Date created:27/8/04
Last modified:27/8/04
Maintained by: John Quiggin
John Quiggin

Don't believe in miracles

Australian Financial Review

22 April 2004.

There are some stories, it seems, that everyone wants to believe. One of these is the story that the program of microeconomic reform in Australia has generated a productivity 'miracle'. The archetypal version of the story is that of the dynamic gains from tariff reform. The removal of tariffs, it is said, exposed import-competing industries to the 'chilly winds' of competition, forcing them to improve their efficiency.

The clinching evidence, it is said, is the surge in multifactor productivity growth in the 1990s, reaching levels unparalleled in Australia's history. The long macroeconomic expansion, 12 years since the end of the last recession, is also commonly attributed to the flexibility created by microeconomic reform.

There are some obvious problems with the productivity story. For a start, many commentators have ignored downward revisions to the initial estimates, after which the 1990s looked only marginally better than the 1960s. More importantly, if you look at the small print the claim that "productivity surged in the 90s" turns out to mean that "productivity surged from 1993-94 to 1998-99, a period of six years coinciding with an economic recovery. This period has been identified by the Australian Bureau of Statistics as a 'productivity cycle'. Both in the previous cycle from 1988-89 to 1992-93, and in the current incomplete cycle, productivity growth has been well below average.

As for the long expansion, it is certainly a good outcome. But for the last four years at least it has rested on the shaky foundations of the housing boom. Our chronic current account deficit suggests that productivity growth in those sectors of the economy exposed to international competition has not been enough to produce fundamental changes in our economic position.

But, in pointing out these problems over several years, I've found that no-one, particularly no-one in official policy circles wants to listen. I was very pleased to discover, then, a report put out by the National Office of the Information Economy, based on a cross-section comparison of productivity growth in different parts of the manufacturing sector.

The main point of interest, naturally enough, was the contribution of information and communications technology to productivity growth. Not surprisingly, this was found to be significant. Between 65 and 85 per cent of labour productivity growth over the period from 1984 to 2001 was found to be explained by technological factors. (The report makes a strong case that, since so much productivity growth is embodied in the rapidly falling price of computing power, it is better to focus on labour productivity than on multifactor productivity).

But the findings create problems for the microeconomic reform story. If ICT explains between 65 and 85 per cent of productivity growth, there's only the residual (between 15 and 35 per cent) left for the beneficial effects of microeconomic reform.

It gets worse for the reform case. Microeconomic factors explained much of the residual. But the factors in question were those that would be expected from standard production economics, most notably human capital investment, as measured by changes in proportions of university graduates working in the industry concerned.

If anything, microeconomic reform has hurt the university sector, rather than helping. A number of microeconomic reformers have expressed the view that we are spending too much, and educating too many people at university level.

A range of measures relating to tariff reforms were included in the estimation, but the coefficients were small, ambiguous and statistically insignificant. The ambiguous nature of the results is probably due to the fact that the two sectors that experienced big cuts in protection, motor vehicles and textiles, clothing and footwear, went in opposite directions. Productivity growth was strong in motor vehicles, but below-average in TCF.

Was this then, to be the moment of truth, when the story of the productivity miracle, driven by microeconomic reform, would finally get the kind of robust criticism it deserved. Sadly, no.

The report begins with an executive summary, which takes pains to play down the main findings, and to pay homage to the conventional wisdom about microeconomic reform.

Moreover, at almost exactly the same time as the report was (very quietly) released it was announced that NOIE would be abolished and its functions absorbed by a new body the Australian Government Information Management Office No doubt this was entirely coincidental. Still, it is most unlikely that AGIMO will include the production of politically inconvenient reports on productivity among its functions.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

Read more articles from John Quiggin's home page

Go to John Quiggin's Weblog