New productivity tsar Danielle Wood must come out swinging

With a fragile economy and productivity growth at a 60-year low, there is growing recognition of the risks to Australia’s prosperity from the lack of reform over the past decade or more.

Incoming Productivity Commission boss and former Grattan Institute chief executive Danielle Wood has her work cut out for her.

Reversing our productivity decline cannot be done overnight and will tax the Productivity Commission like never before. It will do so because the consistent and robust framework of the Productivity Commission – a neoclassical focus on free markets and restoration of equilibrium – works well in periods of incremental change, but can be found lacking in periods of structural change. And structural change abounds.

The polar debates of free markets vs socialisation used to be fought on (political) ideological grounds, but now we find conservatives as nationalistic, interventionist, and protectionist as any other with cries for on-shoring and sovereignty – all vying for the short-term political gains based in blame and fear. In the midst of this, the Productivity Commission must navigate an economic path for Australia which is rigorous, pragmatic and ready for implementation.

And this is where the renovation of the commission must begin to maintain its institutional function as the bastion of good economic policy focused not just on growth, but economic development.

The neoclassical model struggles when it comes to structural change, and as climate change, technological change such as generative AI, and geopolitics remake our socio-economic landscape. We need a strong and robust Productivity Commission that is fit for purpose.

Just look at some of our major debates. First, while we have, at long-last, recognised climate change as an economic issue, the debate on the costs of a disorderly versus orderly transition are only now emerging even as the window for emissions reduction has narrowed.

Second, look at the debate on the technology revolution sweeping the world and the move from a debate about the efficiency of technology and scientific endeavour to that of public interest technology and security.

Third, look at the major changes in global supply chains – having formed on the basis of wage arbitrage, they are now being refashioned by an emerging new geopolitical architecture and the new economics of energy. Indeed, the possibility of economic decoupling is real today, compared with the halcyon days of accelerating globalisation just a few decades back.

Each of these three examples points to the complexity that the Productivity Commission must now factor and analyse. These three examples move beyond simplistic analysis to a world now characterised by the triangulation of economics, socioeconomic infrastructure, and security consideration, reflecting structural changes, socio-political shifts, and national security.

Business is now confronting these, writ large, as boards and executives struggle to deal with questions of social licence, new technology, the challenge of climate change to their core production systems, and the complexity of geopolitical change as it affects supply chains, corporate governance, taxation, and security regulations for the future.

The reality is that the energy transition under way, rewrites economic equations, domestically and globally.

Fundamental changes in production systems, input costs, and global supply chains are and will be profound. They give rise to a new energy-industrial complex, which can facilitate a more orderly structural change than the standard Productivity Commission textbook.

A renovation in our thinking is required.

The new economic arguments about the
energy-industrial complex are not the old-fashioned arguments about protectionism; indeed they are now about productivity, competitiveness, and globalisation.

The new industrial complexity arguments are not the old-fashioned arguments about rewarding rent seekers; indeed they are about innovation and diffusion to aid a more orderly structural change.

Structural change in the economy demands an economic frame, which is relevant for policymakers, grounded in the realities of the drivers of structural change, and which incorporates rather than assumes away the political economy of change.

An adherence to the standard Productivity Commission textbook will render the commission simplistic and increasingly irrelevant to the policy debate about the future.

To be clear, this is not some capitulation to fad or fashion. The economics of structural change are real and in need of being surfaced into the policy debates of the present to fashion a new path for rational and reasoned policy action.

It’s time to turn the debate from short-termism, politically expedience-driven debate, to an economic policy focused on the long-term economic development of Australia.

Dr Pradeep Philip is the head of Deloitte Access Economics; James Boyle is an associate director at Deloitte Access Economics.