Productivity, Natural Resources and the Wealth of Nations

Prof. Kevin Fox's work enables government departments to incorporate natural capital into economic productivity measurements

Background

The Australian Bureau of Statistics (ABS) measures the “Agriculture, Forestry and Fishing” sector as the star productivity performer for Australia over the last 25 years, with a productivity increase of more than 85%. This contrasts with a more than 30% decline in productivity in the “Mining” sector over the same period. Both results feed into “Market Sector Productivity”, which experienced an 18% increase over the period, or 0.7% on average per year. While there is obviously huge diversity in experience at the industry level, the aggregate market sector productivity estimates inform much policy debate and feed into policy formulation, such as through Treasury budget forecast models and innovation policy.

The two sectors mentioned above, “Mining” and “Agriculture, Forestry and Fishing”, are at opposite ends of the scale in terms of productivity performance yet both depend crucially on natural resources. However, in measurement of productivity, no allowance is made for environmental degradation or resource depletion. This is important because if this period’s productivity performance is high due to depleting the nation’s environmental wealth, then neither the productivity performance nor the income revenue of the sector is sustainable. Hence, consideration of productivity performance in the context of, and accounting for, natural resources is crucial to avoid inappropriate policy conclusions that could lead to environmental mismanagement and poor government budget predictions.

Policy Engagement

Kevin has been a member of the Productivity Measurement Reference Group of the ABS since 2005, and a member of the Methodology Advisory Committee since 1999. He had a 2008-2013 Australian Research Council Linkage Grant, partnering with the Productivity Commission and ABS to improve productivity measurement. In addition, he was a Member and Sub-group Leader for the project “The role of science, research and technology in lifting Australia's productivity," Australian Council of Learned Academies (ACOLA) Expert Working Group, which reported to the Prime Minister's Science Engineering and Innovation Council.

In addition to organising many workshops and conferences on productivity that bring together leading international academics, industry and government, he has run training workshops for the ABS and The Treasury on productivity measurement. He has also reviewed productivity reports for the Department of Communications and the Arts, the Productivity Commission and the ABS, as well as presenting on innovation policy and productivity to the Australian Bureau of Agricultural and Resource Economics and the Sciences (ABARES), Department of Industry and Science, the Department of Education, and The Treasury.

Through these activities, he has contributed to improving productivity measurement and the understanding of the role of differences between sectors in terms of productivity performance, emphasising the importance of capturing missing environmental and resource inputs to improve standard analysis and policy recommendations.

Policy Outcomes

In a body or research with Quentin Grafton, Tom Kompas and others, Kevin’s work on property rights, fisheries management, productivity and efficiency have had a significant impact on assessments of the productivity impact of policy changes. For example, one method has been used by the Australian Fisheries Management Authority to assess the performance of fisheries through property rights changes while accounting for changes in the resource stock, and has provided support for continuing strengthening of individual rights over the commons. In addition to his own research and engagement with domestic government agencies, he has promoted the incorporation of natural resources in productivity through editing and publishing an OECD report on “productivity measurement with natural capital”.

He has recently presented at the OECD on improving methods for valuing subsoil assets and furthering the method currently employed by the World Bank in valuing nations’ wealth. These improvements will benefit the accuracy of productivity assessments and forecasts of economic growth potential. Kevin has also promoted the development of new productivity accounts about to be released by the ABS, providing a richer understanding of productivity dynamics which, with enhancements, will allow a better understanding of the role of natural resources in driving productivity performance.

In the long-run, productivity performance is a fundamental determinant of living standards. Hence, appropriate measurement taking into account environmental degradation is essential for formulating appropriate policies and understanding the future prosperity of nations.

Kevin is Professor of Economics at the University of New South Wales and Director of the Centre for Applied Economic Research.

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