Donal Curtin

Donal Curtin is a macroeconomist (former chief economist for a big bank), writer (six years as a financial journalist with Euromoney, award-winning economics columnist, blogger), economic regulator (12 years on the Commerce Commission). He has an economics consultancy based in Auckland and blogs for The Dismal Science. Donal is on Twitter @donal_curtin

Three decades later, still bonkers - The Dismal Science

Oct 17, 2014

Last week the Australian Productivity Commission came out with a couple of reports, on the Aussie dairy trade (pdf) and on Aussie retailing (pdf). I wrote up the dairy one because it had various angles relevant to us, notably some discussion of our Fonterra-centred industry structure, a good smackdown of the 'national champions' idea, and some useful analysis of the economics of the global dairy trade.
I've only just got round to taking a squizz at the retail report, and it's equally good. It points out, for example, that a lot of planning/zoning regulation can be both inefficient and anti-competitive, and that there's a reasonably straightforward path to fixing both problems:

Two reforms have been identified as being of particular importance: first, the need to
reduce the number of business zones and increase the permissible uses of land (to reduce
prescriptiveness) within these zones; and second, to remove consideration of the effects on existing individual businesses from the approval process for development applications (to avoid anticompetitive outcomes) (p11)
The Commission is strongly of the view that state, territory and local governments can
assist consumers and the retail sector by developing and applying zoning policies that
ensure the areas where retailers locate are both sufficiently large (in terms of total retail
floor space) and sufficiently broad (in terms of allowable uses, particularly those relating to business definitions and/or processes). This would allow new and innovative firms to enter local markets and existing firms to expand (p11)
As an example of how those reforms would work, the Commission had heard submissions about high rents being charged to retail outlet tenants by shopping centre owners, and while it noted that following best practice in leasing wouldn't be a bad idea, it also found that "the root cause of most retail tenancy lease problems are unduly restrictive planning and zoning controls that limit competition and restrict retail space, particularly in relation to shopping centres. Addressing the latter would also resolve many of the problems in the retail tenancy market" (p12).
More generally, the report got me thinking about how far Australia, and New Zealand, have got with pro-growth, pro-efficiency, pro-competition deregulation. Because, as this report found, despite years and years of economic reform, there are still thickets of regulation that are absolutely bonkers.
Three examples. I'll let them speak for themselves, other than to note the Aussie Commission comment (p113) that "In many cases, these [trading] rules are anachronistic and have no apparent rationale".
Here's a map of trading hours regulation in Western Australia (p7, repeated on p113).

And here's a decision tree on whether you're allowed to open for business in Australia on Easter Monday (p114).

And here's what Woolworths discovered about trading rules in Western Australia for its Masters Home Improvement Stores (which are like Mitre 10 or Bunnings Warehouse megastores):
in Western Australia, regulations prevent Masters Home Improvement stores from trading in line with the hours enjoyed by other hardware stores. To be eligible to trade as a ‘domestic development shop’ Masters must only sell those goods that are prescribed by the Retail Trading Hours Regulations 1988. The regulations prescribe a list of what a ‘domestic development shop’ can sell, which gives rise to all sorts of inconsistencies and anomalies. The regulations allow the sale of:
• light bulbs but not light fittings
• outdoor lighting but not indoor lighting
• kitchen sinks but not dishwashers
• wood-fire heaters but not gas heaters
• indoor television antennae but not outdoor television aerials (p10)
I suppose the good news is that both Australia and New Zealand now have Productivity Commissions that are able to turn over the flat stones and tell us what they're finding underneath, and there's the occasional one-off inquiry like Australia's recent Competition Policy Review that has been doing the same thing (have a read here in particular). It's good to know that there's still some kind of following wind to keep the momentum of reform going.
But isn't it strange, and a bit dispiriting, that after the best part of 30 years of progress in both countries, we're still lumbered with this kind of malarkey. And while I suspect we may not be as bad as the Aussies on most shop regulation (though I could be wrong about the  Easter trading, where our regime is probably as chaotic as theirs), I wonder what we'd find if, for example, we turned over some flat stones of our own. I wonder what's underneath the occupational qualifications one?

Three strikes, and you’re – still going…. - The Dismal Science

Oct 17, 2014

In a previous post I mentioned that Australia's Competition Policy Review had put a torpedo into the side of 'national champions' - requiring or allowing mass consolidation of an industry to produce what will supposedly be a more internationally competitive player.
And last week, I'm pleased to say, the drifting hulk took another blow as Australia's Productivity Commission got it amidships with another one.
The occasion was the Commission's report on dairy manufacturing (pdf) - the latest in an industry series on 'Relative Costs of Doing Business in Australia'. There's lot of interesting stuff in the report, including the short but informative Appendix B down the back on 'Economics of dairy markets',  but for me the highlights were the bits where the Commission responded to submitters arguing that Australia should go the Fonterra route (these are all on p3):

the Australian dairy industry is a price taker on global markets and has no capacity to alter this, irrespective of the structure of the industry. A belief that any single Australian dairy company could exert market power is not consistent with market realities
the emergence of a dominant manufacturer is not a prerequisite for developing distinctive Australian branding for dairy products
there are potential risks associated with highly concentrated industry structures if the overall performance of the industry is linked with one company
Fonterra-like arrangements are not necessary to ensure that scale benefits at the plant level are realised — indeed, there is considerable evidence that Australian dairy manufacturers are taking advantage of scale benefits where it is profitable
And the Commission wrapped it up on p8 with this:
...industry participants are best placed to balance the various tradeoffs and commercial considerations they face (such as between scale and transport costs). Other than where legitimate competition concerns are relevant...the most beneficial dairy industry structure for Australia will be determined by the market place. Attempts by governments to ‘second guess’ market outcomes to achieve a particular industry structure are fraught with difficulty, and likely to impose net costs on the industry and the community more generally. It does not require much imagination — or experience with price setting by government — to envisage highly problematic judgements in setting an Australian price (or prices) for guaranteed domestic milk supply, as occurs today in New Zealand.
The Commission also quoted (pp115-6) from a recent speech by Rod Sims, the head of the ACCC, where he said:
We are seeing a return to calls for ‘national champions’ in Australia. It is, of course, terrific when companies out compete their rivals and take on the world. The concern is when they call for restrictions on competition at home so they can better compete on the world stage. The argument is a contradiction: if you cannot beat your rivals at home how can you hope to do so overseas? Firms involved in cosy oligopolies or oligopolies in Australia are unlikely to succeed on the world stage.
So it looks as if the old rustbucket SS National Champion has now taken three hits in a row. Unfortunately, if past experience is any guide, it will manage to struggle back to port, get patched up, and in due course set out again on another hopeful journey.

No national champions, please - The Dismal Science

Oct 09, 2014

In earlier posts (main one here, follow-up here) I've commended the wonderful work done by Australia's Competition Policy Review. They've systematically taken a pro-consumer, pro-competitive approach without wandering off piste into anti-business populism.

They didn't get stampeded, for example, into "doing something" about the concentrated Aussie grocery business, noting that "While concentration is relevant, it is not determinative of the level of competition in a market...competition between supermarkets in Australia appears to have intensified in recent years... consequently, few concerns have been raised about prices charged to consumers by supermarkets" (p181). If there are issues of the big supermarkets strongarming their suppliers ("unconscionable conduct" in Aussie competition-speak), well they are before the courts, "where they are best considered" (p182). And if the arrival of the big chains tended to deal to the traditional mom-and-pop high street shops, "Undoubtedly these changes can damage individual businesses. However, consumer preferences and choice should be the ultimate determinant of which businesses succeed and prosper" (p183), and "While the Panel is sensitive to these concerns, they do not of themselves raise competition policy or law issues" (p184).
Along the way I wrote about some of the ridiculous anti-competition regimes that the Policy Review uncovered - notably Western Australia's bizarre potato regulations and New South Wales' monopoly organisation of the rice market, and I had some reader feedback that perhaps here in New Zealand we weren't much better, given the way we've allowed the creation of Fonterra.
As it happens, the Aussies looked at the "national champion" issue, too, and again took the pro-competition road. They had a bit (Box 15.1 on p196) specifically about Fonterra, and said that it wasn't in fact the kind of "national champion" monopolist that some Aussies were promoting. "The [Fonterra establishment] legislation included provisions and obligations on Fonterra designed to provide for domestic competition and prevent harm to consumers and farmers as a result of the merger. Concerns were raised that the farm-gate price would be depressed due to Fonterra's dominance as a buyer. These were addressed through a combination of regulation and incentives...To achieve domestic competition in the sale of milk products Fonterra had to divest several brands to competitors and is obligated to supply them on competitive terms". And they quoted Bill English as saying, "Sometimes they think in Australia that we've got a monopoly and it works, but we don't and having one doesn't".
Then they turned to the general issue of whether creating "national champions" is a good idea, as there's always someone lurking with a cunning plan along those lines (our meatworks industry is a plausible candidate for the next one). As far as I'm concerned, these next couple of paragraphs (from p195) ought to be carved in stone and erected outside any government departments or agencies thinking about going along with a bit of "national champion" industrial planning. The added emphasis is mine.
From time to time there are calls for competition policy to be changed to allow the formation of ‘national champions’ — national firms that are large enough to compete globally. While the pursuit of scale efficiencies is a desirable economic objective, it is less clear whether, and in what circumstances, suspending competition laws to allow the creation of national champions is desirable from either an economic or consumer perspective.
Porter and others have noted that the best preparation for overseas competition is not insulation from domestic competition but exposure to intense domestic competition. Further, the purpose of the competition laws is to enhance consumer welfare through ensuring that Australian consumers can access competitively priced goods and services. Allowing mergers to create a national champion may benefit the shareholders of the merged businesses but could diminish the welfare of Australian consumers.

We need more cables - The Dismal Science

Oct 01, 2014

Earlier this month the World Economic Forum came out with the 2014-15 edition of its Global Competitiveness Report (you can find a link to downloading it here). It got a bit of media attention at the time, mostly on somewhat invidious chauvinist grounds - we moved up a notch, and the Aussies moved down one.

Other than that, the detail didn't get much of an outing over the mainstream media fences, and that's a shame, because the report is full of interesting comparisons, which make for suggestive diagnostic policy tools. Here, for example, is what our business community rates as the main problematic factors for doing business.

This is an interesting diagnosis, especially as it's not the sort of clichéd grumbling you might expect from a business group. In fact, these surveys seem to be pretty accurate around the world. The equivalent French survey, for example, came up with this - quite a different set, and one that looks absolutely on the money.

Coming back to the 'Inadequate supply of infrastructure' theme, here's something that I found disconcerting.
By way of background, the Report covers three groups of things for each country - the essentials; things that make the country work better ("efficiency enhancers"); and things that enable you to compete in the deep end of the international swimming pool ("innovation and sophistication factors"). Those "efficiency enhancers" are made up of six "pillars", one of which is "technological readiness", and which in turn has seven components. Here's how we stack up (score and relative world ranking).

We scrub up reasonably well on technological readiness overall. Indeed, two of them (9.02 and 9.07) count as relative advantages for us, as we do better on those criteria (11th and 14th internationally) than we do on our overall competitiveness (17th). 
But there's one big exception, 9.06: the size of our physical internet connections to the rest of the world let us down badly. And if you want to see how badly, here are the countries most like us on the criterion of available international internet bandwidth*.

From the point of view of sophisticated economic development, this is not the sort of company we should be keeping.
So my thought is, the sooner someone can lay pipe in competition with Southern Cross, the better.

*Note A fair amount of the Report's data is based on subjective 1 - 7 sorts of scales. Not this bit. The definition (from p543 of the Report) is "International Internet bandwidth is the sum of capacity of all Internet exchanges offering international bandwidth measured in kilobits per second (kb/s)" and the source is International Telecommunication Union, World Telecommunication/ICT Indicators 2014 (June 2014 edition) 

More evidence of free trade payoffs - The Dismal Science

Sep 25, 2014

Post-election, thoughts have turned - finally - to policy. It's reported in the Herald that among the likely policy initiatives over the next three years, John Key "identified progress on a trade deal with South Korea, which is close to a conclusion, and the Trans Pacific Partnership as priorities".
A bilateral deal with South Korea is definitely a good idea: I know, in an ideal world we've have comprehensive multilateral trade agreements, but it's not an ideal world, and take what you can is the order of the day. These bilateral agreements can be quite handy: our agreement with China, for example, gave us a clear competitive advantage against the Aussies in the dairy trade with China (as I wrote up here).
Whether the TPP ever gets off the ground, and whether it will in fact be a genuine free trade agreement, is anyone's guess. There have been leaks about the negotiations that have raised suspicions of TPP as potentially protectionist of US intellectual property, rather than helping to free up trade, and I've also seen speculation that the Japanese will make sure that any agricultural trade liberalisation in the TPP will get watered down to meaninglessness.
One worry I've got is that a 'bad' TPP will taint the arguments for free trade, which tend to struggle at the best of times against the loud voices of anti-trade ideologues and of formerly protected interests. The voice of the family buying cheaper T-shirts and food tends not to get much of a look in.
So I thought I'd just point to some new research about one of the big free trade deals - NAFTA, the North American Free Trade Agreement of 1994. At the time the usual suspects came out in force against it: you might remember Ross Perot running for President in the US in 1992 on fears of the "giant sucking sound" of American jobs going down the gurgler towards Mexico (and finding nearly 20 million American voters to agree with him).
The latest research comes from the Peterson Institute for International Economics in Washington, "a private, nonprofit institution for rigorous, intellectually open, and honest study and discussion of international economic policy...The Institute is completely nonpartisan". The summary is here and the whole thing (pdf) is here.
How did this contentious agreement work out? Pretty well, as it happens, though one of the lessons is that proponents of freer trade need to be more realistic about the payoffs: it's not just the opponents that can go off the deep end. That said, the benefits were real: look at this.

This shows the initial level of  goods trade between the NAFTA countries (blue), the extra trade that would have happened in any case as the NAFTA economies grew (dark green), and the impact of NAFTA (light green). Trade was basically twice as large as it would have been without NAFTA. That's a bit of a heavy-handed summary on my part,  and the authors are more nuanced, but the guts is that trade got a large boost.
This increased trade in turn fed through into higher incomes everywhere. As the authors say, these higher levels of trade boosted GDP in all the countries involved (I've left out the footnotes):
Ample econometric evidence documents the substantial payoff from expanded two-way trade in goods and services. Through multiple channels, benefits flow both from larger exports and larger imports. As a rough rule of thumb, for advanced nations, like Canada and the United States, an agreement that promotes an additional $1 billion of two-way trade increases GDP by $200 million. For an emerging country, like Mexico, the payoff ratio is higher: An additional $1 billion of two-way trade probably increases GDP by $500 million. Based on these rules of thumb, the United States is $127 billion richer each year thanks to “extra” trade growth, Canada is $50 billion richer, and Mexico is $170 billion richer. For the United States, with a population of 320 million, the pure economic payoff is almost $400 per person. 
The same is true of the proposed agreement with South Korea, as MFAT's briefing page on the negotiations points out:
An independent joint study into the benefits and feasibility of an FTA was completed in 2007. It found that New Zealand and Korea are two of the most complementary economies in the Asia-Pacific region and that an FTA would deliver economic benefits for both countries. The analysis, by the New Zealand Institute for Economic Research and the Korean Institute for International Economic Policy, suggested that the FTA would provide gains to real GDP between 2007 and 2030 of US$4.5 billion for New Zealand and US$5.9 billion for Korea.
Opponents of trade liberalisation, in short, would take US$10 billion of benefits from a Korean agreement alone, and scatter them to the winds.

An inequality story in four graphs - The Dismal Science

Sep 22, 2014

Inequality isn't one of my core research interests, but over the last few days I've found myself absorbed in lots of interesting bits of research on inequality all arriving at once (I wrote up one of them yesterday).

Here's the latest one, which I've extracted from the OECD's mammoth Education at A Glance 2014, which appeared last week. The four graphs are quite large, which would make for an over-long post, so I've put them "over the fold", as they say. The gist of it is that we've got a developing problem in equitable access to good educational outcomes: right, on to the graphs.
Graph 1 - our students' performance at maths. It's not bad by international standards,  modestly better than the OECD average. All good so far.

Graph 2 - our performance is slipping, in absolute terms. Our students score less on tests of mathematical attainment than they used to. We're not alone in this (see also Australia and some of the Scandinavian paragons), and I've no idea why, and I expect I'd be as welcome among the education research community as a sociologist at an economics conference if I speculated, so let's just note the fact and move on.

Graph 3 - you'd prefer if we were in the north-east quadrant of the graph below (higher than average maths performance, less influence of family status on the outcome), but we're in the north-west quadrant (higher than average scores, higher than average link to family status).

Graph 4 - we're at real risk of dropping into the south-west quadrant in the map above, where you absolutely don't want to be, because our performance is dropping and the contribution from family background is rising.

I don't know why any of this is happening, or how to fix it: I'm just putting it out there, as I haven't seen this material in the mainstream NZ media (or indeed on the blogs I follow, either). Hopefully there'll be readers with constructive ideas.

Technical PS - don't shoot the messenger
(1) If you don't like the idea of testing, or you wonder why maths and not other scores, or you think the results are all down to tiger moms pushing their little darlings through rote learning crammers in Asia, don't look at me. Take it up with the OECD. They say (p188) the scores don't just reflect rote learning for test purposes, and that their maths testing survey "does not just ascertain whether students can reproduce what they have learned; it also examines how well they can extrapolate from what they have learned and apply that knowledge in unfamiliar settings, both in and outside of school. This approach reflects the fact that modern societies reward individuals not for what they know, but for what they can do with what they know".
(2) Ditto on the accuracy of measuring the influence of family status. "Students’ socio-economic background", the report says on p193, "is measured with the PISA index of economic, social and cultural status, which is based on information provided by students about their parents’ education and occupations and their home possessions, such as a desk to use for studying and the number of books in the home". Sounds reasonable to me: if you've got a different view take it up with them directly. The nearest Metro station is La Muette.

Inequality in New Zealand - The Dismal Science

Sep 22, 2014

Yesterday evening in Auckland we had another interesting Law and Economics Association (LEANZ) event, with Max Rashbrooke talking on 'Inequality in New Zealand', largely based on his book Inequality: A New Zealand Crisis, published by Bridget William B...