Competition policy evaluated

My intellectual starting point when talking about competition is almost, to paraphrase the fictional character Gordon Gecko (played by Michael Douglas) in Oliver Stone’s 1987 film Wall Street, “Competition is good. Competition works; competition is right. Competition clarifies, cuts through, and captures the essence of the evolutionary spirit. Competition in all its forms … has marked the upward surge of mankind … and competition, mark my words, has saved the previously malfunctioning corporation called Australia”.

I said my intellectual starting point was almost that paraphrase, because I would want to qualify it by noting that competition is not an end in itself, but rather a means to an end, and that, as the Productivity Commission’s chairman Gary Banks has pointed out, “there are circumstances in which restraints on competition can be justified from a community-wide perspective”.

Nonetheless, at least since Adam Smith pointed out nearly 230 years ago that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices,” most economists have recognised the importance of having and enforcing competition laws.

And research over the past decade supports the proposition that productivity growth is enhanced by competition.

Summarising this research, a 2002 paper from the OECD concludes that “competition has pervasive and long-lasting effects on economic performance by affecting economic actors’ incentive structure, by encouraging their innovative activities, and by selecting more efficient ones from less efficient ones over time”. It goes on to show that “the link between product market competition and productivity growth is positive and robust”.

Australia’s experience exemplifies the conclusions of this research. The principal purpose of most of the “micro-economic reforms” of the past two decades has been to expose businesses, workers and government instrumentalities to greater competition, both from abroad (through, for example, reductions in barriers to imports and to foreign investment) and from within (through, for example, de-regulation, privatisation and competition policy).

The result has been a significant improvement in Australia’s productivity performance, relative both to our own (rather unimpressive) history, and relative to other countries at comparable stages of economic development.

Australia’s labour productivity growth rate accelerated to 2.8 per cent a year over the decade ended 2003-04, from an average of 2.2 per cent a year over the preceding three decades. That might not sound a lot, but it means that it takes 26 years to double our output per hour worked at the growth rate of the past decade, compared with 33 years at the growth rate of the preceding 30 years.

Our multi-factor productivity growth rate - which measures the efficiency with which labour and capital are combined to produce output - improved from an average of 1.1 per cent per annum over the three decades ended 1993-94 to 1.5 per cent per annum over the ten years ended 2003-04 - enough to cut the time required to double our output per unit of labour and capital inputs by 17 years.

Australia is one of a handful of OECD countries which have been able to reverse the substantial decline in productivity growth which set in after the first oil shock of the 1970s.

Partly as a result, Australia has also been one of the few Western countries in which growth in per capita GDP - the broadest commonly available measure of improvements in average living standards - has trended upwards since the 1980s.

Enhanced domestic and international competition within Australian product and labour markets has contributed to this result, not only by the impact it has had on boosting productivity growth, but also by enabling the economy to operate at higher rates of resource utilisation (that is, at lower rates of unemployment, among other things), without generating the sort of cost and price pressures which in previous cycles would have prompted the Reserve Bank to curtail the economic expansion through aggressive increases in interest rates.