ECONOMICS: by Colin TeeseNews Weekly
Productivity report driven by ideology
, December 4, 2004
"In olden days, a glimpse of stocking
Was looked on as something shocking.
But now, heaven knows,
Anything goes."What, readers might ask, do the opening lines of Cole Porter's great tune from the 1930s, Anything Goes, have to do with the Productivity Commission's draft report on the operation and effectiveness of National Competition Policy (NCP)?
Plenty - once you read the commission's report. "Anything goes" is the approach the commission takes on objectivity. And, in the process, it is prepared to show quite a bit of ideological stocking.
At the beginning of its report the commission proclaims itself to be "... an 'independent agency' and [is] the Government's principal review and advisory body on microeconomic policy and regulation."
It goes on to say its independence is underpinned by an Act of Parliament. Perhaps the commission hasn't noticed, but the Parliament is controlled by the Government, by virtue of its numerical supremacy in the House of Representatives.
The commission explains that, among other things, that its "processes and outputs are driven by concern for the well-being of the community as a whole". No doubt they are, but from the perspective of a particular ideology.
The report has obviously been painstakingly prepared. Essentially, its message is contained in a single-page overview. The benefits of NCP are obvious and incontestably large.
Most notably, they have contributed to productivity growth, and thereby helped raise average household incomes over the last 10 years. They have reduced the prices of some goods and services, especially to business-users
. And they have provided consumers with a wider range of product choice.
And, finally, while there have been some adjustment costs associated with NCP, these have now been incurred, and the benefits will be ongoing.
Not surprisingly, the commission's prescription for the future is more of the same. To some extent this outcome is not altogether surprising. The commission was under direction from the Government, in the form of a terms of reference which itself assumed that National Competition Policy was a good thing, and the task at hand was to discover how we might get more of it.Slant
The commission certainly took the Government at its word. As for the commission's independence, that was never going to be an issue: the Government and the commission are at one as to the merits of NCP.
But it is only when we come to the detail of the report that it is possible to recognise the slant of the document. In the overview, the report maintains that NCP has "contributed" to productivity gains. Later, NCP and microeconomic reform are said to have been a major contributor to the gains in productivity achieved in the last decade.
Much can be said about productivity in Australia, and some of it has been reproduced in tables in the report. But more of that later. First, it has been concluded that microeconomic reform (including NCP) has contributed between 15 and 35 per cent towards our productivity gains over the period in question. The remainder has been provided by technology advances.
This should surprise nobody. Presumably, most of the productivity gains since the industrial revolution have been the result of the application of new technology to the manufacturing process.
The commission makes unfavourable comparison between our productivity levels and those of the US. This is a complicated comparison, but taking it at face value, the commission concludes that if we were to reach US levels of GDP per hour worked, average household income would increase by 20 per cent. Reaching US levels of productivity, or higher, might only be possible if accompanied by some uncomfortable side-effects.
Belgium, for example, which is much higher up the productivity table than the US, achieves that distinction in part by virtue of the fact of its high unemployment rate. Quite obviously, if the less skilled (and therefore less productive) workers are taken out of the workforce, then the effect will be to raise productivity levels. Among other things, the message to be taken out of all this is that productivity, of itself, may not be the sole measure of any economy's efficiency. The commission's own table, taken from OECD figures should have alerted it to this danger.
After all, Norway, Belgium, Ireland, Netherlands, France, Germany and Denmark all rank above the US in the productivity stakes. And, remember, these are the very economies which orthodox economic opinion describes as those possessed of "European sclerosis".
Japan, which is below Australia in the table, does not seem to have much difficulty in finding exports markets for its manufactures, running surpluses on its trading and current accounts, and in generating higher per capita incomes for its people.
In the circumstances, perhaps we might have expected the commission to linger a little longer over this table. If so-called efficiencies generated by microeconomic reform and competition policy are so important, how are these contradictions explained?
Why is Norway at the top of the table? It does not have the same unemployment problems as Belgium. It has a highly protected agricultural sector - its agricultural subsidies are the highest in the world.
Sweden is also interesting. It is the Scandinavian country which has most followed what we might call the Productivity Commission micro-economic prescriptions, and yet it performs well below the other Scandinavian countries and only slightly above Australia in productivity performance.
Now I've dwelt a bit on productivity because, for a start, the report itself has made that issue the centrepiece of its justification for NCP. And, remember, we are here talking about the Productivity Commission. If on nothing else, it should have the answers for us on productivity. Yet it does not.Discredited proposition
What is worse, the commission has put before us as its principle justification for the merits of NCP, the already discredited proposition that micro-economic reform has been the major contributing factor for our economic growth.
An alternative explanation for the productivity gains by Australia, such as there are, might well be explained by microeconomic reform, but not for the reasons advanced in the report. It might be that, like Belgium, we can attribute the gains to the numbers of our unskilled workers now unemployed.
Many of those jobs were in our now curtailed manufacturing sector (courtesy of microeconomic reform), and those former workers are now unemployed. Productivity advances may well have come to us via the unemployment rolls.
The question then to be asked is this: are we, as a community, better off with higher productivity gained at the expense of the unemployed?
And, while on the question of employment, the report emphasises the gains in employment which it believes are attributable to NCP.
The trouble with its analyses is that comparisons with previous periods are invalid because the definitions of "unemployed" have changed markedly over time. The report rejoices in what it calls workplace flexibility, which is a polite name for casual employment, though it does admit that 15 per cent of children living in unemployed households is "relatively high". Relative to what is not explained.
As to price impacts of NCP, the report is all over the place. It makes the quite unsupported assertion that, before privatisation, infrastructure services, e.g. electricity, were priced with little regard for commercial realities.
Yet later, in the face of difficulties faced by privatised agencies where these were "single service providers" (note: government agencies were called "monopolies", private "single services providers"), it acknowledged the need for regulation.
It had to. All over the world, private monopolies were restricting supplies to push up prices. Business and household users were both affected. And, they weren't putting aside reserves to rebuild plants. Even the deregulationist Productivity Commission had to admit the need for regulation to deal with these problems.
The question is: was privatisation ever really needed? Could not all of the problems in publicly-owned agencies have been handled with sensible regulation? And might not the community - and business - outcomes have been better?
Finally, the report is nowhere less comfortable than when it deals with agriculture and NCP. It clearly has no sympathy with marketing authorities, or with the justifications made for their existence.
However, in a refreshingly frank moment, it does concede that for some agricultural industries (it specifies sugar and dairy), consumer gains have been smaller than the reduction in farm-gate prices. Some concession, since that was the prediction of some farm sectors, before
NCP was implemented!Subsidies removed
According to the report, the good thing about the NCP reforms was that they removed consumer-funded subsidies to farmers. These, the report observed, were having the same adverse effect on farm-sector efficiency as did tariffs for manufacturing.
Exactly so, many would concur. But, whereas advocates of microeconomic reform and NCP would welcome and endorse the reforms, many others, including some of our trading partners, would see things differently.
And, on the basis of at least some of the evidence gathered by the Productivity Commission so far, some of them might well be better economic performers than is Australia.
- Colin Teese was deputy secretary of the Department of Trade.