FPJ1801 - Thomas, S & Heath, R (2021), Total Factor Productivity should not be the sole measure of industry performance: Observations from the Australian sheep industry

FPJ1801 - Thomas, S & Heath, R (2021), Total Factor Productivity should not be the sole measure of industry performance: Observations from the Australian sheep industry

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Industry performance measures are vital indicators for understanding return on industry investment, judging appropriate levels of government and other public support and how industries contribute to economic health and wellbeing.
Total Factor Productivity (TFP) is a standard measure of industry performance which describes a ratio of all outputs relevant to all inputs. As governments around the world contribute considerable resources towards measuring and reporting TFP, it is concerning that TFP measures as a sole indicator of industry performance may not accurately reflect the lived experience of profitability and growth for some industries. The propensity to then base investment and policy decisions on headline TFP estimates with little reflection on underlying variables may lead to sub optimal outcomes.
This paper examines changes in the sheep industry during the period from 2000–18 (the period of operation of the Sheep CRC) to understand why the reported growth in TFP remained relatively low (compared to other industries) at around 0.2% per annum, through a time when many individual sheep producers experienced significant gains in profitability and productivity, annual industry GVP increased by almost 50% and real GVP ‘per sheep’ increased 2.6-fold.
While TFP remains an important measure of industry performance, we demonstrate here that other measures of profitability, and sustainability should also be considered in determining the effectiveness of investment and government policy.

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