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Exporting in Aust: the Productivity puzzle’s missing piece

13 April, 2007

There has been a lot of talk about productivity and how Australian fares in the productivity stakes. Source: Tim Harcourt, chief economist of Austrade.

Economists often worry about productivity. Why? Because productivity is the main determinant of living standards. Increasing productivity is all about increasing output for the same input (usually measured per worker or per hour worked in the case of labour productivity).

Productivity can be increased by improvements in technology (which raises
total factor productivity), working harder or working smarter (through investments in education).

Productivity improvements can potentially improve our quality of life as well as our material standard of living because if as an economy, we can produce more for every hour that we work, we can for instance; make the choice to spend more leisure time with the family.

Australia’s current productivity performance has come under fire from ANZ Chief Economist Saul Eslake, who notes that in the 2000s, Australia’s productivity growth has average just under 1.5 per cent per annum, compared to the OECD average of 1.8 per cent.

Furthermore, as a proportion of US productivity – considered to be the world’s benchmark – Australia’s level was 79 per cent in 2005 which is the lowest it has been since 1990. This has become known as Australia’s productivity ‘puzzle’.

But can Australia’s productivity be level with the US’s?  According to Australian Treasury research, probably not. They consider Australia’s geography – that is the ‘tyranny of distance’ factor both beyond and within our shores too big an obstacle. Australia cannot possibly reach the scale of US industry. However, there are things we can do with education, infrastructure and business regulation that can help to improve our standing.

Of course, one way Australia can improve productivity is by raising the global commitment of Australian enterprises. According to international research associated with the University of Nottingham, as nations – at all levels of economic development – encourage more of their businesses into exporting, total productivity in the economy improves across the board.

The Nottingham studies examined mature economies like the USA, Taiwan, Germany, UK and Canada but also some developing economies like Chile, China and even Columbia. The studies showed that businesses, who exported, on average, were more innovative, productive and flexible than their non-exporting counterparts, and they also go better overtime through ‘learning by doing’.

These improvements helped raise productivity all round in each nation’s economy. For example, in the UK’s case, the evidence showed that 60 per cent of UK productivity growth during the 1996-2004 period was attributable to exporting businesses.

Now here’s the good news - there’s some new evidence that this is happening in Australia as well, in the heartland of the manufacturing sector. We know the story well. With tariffs reduced, many manufacturers had to become exporters due to import competition.

As a result, they became more innovative (‘learning by doing’ and eventually more productive. This also meant that they could pay higher wages and provide better working conditions to their employees. According to Melbourne Institute research, there is evidence not only of self-selection (that is better firms go into exporting in the first place) but also ‘learning by doing’ as a result of becoming exporters.

The Melbourne Institute looked at manufacturing firms in Australia between 1994 and 2000, and found that higher export intensity and a longer period of export exposure is associated with a higher level of productivity.

So exporting is good for the firms themselves, good for the workers, and via ‘learning by doing’ productivity gains – good for the rest of us too. The productivity gains by exporters ultimately provide better living standards and the chance to improve our quality of life.

Accordingly, Austrade is doing its bit to get more companies to export and to keep them exporting – and to widen and deepen the ‘global engagement’ of Australian enterprises. This will have widespread benefits as exporting (and importing for that matter) may well be the missing piece of the productivity puzzle.

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