Game over ?
Among the many long-running policy debates in which I’ve been involved, the most drawn-out (except maybe for the one about private infrastructure and PPPs) has concerned micro-economic reform and productivity growth. For the last decade or so, the Productivity Commission and others have been claiming that reform has generated a surge in productivity growth, notably multifactor productivity growth (the term â€˜multifactorâ€™ refers to the fact that capital as well as labour inputs are taken into account) estimated by the Australian Bureau of Statistics.
One reason the debate is so drawn out is that the ABS presents estimates for ‘productivity cycles’, which are supposed to smooth out year-to-year fluctuations. Until very recently (in fact, until two days ago), the most recent cycle for which estimates were available ended in 1998-99, and this showed strong MFP growth. Arguments that this was a cyclical recovery or the result of increased work intensity were waved away.
The latest National Accounts, released on Monday, should settle the question once and for all. ABS now identifies the period from 1998-99 to 2003-04 as a complete productivity cycle and reports that â€˜During the most recent MFP growth cycle (1998-99 to 2003-04) MFP grew annually, on average, by 1.0% â€“ slightly lower than the long term average between 1964-65 to 2003-04 of 1.2%.â€™ The acceleration of productivity growth in the mid-1990s was not sustained.
The results for 2004-05 are even worse. Productivity actually declined 1.7 percentage points. For the entire period since 1993-94, when the productivity surge supposedly began, the average rate of productivity growth has been 1.2 per cent, the same as for the entire period since 1965. The â€˜productivity surgeâ€™ of the mid-1990s was, at best, a temporary blip.
As I say, this should settle the question once and for all, but my experience in such debates is that it won’t. It will be interesting to see what counterargument is offered now.