Reading this article reminds me of the time I was still in the Philippines during the many years it had to face many economic crisis that required the involvement of the World Bank and the International Monetary Fund to help address its situation. Structural reform was always perceived as a bad word because it meant prices of subsidized goods go up, certain taxes being introduced or tariffs on imports reduced. An equally bad word was productivity which meant you had to work more for the same pay. Reading this article today I see a different perspective from an Australian economic circumstance. I still have to give more thought whether in a Philippine context whether those negative perceptions hold true particularly when there continues to be unequal distribution of wealth, massive poverty, high concentrations of economic power and ownership, and high unemployment. The  only game changer in the last 20 years I can quickly recall into mind is the emergence of the Business Processing Outsourcing and Overseas Filipino Workers which help generate millions of new jobs and dollar inflows which sheltered the economy from worst economic shocks all these years. Let’s hope the new administration with its high emphasis on governance will finally make a third game changer: reducing if not eliminating the common practice of graft and corruption. Of course, while doing this effort, I also hope they realise we still need to create jobs, delivery the needed public services and grow the economy. Its a form of structural reform too if you think about it but let’s not forget we got to keep the business running too.

 

Structural reform will bring back productivity

From the Sydney Morning Herald

By Ross Gittins
20 February 2012

If your goal is to raise Australians‘ material standard of living, the debate about what must be done to increase our flagging productivity is vitally important. But if we want the debate to achieve something, we should stop talking so much weak-headed nonsense.

People are talking about productivity as if it’s motherhood for businessmen – all fluffy and soft. Sorry, productivity is more nasty than nice. Sometimes it’s red in tooth and claw. It always involves effort and unsettling change, and often involves people being thrown out of their jobs.

As the headlines scream at us every day, many of our industries are being put through the wringer at present, and are shedding workers to prove it. This is not a downturn in the economy, it’s the economy being hit by multiple pressures for structural change.

Manufacturers (and tourism and education – not that anyone cares about them) are being hit by the high dollar. Retailers are being hit by the end of a 30-year period in which consumer spending grew faster than household income and by globalisation as the internet breaks down longstanding national price-discrimination schemes. Shopping-centre owners are also in the gun.

Banks are still adjusting to the continuing global financial crisis, which has increased their cost of funds while also increasing their pricing power. Newspaper and media companies, and book publishers and sellers, are adjusting to the information and communication revolution. Qantas is adjusting to deregulation and globalisation.

Guess what? All these nasties are in the process of increasing Australia’s productivity – as we speak. To the extent firms are shedding labour faster than their unit sales are declining, they’re increasing their productivity as a matter of simple arithmetic.

More fundamentally, structural change is presenting all these firms (bar the banks) with an ultimatum: shape up or die. As they fight for corporate survival in a radically changed world, they will become leaner and fitter. In the process, they’ll almost certainly contribute to an increase in national productivity.

What this means, however, is that all the business people, union leaders, opposition politicians and commentators pressuring the government to protect industries from change are fighting to prevent productivity improving. And every time the government gives in to those pressures it’s acting to stop productivity improving.

I’m convinced many of the worthies banging on about productivity don’t actually know what it is. Productivity is output per unit of input. That means it’s about comparingquantities, not prices or values.

This is why productivity and profit (or profitability – profit relative to the equity capital or assets employed to earn the profit) are quite different concepts, not pretty much the same thing – as many business people seem to imagine.

Usually productivity is measured as output divided by units of labour inputs (hours worked), giving the productivity of labour. If you divide output by units of both labour and capital inputs you get ”multi-factor [of production] productivity” (which always grows at a much slower rate).

The great delusion of the productivity debate – one inadvertently fostered by crusading economists – is that productivity improvement is a gift governments deliver to business, provided they have the political courage to implement ”reform”.

Rubbish. As our great private-sector productivity expert Saul Eslake has said: ”Productivity only happens as a result of the decisions that are made and implemented in places of work.”

So there’s an obvious question no one is asking: why have Australia’s chief executives failed to increase their firms’ productivity for the past decade? Obvious answer: because it’s been easier for them to increase their profits without doing much to increase their productivity. (And a big part of the reason for this is that the economy’s been growing reasonably strongly, year after year, for 20 years – with just a mini-recession in 2008-09.)

Research suggests few firms actually measure their labour productivity. That’s no surprise: the goal of firms isn’t to increase their productivity it’s to increase their profit – which is what they do measure, carefully and often.

Increased national productivity may be the key to rising material living standards, but increased productivity is just an incidental by-product of a firm’s efforts to increase its profit. There are often many easier ways to increase profit than to improve your productivity.

Sometimes firms increase their productivity in response to opportunities or incentives – carrots – created by governments. This is what chief executives dream about while primitive tribes dream about planes dropping cargo from the sky.

Sometimes firms increase their productivity in response to governments beating them with sticks to force them to lift their game. This is known as ”micro-economic reform”. You slash protection against imports, allow the dollar to float, dismantle a host of interventions designed to give industries an easy life and tighten up the Trade Practices Act.

All this increases the competitive pressure on firms – from imports and local competitors – forcing them to lift their performance and their productivity. Is this the ”reform” the business lobbies are crying out for? I doubt it.

Sometimes national productivity is improved by nothing more than firms doing what they do: striving to increase their profits. But, as we’ve seen, that hasn’t been happening for a decade.

Alternatively, national productivity is improved as a by-product of firms grappling with adverse changes in their economic environment that threaten their profits and even their survival.

That’s what’s happening in our economy right now. You want higher productivity? Your wish is about to come true. When we’ve got through the present bout of structural adjustment we’ll have a much more efficient set of industries. But everyone seems to be hating it.

Ross Gittins is the economics editor.

This story was found at: http://www.smh.com.au/business/structural-reform-will-bring-back-productivity-20120219-1th7h.html

 

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