ITIF Search
The Australian Productivity Commission: Don’t Try This at Home

The Australian Productivity Commission: Don’t Try This at Home

May 2, 2024

Would Canada benefit from establishing a productivity commission modeled on the version that has been operating here in Australia for several decades? The evidence is hardly compelling, at least for a carbon copy of the Australian model. However, there is a case in both countries for a more effective policy framework to address the problem of stalled productivity growth, as well as the dangerously narrow trade and industrial structure both countries suffer from.

Canada and Australia share many common features, so much so that a recent Economist article grouped them as one economy “with one set of flaws.” This economy, “Ozanada,” would be the world’s fifth-largest, bigger than India and just behind Germany. But its over-reliance on resources exports has “weakened its incentive to build globally competitive industries in other areas.”

Narrow Trade and Industrial Structure

The problem is evident from ITIF’s Hamilton Index, which measures the share of advanced industries in an economy compared with its share of the global economy (a location quotient or LQ). If Ozanada had the same share of advanced industry output as the global economy, its LQ would be 1.00. Such industries include pharmaceuticals, electrical equipment, machinery and equipment, motor vehicles, other transport equipment, computers and electronics, and information technology and information services.

However, Ozanada’s performance is in long-term structural decline. By 2020, Canada’s score had fallen to 0.58, and Australia’s to 0.46, meaning they had 42 percent and 54 percent respectively less advanced industry production as a share of their economies than the world. To compare, America’s LQ is 0.87, Germany’s 1.39 and China’s 1.47. Even the UK, which has also deindustrialised, leads Ozanada with a 0.67 score.

This fundamental weakness and overspecialization on resources in the Australian economy is further exemplified by the Harvard Atlas of Economic Complexity, which measures the diversity and knowledge intensity of a country’s export mix. Here, Canada is ranked 41 out of 133 countries, with Australia at 93, just behind Uganda.

As the Economist article points out:

Ozanada Inc’s limitations are particularly acute at the cutting edge of technology. Products deemed ‘high-tech’ by the World Bank, such as computers and drugs, represent more than 7% of the combined exports of OECD members, but only 4% for Canada and less than 2% for Australia. Patents granted per 10,000 people are a mere 5.9 in Canada and 6.7 in Australia, compared with 9.9 in America and 28.2 in South Korea.”

The article goes on to say, “This is not for want of well-nourished brains; Ozanada is home to world-class universities and boasts some of the highest rates of tertiary education in the OECD. Rather, the problem is an underfed innovation system.” While Australia ranks 24th overall in the “Global Innovation Index,” it ranks around 40th for industry diversification and over 60th for high tech exports. It’s a slightly better story for Canada but not by much.

R&D spending relatively low in both countries, at around 1.7 percent of GDP, compared with an OECD average of 2.8 percent and with R&D leaders like Korea, Israel and Switzerland approaching 5 percent. And the hollowing-out of manufacturing capability, which drives the research and skills ecosystems of most developed economies, has worsened an already poor record for converting ideas into new products and processes.

Productivity and Wage Stagnation

As a result, on the Australian Productivity Commission’s watch, productivity growth in Australia over the last two decades is at its lowest for 60 years, with accompanying real wage stagnation. While the Commission may lament that this outcome is due to some of their more recent recommendations not being accepted by government, the reality is that their central ideological case for a limited government role has guided economic policy over this entire period.

So, imagine the consternation when Prime Minister Anthony Albanese announced in a speech on his “Future Made in Australia” initiative that we need to be “willing to break with old orthodoxies” and “pull new levers to advance the national interest.” A chorus of criticism by past and present Commission heads made it clear that he would not be able to do so without fierce resistance from those whose attachment to old orthodoxies dies hard.

On the Australian Productivity Commission’s watch, productivity growth in Australia over the last two decades is at its lowest for 60 years, with accompanying real wage stagnation.

This criticism has taken a familiar form over the years, essentially that any attempts by government to reshape or diversify Australia’s industrial structure, based as it is on primary commodity exports, are bound to fail. With a selective use of evidence, it is said that such attempts would simply “encourage rent-seeking,” produce a “misallocation of resources” and result in “sub-optimal outcomes.”

We have to wonder at this choice of language, as the commission has itself—through its relentless advocacy of privatization, contracting out and other “reforms”—enabled rent-seeking. The result, as we now see from a string of public inquiries is not productivity-enhancing competition.

Nor is the Commission averse to subsidies, provided they suit its version of comparative advantage, which privileges the export of unprocessed raw materials over more complex, value-adding activities. Its annual Trade and Assistance Review regularly draws attention to what remains of the support for manufacturing while omitting any reference to fossil fuel subsidies.

For example, Australia’s diesel fuel tax rebate, which is accessed predominantly by a handful of international mining companies, costs the taxpayer $7.9 billion a year—more than half the entire Commonwealth spend on research and innovation. In accepting the Productivity Commission’s focus on “natural” comparative advantage, policymakers missed the chance to promote new and existing areas of competitive advantage, based on knowledge and ingenuity.

Hollowed-Out Manufacturing

Some history provides the context. After starting at level pegging early last century, Australian living standards surged ahead of Argentina thanks to a crude but effective strategy of infant industry development behind protective tariffs. The famous 1929 Brigden report noted that “the maximum income per head for Australia would probably be obtained by reducing it to one large sheep-run with the necessary subsidiary and sheltered industries.”

When by the 1980s, the costs of protection were seen to outweigh the benefits, the Hawke-Keating government embarked on a process of tariff reductions. But in doing so, they introduced industry plans and structural adjustment measures to encourage a shift from vertically integrated mass production to smaller, more specialized firms that could compete in global markets and value chains, with increasing returns to scale.

While manufacturing as whole contracted, the success of this new approach could be gauged from the fact that “elaborately transformed manufactures” became the fastest growing area of Australia’s export trade. However, instead of building on this success in the subsequent commodity boom, governments complacently took the windfall gains and allowed the market to take its course.

These windfall gains masked a deterioration in Australia’s productivity performance, as the “resource curse” of a stronger dollar rendered much of the new manufacturing uncompetitive. Rather than emulating the Norwegians, who took a stake in their North Sea oil and gas assets, imposed a 76 percent resource rent tax and created the world’s largest sovereign wealth fund, Australia followed the British model, which promoted short-term consumption over investment.

As a result, the manufacturing share of GDP in Australia is the lowest in the OECD at around 6 percent, with the manufacturing trade deficit doubling in the last two decades to AUD 180 billion. Essentially, iron ore and coal exports have allowed us to enjoy a developed economy lifestyle with a precarious underdeveloped industrial structure, but for how long?

The Economist concludes that, “Ozanada’s economic model is not about to collapse. In time, though, its corporate weaknesses may come back to bite it.” In this scenario, the way forward is not to be found in the “static equilibrium” modelling of the Productivity Commission, where the assumptions themselves give rise to predictable winners and losers, but a new approach to industrial policy based on the Schumpeterian model of dynamic growth and innovation. 

New Approach to Industrial Policy

Australia, like Canada, is uniquely fortunate, once again, in having another chance to get its policy settings right. And, faced with the existential challenge of climate change and energy transition, as well as the decline in global demand for our traditional exports, we must. The scale of the opportunity is huge—to grow the industries and jobs of the future in a global market estimated to be worth $10 trillion by 2050.

Importantly, this opportunity must go well beyond switching reliance to new categories of raw materials, simply because they can be retitled as “critical minerals.” For example, Australia produces 50 percent of the world’s lithium and sells 90 percent of it to China, but captures only 0.53 percent of its final value. It changes nothing in Australia’s domestic economy if these exports are redirected to other, more “friendly” countries.

The Albanese government’s Future Made in Australia initiative is the first step in a coordinated “whole of government” approach to enabling competitive advantage in a new, higher value adding growth market for entrepreneurial Australian firms. It will require close collaboration by industry with research and education institutions, which can and do play a major part in lifting innovation and enterprise capability.

This approach also calls for a central institutional focus in the design and implementation of a mission-led industrial strategy, with national missions validated by regular technology foresighting. Examples of such a focus include Vinnova in Sweden and InnovateUK, whose impact may be enhanced by a tripartite structure involving both industry and unions. This would also have the benefit of providing an alternative source of advice to the Productivity Commission.

In addition, there is scope in both Canada and Australia for a more ambitious approach to public procurement, skills upgrading and the development of place-based innovation ecosystems. Again, the design of these ecosystems can draw upon international experience, in particular the German Fraunhofer Institutes, UK High Value Manufacturing Catapults and the Manufacturing USA Institutes.

There is now broad recognition around the world that government must play an active role in building a more competitive and dynamic knowledge-driven economy, particularly with increasingly interconnected productivity and climate challenges. It would be helpful in this context to draw on an expert advisory body with the capacity to guide the implementation of a modern industrial strategy, but that body should not be modeled on Australia’s Productivity Commission.

Back to Top