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A backward look at productivity growth

October 27th, 2004

I’ve been arguing with the Productivity Commission about microeconomic reform and productivity growth for nearly a decade. Our first round concerned prospective estimates of the benefits of National Competition Policy, aka the Hilmer Reforms. At the time these reforms were being debated, the PC (then called the Industry Commission) put out a study estimating that the reforms would permanently raise GDP by 5.5 per cent. I looked at their analysis and found lots of problems, which i discussed in this 1997 paper and also in my book, Great Expectations, and proposed an alternative estimate of 0.7 per cent.

The PC has just released a discussion draft, of a Review of National Competition Policy Reforms and it pretty much splits the difference, suggesting a net benefit equal to 2.5 per cent of GDP. It seems to me that some of the errors I criticised have been fixed either by changes to the modelling, or by the replacement of optimistic assumptions with observed outcomes. Some others remain, though. For example, all the reductions in prices for telecommunications appear to be treated as a benefit from reform even though there’s been a long-term technologically driven trend reduction of 5 per cent per year, going for many decades. In the last few years, the rate of price decline has slowed, and even been reversed.

More on this soon, if I get time.

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  1. Harry Clarke
    October 27th, 2004 at 23:06 | #1

    The PC is an interest group so it is natural to focus on benefits from microeconomic reform. They are selling their expertise to provide a reform agenda. Indeed how, inside the public sector, could one design a contract that prevents this type of institutional bias?

    The dreary predictability of many PC reports puts a damper on what is often informative research.

  2. Uncle Milton
    October 28th, 2004 at 09:12 | #2

    The PC report is earnest and quite useful in its own way. But one thing strange about it is that, in selling the case for more microeconomic reform, it has a chart of GDP per hour worked which shows us lagging behind a lot of countries, including European countries like Belgium.

    This is strange because these countries are usually thought of as being poor economic performers, and they have high GDP per hour worked because they have low employment (and high unemployment). The explanation for this coming from places like the IMF is that in these countries, the ratio of labour costs to capital costs is high, so they don’t employ much labour, but do employ a lot of capital. As a result, measures of labour productivity, like GDP per hour worked, are high – even higher than a truly high productivity country like the US.

    Is the future the PC would like us to have?

  3. gordon
    October 28th, 2004 at 14:09 | #3

    Looking forward to further posts from Prof. Quiggin on this. “Microeconomic Reform” is one of the great initiatives in the class war, easily ranking with the Harvester judgement and the 8-hour day (on the left) and the rise of the squattocracy (on the right). History being made here, folks.

  4. vee
    October 29th, 2004 at 12:17 | #4

    I am looking forward to more on this as well.

    Particularly in reference to rural and regional Australia. I am only just delving into this current report and I disagree with about everything it says in this area.

    Empirical evidence does support the PC’s conclusions. However I have little expertise in this area.

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