The Long Term View
Patricia Scott
Commissioner, Productivity
Commission
Melbourne Institute Economic and Social Outlook Conference
2nd 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
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Industries Assistance Commission graph
Production cost as a percentage of minimum
production cost
Manufacturing at Below
Optimal Scale
250
70 000 units Australian top
selling vehicle
200
Compact
Mini
150
100
0
100
150
200
Output per annum
300
Adapted from IAC, Report No. 267, 1981
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Car assistance making headlines
Source: Australian Financial Review, 2012
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Car assistance vs. steel assistance
Source: Kretser D, 2012, ‘Car industry slams steel protection plan’ Australian Financial Review,
October 4 2012, pp 1.
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Effective rates of protection for the
textiles, clothing and footwear sector
%
1960s
1970s
1980s
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70
106
157
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%.
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Complementary Structural Reforms
• Floating exchange rate (December 1983)
• Capital market liberalisation (1983+)
• Pro-competitive infrastructure reforms (mid90s+)
• Improved labour market flexibility (mid-80s+)
• A coordinated National Competition Policy
(1995+).
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Effective assistance rates for cars and
clothing
180
1984
160
140
Per cent
120
100
80
60
40
20
0
Textiles, clothing and footwear
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Motor vehicles and parts
9
A more open economy (falling
protection, rising trade intensity)
45
40
35
Per cent
30
25
20
15
10
5
0
Manufacturing ERA (LHS)
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Trade intensity (X+M)/GDP (RHS) - CVM
10
Falling assistance and unemployment
25
12
10
20
15
6
10
Per cent
Per cent
8
4
5
2
0
0
Manufacturing ERA (LHS)
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Agriculture ERA (LHS)
Unemployment rate (RHS)
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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 to 1993-94 to 1998-99 to 2003-04 to 2007-08 to
1988-89
1993-94
1998-99
2003-04
2007-08
2010-11
-1.0
-1.5
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Reform
imperative
remains
Reform improved Australia’s
relative economic performance
Australia's economic ranking (GDP per Capita, in 1990 ppp, 23 OECD countries)
1
2
3
4
•
Australia
ranked
4th
in 2011
Australia
ranked 4th
in 1950
•
5
6
7
•
Domestic
8
9
Australia
ranked
7th
in 2005
10
11
12
Ageing
population
Term of
trade
Growing
demands for
government
funded
services
Australia
ranked
14th
in 1983
13
14
15
16
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: The Conference Board Total Economy Database™, January 2012, http://www.conference-board.org/data/economydatabase/
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A change in the types of measured
assistance
2.0
2010-11
1996-97
Proportion of total assistance
1.5
1.0
0.5
0.0
-0.5
-1.0
Output assistance (mainly tariffs)
Input penalties (mainly tariffs)
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Assistance to value adding factors (R&D, etc)
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A change in the types of measured
assistance to the manufacturing sector
2.0
1981-82
2010-11
Proportion of Total Assistance
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)
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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
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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.
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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).
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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.
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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
Per cent
T1. Australia-small countrya
0.054
5.7
T2. Australia-large country
T3. Australia unilateral
T4. Stylised APEC
T5. World
0.117
0.559
0.862
0.940
12.4
59.5
91.7
100
Source: GTAP model simulations (PC, 2010)
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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.
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