Successful reform: past lessons, future challenges

Gary Banks, the chairman of Australia’s highly regarded Productivity Commission, is a valued colleague and good friend of New Zealand.

Last week he gave an important speech with the above title on economic reform in Australia.

It comes at a time when the Gillard government is struggling to establish its reform credentials.  Both major parties in Australia compete to embrace the Hawke-Keating-Howard reform legacy, unlike their counterparts here which often distance themselves from a similarly successful reform programme (even though they have kept in place its main elements).

Gary began by reflecting on the current climate of opinion about reform:

Paul Kelly, Australia’s pre-eminent policy journalist and chronicler of our reform history over the past three decades, asserted earlier this year that “the historic post-1983 reform era is terminated”. Ross Garnaut, one of the most policy-influential academics of that era, recently made the following assessment: “Economic policy since the GST [2001] has been characterised by change, rather than productivity enhancing reform”. He went further: “Attempts at major reforms have failed comprehensively and poisoned the well for further reform for a considerable while”.

 He observed:

If ‘productivity enhancing’ reform is indeed becoming a no-goer, Australia is in for a tough time. For a start, this would make it harder for us to meet the fiscal challenges of the Global Financial Crisis in the short term and, in the long term, the ageing of the population. We would also struggle to meet the demands and costs of more sustainable resource use and desirable environmental rectification. Australians may again start to see international competition and globalisation as threats rather than opportunities. And our capacity to raise the living standards of Indigenous and other disadvantaged members of the community would be weakened when it needs to be strengthened.

Explaining the importance of productivity growth, he said:

Productivity enhancing reform is so crucial to our economic (and social) futures because productivity growth itself – the ability to get more out of a country’s resources – is the mainstay of economic progress …  If, as the Nobel Laureate Paul Krugman has famously put it, ‘in the long run productivity is nearly everything’ Australia’s prospects currently may not appear very promising. Following a stellar performance in the 1990s, driven in large part by the structural reforms initiated in the previous decade, our productivity growth in the early 2000s fell back to its long term average.

Putting numbers on the productivity challenge, Gary commented:

… if (labour) productivity growth could just get back to the long-run average rate of 1.75 per cent that preceded the 2004-2008 cycle, rather than the 1.6 per cent average growth assumed in Treasury’s latest Inter-generational Report, then, abstracting from changes in the rate of employment and investment, per capita incomes would be 6 per cent higher by 2050. And if we could reclaim the 2 per cent average annual growth recorded in the 1990s in a sustainable way – admittedly a big ask – Australia’s GDP would be some $400 billion larger than otherwise, with per capita incomes 17 per cent higher (worth nearly $19,000 per person in today’s dollars).

New Zealand’s productivity growth was actually a little better than Australia’s from 1992-2000 following its earlier reforms, but declined more dramatically than Australia’s in the past decade with the changed policy approach of the last Labour government.

Gary noted that according to the dictionary, ‘reform’ means “change for the better”, but quoted Nicolo Machievelli’s famous remark about its challenges:

There is nothing more difficult to carry out, more doubtful of success, nor more dangerous to handle, than to initiate a new order of things. For the reformer has enemies in all who profit from the old order, and only lukewarm defenders in those who would benefit from the new.

He talked about where the backing for Australia’s reforms came from:

Support was strongest among the professional policy cadre – within government, academia and the ‘commentariat’, including opinion media. But there was also strong support from peak business, and to some extent from community organisations, depending on the reforms. Broader ‘public opinion’, if not actively supportive, was at least not actively hostile.

In New Zealand’s case, support from academics and the media, with some exceptions, was notable by its absence.

And a little further on in the speech, Gary Banks added:

Leaders with the right vision for a better Australia and the skills to realise it, were fundamental to all the individual ‘success factors’ just described – they could be said to be have been the ultimate success factor.

He ended by listing some of the priority areas for reform in Australia today:

One key dimension is the budgetary constraints that governments face in the aftermath of the Global Crisis.  The combination of fiscal constraints from the Global Financial Crisis and structural pressures from the mining boom suggests that the productivity enhancing reforms that deserve some priority right now are those that can reduce business costs and enhance the economy’s supply-side responsiveness, while being ‘fiscally parsimonious’.

In addition:

Regulatory proposals that would have pervasive effects across the economy need particular scrutiny, especially those impacting on the markets for labour and capital, and key infrastructural inputs to production such as transport (not forgetting coastal shipping), energy, telecommunications and water … Among these, industrial relations regulation is arguably the most crucial to get right. Whether productivity growth comes from working harder or working ‘smarter’, people in workplaces are central to it. The incentives they face and how well their skills are deployed and redeployed in the multitude of enterprises that make up our economy underpins its aggregate performance.

Practically all of this agenda and more applies to New Zealand.  (Water reform, for example, has not even got off the ground whereas it has been underway in Australia for two decades.)

The full speech is here.

A speech with similar themes is this one, Reigniting Reform in Australia and New Zealand, given by Hugh Morgan, president of the Business Council of New Zealand, to a New Zealand Business Roundtable retreat in 2004.

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