The New Economy?
A New Look at
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this paper are those of
the staff involved and do
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those of the Productivity
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An appropriate citation for this paper is:
Parham, D. 1999, The New Economy? A New Look at Australia’s Productivity
Performance, Productivity Commission Staff Research Paper, AusInfo, Canberra,
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This paper draws on a paper presented by the author at a seminar convened by the
Australian Bureau of Statistics (ABS) on Capital Stock and Multifactor Productivity
in Canberra on 6 May 1999.
It offers a new look at Australia’s productivity performance in two senses. First, the
ABS has upgraded its methodology for estimating productivity and has extended the
time horizon of estimates by two years to 1997-98. The ABS estimates provide the
foundation for this paper and enable an update of the earlier work of the Industry
Commission on Assessing Australia’s Productivity Performance (IC 1997). Second,
a new methodology is developed in this paper to assess the implications of
Australia’s productivity performance for growth in output and living standards.
Other previous and continuing work on Australia’s productivity performance
includes the work of Paul Gretton and Bronwyn Fisher on Productivity Growth and
Australian Manufacturing Industry (Gretton and Fisher 1997) and forthcoming
papers by the Productivity Commission on Microeconomic Reform and Australian
Productivity: Exploring the Links (PC 1999) and a staff research paper on
Productivity and the Structure of Employment (Barnes et al 1999).
The current paper has benefited from unpublished data and comments provided by
the ABS. Particular thanks are due to Peter Harper and Charles Aspden.
The assistance of colleagues in extracting and manipulating domestic data (Darrell
Porter and Tracey Horsfall) and international data (Paul Roberts) is acknowledged.
Tracey Horsfall and Maggie Eibisch assisted in the presentation of material for both
this and the original seminar paper.
The views expressed in this paper are those of the author and do not necessarily
reflect the views of the Productivity Commission.
The new economy?
A new look at Australia’s productivity performance
Enhancements in the ABS productivity estimation methods
An assessment of productivity trends
Evidence on the new economy and some implications
Interpreting the trends in capital productivity
Appendix A. International comparisons of growth paths
Australia’s productivity performance is now at an all-time high. Productivity
growth is faster now than in the so-called ‘Golden Age’ of growth around the
ABS estimates show that multifactor productivity growth has accelerated to
an average 2.4 per cent a year between 1993-94 and 1997-98, compared with
a long-term average of 1.4 per cent a year.
Growth in trend multifactor productivity has accelerated to 2.5 per cent a year
over the two years to 1997-98.
Strong productivity growth has been sustained well beyond the period that
could be associated with recovery from the early 1990s recession.
The productivity acceleration over recent years is due to very strong growth in
output, even though input growth has also been strong.
The acceleration has not come from a reduction in labour. In fact, the growth
in hours worked over recent years is high by historical standards.
There is evidence to support the notion of ‘the new economy’. Qualitative
assessments have emphasised greater flexibility and resilence in the Australian
economy. The analysis presented in this paper shows the Australian economy to
have taken a new growth path which has opened up possibilities for faster
growth and more rapid improvements in living standards.
Up until the 1990s, Australia showed a remarkably stable pattern of gradual
growth in output (per hour worked) based on steady capital accumulation and
steady but unspectacular growth in multifactor productivity.
From the beginning of the 1990s, Australia has taken a different and faster
growth path, based on stronger MFP growth.
Output per hour worked is now 15 per cent higher than it would have been
had Australia continued on the old growth path. Put another way, the growth
that would have taken 13 years on the old path has been achieved in six years.
These more rapid increases in output per hour worked also mean more rapid
improvements in average incomes — a foundation for better living standards.
Australia’s growth experience in the 1990s is unique in the 33 years of evidence
available. It is also rare, if not unique, among high-income countries in the
1990s. (Norway is one of two other possibilities examined in the paper.)
An implication of the new growth path is that Australia can pursue growth in
output and living standards without running up against savings and balance of
payments constraints that would most likely frustrate the alternative path of
relying on large increases in investment and capital accumulation.
The ABS has introduced enhancements to its productivity estimation methods.
The major changes are a switch from constant price to chain volume
measures for output and capital; and a major overhaul of capital measurement
methodology. The Finance and insurance industry is now included in the
These changes have the effect of raising estimates of productivity growth
slightly for the 1990s. More noticeable differences are reductions in
productivity growth estimated for the 1960s and 1970s.
The new estimates show a decline in capital productivity from the 1960s
through to the mid-1980s. The decline reflects large increases in capital
relative to labour. From the mid-1980s, however, combinations of slower
growth in capital relative to labour, and stronger growth in multifactor
productivity, worked to slow down and then reverse the decline in capital
Australians have enjoyed relatively high living standards this century, built in large
part on an abundance of natural resources. However, Australia’s productivity
growth — a major contributor to growth in living standards — has been low by
international standards over the long term (IC 1997).
By the 1980s, pessimism about the outlook for Australian commodity exports, the
emergence of strong competition in manufactures from Asia and concern about our
slippage in the international league tables of per capita incomes focused the
attention of policymakers on the need for policy reform.
It was realised that the Australian economy needed to show better productivity
performance if Australians were to enjoy the ongoing improvements in living
standards that they value.
Australian governments embarked on major policy reforms from the mid-1980s.
Both macro and micro approaches were adopted. An emphasis on microeconomic
reforms was designed in large part — but not exclusively — to improve Australia’s
Talk of ‘the new economy’
There is now a growing perception that the Australian economy is performing in a
different way than it has in the past. A number of commentators have taken a lead
from official statements.
In its recent Semi-Annual Statement on Monetary Policy, the Reserve Bank
observed that the combination of strong growth and exceptionally low inflation
observed over recent years is quite unlike the experience of the preceding 30 years.
It went on to say, ‘That such a performance has been maintained, almost two years
after the Asian crisis first broke in Thailand, is indicative of the extent to which the
Australian economy’s underlying strength and resilience have been improved over
time.’ (RBA 1999, p. 1).
In the Budget Papers, the Commonwealth Treasury attributed the current
combination of favourable economic indicators to a sound macroeconomic policy
framework, coupled with microeconomic reforms which have delivered higher
productivity growth and a more responsive and flexible economy (Treasury 1999,
p. 3-3). It also noted that the strong productivity performance in recent years has
helped the economy to withstand the international downturn by supporting growth in
real household incomes and profits and by contributing to low inflation (p. 3-20).
Thus both macro and micro policy influences appear to be behind the remarkable
performance of the Australian economy. Reforms that have increased flexibility,
resilience and productivity growth are seen as a central part of the story.
The policy focus on productivity has in turn focused attention on productivity
estimates. The Australian Bureau of Statistics (ABS) plays a major role in
generating output and input measures and producing official productivity indicators.
The ABS view on Australia’s productivity performance has been in hiatus for a time
while the Bureau undertook improvements in its estimation methodology. Previous
ABS estimates, covering Australia’s productivity performance up to 1995-96,
showed signs of acceleration in Australia’s productivity growth in the 1990s — but
care in interpretation was necessary (IC 1997).
The ABS released new productivity estimates on 23 April 1999. They extend
estimates of productivity performance up to 1997-98 and are based on the improved
The principal objective of this paper is to:
interpret the latest estimates and, in particular, examine evidence that the
economy is performing differently.
Other objectives are to:
explore the differences between the new and old productivity estimates; and
interpret the trends in capital productivity — an area of some difference between
the old and new estimates.
THE NEW ECONOMY?