Do not squander recession recovery

Article by Tom Dusevic courtesy of The Australian


The Morrison government’s key adviser on economic reform says Australian living standards will fall unless policymakers find new ways to drive productivity growth in the burgeoning services sector.

In a wake-up call to the political class to not squander the opportunities in the recovery from the COVID-19 recession, the Productivity Commission cautions governments not to repeat the mistakes of the nation’s protectionist past through special deals for manufacturing and a forlorn quest for national champions.

The commission foreshadows that instead of the “big bang” approach of the 1980s and 90s reform era, policymakers will need a suite of discreet policies to keep Australia open to the world, flexible and competitive after the “most severe economic contraction since the Great Depression”.

In a research report released on Thursday, Australia’s Long Term Productivity Experience, the commission said a new focus on the drivers of higher living standards, fresh policy thinking, and understanding of history were needed to navigate the postpandemic policy terrain. Innovation will come not via traditional research and development but through greater reliance on new business models and start-ups as vehicles for experimentation.

As well, given its labour intensive nature, to make services more productive policymakers need to focus on skilling workers, making them adaptable and mobile, and keeping them healthy.

Underlying themes of the commission’s analysis include encouraging robust competition, making it easier for service firms to enter local and global markets, and not propping up with subsidies iconic industries and companies that have seen better days.

The report comes amid the Morrison government’s push to secure sovereign manufacturing capability in strategic areas, including medicines, defence, food production and the space industry, as supply chains were disrupted by the pandemic and a deteriorating relationship with China, our largest customer.

The commission argues being a high-performance economy in the 21st century relies on having a high productivity services sector; once considered a “residual sector”, it now accounts for 90 per cent of employment.

It noted the drivers of innovation and productivity growth in services might be different to those that achieved “stellar gains” in agriculture, mining and manufacturing.

“Due to the service sector’s diversity, there can be no cookiecutter policy approach appropriate to all sub-industries,” the report said.

“It may be that there is less of a role for traditional ‘big bang’ reforms in favour of more tailored, targeted and piecemeal changes.

“There is a need for new research in this area, similar to that which exposed the costs of trade protection in the post-war period and paved the way for future liberalisation.

“However, the general lessons of the past remain robust: fostering innovation and diffusion of knowledge, openness to the world, flexibility in resource allocation and avoiding policies that promote particular industries, firms, technologies or inputs.”

Commission chairman Michael Brennan said: “Almost all of Australia’s long-term increases in income are due to productivity growth. But the path has not always been smooth.”

Mr Brennan said the microeconomic policy reforms of the 1980s and 90s coincided with — and likely contributed to — a productivity boom in the 90s, in which our productivity grew at its fastest rate in the two decades before or after, with per capita income growth surpassing that of all G7 economies.

“Looking to our history provides some lessons for the future

— including the importance of openness to trade and investment, competition and flexible regulation of product and labour markets,” he said.

“Just as COVID-19 has brought sudden, disruptive change to the economy … it is likely that underlying policy settings will also be affected,” the report said.

“Australian economic history shows that policy can either help or hinder the achievement of higher living standards. Building future prosperity will require new thinking, based on a fresh policy agenda informed by quality research, but firmly grounded in the lessons of the past.”

To spur growth and reduce unemployment, the Reserve Bank and Treasury have both highlighted the need for reforms to taxation, infrastructure pricing, education and training, regulation and workplace relations to encourage businesses to expand, innovate, invest and hire people.

In its report, the commission also noted the nation’s macroeconomic policy environment and avoiding a recession after the global financial crisis were behind our sustained rise in living standards over three decades.

‘Looking to history provides some lessons for the future — including the importance of openness’

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