When I read the suggestion in the foreword of the OECD’s
recent publication The Future of Productivity that governments should be “reviving the diffusion machine” to
“promote inclusive growth” my initial reaction was that the OECD would have a
difficult task persuading me that markets could not deal with diffusion of new
technology without government help. However, it turned out that I had grasped the wrong
end of the stick. The OECD researchers have been investigating whether
diffusion gaps might be linked to government policy failures. Reviving the
diffusion machine involves, among other things, reducing government regulation
that prevent markets from functioning efficiently.
The growing diffusion gap in OECD countries is shown in the
graphs below. The graphs have been reproduced elsewhere, including by Timothy
Taylor, the conversable economist, but they deserve to be widely published.
The graphs suggest that productivity growth at the global
frontier has remained relatively robust, despite the slowdown in productivity
growth in many OECD countries during the 2000s (as previously discussed on this
blog). It is interesting that the productivity divergence between top
performers and the rest began to widen prior to the financial crisis. That is
particularly evident in the case of service sector firms.
The authors acknowledge that the productivity gap is
consistent with winner-take-all dynamics or “superstar effects” as well as
slower diffusion of new technologies. However, the former explanation is
discounted because the divergence is not confined to the ICT sector where
winner-take-all dynamics might be expected to be most important. For a
discussion of this point by Dan Andrews see the video of the launch of The Future of Productivity at the
Petersen Institute (Dan’s response to the relevant question is near the end of
the session).
Regression analysis suggests that the ability to learn from
the global frontier is stronger in economies that are more open to
international trade and more integrated in global value chains (GVCs). The
productivity of national frontier firms is negatively influenced by cumbersome
product market regulation, and positively influenced by quality of education
systems, R&D subsidies, closer R&D collaboration between business and
universities, and stronger patent protection. In some economies where national
firms have productivity that is close to the global frontier, the impact of
those firms on national productivity is muted because they are undersized. The
difference between the size of national frontier firms and global frontier
firms tends to be smaller in industries with higher job layoff rates, less
stringent employment regulation and bankruptcy laws that do not overly penalize
failure.
The growth of innovative firms is restricted by high rates
of skill mismatch in many countries. The
authors suggest that skill mismatches can be exacerbated by high transactions
costs in housing markets (e.g. stamp duties) and bankruptcy legislation that
leaves people with valuable skills employed in zombie firms.
The report suggests:
“It is important that young firms either grow rapidly or
exit but no longer linger and become small-old firms”.
That set off alarm bells in my mind. What the authors meant
to say, presumably, is that governments should reform regulation that assists
low-productivity firms to hold resources that could be used more efficiently
elsewhere. The idea that young firms should grow rapidly or exit brought to
mind memories of the phrase “get big or get out”, coined by an Australian
agricultural economist in the early 1970s, and used by industrious bureaucrats and
politicians to justify questionable interventions in the normal functioning of
credit markets.
A question some of my readers might be asking themselves at
the moment is how well Australia scores in relation to the policy variables
noted above. The question is not easy to answer because Australian data is not
included in some parts of the analysis.
- Australia’s participation in GVCs is relatively low for a small economy. (GVC participation is measured in terms of imported inputs used in exports and exports used as inputs in other countries’ exports.) This reflects Australia’s remoteness, but it may nevertheless make it more difficult for Australian firms to maintain close linkages with the global frontier.
- Some OECD data on product market regulation (Koske, I et al,2015, The 2013 update of the OECD’s data base on product market regulation …) suggests that Australia is among the best for OECD countries. Our regulation is apparently more restrictive than that for the Netherlands, UK and Estonia, but less restrictive than for Greece.
- In 2013 Australia’s score on the OECD’s data base on restrictiveness of labour market regulation – covering ease of dismissal etc. - was 1.94 out of a possible score of 6 (higher scores indicate more restrictions). Australia’s score implies somewhat less restrictions than the OECD average (2.21) and Greece (2.41), but more restrictions than New Zealand (1.01) and the US (1.17).
- The World Bank’s Doing Business ratings suggest that Australia’s performance in resolving insolvency (rating of 81.6%) is somewhat better than the OECD average (76.9%) although not as good as the US (90.1%) or Canada (89.2%). The average time required to resolve recover debt in Australia is 1 year, considerably lower than for the OECD average (1.7 years) the US (1.5 years) but higher than for Canada (0.8 years).
The fact that some of Australia’s policies look relatively
good by comparison with OECD averages is hardly grounds for complacency. OECD averages are heavily influenced by some
of the most sclerotic economies in the world which have had woeful
productivity performance over several decades.
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