As the economy slows and productivity flatlines, is Australia having another banana republic moment?

The Guardian

a day ago

When Paul Keating stepped into a noisy kitchen in a Melbourne function centre for an interview with John Laws, he didn't mince his words.
It was 14 May 1986 when the then Labor treasurer told Laws that without some serious changes, a collapse in export prices meant our trade-dependent country was living beyond its means and fast on its way to becoming 'a banana republic'.
'If this government cannot get the adjustment, get manufacturing going again and keep moderate wage outcomes and a sensible economic policy, then Australia is basically done for,' Keating told Laws.
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It was that sense of urgency – the threat of a 'banana republic' – that helped blow away the cobwebs of complacency and drive the massive reforms of the 1980s and 1990s.
Australia in the decades since has prospered. Yet once again we are having similar conversations.
The economy doesn't seem to be functioning as it should, and may only be capable of growing at a fraction of the rate it used to.
The budget is in structural deficit. The population is ageing, and our demand for government services grows and grows, even as our capacity to fund that extra spending goes the other way.
Younger Australians are increasingly resentful about their lot, homes are too expensive and the world outside our shores looks more dangerous than it has in decades.
Used to being a standout on the global stage, we are being relegated to the back of the pack.
Living standards across the rich world climbed by an average of 22% over the past decade. In comparison, our living standards are up just 1.5%, according to analysis by Chris Richardson, an independent economist.
Analysts place a lot of the blame for this on a slowdown on one thing: productivity growth.
They point to the fact that our economy is no more productive now than it was in 2016. Over the longer term, productivity growth is the ingredient that delivers higher real wages, generates better-quality goods and helps pay for government services.
Technological change can explain a lot of productivity growth over the decades. The promise of artificial intelligence is that it ignites an explosion of new growth as AI embeds itself deeper into the economy and our lives.
With so much apparently at stake, Chalmers in a recent interview was asked if flatlining national productivity was a 'crisis'.
'No,' the treasurer said, 'but it's a big challenge'.
Australia and Australians have a lot of 'big challenges', and some are regularly referred to as 'crises'. Yet not all are worthy of a three-day economic reform roundtable with 900 submissions and 40 ministerial mini-roundtables leading up to it.
At the National Press Club on 18 June, Chalmers declared that the government has 'a responsibility to rebuild confidence in liberal democratic politics and economic institutions – by lifting living standards for working people in particular'.
Days out from the start of the roundtable, Chalmers has been at pains to play down the very reform fervour that he fanned.
Anthony Albanese appears to have little appetite for spending political capital in pushing through tough economic reforms. The PM has made it clear that there will be – read his lips – no new taxes this term.
The treasurer has obediently narrowed the scope of the potential 'deliverables' to regulatory reform to get more homes built, with a side promise of some progress on longstanding policy ideas, like a road user charge.
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The lack of a 'crisis' in productivity may make it hard to understand why we have spent nearly six weeks leading up to this talkfest in Canberra. But it does help explain the apparent lack of urgency to solve the issue.
So what do economists reckon: do we have a productivity crisis?
The answer, Richardson quips, 'depends whether you like rising living standards or not'.
Are we a commodity price collapse away from becoming a 21st-century version of Keating's 'banana republic'? Saul Eslake, another independent economist, says no – the economy now is totally transformed.
Rather than crisis, Eslake volunteers the word 'malaise'.
'I don't think it would help the debate to call it a productivity crisis,' he adds – that could lead to rushed and short-term measures that might just goose the economy for a year or two.
'There are no magic bullets, no short-term solutions. Nothing that can be done, even with the greatest amount of political will, to lift productivity growth in 12 months' time,' Eslake says.
John Hawkins, an economics professor at the University of Canberra, says productivity is not a crisis because it's 'not something that is making people worse off'.
Instead: 'It's a lost opportunity to make us better off'.
'We got used to the idea that incomes go up over time. Over the long run most of that increase has come from productivity,' Hawkins says.
'More recently we got away with low productivity growth because commodities were strong, but we need to do something if we want real income growth going forward.'
Shadows of the 1980s, then, from which we can expect echoes of that era's reforms.