Source: https://treasury.gov.au/publication/economic-roundup-winter-2001/article-2-a-more-productive-australia-policy-and-technology
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Article 2 - A more productive Australia - policy and technology | Treasury.gov.au
The following is a reprint of Statement 4, A More Productive Australia - Policy and Technology, from Budget Paper No. 1: Budget Strategy and Outlook 2001-02.
A more productive Australia -
Identification of general purpose technologies is in part subjective, but on one reckoning, there have been only about a dozen general purpose technologies in the history of modern humans (that is, about 40,000 years):
Box 1: Historical experiences of new technologies and productivity growth surges (continued)
the domestication of crops; the domestication of animals; bronze; iron; the water wheel and windmill; the three-masted sailing ship; the printing press; automated textile machinery; the steam engine; electricity; the internal combustion engine; and the computer.
• Productivity growth accelerated considerably, averaging over 3 per cent per year compared to 1.4 per cent for the previous 20 years. In contrast, labour productivity growth in the other G-7 economies slowed over the same period.
• Real GDP growth rates averaged above 4 per cent per annum, almost half as fast again as in the previous 20 years.
• The unemployment rate fell to below 4 per cent - the lowest level in a generation. Disadvantaged groups have shared in the improvement.
• African-American unemployment has fallen from 13 per cent in the early-1990s to under 8 per cent in 2000, and Hispanic unemployment fell from almost 11 per cent to under 6 per cent. In both cases, these are the lowest rates since separate statistics began to be collected in the early-1970s.
• Real hourly wages in the private sector rose (after a period of contraction in the late-1980s and early-1990s).
• Poverty rates fell across the board, with the largest improvements for the most disadvantaged groups. The incomes of the poorest 20 per cent of households grew slightly faster than the incomes of the richest 20 per cent.
1992 WWW software and protocols la
unched.
Box 2: The evolution of information and communication technologies (continued)
The melding of all these advances into large networks was critical to their economic value. Economists analyse e-commerce and the Internet in terms of `direct network economies'. A direct network economy arises in two-way communications networks, where each new customer increases the value of the network to all previous customers.
Users of the network receive increasing returns in consumption. For example, the English language is a communications network, and every additional speaker of English increases the value of the language to all existing speakers. So are the TCP/IP protocols on which the Internet rests. So are all applications of the Internet, such as B2B exchanges.
• Around 11 per cent can be attributed to total factor productivity (TFP) growth in computer producing industries.
• Around 63 per cent can be attributed to TFP improvements throughout the rest of the economy. This implies that improvements in the ways capital and labour are used throughout the economy are central to the recent acceleration in productivity. Some of these gains have likely resulted as firms learn to apply innovative information technology to their particular business and production methods.
• Most of the remainder can be attributed to capital deepening, as the non-ICT sectors invested more in ICT.
Profits and share prices of the early electricity firms were disappointing. During the electrification of American industry, profits actually fell slightly as a share of GDP, as competition drove manufacturers to pass cost savings through to consumers. A few of the `new economy' firms at the beginning of the last century, producing the technologies of the electric age, prospered and h
ave survived into the computer age (such as the archetypical `General Electric', the only company listed in the Dow Jones Industrial Index today
Box 3: Stock market `bubbles' and previous radical or general purpose technologies (continued)
that was also included in the original index in 1896). But references to many other firms and their brand names are now to be found only in the Smithsonian museums. In contrast, the whole-of-economy beneficiaries of the electric age are everywhere.
Australia's economic performance in the 1990s and particularly in the second half of the decade was as remarkable as that of the US. Economic growth was strong and sustained, the unemployment rate fell to around the lowest level in a decade, yet inflationary and wage pressures remained subdued.
• Following the recession of the early-1990s, gross domestic product (GDP) growth strengthened, with nine years of positive growth. This strong performance included thirteen consecutive quarters of through-the-year growth above 4 per cent - the longest run of such growth recorded in the history of the quarterly National Accounts (since September 1959).
• The unemployment rate fell from an historic high of 11.2 per cent in December 1992 to 6.0 per cent in September 2000 - the lowest level in over 10 years.
• Inflation averaged 2.3 per cent in the 1990s, compared to over 8 per cent in the 1980s and over 10 per cent in the 1970s.
Capital productivity in any modern economy is usually in secular decline, as new investments are added to a slowly growing labour supply. But Australia's capital productivity fell very rapidly from the 1960s to the 1980s, because of inefficiency in allocating and operating investments. In the 1990s, capital productivity declined at a much slower rate than previously, as sharpened competition and more flexible markets (including labour markets) permitted more efficient resource allocation and more intensive use of the existing capital stock - see Box 4.
Box 4: Capital productivity
Traditionally, capital productivity has declined due to increasing capital intensity. The capital-to-labour ratio has increased in all but a few years since the mid-1960s, reflecting a greater reliance on the use of machinery in the production process. By definition, this has the effect of increasing the relative productivity of workers and lowering the relative productivity of capital.
Chart 1: Capital productivity
However, in the 1990s capital productivity growth has been relatively stable, a clear break from the downward trend of previous decades.
This moderation in the decline of capital productivity can be attributed to the widespread structural reform that has been implemented since the mid-1980s. It provides evidence that resources are now being directed into more productive and efficient areas, increasing economic returns to investment within the Australian economy, with economic benefits to all Australians.
This strong productivity performance has gained both domestic and international recognition. The May 2001 OECD Report of the Growth Project highlighted Australia as one of only three countries (together with the Nethe
rlands and Ireland), to experience markedly stronger trend growth of GDP per capita in the 1990s, largely as a result of improvements in productivity.
The strong growth in MFP in the 1990s also highlights the fact that Australia's productivity surge did not simply reflect an increase in capital investment - commonly referred to as capital deepening - Chart 2. Instead, it reflected underlying improvements in the overall efficiency of the economy: the skill with which capital and labour were combined and managed.
Chart 2: Decomposition of Australian annual labour productivity growth
Despite the similarities between the magnitudes of the Australian and US productivity accelerations, there are important differences. Following a period of weak growth in the 1980s, Australian productivity growth accelerated strongly in the early-1990s. This initial surge began too early to have been initiated by the diffusion throughout the economy of those recent ICT breakthroughs that powered the US surge. Instead the Australian productivity improvement was triggered by a wide-ranging structural reform programme.
Reforms such as the reduction of external barriers to trade and increased access to essential infrastructure through the National Competition Policy (NCP), began the process of increasing competition and improving the underlying efficiency of the Australian economy.
The effects of this reform can be seen by examining an industry breakdown of labour productivity growth rates in the early 1990s. Those sectors that were the primary focus of reform, including financial services and those sectors previously dominated by government owned monopolies, experienced very rapid productivity growth - see Chart 3.
In the second half of the 1990s, Australia stepped up the reform process. The New Tax System replaced a range of narrowly-based indirect taxes, reducing the distortion of production and consumption choices. Enterprise bargaining replaced the centralised setting of wages and conditions of employment, with wage rises now set in a more competitive, flexible environment and more dependent on productivity improvements in particular workplaces.
The Government also established a transparent, medium-term macroeconomic policy framework. In August 1996, the Statement on the Conduct of Monetary Policy formalised the objective of `keeping underlying inflation between 2 and 3 per cent, on average, over the cycle' and gave the Reserve Bank of Australia (RBA) operational independence in meeting that objective. The Government also adopted a medium-term fiscal objective of achieving underlying budget balance, on average, over the economic cycle. The credibility of fiscal policy was also enhanced through accrual accounting and superior transparency arrangements legislated into the Charter of Budget Honesty.
This combination of a sound and responsible macroeconomic policy framework and ongoing structural reform has continued to directly improve the underlying productivity of the Australian economy by creating a more dynamic and competitive environment.
In pursuing productivity improvements within this highly competitive environment, Australian firms have applied new technology. Indeed, Australia is now amongst the most intensive and sophisticated users of new technology in the world, with recent OECD estimates ranking Australian spending on ICT as a percentage of GDP amongst the highest in the OECD - see Chart 4.
Chart 4: ICT expenditure as a per cent of GDP
The OECD noted that Australia trails only the US and Iceland in the density and rate of growth of secure servers (a measure of preparedness for encrypted e-commerce). Of seven leading economies reviewed by the OECD, Australia had the second highest home Internet access among the richest quartile of household incomes, and the highest access among the poorest quartile.
More generally, ICT investment has also been growing rapidly, with the shares of capital income accruing to software and hardware owners in Australia - a measure of the importance of ICT investment in the capital stock - rising rapidly in the 1990s, towards US levels.
In Australia's case, as a result of the reform-driven increases in domestic and international competition, investments in ICT have been practically and commercially focused. Indeed there has been a fundamental interplay between improved competition and the efficient adoption of new technology.
This rapid and efficient adoption of new technology by world standards, combined with Australia's long history of innovation, makes Australia very well placed to experience a second wave of productivity growth, as all sectors of the economy harness the benefits of new technology. As an example of Australia's ability to focus scientific research on new innovations, Australia is
third to only the US and Canada within the OECD in the citation rates of research in patents taken in the US. As the OECD's Report on the Growth Project notes:
The benefits of ICT are also being felt in traditional industries such as mining and agriculture. By the end of March 1999, close to half of all farms in Australia owned or used a computer.15 This technology is being used to help overcome the communication and distribution problems posed by the isolated geographic nature of many of Australia's rural industries. It is also being used to access and compete effectively in new markets, particularly overseas.
These examples of a range of industries across the economy effectively harnessing the benefits of new technology, again highlight the long-run differences between the use and the production of new technology. Australia's small ICT-producing sector is not competing in the `commoditised' chip production and PC assembling end of the market, but rather in specialised software applications that build on Australia's other commercial comparative advantages. Australia is also benefiting from our openness with the world's best in this intrinsically globalised industry, as illustrated in the recent success of `Radiata', whose alertness to the world potential for wireless LAN applications would be hard to envisage without its key Australian personnel's own experience in US academia and Silic
on Valley.
Australian firms will continue to benefit from applying ICT productively throughout a competitive and flexible economy long after the apparent obsession with Internet start-up companies has faded away. This is the true test of a so-called `new economy', and in the long-run Australia is well placed to compete in this new global arena.
5 The Annual Report of the Council of Economic Advisers (CEA), Economic Report of the President, January 2001.
11 Shiller, R.
J., Irrational Exuberance (2000).
13 OECD (2001), p 12.
14 The application of the ubiquitous bar code scanner together with the computer is another example of how competition drives innovation in unpredictable directions through unforeseeable linkages, with application rather than production being the key. Bar code scanners use lasers. When Bell Laboratories invented the laser in 1957, it did not bother patenting it, regarding it as only a specialised scientific and potentially military tool. The barcode scanner (and other commonplace applications, such as the Compact Disc) awaited the pairing of the laser with complementary developments in the semiconductor industry.
15 Use of Information Technology on Farms, 1998-99, ABS Cat. No. 8134.0.