Tuesday, 29 November 2016

Good ideas - but now what?

Yesterday's report from the Productivity Commission, 'Achieving New Zealand's Productivity Potential' (press release here, overview here, whole thing here), is full of good ideas.

In the housing market, for example, their proposals would have the happy outcome of pressing both the equity and efficiency buttons at once. In addition to dealing to people sleeping in cars, a better functioning market would lift productivity: "A housing market that responds to demand pressures facilitates labour mobility and improves productivity by allowing firms access to a deeper labour market, as well as more opportunities for specialisation, innovation and technology spillovers. For workers, being able to live in places where their skills are most valued improves their incomes" (p65).

The Commission is big enough and bad enough to push its own barrow, so I'm not going to recycle its full list of proposals, but I would like to add a little bit of support for its competition ideas.

As the report says, "Lifting competitive intensity is key to improving services sector performance...Increasing competition would energise market selection effects, making it less likely that productive resources – including skills and intellectual property – get trapped in lagging slow-growing incumbents and, instead, flow to innovative new entrants" (p69). And trapped they are: as the report overview notes (p7),  "a relatively long and persistent tail of productivity underperformance exists in New Zealand", with not enough competitive pressure on it to either lift its game or get off the pitch.

The Commission has two suggestions, and I'm fully behind both of them (though I should disclose that I may be a teeny bit involved in helping to get the second one on the agenda).

The first one is reform of s36 of our Commerce Act. Life has moved on, particularly in Australia, since the Commission started running with this, so here's the Commission's latest take (p69):
In its inquiry into boosting services sector productivity, the Productivity Commission found that Section 36 of the Commerce Act – taking advantage of market power – is impractical and needs to be reviewed. Under this Act, abuse of dominance cases are assessed using a “purpose test” that the conduct had an anti-competitive purpose and a “counterfactual test” that the conduct could not have occurred in the absence of market power.
This approach is increasingly out of step internationally, with competition law in almost all other OECD countries focussing on whether a dominant firm’s behaviour creates demonstrable harm to consumers (OECD, 2005). Following the Harper Review on competition policy in Australia – which recommended shifting to an effects-based test of abuse of dominance – the New Zealand approach is looking increasingly unusual and unworkable.
The second is proactive kicking the tyres ("market studies") where there might be competition problems (p70):
Much of the debate on competition in New Zealand has been from a legal perspective and very little is known about the economic impact of competition in New Zealand markets. Given signs of weak competition in conjunction with high rates of return in some parts of the economy, policy-relevant research aimed at better understanding the role of competition in the economy would be highly beneficial.
For example, the advocacy role of the Commerce Commission in promoting competition as means to enhanced economic efficiency and wellbeing could be improved. Specifically, the Commerce Commission should be able to conduct market studies without reference to a merger application or other investigation, as is the case in Australia. These changes would help strengthen the competition culture among policymakers and the public. For example, the ability to conduct market studies would allow the Commerce Commission to investigate potential barriers to competition in poorly performing but highly profitable industries.
A policy combo aimed at effectively policing any Big Beasts impeding the competitive process, and at looking to see whether poor outcomes but high profits are down to a lack of effective competition, sounds like an excellent double header to me. And I'd stress that this is not from any anti-business perspective: as the Commission points out (pp67-8), it is other businesses that wear the input costs of whatever old Spanish practices may be operating in the cosier corners of the economy.

Which is where MBIE could usefully do its bit to improve the labour productivity of the economy by letting us know what it's going to recommend on s36 and market studies. It's just over a year now since MBIE started down this path, and the final round of submissions and cross-submissions closed four months ago.

It's time to hear from you, guys.


  1. After a quick glance, good to see stress on technology diffusion but no mention of Schumpeterian growth theory not taxes

  2. Hi Jim - thanks for that. Sure, there could be other or additional stuff, but on the other hand we've slowed to a crawl in terms of incremental reform, and some progress on at least some fronts would be a plus!

  3. As I commented to you at NZAE, the irony is that we're probably closer to getting a mandate to undertake proactive market studies in urban development than in most other markets. For instance, our recommendation to investigate the state of competition in urban development markets using the analogue of Herfindahl-Hirschman indices and Lerner indices basically went down well with the policy agencies.

    Odd times...

    1. You've reminded me, I meant to follow up on your interesting ideas and haven't got round to it yet (I've been head down on another project).

      There is no policy logic whatever in this space (as you appreciate). In some sectors, ComCom mustn't do anything. In others (telecoms), it's required to. In electricity, the Electricity Authority conducts surveys of the intensity of competition: nobody says this is a strange thing for them to do, and most would say it comes with the territory, unlike the court that, oddly, said that ComCom shouldn't do the same thing economy-wide.

      And the really stupid thing is that when ComCom examines a potentially problematic merger, it does exactly the assessment of the state of competition that, supposedly, it shouldn't be doing outside of a merger being placed in front of it.

      From a policy perspective, this is amateur night.

      I'm pleased there is the prospect of some progress in assessing the state of competition in urban development markets. The sooner someone is empowered to look at other markets as well, the better.

    2. My mental model of policymaking includes a very large element of status quo bias. Generally, where there are internal inconsistencies that's the only explanation that stands up. People put the burden of proof on change, rather than maintaining the current state.