Friday, November 14, 2014

Wrong-headed on local preference

 Cairns Post: Cairns Regional Council caught out on cheapskate weighting for local tenders

Cairns Regional Council has been urged to give more regard to local companies amid ­revelations it only gives them a 5 per cent competitive advantage in tender processes.
That’s half the 10 per cent weighting Townsville applies and well behind the 15 per cent price advantage mandated on the Gold Coast. Cairns Chamber of Commerce chief executive Deb Hancock challenged council to follow the southern councils’ lead.

Local preference is effectively similar to a tariff as a form of protection. The economic case for tariffs has been pretty well demolished but that hasn't stopped the provincial protection zealots in the Banana Republic of Cairns and rent-seekers at the Cairns Chamber of Commerce..

All I see in a situation where all councils compete between themselves to match local preference protection is broadly increased costs and reduced productivity. One would have thought the lessons of competitive protection were learnt in the Great Depression but apparently not.

It's no surprise these policies are popular during periods when the economy is weaker and unemployment higher such as recent years in the USA. Research in the USA indicates increased costs and distortions at local preference levels over 5%. Similar to tariffs, higher preference margins such as the Gold Coast can be particularly harmful when it discourages potential competitors from tendering at all. This also lays the groundwork for crony capitalism.

For the provincial protection zealots the payoff is through a magic multiplier for the local economy when the money stays here. Yes, the uses and abuses of multipliers come into play again. I used to think the problem with applying a local multiplier effect across the broad economy by aggregating all those locally multiplied economies would be obvious but apparently not. A fallacy of composition?

An interesting paper on why these local preference policies can work for politicians despite negative long-run economic consequences came to the following conclusion: Preference Policies - American Economic Association

Using a two-player repeated game framework, preference policies can be rational for politicians who have a discount rate that emphasizes short-run benefits. Even when assuming perfect information as to the long-run inefficiency of these policies, short-sighted politicians with low discount rates, sticky capital, and lengthy political response functions provide justification to policy makers for introducing preference policies.
A 5% preference may be reasonable with limited unintended consequences. The Gold Coast tender preference is well beyond that. It is not in the broader interest of Cairns to respond to the Gold Coast with a 15% preference which would only damage ourselves.

An interesting suggestion within that paper is the alternative of a reciprocal preference policy where it may not be politically realistic to remove local preference. So there would be no local preference but rather a 15% penalty for any Gold Coast business tendering in Cairns. Have to think about that one not sure it works for me or would be practical.

Perhaps we should also erect a big sign at the airport arrival gates: "Go Home, Buy Local"

Some further reading:

Nicholas Gruen: Fair trade or no trade? Economic illiteracy alive and well in our think tanks; Krugman: Ricardo's difficult idea; Bastiat: A negative railway & The candlemakers petition; Backward economics; Bill would end local preference practices; The inefficiency of local food; The buy locally owned fallacy; How tilting the playing field spilled millions in Homestead & Bernard Keane: Buy foreign, buy local, just don’t buy Paul Howes

1 comment:

  1. Great post, Mark. That reciprocal preference policy is a neat idea!