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The Australian economy has just celebrated its 25th year of continuous economic growth. Over the past quarter of a century, the economy has weathered the Asian Financial Crisis, the popping of the dot-com bubble and the Global Financial Crisis. Our incomes have grown faster than in the United States, Japan, the United Kingdom and Europe. We have incurred just four negative quarters of growth — a feat unmatched by any other economy in the OECD.

As we look towards the next 25 years, several challenges await. An increasingly interconnected global marketplace will subject Australia’s firms and workers to greater and greater competitive pressures. New technologies will re render the “old ways” of production (and consumption) redundant. And an ageing population will cause further structural change throughout the economy.

Of greatest concern is the decline in productivity. Productivity improves when we do more with less. That could either mean providing customers with more value, or achieving outcomes with fewer resources. Either way, productivity growth is imperative to our nation’s competitive positioning.

Over the long run, productivity growth is the key driver of improvements in living standards. To replicate the improvements we saw over the past 40 years, productivity growth needs to twice as much as it is today.

In the past, governments have boosted productivity by pursuing microeconomic reforms.

Unfortunately, while reforms were able to deliver considerable improvements in the past, they may not be as impactful today. For example, the National Competition Policy Reforms of the early 1990s, picked some very low hanging fruit and were able to generate significant benefits across the economy by opening up markets and putting an end to monopolies. The recent Harper Review, identified a number of further reform opportunities, but nothing of a comparable scale. It’s a similar story for tax reform, regulation and trade.

Indeed, while there are improvements that can still be made, the opportunities for government to boost productivity levels are either too small, too hard or too expensive.

The exception to this is innovation. Innovation is about doing things differently and creating value as a result —and in this way, innovation and productivity growth are inextricably linked.

Despite Australia’s many successes, the performance of Australia’s innovation, science and research system is left wanting. Our businesses and universities are much less likely to collaborate with each other than elsewhere in the OECD. Our firms are much less likely to introduce “new to world” innovations. Too few of our researchers are in businesses. Our venture capital sector is immature. We do not spend enough on research and development. The public sector has a key role to play in driving innovation outcomes. They set the incentives, create the intuitions and the rules, as well as being innovators themselves.

If unaddressed, the shortcomings in our innovation, science and research system are going to become more apparent in the years to come. The economy is transitioning away from being one that is led by investment in the mining sector, towards one that is dominated by services and where new digital technologies will play an increasingly central role. Future economic growth will not come off the back of the next big industry. Rather, it will be the consequence of hundreds of thousands of small improvements to products and processes — a rising tide of innovation.

All views expressed on this site are personal, and do not necessarily represent those of my employer.