Competition policy evaluated

This argument is supported by some recently-published work by Reserve Bank researchers, which finds that less product market regulation has played a role in reducing the volatility of aggregate output, even after controlling for other factors such as a decline in the magnitude of global economic shocks, and changes in monetary policy regimes.

Competition has provided an additional source of discipline on the capacity of firms to raise prices, and of labour to extract wage increases over and above improvements in productivity, in the face of increased demand and tighter supply.

Despite the significant benefits for the Australian economy and for Australian consumers of the greater role played by competition in the Australian economy over the past two decades, Australians retain a curiously ambivalent attitude towards competition.

As in so many aspects of Australian life and culture, Australians tend to apply different standards to sport from those which they apply in other areas. Australians seem to regard competition - albeit within well-defined and (usually) strictly-enforced rules - as something to be applauded on the football field, the running track, the cricket pitch, the swimming pool and the tennis court, but see it as something to be regarded elsewhere with a mixture of fear and loathing.

Australians readily acknowledge that competition is a spur to greater achievement in sport. But a surprisingly large number of them seem still to regard international competition in other areas as something from which governments should shelter them (or their employers).

And it’s still far from uncommon to hear or read of business people and or their representatives objecting to Sunday trading, the removal of laws restricting entry into particular industries, or calling for legislation preserving their share of particular markets.

The OECD’s annual survey of the Australian economy pointed out earlier this year, there is still more work to be done to “promote higher growth by further strengthening competitive pressures in the economy”.

Australia still ranks only 16th among OECD countries in terms of GDP per hour worked, 19 per cent below the comparable figure for the United States. On this measure, Australia’s aggregate labour productivity has fallen from 86 per cent to 81 per cent of the US level, and from 95 per cent to 92 per cent of the average OECD level, since 1998.

There may be reasons stemming from our geography, scale and distance from other major economic centres as to why we cannot aspire to close the gap entirely; but there can be little doubt that there is still considerable potential to improve Australians’ standard of living through further pro-competitive and productivity-enhancing reforms.

The latest annual national accounts show that Australian labour productivity actually fell by 1.3 per cent in the 2004-05 financial year, the first decline since 1986-87 and the third largest decline in the 39 years for which such data is available. This decline in labour productivity was broadly-based, falling in 11 of the 14 market sectors for which such data is compiled - the first time in 18 years when a majority of industries have registered negative productivity growth.

This somewhat unexpected decline in labour productivity may be partly - but only partly - due to the traditional lag between a slowdown in the rate of economic growth (which began in 2004) and the corresponding slowdown in employment (which has begun only quite recently).

The ABS has previously attributed it to a combination of the significant improvement in profitability arising from the strong increase in Australia’s terms of trade (the ratio of export to import prices) in recent years, which may have made employers less likely to shed labour in the face of a slowdown in output growth.