Why has capital productivity plunged? It’s largely because of the mining industry. Mining investment has grown every year for much of the past decade as resource deposits take more and more equipment to haul out of the ground due to the depletion of the easiest-to-reach deposits.
High commodity prices have added to this, by allowing miners to carry far higher costs of production while still making a profit.
And then, there’s the statistical lag. Mining investment can take years to pay itself off. This can lower productivity in the short term. “It is highly likely that production lags are still temporarily holding back measured productivity in mining, and possibly now account for slightly more than one-third of the 40% decline in MFP since 2003-04,” the Productivity Commission report states.
Every one of the 12 industries, who together make up the ‘market sector’, has very different productivity problems or successes, the Productivity Commission notes, making it hard to make broad, sweeping statements that apply equally to all industries.
When it comes to our productivity slowdown, some of the capital stuff should sort itself out with time. Australia has seen huge levels of investment in mining and utilities in recent years, and these will pay their way eventually.
With this in mind, the Productivity Commission concludes its report by looking at a few different projections for labour productivity, none of which are very optimistic about the future.
There’s another aspect to productivity not directly addressed in the Productivity Commission’s report.
We usually compare Australia’s current productivity growth to its growth in the past or, as the Productivity Commission does, to productivity growth in other developed economies. But the world is changing, and there’s little indication the past will be enough.
Productivity is hard to come by the more of it you have. Like almost everything in economics, the returns are diminishing. Many parts of the world have far lower overall productivity than Australia, and could double their productivity through something as simple as access to the internet.
You’d expect these countries to have higher productivity growth than us (and most countries in the world do).
But what you wouldn’t expect is for them to be more productive than us on an absolute scale.
Increasingly, the developing world is finding new, innovative, productivity-raising ways of doing things, upping the ante on what we need to do to compete.
Professor Mark Crosby is an economist at the Melbourne Business School. He recently told LeadingCompany the competitive landscape is changing far quicker than we realise, and if we don’t build a flexible, competitive economy, we could find the interesting jobs and industries aren’t there for the next generation of Australians.
This means Australia does have a problem with productivity. But it’s not the one you hear about.
Myriam Robin is a reporter for SmartCompany and its sister site LeadingCompany. She has degrees in economics, international studies and journalism. She likes writing about businesses taking risks and doing new things.
