3 days ago
RBA says decline in competition costs Australians A$3,000 per person
[SYDNEY] A decline in business competition in Australia from the mid-2000s to the Covid-19 pandemic has hurt productivity and household incomes, according to new analysis by the Australia central bank.
If competition had not dropped, productivity and therefore output would have been 1 to 3 per cent higher due to resources being better allocated across firms in the economy, Reserve Bank of Australia's (RBA) Jonathan Hambur and Owen Freestone said in a research paper released on Thursday (Aug 14). This equates, at the upper end, to around A$3,000 (S$2,511) per person, they said.
The duo said there's 'substantial evidence' that competition slid over the 'decade or so' leading up to the pandemic.
Markets became more concentrated, with dominant firms securing a larger share of sales, becoming more entrenched and harder to displace, while markups — the ratio of price to marginal cost — also rose.
'One way in which weaker competition may have led to lower productivity is by causing a misallocation of resources across firms,' they said.
The RBA this week blamed weak productivity for sluggishness in the economy, assessing potential growth at around 2 per cent, down from 3 per cent two decades ago. Australia's centre-left government will convene a three-day roundtable in Canberra next week to generate ideas to boost economic efficiency.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Sign Up
Sign Up
'The past decline in competition has significantly dragged on aggregate productivity over the period,' Hambur and Freestone said. They added that according to the model they used, this shouldn't weigh on future productivity gains.
'However, if competition continues to weaken, or if weaker competition was to weigh on a firm's impetus to improve (which is not captured in the model), there still could be ongoing effects,' they said.
The RBA, in its quarterly update of forecasts released on Tuesday, downgraded its productivity growth assumption to 0.7 per cent from 1 per cent. governor Michele Bullock addressed the change in a news conference that day.
'One of the reasons we've come to this position is that our forecasts were such that we were hitting our employment and our inflation forecasts, but we were overestimating our GDP and our consumption forecasts,' she said. 'So there was a tension.' BLOOMBERG
