Australia’s long term productivity experience

• Australia has entered its worst recession since the Great Depression because of the COVID‑19 pandemic.
  • Australia’s future prosperity will be affected by the severity and length of the downturn, but also by the growth rate of productivity once the economy has recovered.
  • The policy challenge is to support a strong and rapid recovery, consistent with policy settings that can also drive faster productivity growth in the medium and long term.
• Despite a 28‑year recession‑free streak, this country is no stranger to recessions.
  • In the past 250 years, Australia has weathered severe recessions and recovery has usually been swift.
  • However, labour markets are often weak long after the recession has ended. In some cases, unemployment has remained high for over a decade after the initial downturn, and ‘hidden unemployment’ (from lower participation rates) can further exacerbate this.
• Almost all of Australia’s longer-term growth in incomes and wages is attributable to labour productivity growth, with policy playing a key role in driving this growth.
• Australia’s economic fortunes have waxed and waned over time.
  • At the turn of the Twentieth Century, Australia had the highest GDP per capita of any country in the world (including the United States of America).
  • For much of the next century, Australia’s relative standing slipped, despite some periods of strong absolute productivity growth.
  • And although Australia has always been a high income country, it is only in the last three decades that our relative income has improved against the frontier, due to growth in GDP per capita outpacing all of the G7 countries.
• Australian policymaking has both shaped, and been shaped by, our economic environment.
  • In the decades following Federation, Australia developed a policy framework that included inward looking and protectionist elements, such as tariffs, import quotas, export controls and a highly regulated labour market.
  • This ‘Fortress Australia’ policy was designed to boost population growth, maintain stable economic growth, and achieve an equitable distribution of incomes. But over time the weaknesses of this model became evident and started to undermine its very purposes
• A series of macro and microeconomic reforms dismantled Fortress Australia, gradually exposed the economy to competition and allowed resources to be allocated more efficiently.

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Australia's long-term productivity experience

The COVID-19 pandemic has generated Australia’s worst recession since the Great Depression and brings to an end 28 years of continuous economic growth.

“Over the last two centuries, Australia has experienced several severe recessions. While economic growth has often rebounded quickly, the labour market has taken longer to recover,” Chair of the Productivity Commission, Michael Brennan said.

Labour markets are often weak long after recessions end. In some cases, unemployment has remained high for over a decade and ‘hidden unemployment’ can mask the real extent of unemployment.

A new research report from the Commission emphasises the importance of policy in improving relative living standards and increasing productivity.

Recessions can also induce fundamental change to policy settings. The aftermath of the 1890s recession saw the establishment of the ‘Fortress Australia’ approach — with trade protection, wage arbitration and government monopolies in key industries.

The 1930s saw the worldwide rise of trade barriers. By contrast, the early 1980s and early 1990s saw a fundamental rethink of Australian policy, focused on openness to trade, competition and greater flexibility.

The report shows that Australia has always been a rich country, but productivity growth rates have varied over time.

“Almost all of Australia’s long term increases in income are due to productivity growth. But the path has not always been smooth,” Mr Brennan said.

The microeconomic policy reforms of the 1980s and 1990s coincided with — and likely contributed to — a productivity boom in the 1990s, in which Australia’s productivity grew at its fastest rate in the two decades before or after, with Australia’s per capita income growth surpassing that of all G7 economies.

“Looking to our history provides some lessons for the future — including the importance of openness to trade and investment, competition and flexible regulation of product and labour markets,” Mr Brennan said.

Being a high productivity economy in the 21^st century relies on having a high productivity service sector.

The forces that drive innovation and productivity growth in services might look different to those which achieved such stellar gains in agriculture, mining and manufacturing. This will require new policy approaches, and a new research agenda to support it.

Media requests

Media team – 02 6240 3330 / media@pc.gov.au