Harping on about productivity

Harping on about productivity

The newly established review into competition policy chaired by Professor Ian Harper could be more of an economic opportunity for Australia than many realise. There is a strong connection between an effective competition framework and growth in productivity that is particularly pertinent to Australia’s current situation.

History can tell us a lot about the importance of this connection. The first inquiry into competition policy was commissioned in 1992 by the Keating government and chaired by Professor Fred Hilmer. The outcome of this inquiry was the National Competition Policy (NCP) – a far-reaching reform agenda that, according to ACCC chairman Rod Sims, was “nothing short of a competition revolution” and a pivotal element in transforming Australia’s economy into an “open, dynamic, flexible and high productivity economy”.[1] Key infrastructure sectors including power, gas, transport and telecommunications were restructured, and over 1,000 pieces of anti-competitive regulation and legislation were reformed.[2]

In 2005, the Productivity Commission assessed the effectiveness of the NCP. It was estimated that GDP was lifted by 2.5% more than would have otherwise been.[3] Additionally, more relevant to Australia’s present situation is the effect it had on productivity. Data from the OECD estimated that from 1980-1990 multi-factor productivity (MFP) averaged an annual growth rate of 0.6%. For the period 1990-2000, this increased to 1.3%, overtaking the OECD average of 1.1%.[4]

Sadly however, over the last decade or so, the importance of competition policy and microeconomic reform began to diminish in the eyes of policymakers. Emphasis shifted from incentives (essentially the end goal of competition policy) toward enablers (infrastructure, education etc.) as the favoured tools for enhancing productivity.

Both these toolkits are important, and indeed there is a strong case for more investment in infrastructure, education and skills. However, incentives are best conceived of as a prerequisite for the effectiveness of enablers. For example, a new rail network connecting two competitive businesses otherwise too isolated from one another is only beneficial for productivity if the microeconomic settings are such that they are incentivised to compete and interact. A focus on competition policy is a focus on these regulatory microeconomic settings.

The in-built incentives that were so critical to the success of the Hilmer review recommendations came in the form of payments from the Commonwealth to the states. They were administered by the newly established National Competition Council (NCC) and were conditional on the implementation of reforms. These payments were halved in 2000, and ceased in 2006. Last year, Professor Hilmer himself lamented the fact that this seemed to lead to a decreasing of political commitment, despite the unequivocal success of the reforms.[5] Since the original review, the mandate of the NCC has narrowed and its influence diminished, and responsibility for competition policy had drifted from the Department of Prime Minister and Cabinet to the outer ministries.

Consequently, Australia’s productivity growth has suffered. Figure 1 below illustrates a decline that corresponds with the lessened status of the NCP and NCC.

Screen Shot 2014-06-30 at 9.31.36 pm

Hearteningly, it has taken centre stage again. Responsibility is back in the hands of the Department of Prime Minister and Cabinet and the new review is underway.

The terms of reference put forward instruct that a key area of focus should be to “identify regulations and other impediments across the economy that restrict competition and reduce productivity”.

The specific meaning of this is obviously yet to be seen, but what is essential is establishing strong mechanisms to ensure continued commitment to competition policy from both federal and state governments. Without such mechanisms, as we have seen, microeconomic reform can fall off the political agenda.

There are two things in particular that can be done to help ensure we do not lose focus: 1) Broaden the mandate of a re-empowered NCC to an advisor for the responsible minister, and the agency permanently overseeing the implementation and effectiveness of reforms; and 2) Reinstate the financial incentives administered by the NCC designed to ensure states follow reform programs recommended by the review, and furthermore, implement the Productivity Commission’s recommendation that there also be financial penalties in place for backsliding.

It is indicative that these recommendations both involve the NCC. The Hilmer review envisaged a much more prominent role for the NCC than actually materialised. Had that vision been realised, the NCP may have retained momentum and Figure 1 may look more appealing. The hope is that the present review and the relevant policymakers similarly prioritise the long-term sustainability of competition policy implementation.



[1]Rod Sims, “Australia’s experience driving economic growth through competition policy reforms” (paper presented at the ‘World Bank Forum – Making markets work for development: a reform agenda on competition, April 13, 2013).

[2]Frederich Hilmer, “National Competition Policy: Coming of Age” (paper presented at the Annual Baxt Lecture in Competition Law, September 19, 2013).

[3]Productivity Commission, “Review of the National Competition Policy Reforms”, (2005).

[4]Giuseppe Nicoletti and Stefano Scarpetta, “Regulation, Productivity and Growth: OECD Evidence,” Economic Policy 18:36 (2003), accessed April 2, 2014, http://elibrary.worldbank.org/doi/pdf/10.1596/1813-9450-2944

[5]Hilmer, “National Competition Policy: Coming of Age”.