The post-war boom in the West and Japan is an epitome of this process working effectively. From the time the Marshall Plan was launched in 1948 to the oil crisis of 1973, productivity shot up as countries built infrastructure, modernized their economies, educated their masses and increased trade. Not surprisingly, productivity rose by around 5% per year in advanced economies in the 60s and 70s, with Western Europe closing the substantial lag it had had with the US following World War II.
In the wake of the 1973 oil crisis, this trend clearly turned south, with productivity growth averaging about 2% for the remainder of the 20th century in the West. Despite the rise of the digital economy and all the concomitant technological progress, there has been a further slowdown, which predates the 2008-09 financial crisis. The question is why.
The right framework
Faced with this predicament, the Council of the EU (i.e. member state ministers who share budgetary and legislative power with the European Parliament) called on eurozone member states in September 2016 to establish national productivity boards.
As a public advisory body committed to teasing out future economic trends, France Stratégie is involved in determining the appropriate institutional framework for such boards. As part of this process, it invited Gary Banks, chairman of the Australia Productivity Commission from 1998 to 2013, to share his country’s experience.
Banks pointed out the Council is very much aware that growth across the EU ultimately depends on member states’ ability to increase their productivity. The challenge, he said, is multi-faceted in that it requires policies to support innovation and skills, reduce market rigidities and enable a better allocation of resources.
“There’s no silver bullet that improves productivity,” he said. “Incentives, capabilities and flexibility are all important factors.”
Incentives include competition, regulation and budgetary assistance; capabilities cover skills, infrastructure provision and organisational; while flexibility is essentially about what regulation is in place.
Perhaps the most important thing about Australia’s Productivity Commission is that though it is a government research and advisory agency, it is independent. What’s more, it is designed to be a counterweight to industry in the public interest.
In terms of the institutional challenges, Banks highlighted the inherent bias against reform that the Productivity Commission came up against during his tenure. To surmount this, he emphasized the importance of raising public awareness of the stakes and supporting political leaders who advocate on behalf of reform.
In addition to its independence, the two core features of the Productivity Commission are its transparency and its economy-wide perspective.
Crucially, it provides the Australian government with unbiased advice based on evidence. The government also uses it to test public reactions to reform ideas and as a means to counter special interests. Moreover, through public consultation it raises awareness of the issues among the community at a large.
The Commission embraces transparency by publishing preliminary versions of its reports and subsequently organizing wide-ranging debates with different stakeholders. This allows fresh input and insight to round out and improve on the initial draft, resulting in a more complete final version.
Banks stressed that following reforms backed by the Productivity Commission, productivity in the country increased and unemployment fell.
It is clear that France and the EU as a whole stand to learn from Australia’s experience. Indeed, a forthcoming working paper by France Stratégie points out that between 2012 and 2016 France’s growth in total factor productivity (TFP), which measures how efficiently an economy combines capital and labour, was a meagre 0.2% per year, well below the pre-crisis levels.