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This paper builds on the empirical research underlying Chapter 1, “Australia: Productivity Growth and Structural Reform,” Australia—Selected Issues and Statistical Appendix (International Monetary Fund, 1999). The author would like to thank Ray Brooks, Peter Downes, Paul Gretton, Jonathan Ostry, Christopher Towe, and participants at seminars at the Australian Treasury and the IMF Asia and Pacific Department for useful comments and suggestions.
Other indicators of trade reform were also examined, including openness, import penetration, and export intensity—the latter two, both for manufacturing industries only and at the aggregate level.
For a similar approach, see Domowitz et al. (1986). Alternative approaches which estimate price-marginal cost margins but assume constant margins over time, include Hall (1988), Domowitz et al. (1988), and Roeger (1995). Morrison (1990) proposes a methodology to estimate time-varying markups using a structural model; however, this procedure is beyond the scope of this paper.
As an example, prohibitive tariff rates afford full trade protection, but the implied protection would not be included in the average tariff rate because sectors with prohibitive tariffs would have no imports.
These countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. While estimates for labor productivity growth can be derived for other OECD countries, the lack of capital stock data for these countries precludes estimating capital productivity or TFP growth. The business sector includes both market and non-market sectors, but excludes producers of government services. The vintages of the data are before September 1999, and thus, the data omits recent historical revisions in a number of countries.
At the aggregate level, most economic studies have found that constant returns to scale cannot be rejected.
For example, labor is not differentiated by level of skill or education while capital is not differentiated by vintage.
Note that unlike the other indicators, an increase in the structural change variable indicates increased market competition or flexibility.
For the structural change explanatory variables, the lag length is 6, as the coefficients beyond the sixth lag were insignificant. This may reflect the shorter time series (from 1971) available for these variables. Also, regressions (not shown) without the Gap variable (see below for the description of this variable) or with the Gap variable lagged only one period or only ten periods also confirm the main regression results, particularly on the impact of structural reforms.
Similar results (not shown) are found when the relative per capita income term is replaced by the ratio of the TFP level to the TFP level in the United States, although convergence is often rejected.
Regressions (not shown) substituting the three-digit structural change variable instead of the two-digit one produced similar results, except the three-digit structural change variables are almost always insignificant in both the short and long run.
Alternatively, significant fixed effects could reflect other factors, including differences in measuring data. Time fixed effects (or dummy variables) are generally significant (not shown); however, the results on the impact of structural reforms generally hold.
For the regressions with log levels, the long-run coefficients can be interpreted as the long- run impact of a 1 unit change in the log level of the explanatory variable. For the regressions with first differences of log levels, the long-run coefficients can be interpreted similarly, except that because the coefficient is calculated as the sum of the coefficients on all of the lags and the explanatory variables are first differences of log levels, the coefficient must be divided by the lag length in order to estimate the impact of a 1 unit change in the log level of the explanatory variable.
These calculations are based on the fixed effects regressions with first differences in Tables 7 and 8, using the long-run coefficients significant at the 10 percent level. The range for the impact on TFP growth is because of the differences in the coefficients. The approximately equivalent positive impact from trade and product market reforms reflects the greater improvement in the product market indicator compared to the trade indicator offset by the higher coefficient on trade reforms.