Microeconomic Reform and Technical Efficiency in Australian Manufacturing

The technical efficiency dividend reaped by Australian manufacturing industries following the implementation of microeconomic reforms over the past three decades is analysed empirically in this paper. The technical efficiency scores have been estimated for manufacturing industries using a combined stochastic production-frontier inefficiency model that is free of simultaneity bias. The model parameters have been estimated using maximum likelihood techniques using a panel data set covering a cross-section of 8 industries spanning a time-series of 26 years (1969-1995). The empirical results shed light on how technical inefficiency in manufacturing has been whittled down by the microeconomic reform induced trade liberalisation and technology diffusion processes. Generalised likelihood ratio tests reject the null hypotheses that trade liberalisation and technology transfer had no significant impact on the reduction of technical inefficiency. The reduction of effective rate of assistance and technical efficiency and technology proxies such as intra-industry trade and capital deepening are negatively correlated during the study period. These findings give credence to the predictions of endogenous growth theories that openness of the economy provides a conduit for accessing new technology that promotes innovation and technical efficiency. The increase in technical efficiency of manufacturing industries is the unsung hero behind the emergence of the 'new economy' or the spectacular pick-up of productivity growth observed for Australia during the 1990s. The error-correction modelling reported at the outset confirms that this productivity pick-up is not an artefact of a cyclical upturn. It is attributable to the microeconomic reforms and the technology transfer that has followed it. The paper concludes on the need for further research , first, to shed light on the constituents of total factor productivity such as technical change and technical progress and second, to design policy to address the challenging issues of equity-efficiency trade-off lest it degenerates into a back-lash that could nullify the whole reform agenda. EPrint Type: Departmental Technical Report