The Long Term View Patricia Scott Commissioner, Productivity Commission Melbourne Institute Economic and Social Outlook Conference 2 nd November 2012 Productivity Commission
What is the Productivity Commission? Government s principal review and advisory body on microeconomic policy reform and regulation Adopts an economy-wide approach Productivity Commission 2
Production cost as a percentage of minimum production cost Industries Assistance Commission graph Manufacturing at Below Optimal Scale 250 200 70 000 units Australian top selling vehicle Compact 150 Mini 100 0 100 150 200 300 Output per annum Adapted from IAC, Report No. 267, 1981 Productivity Commission 3
Car assistance making headlines Source: Australian Financial Review, 2012 Productivity Commission 4
Car assistance vs. steel assistance Source: Kretser D, 2012, Car industry slams steel protection plan Australian Financial Review, October 4 2012, pp 1. Productivity Commission 5
Effective rates of protection for the textiles, clothing and footwear sector % 1960s 70 1970s 106 1980s 157 Productivity Commission 6
Unilateral action to increase competition 1973-25% tariff cut across the board 1988 - Most tariffs reduced to 15%, auto quotas abolished 1991 - general level of assistance to be reduced to 5% by 1996 Phased reductions for PMV tariffs from 35% TCF Tariff reductions to 25% by the year 2000 1993 - TCF quotas abolished. 2005 - PMV and TCF highest tariffs 10% and 17.5% 2010 - PMV top tariff reduced to 5% - TCF top tariff reduced to 10% 2015 - TCF tariffs to be reduced to 5%. Productivity Commission 7
Complementary Structural Reforms Floating exchange rate (December 1983) Capital market liberalisation (1983+) Pro-competitive infrastructure reforms (mid- 90s+) Improved labour market flexibility (mid-80s+) A coordinated National Competition Policy (1995+). Productivity Commission 8
Per cent Effective assistance rates for cars and clothing 180 160 1984 140 120 100 80 60 40 20 0 Textiles, clothing and footwear Motor vehicles and parts Productivity Commission 9
Per cent A more open economy (falling protection, rising trade intensity) 45 40 35 30 25 20 15 10 5 0 Manufacturing ERA (LHS) Trade intensity (X+M)/GDP (RHS) - CVM Productivity Commission 10
Per cent Per cent Falling assistance and unemployment 25 12 20 10 15 8 6 10 4 5 2 0 0 Manufacturing ERA (LHS) Agriculture ERA (LHS) Unemployment rate (RHS) Productivity Commission 11
Productivity and innovation uplift Average multi factor productivity growth 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 1985-86 to 1988-89 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2007-08 2007-08 to 2010-11 -1.0-1.5 Productivity Commission 12
Reform improved Australia s relative economic performance Reform imperative remains Australia's economic ranking (GDP per Capita, in 1990 ppp, 23 OECD countries) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Australia ranked 4 th in 1950 Australia ranked 14 th in 1983 Domestic Australia ranked 4 th in 2011 Australia ranked 7 th in 2005 16 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Ageing population Term of trade Growing demands for government funded services Source: The Conference Board Total Economy Database, January 2012, http://www.conference-board.org/data/economydatabase/ Productivity Commission 13
Proportion of total assistance A change in the types of measured assistance 2.0 1996-97 2010-11 1.5 1.0 0.5 0.0-0.5-1.0 Output assistance (mainly tariffs) Input penalties (mainly tariffs) Assistance to value adding factors (R&D, etc) Productivity Commission 14
Proportion of Total Assistance A change in the types of measured assistance to the manufacturing sector 2.0 1981-82 1.5 2010-11 1.0 0.5 0.0-0.5-1.0 Output assistance (mainly tariffs) Assistance to value adding factors (R&D, etc) Input penalties (mainly tariffs) Productivity Commission 15
Total measured assistance Total measured assistance at the Commonwealth level is $17.7 billion per annum but this is the quantifiable amount Estimated assistance at the State level is $4 billion per annum (only what can be measured) A lot of assistance is not measured Productivity Commission 16
Types of assistance not estimated Quarantine restrictions that may provide assistance Government purchasing preferences and local content arrangements Regulatory restrictions on competition pharmacy, air services, importation of books and media and broadcasting Anti-dumping and countervailing measures Certain differential tax rates Certain State and Territory government support to industry Government programs and tax concessions affecting professional sport and the arts Government programs affecting the labour market Resource access arrangements including to mining, forestry and fisheries. Productivity Commission 17
Hiding a deeper story Broad industry groupings conveys assistance rate at 2 4% Film industry assistance estimates 12% Latest X-Men movie assistance 30% Many grant programs provide for 50/50 or 3:1 government/business funding Car industry assistance of $2 billion per annum with each job saved costing $300,000 annually (2008). Productivity Commission 18
Assistance can be in Australia s interest.. when it is subject to a net benefits test The key efficiency rationale for assistance is market failure: spillovers, public goods, information deficiencies and asymmetry, natural monopolies. Productivity Commission 19
A recent analysis quantitative modelling of trade-policy options Liberalization scenarios considered Preferential bi-lateral, Unilateral action, APEC-style, Global action Simulation: tariffs to zero GDP-Australia Share of potential world gain Per cent change T1. Australia-small country a 0.054 Per cent T2. Australia-large country 0.117 12.4 T3. Australia unilateral 0.559 59.5 T4. Stylised APEC 0.862 91.7 T5. World 0.940 100 5.7 Source: GTAP model simulations (PC, 2010) Productivity Commission 20
Looking forward Industry assistance has moved towards market failures but there are still some standouts The long term fundamentals for an industry are rarely changed by assistance Largest gains occur when markets are flexible Policies that facilitate easier adjustment are more beneficial than policies that resist change Opportunities for further gains are within our reach Gains will be necessary to close the gap between expectations of government and capacity to fund Lowering counter-productive assistance could go to fund necessary services. Productivity Commission 21