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Parham vs Quiggin on productivity

November 14th, 2005

Dean Parham of the Productivity Commission has written to the Fin to criticise my piece on the (productivity) surge we didn’t have. His letter, with some responses, is over the fold.

Quiggin wrong on productivity

growthJohn Quiggin’s “The surge we didn’t have” (Opinion, November 10) adds another twist to his apparent determination to find no upside to Australia’s productivity performance or policy reforms.
He reverts to his earlier no-productivity-surge position by observing that productivity growth since 1993-94 has been no more than the long-term average.

I’m not sure what “reverts” means here, but at least we seem to be in agreement on the key point. Productivity growth since 1993-94 has been no more than the long-term average.

How can this be when the official Australian Bureau of Statistics estimates show two underlying productivity growth rates since 1993-94 – one between 1993-94 and 1998-99 that is almost a full percentage point above the long-term average (and if that is not a surge, what is?) and the other between 1998-99 and 2003-04 that is only slightly below the long-term average?

The relevant stats. The long-run average rate of multifactor productivity growth is 1.2 per cent, the rate between 1993-94 and 1998-99 was 2.0 per cent, and the rate from 1998-99 to 2003-04 was 1.0 per cent, for an average over the ten years between 1993-94 and 2003-04 of 1.5 per cent. That’s a net gain of 0.3 percentage points a year (well within the range of error indicated by the history of revisions to this series) or a cumulative impact of 3 percentage points. It only takes one bad year, like 2004-05 when productivity fell by 1.7 per cent (a shortfall of 2.9 percentage points) to wipe out the entire effect and that’s what happened. I can’t see

It could only be if you broke with established convention and included the decline from the 2003-04 peak over the past year. By definition, declines occur after peaks and it is way too early to say whether last year’s result has any structural significance. That result should be set aside.

I don’t agree with this convention. There is no economic basis for the notion of productivity cycles. In the present context the effect has been to allow the PC not to mention the slowdown in productivity growth after 1998-99 on the basis that the cycle wasn’t complete (there have been occasional mentions in newspaper articles). As a result, until last week, the debate was based on data that was seven years old. If the “convention” is accepted, last year’s productivity decline will be ignored until some time around 2010.

While he didn’t mention it, one of the developments that Quiggin identifies helps to explain why productivity went negative in the last year. In response to higher commodity prices, miners have done a lot of investing and hiring of labour in the exploration and development phase of production. But the expected increase in volumes has not come through in the data as yet. And so the short-term drop in mining productivity is likely to turn into a longer-term increase.

This is a fair point. So, maybe we will see some above-trend productivity growth in the future. The fact remains that, over the period from 1993-94 and 2004-05 there has been no extra growth, and performance in the first decade of micro-economic reform was well below the long-term average. I’m not sure, by the way, how much of the extra capital investment in mining made it into the 2004-05 data – many of the projects I’m aware are at a fairly early stage – but presumably Parham has some data on this. I’ll check.

It’s worth noting at this point that 18 months ago, Parham was pointing to different temporary factors, such as drought, and predicting a rapid resurgence of productivity growth. Although we haven’t yet had a complete recovery from drought, the big adverse impact was in 2002-03. The recovery from drought boosted productivity growth in 2003-04 and drought had little or no impact on growth rates in 2004-05.

Quiggin attributes any signs of strong performance since the early 1990s to the good luck of avoiding recessions (and, recently, higher commodity prices), rather than to policy reforms. Does he really believe that a more open, competitive, flexible and innovative micro-economy has not encouraged and enabled businesses to be more productive and has not assisted macro policy settings in ensuring a more stable macro-economy?

Some reforms undoubtedly have had this effect. But others, such as reliance on private infrastructure investment and the bungling of telecommunications policy have done the opposite. As regards the macro-economy, New Zealand reformed more vigorously than we did and it didn’t help them when Don Brash mismanaged the monetary policy response to the Asian crisis.

And where is the empirical testing that micro-economic reform is not a primary source of productivity growth?

It’s always hard to prove a negative, but it’s particularly hard when there is no extra productivity growth to explain.

Anyway, I expect the argument will continue for years to come, but as far as I’m concerned, the evidence is pretty conclusive. To repeat Productivity growth since 1993-94 has been no more than the long-term average. Having made this point yet again, I’ll probably leave it alone for a fair while, at least as far as the Fin is concerned. However, no doubt Dean and I will cross swords again at some point in the future.

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  1. Ernestine Gross
    November 16th, 2005 at 23:00 | #1

    Re Chatswood-Paramatta rail-link.

    The original cost benefit analysis (Environmental Impact Statement) attracted the attention of a resident in Ku-ring-gai. The resident went through it with a fine comb and discovered that the benefits, measured in travel time saved, could be achieved if and only if the trains would not stop at several of the planned train stations.

    I used to use this case in class to encourage MBA students with an interest in becoming consultants not to under-estimate the intelligence and dilligence of residents.

  2. Rod Pinna
    November 17th, 2005 at 02:44 | #2

    Conrad: On public transport, the metropolitan rail system in Perth has been a success. The following page

    http://wwwistp.murdoch.edu.au/publications/e_public/Hope4future/cstudies/planningandtransport/trains/trains.htm

    has an interesting graph comparing performance for Perth and Adelaide.

  3. jquiggin
    November 17th, 2005 at 06:14 | #3

    Conrad, the Alice Springs-Darwin railway is a PPP. Of course, it was a lousy project however financed, but it would probably not have been built if explicit public finance had been required.

  4. Terje Petersen
    November 17th, 2005 at 06:41 | #4

    I have often wondered if there is not a strategic defence component to the Alice Springs to Darwin railway. Such that it was never worth it except as an insurance policy in the event that we ever need troops and Tanks in the North quickly.

  5. conrad
    November 17th, 2005 at 07:08 | #5

    Terje : excluding the early part of the Chatswood->Epping train line, I think most of the land is actually owned by Macquarie University (all the parkland that the M2 is on — basically everything past the Macquarie Centre) and a bit by the State government (Land Cove National park). Also, I was also under the impression that the Epping->Paramatter part was cancelled after cost overruns in the first stage of construction.

    John : I realize the Darwin->no-where was a PPP. However, it is a good of example of why slightly more cynical people might argue that the goverment should be involved in as little as possible in terms of infrastructure development (which I agree, is different to whether the various state governments can build and run things efficiently once the potentially corrupt routes have been decided) .

  6. Terje Petersen
    November 17th, 2005 at 19:18 | #6

    Conrad I am not sure of your point. I was talking about private land in the geneneral vicinity that might expect to be more valuable if their was a commuter train near by.

    When construction started I lived about 5 minutes walk from the new Dehli road station so I was very conscious of the start of construction and the announcement that the plug was being pulled on the Epping to Paramatter component. The start to construction and the change of plan happened pretty much within a month of eachother.

  7. Tom N.
    November 24th, 2005 at 13:42 | #7

    SAUL ESLAKE’S VIEW*

    Dean Parham has done some outstanding work explaining the sources of the improvement in Australia’s productivity performance since the early 1990s. His work consistently shows that this was largely the result of policy reforms aimed at exposing the Australian economy to greater domestic and international competition.

    It follows from Dean’s work that the the deterioration in productivity performance since 2003 may be due to the absence of any significant productivity-enhancing reforms since the late 1990s.

    It’s also worth wondering whether this deterioration might not be at least in part due to an explosion of productivity-stifling regulation in two areas over this period – security and corporate governance.

    As a few moments spent in any airport or any large building accessible to the public will confirm, there are now employed across Australia tens of thousands of people who do absolutely nothing (or at least, nothing which contributes to lifting productivity) except prevent those who are doing something from doing it as quickly or as cheaply as they otherwise would – in the (I would argue) mistaken belief that this will reduce the likelihood of people dying in a terrorist attack.

    In much the same way, following the sequence of corporate scandals and collapses in the US, Australia and elsewhere in the early years of the current decade, governments and regulatory agencies have required businesses to employ thousands of additional people to produce reports that hardly anyone will ever read, in the (I would argue) mistaken belief that this will result in better standards of corporate governance and fewer corporate scandals.

    I’m not suggesting that the explosion of regulation in these areas is the sole cause of the deterioration in productivity growth since it started (the ABS provided some other plausible explanations in its commentary on the June quarter national accounts). And I accept that it would be very difficult to quantify the impact of such regulations on productivity growth. But I think Dean Parham would be performing a service to the nation if he attempted to do so, and I would encourage him to take up the challenge.

    __________

    * Copied from the comments thread to Parham’s article “Gains From Reform” at On-Line Opinion (http://www.onlineopinion.com.au/view.asp?article=3868).

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