Global competitiveness, government regulation and productivity growth: Where does Australia rank?

Updated

Prime Minister Tony Abbott recently highlighted two international surveys that challenge the belief that Australia's economic performance has been a standout.

In the House of Representatives on March 19, he said: "On the World Economic Forum's global competitiveness ranking, Australia has slipped six places in four years to 21st. Australia's ranking on the burden of government regulation is 128th - yes, 128th in the world, nestled between Romania and Angola. On The Economist's productivity growth ranking, we come second last, just ahead of Botswana."

Given the importance of Australia's economic competitiveness and productivity growth, ABC Fact Check investigates these claims.

The claims: Tony Abbott says Australia is ranked 21st in global competitiveness, 128th when it comes to burden of government regulation and second last in productivity growth.

Tony Abbott says Australia is ranked 21st in global competitiveness, 128th when it comes to burden of government regulation and second last in productivity growth. The verdict: Mr Abbott quoted his sources accurately. The information they provide, however, is of questionable value.

Global competitiveness: Is Australia ranked 21st?

The World Economic Forum, a respected economic research body which runs a summit in Davos, Switzerland, each January, publishes an annual Global Competitiveness Report. The report ranks most countries in the world on roughly 100 economic criteria. It uses partner organisations in each country to carry out surveys of selected businesses, while the forum itself supplies additional hard data.

The forum's partner organisation in Australia is the Australian Industry Group, a business association with members in industries including manufacturing, construction and telecommunications.

The surveys dominate the index. Only about 20 of its rankings measure verifiable facts.

The businesses surveyed are asked to rate their country from 1 to 7 on 79 different issues. Some are specialised, remote from the average business. Others are general, such as the extent of judicial independence or the quality of primary education.

The survey is essentially an opinion poll of the businesses responding. Their answers are compared to the ratings that firms overseas gave their countries on the same questions. So countries' rankings in each area measure how positive their businesses feel.

In Australia, just 57 firms took part in last year's survey. The findings combine their opinions with those of the 68 firms who took part in the 2012 survey. (Each year's report combines results from two consecutive annual surveys.)

The one-page list of the latest rankings shows Switzerland, Singapore and Finland leading the way in the 2013-14 report. The country-by-country summary notes that this is the first time Australia is not in the top 20 and is overtaken by New Zealand.

Under governments of both sides, Australia has consistently done worse in the index than might be expected from its economic record. The survey findings suggest that, compared to their counterparts in other countries, Australian businesses tend to be grumpy when the Coalition is in power, and very grumpy when Labor is in power. For example, the 2007-08 ranking, using surveys taken in 2006 and 2007 during the Howard government, put Australia just 19th in global competitiveness.

The 2009-10 report shows that during the global financial crisis, Australia climbed briefly to 15th. It is the fall from that position to this year's ranking of 21st that Mr Abbott referred to in Parliament.

Australia's actual score on the competitiveness index declined only very marginally in those years. It was 5.2 at the end of the Howard government, and 5.1 in the latest survey. (A perfect score would be 7.)

The detailed findings show that improvements in some of the hard data - higher incomes, higher savings, lower inflation, higher participation in tertiary education, wider usage of broadband and the internet - only partly offset a sharp fall in the ratings given by the firms surveyed across a wide front.

Australian businesses surveyed in 2012 and 2013 thought most things had got worse. They saw their customers as less sophisticated and more price-driven than in 2007. They thought their business rivals had become less ethical, governments were more likely to favour particular firms, and the courts were less independent and less able to settle business disputes.

Business in 2012 and 2013 thought the competition regulators had become far less effective, schools' educational standards were deteriorating, farmers were becoming a bigger burden for the economy to carry, and business had less legal protection for intellectual and other property, and less flexibility in fixing wages and less freedom to hire and fire.

The index put all these responses together, weighed them against the improved economic data, and Australia came out as marginally less competitive than it had been.

The reason the ranking fell six places over these four years was that six other countries – Qatar, Austria, Belgium, New Zealand, the United Arab Emirates and Saudi Arabia – overtook Australia, because their business leaders judged them to have become more competitive.

The issue seen by many in Australia as the most important factor making business uncompetitive – the dollar's rise from 51 US cents at the start of 2002 to $US1.05 in 2012 – was not covered by the survey.

Burden of government regulation: Is Australia ranked 128th?

Mr Abbott's claim about the burden of government regulation comes from the same Global Competitiveness Report. Australia's ranking of 128 out of 148 countries was based solely on the opinions of the 125 Australian businesses surveyed in 2012 and 2013, compared to the responses of their counterparts in other countries to the same question.

Respondents were asked: In your country, how burdensome is it for businesses to comply with governmental administrative requirements (e.g., permits, regulations, reporting)? The answers were scored from 1 (extremely burdensome) to 7 (not burdensome at all).

Australia's score was 2.8. This was worse than the score of 3.2 four years ago, which gave Australia a ranking of 66 out of 133 countries.

Over the same period, businesses in countries such as Mexico, Bangladesh and Zimbabwe thought their regulatory burdens had lightened. So they rose in the rankings, and Australia plunged.

This table shows the latest rankings and scores of the world's 10 biggest economies:

Burden of government regulation 2013-14 Country Rank Score out of 7 China 14 4.3 UK 45 3.7 Germany 56 3.6 USA 80 3.4 Japan 81 3.4 India 104 3.1 Russia 120 2.9 France 130 2.7 Italy 146 2.2 Brazil 147 2.0 Source: Global Competitiveness Report

The report provides no hard data to explain Australia's low ranking. The only hard data it quotes implies the opposite: a World Bank report which found Australia was the second easiest country in the world in which to start a business. To register a business in Australia, the World Bank found, took just two steps, and two days. In Indonesia, it took nine steps and 47 days.

So why did businesses in Indonesia rate their government regulation as less burdensome than the Australian firms rated theirs? The report leaves such questions unanswered.

Productivity growth: Is Australia ranked second last?

The figures Mr Abbott cited on Australia's negative growth in productivity come from a report published in July 2012 by the Australian Human Resources Institute (AHRI) and its US counterpart, the Society for Human Resource Management (SHRM).

The report was not written by The Economist, nor even by the magazine's lesser known sister body, the Economic Intelligence Unit. Its author is Paul Begley of the AHRI, who drew on the work of the unit. He states that the index was "developed by the EIU . . . in consultation with SHRM and AHRI".

Productivity measures efficiency in the use of resources. It matters because doing things more efficiently is what drives economic growth. Labour productivity measures the output of workers per hour worked.

measures the output of workers per hour worked. Capital productivity measures the "bang for buck": output per dollar invested.

measures the "bang for buck": output per dollar invested. Total factor productivity, sometimes called multifactor productivity, combines the two.

Productivity measures efficiency in the use of resources. It matters because doing things more efficiently is what drives economic growth. Labour productivity measures the output of workers per hour worked. Capital productivity measures the "bang for buck": output per dollar invested. Total factor productivity, sometimes called multifactor productivity, combines the two.

The report gives the annual growth rate in Australia's total factor productivity as minus 0.7 per cent. It does not state its source, or time period, but its figures are close to figures published by the Australian Bureau of Statistics at the time for growth in multifactor productivity in the market sector between 2004-05 and 2010-11.

Of the 51 countries in the index, the report stated that only three had negative productivity growth: Japan (-0.1 per cent), Australia (-0.7 per cent) and Botswana (-1.5 per cent). The rankings were topped by Argentina, where productivity was reported to be growing at 6.3 per cent a year, followed by Italy (1.7 per cent) and Austria (1.0 per cent).

The other countries near the bottom of the table are notable. China, which has enjoyed the greatest run of economic growth in recorded history, was ranked equal fifth bottom, with productivity growth reported as just 0.1 per cent a year. India, another economic success story, was equal seventh bottom (0.2 per cent).

The Bureau of Statistics, among others, has warned against taking productivity figures too literally. "Year to year changes in measured productivity may reflect changes that are conceptually distinct from the notion of productivity," it points out in a note to the national accounts.

The Productivity Commission estimates that over the past 40 years, Australia's multifactor productivity in the market sector on average has grown by 0.8 per cent a year. (Statisticians focus on the market sector, because they cannot measure productivity growth for services that have no market price, such as government administration.)

But year-to-year measurements are affected by timing issues. From the 1990-91 recession to the start of the mining boom, Australia enjoyed unusually strong productivity growth. The Bureau of Statistics estimated that multifactor productivity grew by 2.5 per cent a year between 1993-94 and 1998-99, and by 1.1 per cent a year between 1998-99 and 2003-04.

But this then slowed to what it now estimates as -0.5 per cent between 2003-04 and 2007-08, and -0.3 per cent in the five years to 2012-13. The slowdown began in 2004, just as the mining boom was beginning.

Economists and officials, particularly at the Productivity Commission, have devoted much time and effort to try to understand why productivity has fallen. This work includes a 2012 Reserve Bank paper and a 2012 analysis by Productivity Commission consultant Dean Parham. Recent revisions to the national accounts, however, have sharply revised down past estimates of productivity growth, and hence undermined earlier explanations for its fall.

There is now a broad consensus among economists as to the causes, although with significant differences in the importance they assign to different factors.

The most recent contribution was on April 2 by Treasury secretary Martin Parkinson, whose speech included this graph, sourced from ABS data and Treasury calculations:

The key factors identified by analysts are:

The mining boom: Between 2003-04 and 2012-13, the mining investment boom saw the stock of capital invested in mining almost treble, from $172.5 billion to $509 billion. But mining output in that period grew by just 56 per cent. On Mr Parham's estimate, this accounts for almost half the reduction in productivity growth. Much of this was due simply to timing gaps: mining investment comes first and the resulting growth in output follows. The fall in productivity over the years of the investment boom will be made up subsequently by rising productivity as investment declines and output expands. Other influences included the decline in output from the Gippsland oil and gas fields as they are mined out, and high global prices leading miners to exploit less profitable fields. None of this is seen as cause for concern, yet the deep slump in mining productivity was the main cause of the productivity decline.

The electricity boom: The investment boom in electricity transmission and distribution that drove up electricity prices also drove down productivity. The capital stock of the utilities sector expanded 60 per cent in the nine years to 2012-13, yet its output grew just 12 per cent.

Manufacturing output decline: Manufacturing productivity also declined, as the high dollar saw the sector's output decline while its capital stock was still expanding at normal rates. In those nine years, the capital stock employed in manufacturing grew 32 per cent, yet its output edged down by 0.3 per cent.

Total factor productivity: The decline in total factor productivity was driven overwhelmingly by capital productivity: between 2003-04 and 2012-13, capital productivity shrank 23 per cent while labour productivity increased 14 per cent. But before the global financial crisis, labour productivity growth also slowed, as good times made firms more relaxed about hiring. Labour productivity grew on average by 1.1 per cent a year between 2003-04 and 2007-08, down from 2.4 per cent annual growth in the previous five years.

Since the global financial crisis, however, firms have tightened up. Labour productivity grew at an average of 2 per cent a year between 2008-09 and 2012-13, compared with an average growth rate of 1.1 per cent over the previous five years. The average fall in multifactor productivity has shrunk to 0.1 per cent in the past four years, compared with 0.7 per cent a year over the previous five years.

In future, mining investment appears set to contract sharply, while mining output will keep surging as the new mines and gas projects come on stream. That will dramatically improve Australia's productivity growth, without anyone changing anything. Just as the fall in productivity largely reflected the timing of the mining boom, so will its recovery.

The verdict

Mr Abbott, by and large, quoted his sources accurately. The information they provide, however, is of questionable value.

Sources

Topics: abbott-tony, liberals, business-economics-and-finance, federal-government, regulation, industry, mining-industry, australia

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