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Australia's competitiveness: reversing the slide

By: Brendan Pearson, Chief Executive, Minerals Council of Australia
04 September, 2014

Urgent budget repair and a range of structural reforms, including labour market reform, are critical to restoring Australia's international competitiveness and future growth prospects, according to a new MCA Monograph by Professor Tony Makin of Griffith University.

In Australia's Competitiveness: Reversing the slide, Professor Makin highlights the impact of loose fiscal policy on the marked deterioration of national competitiveness.

"Overly expansionary fiscal settings of federal and state governments in the wake of the crisis, settings that have yet to be fully reversed, have contributed to the dollar's strength and been a major source of our competitiveness problem."

Professor Makin's report is critical of the scale and timing of the stimulus package deployed during the global financial crisis (GFC), including the Building the Education Revolution program:

"…The fiscal stimulus measures, most notably the BER program, failed to deliver as originally expected and left a loss of competitiveness as a lasting legacy."

Fiscal response to crisis


By contributing to the dollar's strength and by creating pervasive policy uncertainty about how the large budget deficit it created was to be reversed, the fiscal response to the crisis weakened the economy, Professor Makin argues.

He concludes that it was the traded goods sector that helped nurse Australia through the worst of the GFC. Close scrutiny of the national accounts shows that "it was the behaviour of exports and imports, not increased fiscal activity that was primarily responsible for offsetting the fall in private investment due to the GFC". Professor Makin adds that Australia's escape from the worst of the GFC bred complacency about the need to address competitiveness and productivity problems via economic reform.

Australia's competitiveness


Professor Makin analyses different measures of Australia's competitiveness, beyond the traditional real exchange rate measure, all of which show a marked deterioration over recent years. These include:

  • The relative prices of non-tradable goods and services (products not traded on world markets, including many government services) to the prices of tradable goods and services (products which are, or could be, traded internationally). On this measure, Australia's competitiveness has deteriorated by close to 30 per cent since the late 1990s as domestic demand pressures have pushed up inflation in the non-tradables sector, putting competitive pressure on the tradable goods sector of the economy.

 

  • Australia's World Economic Forum (WEF) competitiveness ranking. Australia has slipped from being ranked in the top 10 most competitive countries in the world in the early 2000s to 21st – outside the top 20 most competitive countries for the first time.

Makin concludes that Australia urgently needs "a more searching national conversation about our international competitiveness", adding that, "Australia will not durably improve its competitiveness without serious fiscal and structural reform, including labour market reform. The Abbott Government should grasp this narrative and own it."

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Letsnotgetfacts | Friday, September 5, 2014, 11:48 AM
Crikey effectively demolished the findings of WEF yesterday (http://www.crikey.com.au/2014/09/04/crikey-says-ignore-world-economic-forums-lazy-polling/) and have previously shown that calls for labour reform to improve productivity seem unnecessary: The best measure of private sector labour productivity, Gross Value Added per hour worked, grew 3.3% during the year in trend terms. GVA per hour worked has now grown 9.5% in the last three years, or around 0.8% a quarter, the strongest period of growth since 1997-99. Even taking out the very strong year of 2011-12, when GVA per hour worked grew 4%, it has grown on average 0.7% a quarter over the last two years. By comparison, the two years in which WorkChoices was in operation — March 2006-March 2008 — saw GVA per hour worked grow by just 2% in total, or on average less than 0.2% a quarter. In comparison, the "other" productivity, measuring the productivity of capital, has declined, so it's seems all those bosses who yearn for Workchoices II should really be looking at their own decisions in relation to increasing MFP.