Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Productivity wikipedia , lookup
Chinese economic reform wikipedia , lookup
Rostow's stages of growth wikipedia , lookup
Ragnar Nurkse's balanced growth theory wikipedia , lookup
Productivity improving technologies wikipedia , lookup
Economic growth wikipedia , lookup
The Australian Economy in the 1990s Commentary at the Melbourne launch of the volume of papers from the Reserve Bank of Australia’s 2000 Conference at a seminar hosted by the Economic Society of Australia (Victorian Branch) Thursday 26th October 2000 Saul Eslake Chief Economist ANZ Banking Group Ltd My comments are based largely on the papers by Brad de Long, David Gruen and Glenn Stevens, and Charles Bean. I want to highlight a few key points from each – in so doing probably doing full justice to none – and then relate these points to some issues which have taken on heightened relevance in the wake of the more recent decline in the Australian dollar. De Long’s paper is from the US perspective, and – as is quite common in such a perspective – doesn’t stray far from the shores of that country. To be fair, he may not have been asked to. However that doesn’t mean that his paper does not contain some important insights which are relevant to the Australian situation. De Long is an unabashed optimist. He concludes his paper with the observation that “the future looks brighter than at any time since the beginning of the 1970s.” Of course the beginning of the 1970s marked the end, rather than the onset, of an extended period of strong low-inflation growth. But if de Long intended any irony, it is well concealed. After considering, and dismissing as too small to have been significant, the conduct of fiscal policy as a major contributor to the acceleration in US economic growth during the 1990s, de Long comes down unequivocally in favour of the productivityenhancing role of IT investment. “It looks more likely with each passing month,” he says, that “the computer has come of age as a macro-economic factor.” Moreover, he continues, “ we can forecast with some confidence that the productivity speed-up in the US will not evaporate.” Indeed, he expects productivity growth in the US to continue to be strong “for at least the next decade”. And although the only other country which gets a specific mention in his paper is Finland, de Long argues that “there is every reason to think that productivity growth outside the United States is about to accelerate as well”. Presumably, this includes Australia. I should note in passing that the discussant on de Long’s paper at the conference, Bill White from the Bank for International Settlements, presented a very different perspective. In his view, what the US had experienced in the latter part of the 1990s was not a “new era”, but instead a “credit-induced asset price boom which would lead inevitably to recession”, and that we might one day look back on the boom in IT spending “a massive misallocation of resources … financed with other people’s money, especially European direct investors”. De Long’s analysis of the sources of the acceleration in US productivity growth relies heavily on the recent paper by Oliner and Sichel, to which I want to return anon. David Gruen and Glenn Stevens cover a broad range of issues in their paper, but the over-riding theme is an analysis of why the Australian economy performed so much better in the 1990s than it did in the 1980s, or indeed had been expected to perform at the onset of the decade. Rightly, in my view, they ascribe a somewhat greater role to the improvement in the conduct of macro-economic policy as a contributor to the better performance of the Australian economy in the 1990s than de Long does to the performance of the US. There are two other aspects of their analysis, which are also covered in Bean’s paper, which I want to highlight here. 2 The first is the point that labour productivity growth was both faster, and more broadly-based, in Australia than in the US during the 1990s. They note that much of the acceleration in productivity growth between the 1980s and the 1990s was in the non-traded sector of the economy, especially in wholesale trade, retail trade and construction – according to Gruen and Stevens, “not those one might have expected”; while productivity continued to grow at a rapid rate, though not significantly different from that experienced in the 1980s, in utilities, mining and communications. In fact, wholesale and retail trade and construction are precisely the sectors that should have benefited from the sort of labour market reforms implemented during the 1990s – ie reforms which permitted more flexible patterns of work, albeit without policy-driven changes in the structure of relative wages. These reforms should also have contributed to continued strong productivity growth in utilities, mining and (to some extent) communications. Indeed the only surprise is that there does not appear to have been a similar improvement in the transport and storage sector. Gruen’s and Stevens’ conclusion is that “the 1990s experience seems to be one of more rapidly approaching the technological frontier, rather than benefiting directly from the rapid productivity growth in the production of the new economy”. Their view is supported by Charlie Bean, who uses a very simple regression to show that “the explanation for Australia’s good comparative productivity performance is not to be found in ‘new economy’ explanations”. Bean instead finds “rather more plausible” the reforms to Australian product and labour markets – in contrast to the previous three decades of “redistributing rents” – as an explanation of Australia’s improved productivity performance. He cautions that “most of the structural reforms should primarily have a once-off level effect, although they take some years to work through fully”. Drawing on the UK experience, he warns of the “the dangers when policy makers and private agents erroneously mistake a once-off increase in the level of national or personal incomes for a permanent increase in its growth rate”. And, in a very different take from de Long’s, Bean suggests that “Australian policy makers and households would be unwise to project the recent high rates of productivity growth into the future.” These observations on the sources of Australian productivity growth are important because a sharp divergence now appears to be emerging between labour productivity growth trends here and in the US. Since the first half of 1998, productivity growth (measured on a four-quarter moving average basis) has accelerated by nearly 2 pc points in the US, whereas in Australia productivity growth has decelerated by more than 2 pc points. To be sure, at least some of the acceleration in US productivity growth is likely to have been cyclical. On the other hand, since Australia’s overall GDP growth rate has been little changed over this period, very little of the apparent slowdown in Australian productivity growth would seem to be due to cyclical factors. 3 Labour productivity growth - Australia and US 5 % change from year earlier (4-qtr moving average) United States 4 3 2 1 Australia 0 -1 91 92 93 94 95 96 97 98 99 00 Sources: US Bureau of Labor Statistics; Commonwealth Treasury website. But if Australia’s productivity growth primarily reflects ‘dividends’ from microeconomic reforms – as both Bean and Gruen and Stevens suggest – whereas the US productivity growth stems mainly from IT production and investment – as de Long suggests – then given the flagging political enthusiasm for micro-economic reform in Australia this apparent divergence may be a warning of the shape of things to come. Gruen and Stevens raise the “important question for Australia” of “how much it matters to miss out on the monopoly profits that are expected to be generated in the new-economy sectors of the US”. They don’t answer that question, although they assume – as is customary among Australian policy-makers – that “many of the dividends from the productivity gains in the new economy are likely to ultimately accrue (sic) elsewhere – to other sectors of the US economy and to other countries”. How much confidence can we in fact have in this assumption? If Robert Gordon’s analysis of the sources of the acceleration in productivity growth is correct, then the answer may be, “not very much”. Gordon, as is well known to those who have followed the US debate on this subject, attributes nearly all of the acceleration in US labour productivity growth since the mid-1990s to either cyclical factors or the productivity growth in the computer manufacturing industry itself – although in more recent work he concedes that last year’s revisions to the US national accounts have lessened the contribution of cyclical factors to the productivity acceleration. On the other hand, work by Stephen Oliner and Daniel Sichel of the Federal Reserve’s research staff attributes just over 0.8 pc point of the 1.0 pc point acceleration in US labour productivity growth between the first and second halves of the 1990s to information technology, with 45% of this contribution (0.37 pc points) coming from productivity gains in the manufacture of computers and semiconductors, and 55% (0.45 pc points) from the use of IT throughout the non-farm business sector. 4 My colleague Tim Toohey has applied Oliner and Sichel’s methodology to the Australian data, and finds, consistently with Bean and Gruen and Stevens, that IT ‘capital deepening’ has made an almost negligible contribution to the acceleration in labour productivity growth in Australia between the first and second halves of the 1990s, and that nearly all of this improvement is attributable to faster multi-factor productivity growth – which, by convention in Australia, is in turn attributed to structural reforms. Australia Labour productivity growth United States 91-95 96-99 91-95 96-99 1.71 2.75 1.53 2.57 0.57 0.66 0.51 0.96 0.28 0.21 0.07 0.34 0.22 0.10 0.23 0.23 0.05 0.59 0.27 0.10 0.35 0.42 0.11 0.14 na na 0.44 0.31 0.75 1.64 0.48 1.16 Contributions from IT capital deepening Hardware Software Communicn’s equipment Other capital deepening Labor quality ‘Multi-factor’ productivity Sources: S.Oliner & D. Sichel, The Resurgence of Growth in the Late 1990s: Is Information Technology the Story, FEDS Working Paper 2000-20, March 2000; Tim Toohey, ‘Information Technology and Productivity’, ANZ Economic Outlook, October 2000. Almost by definition, Australia seems fated to miss out on whatever contribution the production of IT hardware and software is making to overall productivity growth in the US – and even on Oliner and Sichel’s analysis, that’s close to half of it. Let me turn now to the second aspect of Gruen and Stevens’ paper that I wanted to highlight, which is the debate about the importance or otherwise of the current account deficit. Under the heading “The Dog that Didn’t Bite” – a slightly inaccurate allusion to the dog which didn’t bark in the Sherlock Holmes story Silver Blaze, that being the ‘curious incident of the dog in the night’ which revealed to Holmes that the dog knew the perpetrator of the crime – they note that “at no time during the 1990s did the predictions of those most pessimistic about the current account look like they would be realized”, and that instead “the 1990s experience has been kind to the consenting-adults view of the current account.” This is indeed unarguable, especially if the point of contrast is with some of the more extreme views of the consequences of large current account deficits which were around at the beginning of the decade. Gruen and Stevens provide four reasons for the diminished importance of the current account deficit: the fact that it self-evidently did not prevent the economy growing at just over 4% per annum over the course of the decade; the fact that “necessary adjustments”, as they put it, “were taking place in the economy’; the sharp turnaround in the method of financing the deficit, from debt to equity; and the decline – as opposed to the often-predicted increase – in the ‘risk premium’ on Australian assets. 5 One possible factor which Gruen and Stevens don’t mention in this context is one which they do mention, earlier in their paper, in the context of the reduced volatility of GDP growth in the 1990s compared with previous decades – namely, that the external shocks hitting the economy were smaller than they have been in the past and, specifically, that “the smoother course of the US economy in the 1990s may have been particularly important in contributing to the smoother outcomes in Australia”. Might this not also be true with regard to the current account deficit? That is, might it not have been easier for Australia to finance its current account deficit in the 1990s than it was during, say, the second half of the 1980s because the US current account deficit – and hence the competition with Australia (among others) for internationally mobile capital which it represents – was smaller, on average, in the 1990s than in the second half of the 1980s? This question seems especially important in the present circumstances where, although Australia’s current account is now smaller than it was a year or so ago, we seem to be encountering rather more difficulty financing it, at least without a significant depreciation of our exchange rate. In that context, it is useful to recall that although one effect of the Asian crisis was to enlarge our current account deficit, another was – courtesy of the massive capital outflows from Asia which were an intrinsic element of the crisis – to make the financing of that deficit easier. It seems to me that the only plausible explanation for the weakness this year in the Australian dollar (and the currencies of other countries or regions which are seeking to finance current account deficits) against the US dollar and the currencies of countries which are running current account surpluses, is that the US current account deficit is now so large that it is (at least in the first instance) pre-empting almost all of the internationally mobile capital available from the countries which are running surpluses – in a way that it has not previously done – forcing other countries which are seeking to finance current account deficits in competition with the US to lower their exchange rates in order to entice the required capital inflows. Current account balances 400 $US billion Japan, other East Asia and Western Europe 300 200 100 United States 0 -100 Australia -200 OPEC -300 Latin America -400 Russia -500 -600 96 97 98 99 00 01 Sources: IMF; Consensus Economics Inc.; Economics@ANZ. 2000 and 2001 figures are consensus forecasts, except for OPEC countries which are from the IMF’s World Economic Outlook. 6 Put differently, it is much easier for Australia to finance a current account deficit of, say, between 4½ and 6% of GDP when the US current account deficit is less than, say, 3% of its GDP – as it was until the June quarter of last year – than when the US is trying to raise the equivalent of more than 4% of its GDP in the international capital markets, as it has been (rather successfully) doing since the December quarter of last year. Since the US has been absorbing such a disproportionately large share of the world’s available capital, it does seem that the trend which Gruen and Stevens noted towards equity financing of Australia’s current account deficit has gone into reverse. During the 1999-2000 financial year, more than three-quarters of the current account deficit was financed by borrowing, the highest proportion in any financial year since 199192. Current account financing 5 % of GDP (4-qtr moving average) Net debt 4 3 2 1 0 Net equity -1 91 92 93 94 95 96 97 98 99 00 Source: ABS. Analysts have struggled to find any consistent link between the magnitude of Australia’s current account deficit and the exchange rate for the Australian dollar: in most multi-variate regressions of the exchange rate, it is barely significant and sometimes has the ‘wrong’ sign. However, there appears to be a somewhat stronger correlation between the US current account deficit and the A$-US$ exchange rate than between the Australian current account deficit and the A$-US$ exchange rate: indeed a simple bivariate correlation exercise suggests 45% in the former case as against a mere 15% in the latter. On the face of it, this would appear consistent with the notion that the sustainability or otherwise of Australia’s current account deficit cannot be considered in isolation from conditions in international capital markets more broadly. Those conditions were, as it happened, rather benign from an Australian standpoint in the 1990s. Who knows whether they will be as benign in the coming decade? Which brings us full circle to the issue of productivity growth which occupied the first half of these remarks. 7 The A$ and Australia’s current account deficit -2 US cents % of GDP Australia's current account deficit (left scale) -3 100 95 90 (e) -4 85 80 75 -5 70 65 A$ vs US$ (right scale) (monthly average) -6 60 55 -7 50 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Sources: ABS; Datastream; Economics@ANZ. September quarter 2000 current account deficit figure is an estimate, including transactions associated with the Sydney Olympics. The A$ and the US current account deficit 2 1 US cents % of GDP US current account deficit (left scale) 100 95 90 0 85 -1 80 75 -2 -3 -4 70 A$ vs US$ (right scale) (monthly average) 65 60 55 50 -5 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 Sources: US Department of Commerce; Datastream; Economics@ANZ In his discussion of Australia’s current account deficit, Bean concedes that “it may be optimal for foreigners always to have a net claim on part of the country’s output”, but is nonetheless unconvinced that Australia’s deficit is sustainable, suggesting instead that “at some stage in the future a fundamental improvement in the balance of trade on goods and services is going to be required.” “The real question,” Bean says, “is whether this is going to come about through an increase in future supply (which might well be the case if the productivity revival were to continue) or through a reduction in domestic demand … If the recent high [productivity] growth rates are sustained, then the external debt-GDP ratio will tend to stabilize … if the rate of [productivity] growth were to return to the rates seen in the 70s and 80s, one would expect the explosive growth of the external debt-GDP ratio to continue, absent direct policy intervention to correct the problem.” 8 To the extent that both the production and use of new technologies, as opposed to further structural reforms, are going to be the source of much of the productivity growth which can be expected going forward, then Australia may well have more of a problem in achieving high productivity growth by international standards, and in financing its current account deficit, than it has done in the 1990s – at least until such time as the Australian orthodoxy, that most of the benefits from technological innovation accrue to users rather than producers, gains much more support from both hard data and market sentiment than has thus far been the case. In the meantime, Australia’s (rather unusual) position as a relatively intensive user but insignificant producer of IT products will both add to Australia’s current account deficit, and make it more difficult to finance. Bean sees the picture as “a cause for mild concern”, although he notes that the degree of “irrational exuberance” (not his phrase) is less here than in the UK at the end of the 1980s, and that Australian policy makers are better placed to weather any consequent storms. That strikes me as a fair summation. It was a privilege to have been able to attend this year’s Reserve Bank conference, and to have heard presented and discussed such a wide range of thoughtful and informed papers on the performance of the Australian economy over the past decade. Anyone looking for insights into that performance, the reasons for it, and the evolution of some of the key policy debates of this period, will find that this volume represents very fruitful reading. References Bean, Charles (2000), ‘The Australian Economic Miracle: A View from the North’, in Gruen and Shrestha (eds.) (2000). De Long, J. Bradford (2000), ‘What Went Right in the 1990s? Sources of American and Prospects for World Economic Growth’, in Gruen and Shrestha (eds.) (2000). Gordon, Robert J. (1999), ‘Has the “New Economy” Rendered the Productivity Slowdown Obsolete?’, Working Paper, Northwestern University, 14 June (http://faculty-web.at.nwu.edu/economics/gordon/researchhome.html) Gordon, Robert J. (2000) ‘Does the “New Economy” Measure Up to the Great Inventions of the Past’, Working Paper, Northwestern University, 14 June (http://faculty-web.at.nwu.edu/economics/gordon/researchhome.html) Gruen, David and Shrestha, Sona (eds.) (2000), The Australian Economy in the 1990s, Reserve Bank of Australia, 2000. Gruen, David and Glenn Stevens (2000), ‘Australian Macroeconomic Performance and Policies in the 1990s’, in Gruen and Shrestha (eds.) (2000). Oliner, Stephen D. and Daniel E. Sichel (2000), ‘The Resurgence of Growth in the Late 1980s: Is Information Technology the Story’, Federal Reserve Board, March (http://www.bog.frb.fed.us/pubs/feds/2000/200020/200020pap.pdf). Toohey, Tim (2000), ‘Information Technology and Productivity’, in ANZ Economic Outlook, October, pp. 17-19 (http://www.anz.com/Business/info_centre/ economic_ commentary/AEO%20October%202000.pdf)