Sunday, October 19, 2014

Missing in Action: The Productivity Commission and ICT in the 21st Century

(This paper was originally drafted over two years ago - but its conclusions are still valid)

In the late 1990s the Productivity Commission’s focus was in seeking to explain the surge that had occurred in Australia’s productivity over the preceding decade.

A PC staff research paper in 2001 considered the impact of ICT on Australia’s productivity surge.[i]  A particular focus of that report was whether Australia was disadvantaged by not having an ICT manufacturing capability.  The paper found that “ICT-related productivity gains can be accessed through use and not just production; and that, through rapid uptake of ICTs, Australia has already caught an ICT-related productivity wave.”

The comments of that paper were captured in a speech delivered by PC Chairman Gary Banks in 2002.[ii]  The key points in that speech were listed as;
               Australia’s productivity growth surged to a record high in the 1990s – more than double the rate achieved over the 1980s. Australia’s productivity surge was also very strong by international standards.
               A new set of service industries – especially Wholesale trade and Finance & insurance – made major contributions to the 1990s productivity acceleration.
               Australia was comparatively quick in adopting information and communications technologies (ICTs) in the 1990s and their use has featured in the productivity accelerations of the new service industry contributors.
               Microeconomic reforms were pivotal in Australia’s improved productivity performance, by sharpening incentives for businesses to be more productive and providing them with greater flexibility to adjust to a more competitive environment. Microeconomic reforms encouraged and assisted the uptake of ICTs and the transformation of industries in ways that tap new productivity potential.
               In looking to the future, further productivity gains are possible from continued ICT uptake and business transformation, and Australia is well placed to benefit from e-commerce.
               Policy will continue to play an important role – particularly in relation to labour market flexibility and the development of ‘human capital’ (in the widest sense).

In brief the adoption of ICT had been a significant past contributor to the productivity surge and could be expected to continue to be so.

In 2007 another staff research paper compared Australia’s productivity performance to that of the US.[iii]  That paper suggested Australia might never be as productive as the US and concluded;
Broadly speaking, government policy will be most supportive of productivity catch-up by putting in place the framework that underpins sound private choices within firms and industries. This means focusing on economic incentives (such as competition), capabilities (such as skills and research and other infrastructure) and flexibility (the scope for firms to adapt, experiment and to implement new business models).

The PC has, however, tended to focus its efforts very much on the first of these over recent years.

The PC has conducted a research project that links the first and third title “An analysis of the effect of product market competition on innovation and productivity in Australia”.[iv]  This study is taking as a starting point a joint PC/ABS paper that draws on the ABS Business Longitudinal Database.[v]  That study interestingly did not find a simple correspondence between increased competition and innovation, as other market characteristics were also important.

It is unclear whether this study controlled for the separate findings of another ABS study on the same data set that found strong evidence of a link between ICT use and innovation.[vi]  This links ultimately links innovation to (communications) infrastructure.

It could indeed be disappointing if the PC were to reach a conclusion about innovation and competition without also considering the link between broadband and innovation.

Despite all the evidence provided by the PC about the productivity surge of the 90s and its link to ICT, and its views about productivity growth being fuelled by further ICT adoption and infrastructure investment, the PC has been strangely silent on the NBN.

Indeed its only foray was the one that led the Minister to redefine appropriate language for a lunchtime television audience when he was asked about a competitive neutrality complaint report emanating from the PC. 

There has been much commentary about suggestions made by the coalition that the Government should have conducted the PC to undertake a cost/benefit analysis of the NBN plan.  The PC has not historically undertaken many cost benefit analyses.

However there is nothing stopping the PC undertaking its own research into the productivity impacts of investment in broadband.  The fact that it has ignored the topic for over a decade indicates that there may indeed be some substance to the view that the PC is now pursuing a myopic view of the determinants of productivity; a myopic view not even supported.

[i] Dean Parham, Paul Roberts, Haishun Sum Staff Research Paper: Information Technology and Australia’s Productivity Surge Productivity Commission 2001
[ii] Gary Banks  The drivers of Australia’s productivity surge Presented at Outlook 2002, hosted by the Department of Industry, Tourism and Resources and the Australian Bureau of Agriculture and Resource Economics, National Convention Centre, Canberra, 7 March.  Productivity Commission
[iii] Ben Dolman, Dean Parham, Simon Zheng Staff Research Paper: Can Australia Match US Productivity Performance? Productivity Commission 2007
[v] Les Soames, Donald Brunker, Tala Talgaswatta Research Paper: Competition, Innovation and Productivity in Australian Businesses Australian Bureau of Statistics and Productivity Commission 2011
[vi] Jessica Todhunter and Ruel Abello  Research Paper: Business Innovation and the Use of Information and Communications Technology Australian Bureau of Statistics 2011

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