Stagnation in the rate of innovation threatens Australia’s living standards and incomes, according to its most senior public servant, Martin Parkinson.
He responded to a growing international fear of slowing productivity by advocating a suite of policies including free trade, increased competition and a tax system that doesn’t penalise “legitimate risk”.
Parkinson, the secretary of the Department of Prime Minister and Cabinet and former Treasury secretary, made the comments in a speech to the Committee for the Economic Development of Australia event in Canberra on Monday.
Australia’s chief bureaucrat said the future of the country will be determined “by the resourcefulness of its people, not the resources lying under it”.
Parkinson noted that in advanced countries, including Australia, growth in incomes has “slowed markedly, with impacts on living standards and fiscal positions”.
By looking at multi-factor productivity, we can measure the rate of innovation in products and the processes for making them, he said.
Parkinson warned that between the 1990s and 2000s average annual growth in multi-factor productivity fell by around a percentage point across several advanced economies and was barely positive in Australia over the past decade.
Even when mining and utilities sectors are excluded, multi-factor productivity growth had “fallen significantly over the past decade” with 10 of 14 Australian market-sector industries recorded lower productivity growth over the past decade than the previous one.
Parkinson examined a number of theories, including that productivity growth is slowing globally because the revolution in communications and information technology has not improved innovation as much as was once thought.
The trend might be reversed when current technologies reached their productive potential, he suggested. “Indeed, the prime minister has noted that in many cases we overestimate the short-term impact of an innovation and underestimate its long-term impact.”
But he concluded we “just do not know whether technological advance is speeding up or slowing down”.
Another explanation could be that ideas are not being taken up as quickly, he said, citing evidence that companies had fallen further behind those at the frontier of innovation.
Parkinson said the government could boost innovation by using intellectual property law to encourage rather than restrict new ideas, increasing access to data, and not penalising risk through the tax system.
He said sometimes businesses failed after taking a “legitimate risk” and the government should avoid imposing costs like when “bankruptcy penalises those able to start again or when the tax system fails to give due recognition for tax losses”.
Governments also needed to stop anti-competitive behaviour because it “favours incumbents over more potentially innovative” and to stop protecting loss-making industries which “stop resources flowing to more innovative ones”.
“Even where we allow government services to be uncontested and directed more by employee interests, rather than consumer interests, we most likely harm innovation.”
Parkinson said business should do their part by improving management practices. One analysis found if Australian manufacturing firms lifted to the average level in the US it would raise the level of productivity in Australian manufacturing by about 8%, he said.
“Open trade, investment, modern communication and data technologies vastly open up the scope for innovative growth across our economy.”
“Those industries and businesses that are international in their outlook, have hooked into global supply chains, embraced change and adapted to the challenges will remain competitive.”
Parkinson said businesses could not only survive but thrive by tapping into global markets but industries that didn’t face trade competition, such as the aged-care sector, would also need to improve their multi-factor productivity.
He concluded by saying that – in Malcolm Turnbull’s words – “doing things better and smarter” was the “main game” in improving living standards.
