Australia is indeed a lucky country, for now at least. While Europe and the US appear to be lurching from financial crisis to financial crisis, Australia despite its strong dollar, has been insulated from the turmoil. But that does not tell the real story of the local economy at macro and micro levels.

In the first decade of the 21st century Australia fell behind in the worldwide productivity stakes. In the late 1990s Australia experienced a productivity boom with growth of 2.3 per cent but between 2003-04 and 2010 productivity levels fell by 0.4 per cent.

Bank of America Merrill Lynch’s chief economist Saul Eslake says the effects aren’t immediately obvious right now because of the China-driven mining boom. “It may be that the consequences of our poor productivity performance won’t be obvious to most people for as long as the commodities boom persists,” he says.

Money buying more abroad

John Daley, CEO of the public policy think tank The Grattan Institute, says that while the upward swing of the Australian dollar has made life difficult for many Australian producers, such as steel manufacturers, it makes some Australians feel wealthier as the money in their pockets buys more from abroad.

“The catch is that currency appreciation is not a one-way street and it is difficult to believe that the Australian dollar is going to go a lot higher than it is at the moment,” he says. “This means future increases in growth are almost certainly going to need to come from doing it the hard way and improving productivity.”

There is obviously a whole series of issues of varying complexity that impact on productivity. The one that both Eslake and Daley focus on is what they describe as ‘productivity zapping legislation’.

Eslake says: “Over the past 10 years, Australia has had a rolling tidal wave of legislation and regulation ostensibly aimed at enhancing various concepts of ‘security’, which amounts to efforts to eliminate through legislation and regulation almost all of the risks associated with being alive in the 21st century. I would argue there is probably some kind of trade-off between ‘security’ and productivity. And if you want more of the former then part of the price you pay is less of the latter.”

At a micro level there are serious regulatory issues that hit businesses. One of these is the constraints of award rates and what some view as archaic wage structures where penalty rates are paid for working evenings and weekends (see side bar).

Improving education

Then there is education, training and health of staff. Daley says that the single biggest lever for improving productivity is improving the quality of education. “This is quite a depressing story in Australia,” he says, “because we characterise Australia’s school education as good but not great.” He points to east Asian education systems, in particular Shanghai, South Korea, Singapore and Hong Kong, which have substantially improved their education systems.

They are now a long way in front of Australia. A Shanghaiese year 9 maths student is said to be two years ahead of their Australian counterpart. “That’s the difference between the average performance of Australian students and Australian indigenous students, which we think of as quite an unacceptably large gap. And it is unacceptably large,” notes Daley.

There are studies by World Bank and the Organisation for Economic Co-operation and Development (OECD) reporting that the impact of better education systems is very material even when taking into account the growth phases that many emerging economies are in. “South Korea has grown faster than one would expect,” says Daley.

Another issue is health, particularly in the workplace. The number of Australians who are drinking in a way that adversely affects work is high compared with other countries, and it is getting worse. And it is surprisingly worse among 45- to 55-year-olds than 25- to 35-year-olds.

“Fitness, obesity and alcohol consumption are significant issues for us,” says Daley. “Of course, changing them is about changing individual behaviour and that is really hard work.”

There are also indirect drivers of productivity such as workforce participation. In Australia the female participation rate is substantially less than other places in the world. According to the latest available figures in 2006 from the Productivity Commission, some 55 per cent of women in Australia are participating in the workforce. An increase of 7 per cent would add another 209,000 women to the workforce, bringing it up to the same level as Canada, and pump another $15 to $20 billion into the economy.