The Productivity Paradox and the Australian Mining Boom and Bust

Abstract

Australia in the 1990s experienced a surge in multifactor productivity ushering in the ‘golden age’ of productivity. The subsequent 2000 decade witnessed a dramatic slump in productivity whilst the economy was riding the crest of the biggest terms- of- trade boom in its recorded history. This plummeting productivity occurring with a mining boom was a paradox. It created much concern and politicians and policymakers call for urgent action to reverse the productivity slump as it posed a threat to long-term growth and living standards of Australians. Much of the debate about the productivity paradox was due to the failure to grasp the phase-wise dynamics of the mining industry investment production cycle which operated with long leads and lags in attaining full capacity production. The paper uses a number of econometric techniques such as multivariate filters, the production function and state space methodology to empirically analyse the occurrence of the productivity paradox and the productivity slump. Thereafter the ‘triangle model’ a version, of the New Keynesian Phillips curve is used to review how the Reserve Bank of Australia (RBA) implemented monetary policy to keep inflation within the target zone whilst the economy was traversing the cusp of the biggest terms-of-trade boom in its recorded history, whilst facing the challenges ‘Dutch disease’ and deindustrialization.