In the Australia in the Asian Century
white paper the Government has set the goal of Australia becoming one of the top ten countries in the world in terms of GDP per capita by 2025. This post briefly considers how achievable the government’s objective is and how useful a focus on GDP per capita is.
The IMF World Economic Outlook database
shows that in terms of GDP per capita (measured in purchasing power parity dollars) Australia ranked 13th in 2011 and is forecast to move to the 12th spot in 2012. However, there is little separating the countries around Australia in the rankings. In 2011 Australia ranked 13th with GDP per capita of $40,847.13 while Canada with GDP per capita of $40,519.11 was ranked 16th. Although ranked three places higher on the league table, Australia’s GDP per capita was just 0.8 per cent higher than Canada’s.
At face value the GDP per capita league table confirms Australia enjoys a relatively high standard of living by world standards. However, when countries are closely bunched, small movements in rankings say very little about changes in relative living standards.
The IMF’s forecasts suggest Australia will move to the 11th spot in 2013 and will hold this position out to the end of the forecast period in 2017. Extrapolating the IMF projections confirms that Australia’s growth would not be sufficient to secure the number 10 spot on a business as usual basis. The white paper argues that for Australia to be ranked 10th by 2025, a labour productivity growth boost of ½ of a percentage point a year is required.
The question is therefore whether Australia will be able to achieve and sustain the kind of productivity growth it experienced in the 1990s.
The white paper focuses on the key productivity drivers of skills and education, innovation, infrastructure, tax reform and regulatory reform. The types of changes envisaged by the white paper in these areas should improve Australia’s long-term growth prospects. However, it appears much of the detail including the timing of specific measures has yet to be settled. Given this, whether or not Australia achieves the kind of productivity growth needed to secure the number 10 spot by 2025 may depend more on the reforms of the last ten years than those foreshadowed in the white paper. Has Australia’s reform agenda been ambitious enough over the last decade to achieve a marked and sustained improvement in our productivity performance?
The experience of the 1980s and 1990s suggests that it takes time for the transformational effects of reforms to flow through the economy and show up in the productivity numbers.
Encouragingly, there are signs that Australia’s productivity growth is picking up. The Library
has estimated that over the last 20 (financial) years labour productivity has grown at an annual average rate of 2.1 per cent. In 2011-12 labour productivity increased by 2.7 per cent its highest rate since 2003-04. This improved productivity performance will need to be sustained if Australia is to achieve further gains in the real incomes of the Australian community. This is particularly the case as the boost in real incomes Australia has enjoyed as a result of the resources boom is unlikely to be replicated.
While GDP per capita is a useful marker of success in terms of material living standards it conveys only limited information about economic performance and social progress. The plan for seizing the economic opportunities posed by Asia’s transformation contained in the white paper could have been underpinned by an agreed set of indicators for measuring Australia’s progress over time. Internationally, the report by the Commission on the Measurement of Economic Performance and Social Progress
convincingly made the case for the need for broader measures of wellbeing. It favoured developing a well identified ‘dashboard’ of indicators with a strong focus on sustainability.
work in developing a set of wellbeing indicators provides an example of both the feasibility and usefulness of this approach. The OECD’s indicators try to capture the most important aspects that shape people’s lives and wellbeing including income, jobs, housing, health, work and life-balance, education, social connections, civic engagement and governance, environment, personal security and subjective wellbeing.
This type of approach potentially provides a way of tracking whether Australia’s success in exploiting the economic opportunities presented by the Asian century is translating into a better quality of life for the Australian community. It also provides a useful analytical tool for helping think through the implications of policy measures from a broad perspective.