Australia Must Invest in Innovation, Infrastructure, Says OECD Economist

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Last week Jonathan Coppel, who is the Economic Counsellor to the OECD Secretary General (and an Australian) posted on his blog a copy of a speech he recently gave at National Economic Review: Australia's Annual Growth Summit 2010.  Coppel's allocated task was to explain how Australia might improve its growth performance.

Coppel's thesis is that Australia's recent growth, measured as increase in per capita GDP, has been achieved through increases in labour utilisation, ie more Australians working more of the time.  However, according to Coppel:

1. Australian GDP per capita remains 7% below the average for the upper-half of OECD nations (although this gap continues to close);
2. Australian productivity, measured as GDP per hour worked, remains 15% below the upper-half OECD benchmark, and is not moving from this level; and
3. growth based on increasing labour utilisation is clearly not sustainable in the long term.

The main elements of Coppel's proposed solution are infrastructure and innovation.  He argues that "the benefits from efficient spending on infrastructure in energy, water, transport and communication sectors go well beyond their direct contribution to capital accumulation" because:

Good infrastructure facilitates trade, bolsters market integration and competition, fosters the dissemination of ideas and innovation and enhances access to resources and public services. These benefits are particularly important for Australia because of its size, geographical dispersion of the population and production centres and distance from other major markets.

This seems like a pretty good argument for the National Broadband Network, despite its projected A$43 billion price tag.

On innovation, Coppel has this to say:

Looking at various indicators of innovation performance, such as business R&D intensity, the share of scientists in business employment, and measures of patents, Australia ranks towards the lower end of OECD countries. On other proxies, however, such as higher education expenditure on R&D, Australia performs relatively well.

The importance of innovation has grown significantly, and the potential pay offs are large. We know from past OECD work that used private sector investment in R&D as a proxy for innovation that when R&D increases by 0.1 per cent of GDP, then output increases by 1.2 per cent.

We note that these observations are consistent with finding in the World Economic Forum's Global Competitiveness Report, which we wrote about a few weeks ago.

AUSTRALIANS HARD AT WORK

According to Coppel's (ie the OECD's) figures, compared to the top-performing OECD countries, Australian has a lower GDP per capita and lower GDP per hour worked.  Some simple math leads to the conclusion that Australians must be working significantly longer hours than residents of those higher-performing nations.

The statistics on this seem to be a bit rubbery, and the exact figures depend upon which report you read (no doubt they all make different assumptions).  However, according to a "Facts Sheet" prepared by the Australian Institute of Family Studies for the 2008 National Families Week:

Australia has long full-time working hours by international standards. In 2006 in Australia, full-time employed men worked an average of 45.9 hours per week, compared to many OECD countries with averages of less than 43 hours per week (for example, Denmark, France, Germany, Ireland, the Netherlands, Sweden).

However, Australia Bureau of Statistics figures suggest that many of those hours may be unpaid, with weekly paid hours varying between about 37 and 44 hours, depending upon industry and occupation.

At the same time, Australia also has relatively high levels of part-time employment, with considerable variation in the split between part-time and full-time workers between different age groups and between men and women. 

A study reported in 2005 concluded that Australians worked, on average, 1855 hours per year, ahead of the US (1835), Japan (1821) and New Zealand (1817).

SOMETHING TO BE PROUD OF?

Many Australians would no doubt wear the label "hard worker" as a badge of pride.  They should not.  In fact, it would be more appropriate for us all to wear those T-shirts bearing the slogan "I'm with stupid!"  It is a cliche to say "work smarter, not harder", but that is exactly what all those high-performing OECD countries are doing.  And their workers are earning more money, working fewer hours, or (in some cases) both.

Achieving greater efficiencies requires innovation – in processes, services and products – not more hours on the job.  It requires more effective capture and deployment of intellectual capital.  Maximising the returns requires sophisticated intellectual asset management, including (though not only) the protection and commercialisation of patentable inventions.  Australia can improve its performance in all of these areas.

As an added incentive, achieving greater efficiency in production and service provision results in reductions in resource utilisation, so there is an environmental imperative as well.

Tags: Australia, Economics, Innovation policy