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Going Down the Gurgler

If we are to look at Australia’s economic progress over the last thirty years we might conclude that we have done quite well. Australia’s per capita GDP over that period has risen from 14th highest in the world to 7th. This is something that we should feel grateful for – but it doesn’t tell the whole story.

Economist Saul Eslake points out that whilst our initial progress, achieved in the first half of this epoch, came as a result of our own efforts to raise productivity, recent improvement has largely been brought about by an almost unprecedented rise in Australia’s “terms of trade”. This has been a most serendipitous outcome for which we cannot take credit.

The advantageous “terms of trade” are now declining. Up until now they have served to mask another disturbing trend, a decline in growth of our labour productivity. Eslake points out that with our declining terms of trade our labour productivity needs to grow at about 3% per annum to maintain our current standard of living. Unfortunately, after a considerable growth in labour productivity in the 1980s and 1990s, in the last twelve years labour productivity has grown at a meagre 1% per annum, well below what’s needed to retain our current standard of living.

Paul Kelly, of The Australian newspaper, lamented in a recent article that he thought that the political environment in Australia was now such that major reform was unachievable. Because of the short term focus of politicians and the ongoing tendency to be populist, reforms of the nature of those of the Hawke/Keating and Howard governments were no longer possible. Let us hope that he is wrong.

If we need inspiration and a role model we could do a lot worse than to look across the Tasman and observe the transformation that has been happening in New Zealand.

Up until recently New Zealand faced dramatically lower living standards and higher unemployment than Australia. But since 2008 under the guidance of Prime Minister John Key, New Zealand has turned its economy around dramatically. Government spending has been curtailed and major modifications have been made to their tax regime and welfare system. There has been strong investment in key infrastructure and measures taken to bolster business activity.

Consequently New Zealand has strengthened its economic competitiveness. On the World Economic Forum’s league table New Zealand is ranked at 17th in terms of global competitiveness whilst Australia languishes at 22nd.

The recent budget proposals by the Australian Government had initiatives, even though I didn’t agree with all of them, which would have been generally helpful to the economic reform agenda necessary to begin to restore the nation’s economy. Unfortunately the Government seemed to lack the ability to sell its reforms. Consequently the Labor opposition was allowed to dominate the debate resorting to arguments regarding fairness and equity that the Government has struggled to counter.

The Gillard/Rudd Governments paid lip service to the need to restore the budget to a surplus. They continually promised budget surpluses but never ever delivered. Now the Labor opposition acts to prevent many initiatives designed to reduce Government spending but with few indications how they might go about progressing this cause if they were returned to Government.

Many commentators suggest that our economic revival will come from the demand generated by the rapidly increasing “middle class” consumers in Asia, and particularly China and India. Australia will only benefit from this if it can be competitive for the products and services that are in demand from these sources. As we saw above, our competitiveness is diminishing. Consequently it is becoming imperative that we take steps to improve our productivity and thus enhance our competitiveness.

On other fronts we are struggling. Our unemployment levels remain high but even more tragically our youth unemployment rates are abysmal. Youth unemployment is currently approaching 14% and in the most disadvantaged pockets exceeds 20%. This is a tragedy because we know unemployment of young people (generally defined as those aged between 15 and 24) is linked with social evils such as youth alienation, alcohol and drug abuse, teenage pregnancies and welfare dependency. This problem is magnified if we look at the issue of underemployment which is purported to run around 30%.

Economist Judith Sloan argues that the problem was exacerbated by changes to the Fair Work Act (FWA) under the Labor Government with:

  • The extension and strengthening of unfair dismissal provisions,
  • Excessive rises in the national minimum wage,
  • The hiking of apprentice rates of pay,
  • The removal of junior rates of pay for 20 year olds in some awards, and perhaps most significantly
  • The extension and escalation of penalty rates.

Now all the above are wonderful initiatives if you are a young person in secure work. They are, however, an unmitigated disaster for those seeking to enter the workforce. As usual in their rush to appease the union movement, the Labor Government took the above course which in turn benefitted union members but put in place greater barriers for the unemployed to gain entry to the paid workforce.

Tony Abbott has proposed an expensive Paid Parental Leave Scheme which has as its purported objective keeping working mothers in the workforce. If the Government was prepared to confront its bete noire, workplace reform, and address some of the above concerns, it would be able to grow the workforce by enabling employers to hire young people to much greater effect on productivity than his vaunted Paid Parental Leave Scheme is ever likely to achieve.

Whilst I will be the first to admit that Work Choices eventually overstepped the mark, it ushered in an era of low unemployment and real growth in wages. Under its successor legislation we now have higher levels of unemployment and real wages are now decreasing. Given that inflation is now quite low, this latter outcome is a damning indictment on the nation’s productivity.

When the Hawke Government decided to embark on its micro-economic reform initiatives, one of its first acts was to send a delegation to Western Europe in order to gain an understanding of why industry there was more productive than their Australian equivalents. On their return they published a document called Australia Reconstructed that set out the lessons learnt and which became the template for micro-economic reform.

I was lucky enough to have had some discussions with one of the union officials that had taken part in this study. He related to me a story about going to a factory in one of the Scandinavian countries, (I can’t now remember which). The head of the local union hosted the visit and he arranged for the Australian official to sit in on a meeting of workers and management who were looking at ways of improving the factory’s productivity.

When it was finished the local union chief said, “What do you think of our processes.”

The Australian official said, “I can’t believe what you are doing. In Australia I would be advising my members not to cooperate so forthcomingly with management. We would withhold any ideas we had about productivity and make the management pay to access them.”

The local union chief shook his head. “We have come to know that if you are to take a portion of the milk of a cow, first you have to feed her well to make sure there is ample milk!”

That showed an implicit understanding that workers were the beneficiaries of productive workplaces. It is in the interest of all stakeholders to ensure that the enterprise is productive. It is legitimate to argue about what portion of the cake (to change metaphors) you are entitled to, but the prime concern should be to ensure there is a cake, (as large as possible) to be shared. It is indeed in all our interests to nurture business success because that is the only source of wealth that we all rely on.

The Business Council of Australia has urged the Government embrace reform including:

  • Building a more competitive tax system,
  • Encouraging innovation,
  • Opening the economy to investment and trade, and
  • Ensuring the labour market can respond to changing circumstances.

It is obvious that we are facing a dilemma.

Firstly we have an unsustainable budgetary position and despite the efforts of the Government the Opposition seems determined to ensure that many of their initiatives will be blocked.

Our competitiveness is going to determine how well we can profit from international markets.

Our competitiveness will be dependent on the flexibility of our labour market and the Government is reluctant to tackle FWA because of their bad electoral experience with Work Choices. Consequently there is no immediate likelihood that issues such as youth unemployment are likely to improve in the near future.

The Government’s attempts at reform have been badly articulated and poorly communicated to the electorate at large.

And unfortunately, irrespective of whether the Bulldogs or the Rabbitohs win this afternoon, there is no immediate prospect that the Abbott Government is going to resolve our economic situation and there seems little likelihood that the Labor opposition even understands the challenge!

 

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  1. 3 Comment(s)

  2.   By des Covey on Oct 5, 2014 | Reply

    Ted,
    The amount of “safety” documentation that the workers have to put up with is certainly a contributor to the lack of productivity. The increasingly litigious society where blame is apportioned means huge amounts of effort is spent on “risk Management” documentation which by and large does little to improve safety and certainly reduces productivity. Tool time for a tradesman must be down to about 2 hrs per day after all the documentation is followed and chased and wasted.

  3.   By Brad Carter on Oct 7, 2014 | Reply

    Hi Ted

    This is a very good insight into lack of policy development at the National and State levels. You are right in that there was significant productivity improvements in industry in years gone by but this momentum seems to have dissipated and possibly because of the lack of government policy to encourage and continue support for productivity improvements. Government policy is now certainly focused on short term next election vote winning ideas that lack rigor and research. The public at large have been conned with a continued debate about the “old chestnuts” of Education, Health, Parental Leave, Illegal Immigration and Reducing the Nation’s Debt etc and therefore the public have lost interest in the long term real issues of improving the nation’s productivity overall as a major plank and strategy to improve our economic and social well being.
    Brad

  4.   By Phil Sparti on Oct 8, 2014 | Reply

    Hi Ted,
    Having lived long enough to see many successive federal governments of labour and liberal persuasion, and despite some good social justice initiatives labour has implemented in the distant past e.g. medicare, superannuation,free(when I went through)then subsidised teritary education, one can only despair that they have lost the plot. There idealogy is to tax hardworking Peter to pay welfare Paul and beholden to the unions, bloat the public service so they can wave the “job creation” flag. Completely devoid of wealth creation initiatives, creating an enterprise environment and grossly incapable finanical management and now impeding initiatives to rectify the situation. Long may they stay in the political wilderness.

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