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.