A backward look at productivity growth
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.