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Statement 4: A More Productive Australia - Policy and Technology

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Contents

Part I: Introduction

Part II: The United States experience

The United States `new economy'
The role of information and communication technology
The NASDAQ bubble - implications for the future of the `new economy'?

Part III: The Australian productivity acceleration

Structural reform and productivity growth
The role of new technology in Australia

Part IV: Looking to the future

Is productivity growth slowing?
The role of Government

Part V: Conclusion

Statement 4: A More Productive Australia - Policy and Technology

There is mounting evidence that the exceptional lift in productivity growth in the United States (US) economy in the late-1990s was largely the result of the productive diffusion of information and communication technology (ICT) throughout the economy. In Australia, a sound macroeconomic policy framework has encouraged competition and created a strong incentive to apply productivity-enhancing ICT advances in the Australian economy. This has created the potential for Australia to experience an extended period of strong productivity growth in coming years.

Part I: Introduction

Productivity growth underpins economic and social advance.

In the second half of the 1990s, the US economy achieved a significant lift in productivity and gross domestic product (GDP) growth, together with unusually low levels of both inflation and unemployment. There is evidence that this exceptional performance was substantially the result of the productive diffusion of ICT throughout the economy supported by highly competitive markets and a favourable investment climate. The US has been able to take advantage of this capital investment - often substituting labour - because of extremely flexible labour markets and the absence of rigidity in employment laws.

Computers and the means to link them in networks have been available for almost half a century, and have long been perceived as the next major `general purpose technology', capable of pervasive application throughout the economy. However, it is only in the 1990s that these technologies have become cheap enough, and have been deployed widely enough in open, low-cost, Internet-based networks, to provide significant benefits to businesses and consumers. Although much of the discussion surrounding this general purpose technology has focused on the production of ICT, historically the greatest benefits of such technologies have come not from their production but from their use throughout the economy.

In the second half of the 1990s, Australia also experienced very strong economic growth by historical and international standards, combined with low inflation and falling unemployment. As with the US, this performance was underpinned by high productivity growth rates, allowing the economy to grow faster without inflationary pressures emerging.

Despite these broad similarities, the initial improvement in Australian productivity growth in the early-1990s preceded the ICT triggers at work in the US. Australian productivity growth during the early-1990s appears to have largely reflected structural reforms, particularly to improve the performance of government business enterprises (GBEs), many of which were not previously subject to competition.

More recently, the Government has established a sound and responsible macroeconomic policy framework favourable to low inflation, low interest rates and high investment, and continued to implement further major structural reforms, including more flexible labour markets. This has encouraged competition and created a strong incentive to apply productivity-enhancing ICT advances throughout the economy. Indeed, Australia is now among the most extensive users of ICT in the world.

The Government has also promoted the efficient use of ICT directly through a range of policies and institutions, including the recently announced Backing Australia's Ability - An Innovation Action Plan for the Future, the largest group of measures ever proposed by an Australian government to foster innovation.

Given Australia's rapid adoption of ICT and sound macroeconomic policy framework, there is strong potential for a further wave of productivity growth in coming years. Such sustained high productivity growth would provide a firm foundation for solid economic growth and rising living standards in Australia over the longer term.

The recent slowdowns in growth in Australia and the US are likely to cause some cyclical slowing in productivity growth. But despite this, and despite the recent falls in equity prices of ICT companies in the US, the potential productivity gains to the entire economy from utilising the recent wave of Internet-based computer applications remains high. As the Organisation for Economic Cooperation and Development (OECD) noted in its May 2001 Report on The OECD Growth Project1, analysing the reasons for improved performance in the US, Australia and a few other OECD economies:

`... it would be wrong to conclude that there was nothing particularly exceptional about the recent US experience or that of other countries whose potential growth has been lifted.'2

Realising that potential will require maintenance of a good investment climate and further structural reforms. In particular, vibrant competition will need to be maintained and labour markets will need to continue to become more flexible to facilitate corporate re-design and the creation of new jobs from productivity-enhancing applications of the new technologies.

1 OECD (2001), The New Economy: Beyond the Hype, Final report on the OECD Growth Project, Meeting of the OECD Council at Ministerial Level.

2 OECD (2001), p 5.

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