Australia’s Economic Performance

Leaders must take action to lift their aspirations and adopt management practices and innovation levels that will allow them to achieve world-class productivity.

March 2015 | by Robert Emmerich

The Australian economy has undergone significant and extensive reform in the last fifteen years. Major government-led changes have transformed its financial system, business regulations and industrial relations environment, and reduced trade protection. There has also been much change in business practices, and in the relationships between employers, employees and unions. Yet despite these efforts, Australia’s relative economic prosperity has not changed since 1970. Its GDP per capita is thirty per cent behind the best performing country, the United States. Most of this gap is due to lower labor productivity, and the remainder to lower employment per capita.

To help understand what further action is required to step up the pace of productivity growth in Australia and thereby improve its economic standard of living, we looked at labor productivity and employment creation in five industries to identify the major causes of differences with their counterparts in leading countries. These industries are food processing, construction, general merchandise retailing, retail banking and aviation. Together, they comprise eighteen per cent of the Australian economy and about one quarter of the market economy.

Findings From Our Case Studies

In four of the five industries we studied, Australia’s labor productivity is significantly below that of the United States. In food processing, Australian productivity is sixty per cent of the US level; in general merchandise retailing, it is eighty per cent; in retail banking, it is sixty per cent; and in aviation, it is ninety per cent.  In the remaining industry, construction, Australia is near best practice, achieving ninety-five per cent of the US productivity level. In terms of employment creation, Australia’s performance is also weaker than the United States in these industries, particularly retailing and food processing.

To understand the reasons for Australia’s relative performance we looked at the potential drivers of productivity in two categories. The first group includes firm level factors such as management aspirations and behavior; the configuration of business processes such as production, distribution and service; product and service innovation; capital intensity; and scale. The second group includes factors largely outside firms’ control, such as market conditions and product and labor market regulation. These external factors influence the competitive intensity of an industry which, in turn, influences how firms behave.

Implications for Australia

If business and government can act to close Australia’s productivity gap in the five industries we studied, benefits worth seven billion dollars per annum could flow to Australians through lower prices and higher economic living standards. Similar benefits in other market sectors could be worth thirty billion dollars a year—a figure that is comparable with the estimated gains from the micro-economic reform initiatives undertaken since 1980.

Although incentive structures are a major influence on average industry productivity, the aspirations of individual firms also make a difference. A major part of the solution to Australia’s productivity performance problems rests with the leaders of all Australia’s corporations—large and small.

Currently, there are pockets of firms which have high management aspirations and are achieving dramatic improvements in performance by pursuing aggressive best-practice initiatives. But to lift Australia’s average industry productivity levels, many more firms must set aggressive objectives and performance targets and buy into the change agenda by actively pursuing worldclass levels of productivity performance. They can do this in many ways: deciding to export, developing a new product in conjunction with an overseas customer, or collaborating with their employees to create productive ways of working.

The importance of implementing world best practice in areas such as supplier management, logistics, workflows, management training and development has been widely recognized and talked about. However, as the business leaders who attended our conference discussed, many firms continue to lag behind worldbest practice in these areas. This lag seems to be greatest in firms not exposed to international competition.

 

Executive Editor

Ms Anna Sullivan

Ms Anna Sullivan