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Improving economic growth: the productivity agenda 14 October 2011 Enhancing regulatory quality: International experience and solutions for Vietnam Sofitel Plaza Hotel, Hanoi Dr Ben Jensen
Transcript of Improving economic growth: the productivity · PDF fileImproving economic growth: the...
Improving economic growth:
the productivity agenda
14 October 2011
Enhancing regulatory quality: International
experience and solutions for Vietnam
Sofitel Plaza Hotel, Hanoi
Dr Ben Jensen
P 2
Grattan Institute
Grattan Institute is an Australian independent and
evidence-based think-tank
•Grattan Institute is truly non-aligned
•The independence of the Institute is underpinned by
independent resourcing
Focus • Cities • Energy choices • Productivity growth • School education • Higher education
Productivity and economic growth
1. Productivity and economic growth
2. Productivity-enhancing reform – examples from Australia
3. The social, economic and political conditions that impact
productivity-enhancing reform
3
Productivity and economic growth
Productivity and economic growth
4
Three P’s of economic growth
1. Population
2. Participation
• Labour force
• (Un)Employment rate
• Hours worked
3. (Labour) Productivity
• GDP/Hours worked
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The perspective of the manager or business owner
1. Regulations/policies that interfere with managers’ and owners’ of capital
decision-making
2. Improve the quality and effectiveness of their factors of production
– Physical capital
– positive association between capital investment and productivity over time
– Infrastructure
– Human capital
– Education and training
– Positive association between education attainment and labour productivity
– Innovation – research and development
– Influenced by regulations – both for innovation and adoption
– Endogenous or exogenous?
Public sector productivity
– Substantial measurement issues
Tradeable and non-tradeable goods sectors
– Exposure to competition
– Need to consider managers in and outside of Vietnam
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Complimentary insights from recent McKinsey study
Productivity of individual sectors matters more than ‘sector mix’
– Maintaining strong growth over time is the the key
Service productivity and competitiveness is critical
– Services sectors have accounted for almost all net jobs growth in nhigh-income countries over the past two decades
Government policies can strongly influence productivity and competitiveness in
sectors not directly exposed to international trade or global competition
– Business entry and exit is a signal of a dynamic economy
– Regulation can promote or hinder this and can impact competition and productivity
New innovative sectors are not the big driver of economic growth
– Too small – tax incentives and direct government involvement have not had a large impact
– Improving capital and labour effectiveness has a much bigger impact
Source: McKinsey Global Institute, How to Compete and Grow: A Sector Guide to Policy (March 2010)
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A note on labour productivity
Regulatory and ‘productivity-enhancing reform can actually
decrease measured labour productivity (at least in the short-
term)
Reform aimed at increasing economic growth
Labour productivity = output per worker
For example
Reducing minimum wages
Reform to labour market regulations
Interaction with social security
8
The impact of slower productivity growth on living standards has been
masked by population growth and the rise in the terms of trade
Note: Real gross domestic income (GDI) is real GDP adjusted for changes in the terms of trade.
Sources: ABS; Grattan Institute.
•9
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Real GDI Population Participation Productivity Terms of trade
1990-91 to 1999-00
2000-01 to 2009-10
% per annum
Sources of growth in Australian real gross domestic income (GDI)
•10 Relative to the US, Australian labour productivity is back to where it
was in the mid-1970s
Australian labour productivity as a percentage of the US
75
77
79
81
83
85
87
89
91
93
60 65 70 75 80 85 90 95 00 05 10
%
Australian GDP per
hour worked as a
p.c. of US
Note: Labour productivity here is real GDP (in 2010 US dollars) per hour worked.
Source: The Conference Board, Total Economy Database 2011; Grattan Institute.
•11
Productivity growth has slowed in most OECD countries
Source: Australian Bureau of Statistics & Conference Board Note: *OECD uses Conference Board Data. Labour productivity is GDP per capita (rather than hours
for Australia). MFP (% change in market GVA divided by market GVA) is Total Factor Productivity (defined as % change in total inputs divided by % change in
output. It is not apparent whether output includes non-market sectors nor whether inputs other than capital and labour have been included.
Labour productivity Multi-factor productivity*
OECD*
OECD
Australia Australia
•12 Relative to the US, Australian labour productivity is back to where it
was in the mid-1970s
Australian labour productivity as a percentage of the US
75
77
79
81
83
85
87
89
91
93
60 65 70 75 80 85 90 95 00 05 10
%
Australian GDP per
hour worked as a
p.c. of US
Note: Labour productivity here is real GDP (in 2010 US dollars) per hour worked.
Source: The Conference Board, Total Economy Database 2011; Grattan Institute.
•13
Productivity growth has slowed in most OECD countries
Source: Australian Bureau of Statistics & Conference Board Note: *OECD uses Conference Board Data. Labour productivity is GDP per capita (rather than hours
for Australia). MFP (% change in market GVA divided by market GVA) is Total Factor Productivity (defined as % change in total inputs divided by % change in
output. It is not apparent whether output includes non-market sectors nor whether inputs other than capital and labour have been included.
Labour productivity Multi-factor productivity*
OECD*
OECD
Australia Australia
Productivity and economic growth
Productivity-enhancing reform – examples from Australia
•14
Australia’s reform era: 1980s and 1990s
Regulatory reform
– Product markets
– Reduced transaction costs
– Labour markets
– Deregulation and increased flexibility
– 1980s
– Tri-partite agreement between government, unions and employers
– Increased productivity in exchange for increased wages
– 1990s
– Slowly a move to enterprise bargaining
– Reduced union membership and power
– Deregulation increased flexibiltiy
– Reduced costs of hiring and firing
Trade liberalisation
– Substantial tariff reductions
– Complete overhaul of many industries and eliminated some
– Manufacturing, TCF, telecommunications
– Deregulation of financial sector (foreign entrants)
– Banking and financial sector
– Natural high-productivity industry
– Floating of the dollar
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Australia’s reform era: 1980s and 1990s
Privatisation
– Time period varied between states
– Some states still lagging behind (political reasons)
– State-owned government enterprises
– Postal
– Communications (phone, internet)
– Utilities
– Transport
– Infrastructure
– Considerable use of public-private partnerships (PPPs)
Competition-enhancing reforms
– Power and prominence given to
– Australian Productivity Commission
– Australian Competition and Consumer Commission
Taxation reform
– Substantial reductions in individual marginal tax rates
– Substantial reductions in corporate tax rates
– Broadening of the tax base – move to a GST/consumption tax
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Australia’s reform era: 1980s and 1990s
Objectives of reform: Facilitate the movement of factors of production from lower- to
higher-productivity activities
Increase competition in particular industries Government-owned enterprises Protected industries
Increase the diffusion of new information and communications
technologies
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Productivity and economic growth
The social, economic and political conditions that impact
productivity-enhancing reform
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Social, economic and political conditions
Strategy means a long-run focus
•Good public policy needs to focus on the long-run
•We are biologically hard-wired for the short-run. •A Stanford professor of Psychology investigated delayed gratification. He put four year old children in a room with a marshmallow. He told them he was going out of the room for 15 minutes. If they could wait until he got back, without eating the marshmallow, he would give them two.
•Two thirds of the kids couldn’t wait.
•The third that waited not only got an extra marshmallow, they went on to earn SAT scores 210 points higher than the kids who only lasted thirty seconds.
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Social, economic and political conditions
Strategy means a long-run focus •Public finance theory can exacerbate short-termism and restrict productivity improvements
•One of the basic questions in cost- benefit analysis is how to value short term benefits relative to long-term benefits. In classic finance theory, this is calculated using a discount rate.
•By applying a high discount rate, the benefits of the long term are small
•Apply a low discount rate; the benefits of the long-term dominate
•In choosing between a quick fix program and a long-term program, your decision will be driven by your discount rate
20
•P 21
Valuing the future
$0
$10
$20
$30
$40
$50
$60
$70
$80
$90
8.0% 5.0% 2.0% 1.0% 0.5%
The value today of $1 every year
Years 51-100
Years 21-50
Years 11-20
Years 1-10
Discount rate
Social, economic and political conditions
Strategy means a long-run focus •Regrettably, public finance often uses higher discount rates
•The analysis borrows from the private sector, but it does not always consider that governments are responsible for long- term economic growth and inter-generational equity
•22
Economic conditions and productivity (reform)
The need for increased productivity is constant but the
‘push’ for reform can have different origins
Stages of growth
Macroeconomic conditions
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•24
Economies typically pass through a stage of development during which
the ‘commodity intensity’ of growth rises sharply before tailing off
Note: Double-headed arrows denote the primary form of economic activity at different stages of economic development. The location of the
countries shown on the vertical scale is intended only as a general illustration of the general level of commodity use and is not based on any
specific units of measurement. Source: International Monetary Fund World Economic Outlook database (April 2011); author’s estimates.
Stylized depiction of the relationship between per capita GDP and commodity demand
0
10
20
30
40
50
60
70
80
90
100
0 5 10 15 20 25 30 35 40 45 50
Per capita GDP at 2010 purchasing power parities (US$ 000s)
Com
mod
ity d
em
and
(h
ypo
thetical u
nits)
US Australia
Japan
Euro area Russia
Mexico
China
Indonesia India
Subsis-
gence
agri-
culture
Manufacturing & urbanization
Services
-14-12-10
-8-6-4-2024
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
30
40
50
60
70
80
90
Budget deficit (left scale)
Net public debt (right scale)
% of GDP % of GDP
•25
On either side of the North Atlantic, governments and central banks
don’t have much ‘ammunition’ to fight a second recession
Sources: IMF World Economic Outlook (April 2011); US Federal Reserve; European Central Bank.
US public finances
0
1
2
3
4
5
6
7
01 02 03 04 05 06 07 08 09 10 11
% pa
US policy interest rates
-7-6
-5-4
-3-2
-10
1
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16
45
50
55
60
65
70
Budget deficit (left scale)
Net public debt (right scale)
% of GDP % of GDP
Euro area public finances
0
1
2
3
4
5
01 02 03 04 05 06 07 08 09 10 11
% pa
Euro area policy interest rates
Economic conditions and productivity (reform)
Low economic growth can be a spur for productivity-enhancing
reform
Australia in 1980s
Europe and USA current day
“Never allow a crisis to go to waste"
White House Chief of Staff Rahm Emanuel
Labour productivity can increase during an economic downturn
Organisations shed workers
Cyclical unemployment
Australian business is now less likely to shed workers
General belief that costs of re-hiring and training workers after
1991 recession was great
Prefer to ‘ride-out’ economic downturn and avoid costs of re-
hiring and training new workers
26
Economic conditions and productivity (reform)
High economic growth can also be a motive
27
•28
China and India still have a very long way to go before they reach the
range of per capita incomes where ‘commodity intensity’ starts to decline
Per capita GDP in 2010 US dollars, 1950-2040
Note: GDP is in 2010 US$, at purchasing power parities. The 18 high-income OECD countries are Austria, Australia, Belgium, Canada, Denmark,
Finland, France, Germany, Iceland, Italy, Luxembourg, Netherlands, New Zealand, Norway, Sweden, Switzerland, the UK and the USA. Per capita
income in these countries and Japan assumed to increase at 1½% pa from 2010 onwards. Per capita income in Korea assumed to rise at 3% pa
2011-2015, 2½% pa 2016-20, and 1½% pa thereafter. Per capita income in China assumed to rise at 8% pa 2011-2015, 7% pa 2016-2020, 6% pa
2021-2025, 5% pa 2026-2030, 4%pa 2031-35, and 3% pa 2036-40. Per capita income in India assumed to rise at 6½% pa 2011-2025, 6% pa 2026-
2035, and 5½% pa 2036-2040. Sources: The Conference Board, Total Economy Database, January 2011 and author’s calculations.
0
10
20
30
40
50
60
70
1950 1960 1970 1980 1990 2000 2010 2020 2030 2040
US$000s
(2010 PPPs)
18 high-income OECD countries
Japan
China
India
Korea
Subsistence
agriculture
Industrialization
and urbanization
Services
Forecasts based on
assumptions in notes below
•29
China’s economy is slowing a bit – as the authorities try to quell inflation
pressures – but there’s no suggestion it’s on the cusp of recession
Sources: HSBC; China National Statistics Bureau; UBS Asia.
China purchasing managers’ index
40
45
50
55
60
06 07 08 09 10 11
Net balance positive (%)
Manufacturing
China retail sales
China construction index
China consumer prices
-20
-10
0
10
20
30
40
50
06 07 08 09 10 11
% change from year earlier 6-mth moving
averageActual
5
10
15
20
25
06 07 08 09 10 11
% change from year earlier 6-mth moving
average
Actual
-5
0
5
10
15
20
25
06 07 08 09 10 11
% change from year earlier
Non-food
Food
Food
•30
Poor productivity growth means that even modest (by historical
standards) wages growth can generate unacceptable inflation in Australia
Source: ABS.
Labour cost growth and
productivity
-4
-2
0
2
4
6
8 % change from year earlier
Non-farm
compensation
per employee
Labour productivity
(output per hour worked)
Unit labour costs
-4
-2
0
2
4
6
8
10 % change from year earlier
Labour costs per
$ of goods and
services produced
BUT a warning from Australia
Do NOT enjoy your economic growth
We fear that complacency has set-in
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The impact of slower productivity growth on living standards has been
masked by population growth and the rise in the terms of trade
Note: Real gross domestic income (GDI) is real GDP adjusted for changes in the terms of trade.
Sources: ABS; Grattan Institute.
•32
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Real GDI Population Participation Productivity Terms of trade
1990-91 to 1999-00
2000-01 to 2009-10
% per annum
Sources of growth in Australian real gross domestic income (GDI)
A warning from Australia
Still much work to do
Taxation reform
Removal of unjustified government assistance
Has increased in the guise of environmental reform
Some industries still protected from new entrants
Targeted infrastructure projects
Most infrastructure projects merely divert economic
activity
Further deregulation and increased flexibility in product
and labour markets
Public sector productivity – school education
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Economic growth and years of schooling
P 34
-4
-2
0
2
4
6
-4 -2 0 2 4 6
Coeff = 0.581, s.e. = 0.095, t = 6.1
Source: Reproduced from Hanusheck and Wößmann (2007)
Note: These results are from a regression of the average annual rate of growth (in percent) of real GDP per capita in 1960–2000 on average years of schooling in 1960 and the initial level of real GDP per capita in 1960.
Conditional economic growth
Conditional years of schooling
Student performance and economic growth
P 35
-0.15
-0.10
-0.05
0.00
0.05
0.10
0.15
-0.50 0.00 0.50 1.00 1.50
Trend in growth rate
Australia
Italy
Belgium
New Zealand
Finland
Netherlands
Germany
Japan
France
United States
United Kingdom
Sweden
Trend in test scores
Note: Only 12 countries have participated in international tests over a sufficiently long period to look at trends over a 30 year period. In the chart, the ‘trend in growth rate’ is simply a bivariate regression of test scores on time. Trends in test
scores are similarly derived. The plot provides the pattern of slopes from the test regressions.
Source: OECD (2010), originally presented in Hanushek & Wössmann (2009)
School education increasingly seen as a big driver
OECD Program for International Student Assessment (PISA)
First results for Vietnam will be published in December 2011
36
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PISA 2009 – Australia’s performance – regional comparison
Country/Economy Below
minimum Minimum
Average
High performers
Shanghai-China 4.1 13.3 63.2 19.4
New Zealand 14.3 19.3 50.6 15.8
Singapore 12.4 18.5 53.3 15.7
Japan 13.6 18 55 13.4
Korea 5.8 15.4 65.9 12.9
Australia 13.4 20.4 52.6 12.8
Hong Kong-China 8.3 16.1 63.2 12.4
Chinese Taipei 15.6 24.6 54.5 5.2
Macao-China 14.9 30.6 51.7 2.9
Thailand 42.8 36.8 20 0.3
Indonesia 53.4 34.3 12.2 0
OECD average 18.8 24 49.6 7.6
Reading literacy
Impact on long-run economic growth
• What is the relationship between student performance and economic growth?
• Hanushek and Wößmann
• One-standard deviation in test scores associated with
• 1.74% increase in GDP growth rates
• 1.47% increase in GDP growth rates for OECD countries
• 1.26% increase in GDP growth rates (including institutional
variables)
• A more conservative estimate shows that a 5% increase in PISA scores in
Australia associated with
• Add over $100bn to Australia’s GDP by 2050, per annum
• Make Australians 12% richer by the end of the century
P 38
Improving economic growth:
the productivity agenda
14 October 2011
Enhancing regulatory quality: International
experience and solutions for Vietnam
Sofitel Plaza Hotel, Hanoi
Dr Ben Jensen
