Productivity takes a political beating

Alan Wood: The Australian - Wednesday, June 20, 2007

ELECTION years are notable for the trivialisation of important policy issues, and lots of bad ideas for dealing with them. It would be hard to find a betterexample than the present political Punch and Judy show over productivity.

There is no doubting the importance of productivity to our national prosperity. As US economist Paul Krugman wrote in his 1992 book The Age of Diminished Expectations: “Productivity isn’t everything, but in the long run it is almost everything.”

Why? Because “a country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker” (one definition of productivity). In short, it makes us all richer.

Most people find this appealing, the exception being our self-proclaimed intellectual Left, who regard our economic prosperity as a source of universal unhappiness. So let me quote two other distinguished US economists, Alan Blinder and William Baumol: “Nothing contributes more (than productivity) to reduction in poverty, to increases in leisure, and to the country’s ability to finance education, public health, environment and the arts.” Worth having, surely?

Whether anything worthwhile will result from the present political debate on productivity is much less obvious. At the moment it is Kevin Rudd who is being discomforted over his flaky performance when quizzed about productivity on the ABC’s AM program last Thursday.

His embarrassment has been increased by the leaking of a briefing note on productivity, written by his advisers the next day. They obviously shared the view that Rudd was floundering, and also exposed a couple of painful truths Rudd has been blissfully ignorant of.

One is that Australia’s weaker productivity performance in recent years has been influenced by the fact that we have been very successful in creating new jobs and cutting unemployment. As unemployment has dropped, lower-productivity workers have been drawn into the labour force, lowering our productivity performance.

Does Labor think this is bad news? Surely not, and the impact on productivity is only short-term anyway.

Another is that there is good reason to think productivity is on the rise. I am not talking about the lift in productivity in the past two sets of national accounts; it can hop around a lot. But there is a more fundamental factor at work.

For several years we have been seeing record levels of investment, driven by the mining industry. But in the initial stage, which lasts some years, a lot of labour is employed in construction before any output comes on stream, which sharply lowers national productivity, as the Productivity Commission has shown.

We are reaching the stage where this will turn around and output (exports) rises sharply as the temporary construction employment falls, leading to a probably sharp rise in productivity. That is, we will finally see the productivity reward from the rapid rise in our capital stock in recent years.

As for trivialisation of the productivity debate, we need look no further than the other hot political issue: broadband. Rudd frequently claims Labor’s plans to extend high-speed broadband to 98 per cent of Australians is crucial to improving the nation’s productivity performance. It is, he says, a vital piece of infrastructure, or as he told the ALP’s national conference in April: “In the 19th century, nation builders laid out the railway network. In the 21st century nation builders are laying out high-speed broadband networks.”

This is surely enough to give anybody familiar with Australia’s economic history pause for thought. The railways were a great way of opening up the nation, but their contribution to our national productivity performance was sadly diminished by the fact that the states all decided to have a different rail gauge.

There is no argument that the telecommunications revolution is a big part of the new global economy story. But what will spreading higher-speed broadband across the nation do?

The ability to download movies, music, internet scams and pornography faster isn’t going to add much to national productivity.

For those who really want it, faster broadband than the 12megabits per second being promised by Labor (and the Government) is already available.

Arguments can be made on other grounds, such as social or equity ones, but not on serious economic grounds. It’s just another handout to the bush on top of the billions already transferred from urban taxpayers by vote-hungry politicians.

Any government or Opposition serious about boosting productivity through telecommunications would have broken up Telstra and focused on increasing competitive forces in the industry to make broadband access much cheaper and a wider range of technology options available.

Labor wanted to retain the bloated Testra monopoly, created by Kim Beazley to keep the unions happy, in government hands, and the Howard Government was too eager to boost Testra’s share price and votes in the bush to break it up before sale.

Not much evidence of a political class interested in productivity improvement here. The only obvious virtue of the Howard Government’s scheme is that it wastes less public money.

But the most serious blow to Rudd’s credibility on productivity is Labor’s policy to roll back reform of Australia’s labour market. Labour market flexibility has a vital role to play in improving our productivity performance.

So far Labor’s concession to criticism of Julia Gillard’s push to restore union power and influence has been to promise to do it in 2010 instead of immediately. It isn’t credible policy.

The national tragedy behind this productivity stoush is that Rudd is right; Australia’s long-term productivity performance is a matter of enormous importance.

And it is true the Howard Government has not had a sufficiently voracious appetite for economic reform, although Labor has to share the blame because of its constant opposition to reforms that have been put forward.

There is no mystery about the reforms needed: water, electricity, transport, education, skills. Both sides are putting forward new policies they claim will address them, but will they?

Not if present performance is any guide. Progress on the Council of Australian Governments’ national reform agenda in all these areas is a bad joke. A national approach is needed, but instead we have constant conflict between the federal Government and the states, where the national interest too often runs a poor second to state parochialism. Whoever wins government this year is going to have to sort out Australia’s ailing federation if we are to lift our long-term productivity performance.

In Iraq, the US has failed to heed Woodrow Wilson's lesson of self-determination.

After 4 weeks' travel through the USA in April and May, this was the best newspaper article I saw on the Iraq issue. It's well worth reading and shows that the US can be self critical.

AN ERRANT PUSH FOR DEMOCRACY FIRST

In Iraq, the US has failed to heed Woodrow Wilson's lesson of self-determination. Instead, dysfunctional borders merely cement foreign policy failures of the past.

By Ralph Peters

Perhaps the worst of the countless mistakes the Bush administration has made in its attempt to open the Middle East to democracy was the rush to hold elections in Iraq before questions of ethnic and reli­gious identity had been resolved.

We confuse the will of the people with democracy, but the latter is a tool, the first a passion. Democracy, as we know it, presumes a national community of in­terests. The lust for self-determination - as manifested by the various factions in artificial states such as Iraq -seeks the supremacy of an exclusive group.

Humans can't be chided into "just getting along."

Because the administration and its partners lacked the vision and fortitude to dismantle Iraq and draw more promising borders for Shiites, Sunnis and Kurds, the series of elections in which Iraqis braved terror to go to the polls had nothing to do with strengthening a nation and everything to do with empowering ethnic supremacists and religious demagogues.

Dismissed as a naive dreamer by the Washington es­tablishment, President Woodrow Wilson got it right nine decades ago: Significant population groups who possess (or assert) a unique identity must be given a chance at statehood.

Not all new states will succeed and frontier revisions will never be perfectly just, but the violence-spawning Conditions we face today - thanks to dysfunctional borders drawn for European advantage — will only worsen until men and women from Darfur through Kurdistan and Baluchistan to the Karenese in Burma enjoy the right to state, "I am X, this is my land, and this is my flag." We seek to reason with those pos­sessed by a dream. It never works.

'Failed borders'

For 500 years, Europe deformed the world. The iro­ny of our times is that the United States, history's greatest force for freedom, spent the years since 1991 maintaining failed borders drawn by the ministers of kaisers, czars and kings. We have dug our trenches on die wrong side of history.

By attempting to leapfrog over the issue of ethnic and religious self-determination in Iraq, we guaran­teed that each successive election would reflect em­battled identities, rather than common national in­terests. Until more-rational borders have been established, attempts at democracy throughout the developing world will continue to follow the African model, in which the largest tribe or religious group dominates the election, then perceives its victory as a license to loot the entire country.

Resolve the issues of identity and land; then vote. Otherwise, we will continue to get ramshackle pseudo-democracies that rely for their survival on our troops, our money and our ability to rationalize failure.

While democracy remains a noble - and wise - long-term goal, we need to master that great Ameri­can weakness, impatience. Democracy takes time: it's a grapevine, not a weed. Elections work best in two polar-opposite types of states: Those, such as the USA, where no single group can dominate and political par­ties rely upon fluid coalitions reflecting shifting in­terests, and those, such as Norway, where homoge­neous populations vote strictly on issues, not over ethnicity or faith. The many countries in between those poles are the problem.

Admittedly, a people's self-determination doesn't guarantee a smooth transition to democracy. The try-it-out phases of self-rule in a newly minted state can produce anything from ethnic fascism to a religious junta. But populations have to make their own mis­takes and learn from them. Democracy is self-taught.

We have to face a fundamental question: Can de­mocracy be "given," rather than learned?

Democracy is progressing around the world, but that progress is not without setbacks. Sudden free­dom can be as terrifying as it is exhilarating. In states such as Russia, voters accept the curtailment of politi­cal freedom in return for greater social freedoms and a sense of security. Even established democracies, such as Venezuela's, may vote for strongmen who despise the ballot box.

Expedience wins out

Two bipartisan failings in Washington hinder our ef­forts to help others achieve democracy: first, our blind acceptance of the world order left behind by collapsed European empires, and second, our prompt default to oppressive regimes in the name of maintaining stabil­ity. Even now, many on both sides of the aisle in Wash­ington advise a retreat into the embrace of the Saudi royal family and despots such as Egyptian President Hosni Mubarak - precisely the approach that put us on the path to 9/11.

We consistently choose the expedient option over the more difficult, but ultimately more promising, course in foreign policy. Without self-determination for major population groups that feel themselves wronged by history, we shall continue to fall short of our noblest goals.

Of course, amending borders to recognize Wilson's dream can't be done by the United States alone, nor need we pursue such a policy aggressively. It would be an enormous step forward if we only grasped opportu­nities to redraw faulty borders as they come - we threw away a great chance in Iraq. But we cannot go on standing on history's beach commanding the massive waves to freeze in place.

Those in Washington who have career-long stakes in the dysfunctional global order will insist that change is too hard, that small or landlocked states cannot sur­vive, that smaller minorities inevitably would be slighted. The reasons for clinging to the past are always legion - and usually wrong.

Until the remaining nations-without-a-state are al­lowed to assert their identities, elections will continue to be about bloodlines and faith, not democracy as we cherish it.

Ralph Peters is a member of USA TODAY'S board of contributors and the author, most recently, of Never Quit The Fight. This article was published on April 18, 2007