incentives — the external pressures and disciplines on them to perform well capabilities — the human resources and knowledge systems, the institutions and infrastructure, needed to devise productivityenhancing changes and support them effectively flexibility — the scope to make the necessary changes. The Commission has characterised the ‘incentives’ channel as a ‘driver’ of productivity improvements, and the other two as ‘enablers’. All three are strongly interactive. Together, they influence the motivation and the ability of organisations to make the changes needed to enhance productivity. The contribution of information technology to productivity growth illustrates this well. Both theory and evidence demonstrate that competition provides a powerful incentive for the development and uptake of IT. But new business models at the firm level, including changed work arrangements and skill sets, are needed to fully exploit the new technologies (PC 2004a). Key implications of this framework are that policy needs and priorities could be expected to vary over time and there is unlikely ever to be a ‘silver bullet’. A related implication is that productivity is unlikely to improve if policy advances in one channel are countermanded by backsliding in others. A ‘proproductivity’ agenda needs to proceed on all three fronts. Policy consistency is also needed to convey the right signals for the managers and owners of enterprises to single-mindedly pursue productivity improvements and undertake the necessary (risky) innovations and investments. In more recent years, the signals have become blurred again, prompting a resurgence of rent-seeking behaviour from firms and industries under market pressure. The Lists All three channels of policy influence have been a focus for government initiatives over the years, commencing with the progressive liberalisation of international trade and capital flows from the 1980s. But while governments have hardly been idle on the productivity front, there have also been important omissions and ‘blind spots’. A number of these have been identified by the Commission as requiring action, and should continue to be on the list of things for governments to do.
1. Incentive policies As emphasised, productivity improvements generally necessitate changes within organisations and across industries. But change is never easy: it requires effort; it can be disruptive, and is often resisted. There need to be good reasons for going to the trouble. Competition provides such a reason, at least for firms operating in the private sector. In competitive markets, enterprises with relatively low productivity will generally be less profitable than others and will eventually face market sanctions. As Samuel Johnson famously put it in another context, the prospect of a hanging ‘concentrates the mind’. Competition accordingly drives both innovation and ‘creative destruction’, the dual determinants of a country’s overall productivity performance. Actions that foster competitive markets — including for corporate control — must therefore be fundamental to a government’s policy agenda to enhance productivity. Exposure to international competition is perhaps the most important area of all, as it obliges local enterprises to strive for world’s best practice. As noted, Australia has undergone successive rounds of reform directed at opening up industries to both domestic and foreign competition. These culminated in the National Competition Policy, which remains embedded in policy-making frameworks today. The benefits to the community have been substantial (PC 2005a). It is therefore of concern that progress has stalled or even reversed in some policy areas. The ‘to do list’ among Commission recommendations is still a fairly long one. Abolish remaining tariffs (PC 2000, 2008a, 2010a). Most industries now receive relatively low levels of tariff assistance, the result of incremental reforms over the past 25 or so years. But remaining tariffs still impose unnecessary costs on the community. They detract from Australia’s productivity primarily by helping to prop up an industry’s least productive firms. They also confuse the signals for all industries as to whether their futures lie in the pursuit of productivity or preferment. Limit provisions for anti-‘dumping’ action (PC 2009b). Selling goods abroad at prices below those at home is normal business practice in various circumstances and one adopted by many Australian firms. Imposing (often sizeable) penalty duties on such imports protects less competitive firms at the expense not only of consumers, but also other local user industries (as the auto assemblers are finding right now in relation to their steel inputs). The rules allowing such
‘administered protection’ should be tightened in the true spirit of the WTO accord, not made more permissive. Terminate selective industry subsidies that cannot deliver demonstrable net social benefits (PC 2008a, 2009c). Unless they rectify a (legitimate) market failure, industry subsidies merely serve to sustain the market performance of less productive and competitive firms or activities, lowering Australia’s productivity in the process. Such programs, totalling nearly $9 billion annually from Australian taxpayers (PC 2012e), should be terminated if they cannot be demonstrated to yield a net payoff to the community. (Taxpayer support for private sector businesses cannot even loosely be characterised as ‘co-investment’ unless this test is satisfied.) In particular: subsidies to support ‘innovation’, including ‘green technologies’, in specific industries (such as the assistance programs for the Automotive and Renewable Energy industries) which currently amount to over $3 billion, need to be able to deliver socially valuable spillovers over and above those attainable through generic support (such as the R & D Tax Concession); adjustment assistance should facilitate change and be directed primarily at enhancing the skills and mobility of workers, rather than supporting firms under competitive pressure (PC 2001, 2012e). Extend reforms to drought support (PC 2009d) so as to move from open-ended assistance for farmers facing hardship, to arrangements with common criteria and duration provisions. Phase out public sector procurement preferences (PC 2008a). Favouring local suppliers on grounds other than price and quality inflates budgetary costs, detracts from government service performance (including Australia’s defence capability) and, once again, undermines productivity by enabling less productive firms to retain market share and hold onto scarce resources. Conduct a second, more focussed round of NCP reviews (PC 2005a, 2011i) Reviews need to target the more significant restrictions on competition that avoided, or were not adequately subjected to, rigorous and independent scrutiny in the first round of NCP legislative reviews, or where the economic environment has significantly changed. Priorities include: pharmacy ownership restrictions, which add to healthcare costs for little apparent benefit taxi licence quotas, which raise transport costs and make it harder to reduce urban congestion, without demonstrably enhancing either safety or quality
The bottom line I am conscious that this list of priorities may look too encompassing or complicated for those seeking quick fixes or simple solutions — or those who sometimes ask at events such as this ‘What is the single most important reform to improve Australia’s productivity performance?’. My usual response to that question, and the burden of my presentation today, is that there is no single thing that can do the job. Indeed, a policy approach based on such a presumption would be destined for failure. Rather, what is needed is an approach to ‘productivity policy’ that embraces both the drivers and enablers of firm performance, and is consistently applied. That in turn requires policy-making processes that can achieve clarity about problems, reach agreed objectives and ensure the proper testing of proposed solutions (including on the ‘detail’ and with those most affected). The beneficial and enduring structural reforms of the 1980s and 1990s are testimony to the value of these fundamentals. Good process in policy formulation is accordingly the most important thing of all on the ‘to do list’, if we are serious about securing Australia’s future productivity and the prosperity that depends on it.
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