Australian economic reform: The next generation

As published on the Lowy Interpreter on 14 July 2014.

Growth in HALE index, Intangible GDP, net national income and GDP, 2005-2014.

John Edwards’ Beyond the Boom tilts effectively against Australia’s congenitalHanrahanism. It points out the extent to which we managed to finance the wild ride of the boom (the massive surge in mining investment, from 2% to 7% of GDP) without blowing out our current account deficit and foreign debt or setting off an inflationary spiral as we’ve done in the past.

We did it with a floating exchange rate, superior macro-economic policy and higher savings. How many people are aware of these facts as recited by Edwards?

By 2013, Australia’s rate of workforce participation was higher than the US, once cited as a country far ahead of Australia in respect of that indicator. Australia’s rate of investment was far higher than Japan or Germany, to which Australia had usually been unfavourably compared in this respect. Its rate of saving was also far higher than Japan or Germany, recognised as saving paragons.

Edwards is strangely muted on the role of compulsory superannuation in lifting savings, perhaps because he’s aware of its huge and inequitable cost to the budget. (Naïve question: If we want to lift household savings, we can use compulsion or incentives. Why do we use both?)

What’s more, as Edwards points out, much of our investment occurred not in physical structures — buildings, plant and equipment — but in human capital, in the skills of our people. The Herald/Age Lateral Economics (HALE) index of well-being takes GDP and adjusts it for some of the major inadequacies of GDP in measuring well-being. And our measure (see graph above) corroborates Edwards’ story, with human capital rising faster than GDP.

For instance, consistent with the figures Edwards cites, the proportion of the workforce with Certificate III qualifications or above has risen from 40.7% in 2003 to 52.3% in 2013. These changes scored a squillionth of the column inches devoted to the mining boom, but they matter more. From mid-2005 to the latest quarter reported, real GDP has grown by 28%. Net national income (NNI) captures the rise in the terms of trade and so lifts our measured economic growth to 33%. The HALE index takes NNI as a better starting point for measuring welfare than GDP and, even with rising obesity and mental illness weighing it down, human capital increases our measured increase in well-being another ten percentage points to 43%.

Does this mean we’re out of the woods? Well, yes and no! Continue reading

TroppoQuiz

 

What is in the foreground of this picture. It is somewhere in Southern England around Salisbury.  The winning entry will fly first class to London to pick up the Troppo Mercedes Sports from the panelbeater – who’s had about enough of it sitting there since we dropped it off a few years ago.
TroppoQuiz

 

Employee satisfaction and corporate performance: it helps if firms can profit from the additional satisfaction they provide

Employee Satisfaction, Labor Market Flexibility, and Stock Returns Around The World
by Alex Edmans, Lucius Li, Chendi Zhang – #20300 (CF LE LS)

We study the relationship between employee satisfaction and abnormal stock returns around the world, using lists of the “Best Companies to Work For” in 14 countries. We show that employee satisfaction is associated with positive abnormal returns in countries with high labor market flexibility, such as the U.S. and U.K., but not in countries with low labor market flexibility, such as Germany. These results are consistent with high employee satisfaction being a valuable tool for recruitment, retention, and motivation in flexible labor markets, where firms face fewer constraints on hiring and firing. In contrast, in regulated labor markets, legislation already provides minimum standards for worker welfare and so additional expenditure may exhibit diminishing returns. The results have implications for the differential profitability of socially responsible investing (“SRI”) strategies around the world. In particular, they emphasize the importance of taking institutional features into account when forming such strategies.

How patents block innovation: just where you’d expect they would

Patents and Cumulative Innovation: Causal Evidence from the Courts
by Alberto Galasso, Mark Schankerman – #20269 (IO PR)

Cumulative innovation is central to economic growth. Do patent rights facilitate or impede follow-on innovation? We study the causal effect of removing patent rights by court invalidation on subsequent research related to the focal patent, as measured by later citations. We exploit random allocation of judges at the U.S. Court of Appeals for the Federal Circuit to control for endogeneity of patent invalidation. Patent invalidation leads to a 50 percent increase in citations to the focal patent, on average, but the impact is heterogeneous and depends on characteristics of the bargaining environment. Patent rights block downstream innovation in computers, electronics and medical instruments, but not in drugs, chemicals or mechanical technologies. Moreover, the effect is entirely driven by invalidation of patents owned by large patentees that triggers more follow-on innovation by small firms.

Australia: blokey from the get-go

It’s Raining Men! Hallelujah?
Pauline Grosjean and Rose Khattar

We document the implications of missing women in the short and long run. We exploit a natural historical experiment, which sent large numbers of male convicts and far fewer female convicts to Australia in the 18th and 19th century. In areas with higher gender imbalance, women historically married more, worked less, and were less likely to occupy high-rank occupations. Today, people living in those areas have more conservative attitudes towards women working and women are still less likely to have high-ranking occupations. We document the role of vertical cultural transmission and of homogamy in the marriage market in sustaining cultural persistence. Conservative gender norms may have been beneficial historically, but are no longer necessarily so. Historical gender imbalance is associated with an aggregate income loss estimated at $800 per year, per person. Our results are robust to a wide array of geographic, historical and present-day controls, including migration and state fixed effects, and to instrumenting the overall sex ratio by the sex ratio among convicts.

Keywords: Culture, gender roles, sex ratio, natural experiment, Australia
JEL: I31 N37 J16

Open Data and the G20

OpenGovData Venn

From a recent column for the AFR. The report can be downloaded here.

Earlier this year our Treasurer, Joe Hockey, led the G20 Finance Ministers to pledge lifting GDP by 2 percent over ‘business as usual’ over the next five years. It’s a big win for the Treasurer, but how can it be delivered? There aren’t many easy options for reform on that scale that don’t create swathes of losers around whom the media then swarm, thus amplifying the inevitable campaigns against change.

But one opportunity is sitting under our noses. In a knowledge economy, data is the new infrastructure. The more open it is, the more it can be reused repurposed. The more it attracts value adding as business and civil society find clever new ways of making it ever more useful. Most data Google Maps delivers has existed for decades. But government open data policies – and Google – convey open data seamlessly to your mobile as you search out your target.

That’s why, Australia’s Government implemented the recommendations of the 2009 Government 2.0 Taskforce which I chaired. But in Australia as elsewhere, high-level commitments have achieved less than they could have if they’d been seamlessly translated down to the delivery coalface as Google has with geospatial data.

Omidyar Network today releases a Lateral Economics report that estimates that a more vigorous open data commitment could grow Australia’s economy by around $16 billion per year. That’s half Joe Hockey’s G20 growth target.

Continue reading

Clever new piece of work on what drove the industrial revolution

Human Capital and Industrialization: Evidence from the Age of
Enlightenment

by Mara P. Squicciarini, Nico Voigtlaender – #20219 (DAE EFG)

Abstract:

While human capital is a strong predictor of economic development today, its importance for the Industrial Revolution is typically assessed as minor. To resolve this puzzling contrast, we differentiate average human capital (worker skills) from upper tail knowledge both theoretically and empirically. We build a simple spatial model, where worker skills raise the local productivity in a given technology, while scientific knowledge enables local entrepreneurs to keep up with a rapidly advancing technological frontier. The model predicts that the local presence of knowledge elites is unimportant in the pre-industrial era, but drives growth thereafter; worker skills, in contrast, are not crucial for growth. To measure the historical presence of knowledge elites, we use city-level subscriptions to the famous Encyclopedie in mid-18th century France. We show that subscriber density is a strong predictor of city growth after 1750, but not before the onset of French industrialization. Alternative measures of development confirm this pattern: soldier height and industrial activity are strongly associated with subscriber density after, but not before, 1750. Literacy, on the other hand, does not predict growth. Finally, by joining data on British patents with a large French firm survey from 1837, we provide evidence for the mechanism: upper tail knowledge raised the productivity in innovative industrial technology.