used in productivity
measurement are not mature. While there are best practice methodologies, there
are not standard methods in place. This makes benchmarking Australian
productivity against other countries problematic.
4.26
This issue was discussed in detail in Chapter 2.
Economic differences
4.27
Australia, like all others, is a unique economy. Our industry
composition (or industry mix) and comparative advantages (such as mining) are
different in nature and scale to other economies. Taxation policies and regulatory
settings are unique, and changes to these occur on different timeframes to the
rest of the world.
4.28
Further, measurement issues arise where countries are at different
stages in the business cycle and significant exchange rate fluctuations.[20]
4.29
Social and cultural factors also impact upon the options open to
industry and government to boost productivity. For example, policies which lead
to low labour utilisation (and hence high unemployment) are unlikely to be
acceptable to the Australian community, even if they provide significant
productivity benefits.
What can we learn from other nations?
4.30
Productivity measurements in other countries are most useful for
observing the outcomes of particular policies, and how those policies impacted
upon productivity growth. It is worthwhile learning from the strengths of other
countries’ successful strategies.
4.31
Australia should note the productivity outcomes of policies which are
relevant in the Australian context and look to countries whose productivity
challenges are relatively similar to ours.
4.32
In particular, Australia may learn from the results of long-term investments
made some time ago in other nations, as productivity growth is a long-term
agenda and most policies are a long-term investment.
4.33
This is preferable to a focus on aggregate productivity measures, which
are not reliable enough to draw robust conclusions about relative performance.[21]
Committee conclusions
4.34
The committee believes that benchmarking our productivity against other
countries is problematic, as measurement methodologies are inconsistent and
Australia is a unique economy.
4.35
Meaningful benchmarking can only be conducted against the frontier
country, the United States.
4.36
We can, however, analyse the policy approaches of other countries in
terms of boosting capacity and capabilities in the economy. This is a smart
thing to do especially in a fiscally constrained environment, where we need to
prioritise spending and plan for the long-term