Cover: On productivity: concepts and measurement, Productivity Commission Staff Research note
Economies that are well below their productive potential can experience rapid productivity growth as they catch-up to their potential. The rapid growth of the Asian ‘tiger’ economies of Japan, South Korea, Taiwan, and Singapore illustrates how fast economies can grow once they were exposed to international competition after barriers to trade and efficient investment are removed.3 Australia’s rapid productivity growth in the 1990s was in large part a product of competition and trade reforms that created incentives for firms to reach their potential.
Economies that are close to their productive potential have to rely mainly on on-going technological and organisational change — producing new and improved products or more efficiently organising production — to drive growth in productivity. This is why, as the Asian tigers caught up to the developed economies, their economic growth slowed. The challenge for Australia, along with other developed economies, is to push out the productivity frontier, and to resist falling behind their potential.
Microeconomic reform plays an important role when it removes barriers to firms realising their productive potential. Competition reform can contribute to firm-level innovation (technological and organisational change) through improving the incentives for change. While government can support innovation by creating an environment for efficient investment in education, infrastructure, and research and development (R&D), a productivity growth agenda must include what drives both firm-level productivity and productivity at the level of the economy.
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