Why bureaucracy matters, part 2: Productivity = investment + bureaucracy
Lifting national productivity means that beyond red tape, the public service must balance regulation, reform, and human foundations.
First published in the Mandarin.
As media attention on the government’s Economic Reform Roundtable subsides, the APS faces the challenge of implementing reforms with a shrinking budget.
Policies, strategies, and plans need development, consultation, workshops, and refinement into practical solutions. Regulations require review, streamlining, harmonisation, and reduction. Tax incentives will be introduced, labour supply expanded, and emerging technologies embraced.
While political pressure for quick wins will influence the agenda, the APS will also quietly focus on long-term objectives.
The Economic Roundtable was promoted as a vital moment to reset the national dialogue on productivity. Business leaders, union representatives, and policymakers gathered to confront a concerning truth: Australia’s once-strong economic engine is losing its momentum.
In the pre-roundtable discussion, the influential consulting firm McKinsey introduced Five Big Tests for Australia’s Productivity Agenda, offering advice on how to lift national productivity.
McKinsey argued that unless Australia unlocks an additional $130 billion in annual private investment by 2030, living standards will continue to decline. Their five tests, which cover areas from capital investment and regulatory reform to the balance between market and non-market sectors, offer a helpful framework for analysis.
The Economic Roundtable appeared to support McKinsey’s reasoning for increasing capital. However, the Roundtable’s outcomes also showed that the issue isn’t just about how much we invest, but also what we spend on and how effectively we manage the reform process.
The systems that boost productivity are as much about political and social change as they are about economics.
The non-market sector as a foundation, not a drag
For many years, Australia’s growth depended on mineral wealth and foreign investment. Invisible yet vital elements, such as human capital, strong institutions, and a readiness to reform, have also contributed to boosting productivity. These often ‘soft’ drivers of productivity (skills, governance, and organisational capability) are harder to measure but no less important.
Increasing investment in education, improving health, and fostering inclusive workplaces all contribute to increased productivity. However, these are often framed as costs in the non-market sector rather than long-term economic gains.
McKinsey accurately points out that measured productivity growth in education, health, and public administration has stayed stagnant. However, this is mainly due to measurement issues. A literate child, a healthier worker, or a more effective regulator is not just an input that hinders progress; they form the foundation for productivity growth.
Framing the non-market sector mainly as a constraint could mislead reform efforts. Instead of hindering its progress, we should look for ways to boost its influence. This includes the usual recommendations.
Prioritise measuring outcomes rather than inputs.
Innovation in service delivery, such as digital transformation in health and education.
Investing strategically in public capabilities that produce enduring economic benefits.
However, these should be seen as productivity reforms, not just financial costs to be managed.
Regulation as enabler
Regulation creep is a real concern. However, regulation is not something to avoid or endure. Well-crafted, intelligent rules can enhance productivity. They build trust, reduce uncertainty, and establish stable frameworks that foster private investment.
While investment is important, overall productivity depends on how effectively knowledge is developed and applied. Regulators influence this process by establishing standards that foster trust and encourage cooperation, offering incentives that drive innovation and knowledge sharing, and ensuring the efficient use of information throughout the economy.
Australia’s history clearly demonstrates this. Reforms related to competition, consumer protections, and environmental standards were not obstacles to prosperity; instead, they fostered growth. Looking ahead, challenges in energy, digitisation, and AI will need regulations that encourage innovation while safeguarding the community.
The politics of productivity
Productivity reform is not just an economic issue but also a political and social one. Unlocking capital and deregulating industries involve both winners and losers. Vested interests, distributional conflicts, and intergenerational trade-offs must be carefully managed and addressed to ensure effective governance.
McKinsey advocates for a new national compact, but it must go beyond just another glossy document. Australians are unlikely to support a productivity plan unless it links efficiency with fairness and growth with shared opportunity.
A broader agenda
Australia does need new investment. But investment alone will not restart the engine. The conversation sparked at the Economic Reform Roundtable should expand beyond capital intensity to include:
Reimagining the non-market sector as a catalyst for long-term productivity, not just a budget burden.
Focusing on recognising education, health, and inclusion as key to productivity.
Designing regulation as an enabler, fostering trust and stability as prerequisites for investment.
Forging a compact that makes productivity a shared, sharper, and more complete project, not only an economic one.
Nothing here is new or revolutionary, and considerable effort is being made to achieve these objectives. However, in productivity discussions, the non-market sector is often recognised as a concern but not an actionable priority.
Looking ahead
At a time when living standards are under pressure, Australia cannot afford a narrow agenda. The productivity debate should go beyond just capital, the market sector, and technocratic solutions. It needs to reflect better the institutional and human foundations on which prosperity ultimately depends.
Institutional efficiency means ensuring resources are not wasted.
For markets, this promotes increased competition and innovation, as well as better leadership and management practices. However, the various business failures discussed in Quentin Beresford’s Rogue Corporations, along with the recent series of royal commissions, provide enough insight into the history and impact of poor corporate management, highlighting the need for targeted improvements in the private sector.
In the non-market sector, it’s about the often-misunderstood concept: bureaucracy. It involves avoiding duplication, red tape, and service delays. If productivity is the engine of our future prosperity, bureaucracy is the vessel through which it must travel.
Bureaucracy is often seen as a technical or administrative part of discussions about productivity. However, history shows its role is more complicated.
Herbert Kaufman highlighted that bureaucracy includes not only rules and routines but also compassion, representation, and a careful balance within democratic systems.
A question
The impact of bureaucracy goes beyond what statistics and policy reports show. There are real frustrations, frictions, and unintended consequences that directly impact people and the community.
The problems with bureaucracy are long-standing and well-articulated. From Dickens’s Circumlocution Office in Little Dorrit to Kafka’s The Castle and The Trial, and from Orwell’s Ministry of Truth to Huxley’s technocratic dystopias, writers have highlighted the absurdities and dangers of bureaucratic systems.
These critiques remain relevant today despite efforts to improve the system. The question is: why is that?
