Crossed Wires Threaten Energy Privatisation

The New South Wales voters may have delivered an unambiguous thumbs down to electricity privatisation but the issues that persuaded the Premier and his Treasurer to favour it remain.  The same imperatives that brought the ALP Government to privatise the Commonwealth Bank and Qantas are present in energy markets.  Chief among them is not sales revenues -- important though this is -- but the incompatibility of government owned businesses operating in competitive markets.  That incompatibility is intensified where businesses are subject to considerable regulatory oversight.

In the final analysis a business must seek to maximise the wealth it obtains for its shareholders.  Breaking up the NSW electricity supply into ten separate firms with a common shareholder is no more likely to assure their total independence than would be the case with separately operated BHP coal mines.

Generators in NSW and Victoria have faced cripplingly low prices over the past two years.  The privatised Victorian generators, which have lower costs, lay the blame for this squarely at the feet of excess NSW capacity.  As a result, one Victorian generator, the $4.85 billion Loy Yang A, is facing some highly publicised financial difficulties.

The Victorian generators maintain that the NSW Government has subsidised the State's generators by guaranteeing them a high price for sales to customers (mainly households) who are not yet free to shop around for lower priced power.  And, further to defray its loss of earnings from generators, the NSW Government placed an additional levy on sales to the customers who are free to choose their own electricity supply.  Price wars are seen across many industries, but the Government's ability to insulate its returns from generation businesses has exacerbated these, creating vast market distortions.

Government ownership also exposes taxpayers to considerable business risk.  The State owned electricity distributor, Integral Energy, is to take on AGL and become a distributor of gas.  Such head to head competition is great for the consumer and may stimulate efficiency.  But as a government business Integral puts at risk taxpayer funds in embarking on what might well become a considerable capital expenditure program.  Worse still, if Integral were to stand toe-to-toe with AGL in a bruising battle for market share, it has similar advantages to the NSW generators.  Unlike AGL, Integral does not face the discipline of shareholders and the effects of poor decisions on its market price and credit rating.

Hence a government owner is damned if it allows a firm it controls to embark on a risky strategy, and damned if it prevents it acting as a genuine entrepreneur.

But should a Government stand by and allow a free rein to the directors it appoints to run its entities?  Some of the dangers of doing so have already been seen in the purchase by the State owned Great Southern Energy of Wagga gas.  Great Southern paid a price of $56 million, twice that offered by private sector suitors, for an asset with a return regulated under the national gas code that could never have valued it above $32 million.  The NSW regulator has since confirmed the regulatory rules and set prices that value the business at less than $30 million.

Much greater financial risks are seen with a commercial dispute between Victorian based retailer Powercor and the Government's Pacific Power generation business.  In that dispute, the Government as shareholder is exposed to possible losses amounting to several hundred millions of dollars.

Already the electricity industry is unrecognisable from the integrated monopolies of five years ago.  Not only is it now subject to naked market forces but it is rapidly fusing with other network industries like gas and telecommunications.  Government ownership will leave the industry either hostage to a shareholder favouring excessive caution or embarking on risky innovation without the checks and balances capital markets impose on private firms.  And government ownership faces considerable risks of over-manned firms or excess capacity due to its shareholder's fears of electoral punishment.  State governments have to find ways of privatising their electricity assets or risk seeing their natural political reflexes upsetting the market framework they have created.

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A Major Blunder by the Coalition

Senator Richard Alston's internet censorship bill -- the Broadcasting Services Amendment (Online Services) Bill 1999 -- displays a conjunction of technological incompetence, commercial destruction and political short-sightedness that has rarely been equalled.

The title itself proclaims technological incompetence.  The Internet covers a diverse array of services from email, Internet telephony, chat lines, newsgroups, etc. to the World Wide Web -- which is roughly like a broadcast medium, though of a "pull" (i.e. the user grabs things at will) rather than a "push" variety (with set programs, such as radio or TV).

The Internet is continuing to evolve rapidly while the Web is doubling in size every year and covers hundreds of millions of sites.  To attempt to regulate this by a "tack on" to TV and Radio regulation is profoundly misconceived.  It is like regulating aircraft by additions to the Navigation Act because aeroplanes are bit like ships.

The bill is primarily aimed at regulating Internet Service Providers and other Internet hosts.  Yet the appropriate analogy is not with TV or Radio, but with ordinary mail or telephones.

The suggestion that Telstra, Australia Post, Optus, AAPT, courier services, etc, should censor their clients' mail, packages and phone calls (even on a complaints basis) would be rightly regarded as absolutely outrageous and ludicrously expensive.  Yet this is what the Bill seeks to do with ISPs.

The Government denies that the Bill -- which establishes a complaints-based regime -- imposes mandatory filtering.  This is either nonsense or proof the regulatory regime is not serious.  The Bill requires ISP's not to host material subject to a "take-down" order -- which must be complied with within 24 hours.

Such material can be replaced on a website at literally the speed of a phone call so -- unless the take-down orders are essentially vacuous -- ISPs would be required to continually check content to make sure that such material was not re-hosted.  The expense involved would be considerable, potentially enough to drive many of the smaller of the 600 current ISPs out of business.  And the implication for universities -- home to thousands of technically literate free spirits -- is just nightmarish.

One can just see some Judge saying "well, without the requirement to continue monitoring, a take-down order would be effectively vacuous, and Parliament cannot have meant to enact a vacuous rule, so ..."

The simplistic extension of broadcasting standards to the Internet would imply that, for example, Rothmans or Philip Morris could not have Australian websites because they involve promotion of tobacco products -- and local ISPs would be obliged to block any overseas sites that they operated from.

The Government says that email, chat lines and other ephemera are not covered, but it defines "content" in such a way that stored email and chat logs are covered.  Are you happy with the thought that your private correspondence has to conform to broadcasting standards?  Keep your love life out of your emails and online chats -- unless you are sure it is not stored in a way available to others anywhere!  (Which almost all of it is at some stage).

And this merely touches on some of the technological problems of the bill.  The Government already has before it a June 1998 CSIRO report which demonstrates the technical impossibility of centrally imposed blocking of porn.

Most serious porn requires a credit card to access anyway, and the market has already responded to demands by users for controls, producing far better Internet filters available to any parent than this Bill -- products such as NetNanny and KidSafe (though they are no real substitute for parental supervision).  What the market can't do is respond to demands by non-users to control access by users.  Only regulation can do that.  But should it?

Opinion polling indicates that non-users are more concerned about content issues than users.  Unsurprising, as it is always easier to raise moral panics among the uninformed.  Non-users have a poorer grasp of the value of the Internet than users and are much more likely to have inappropriate mental pictures of what the Internet is actually like.  Polling also indicates that both groups are more concerned about cost than content -- and this bill will certainly raise costs.

The Coalition is making a major strategic blunder with its proposed Internet censorship.  The IT community is young, entrepreneurial, willing and natural denizens of a free labour market.  A clear target group for the Liberal Party, one would have thought.

But no, the Coalition is determined to alienate them by putting them in a futile, yet potentially expensive, regulatory straightjacket with great potential to significantly degrade Australia's participation in IT growth and development.  The IT culture is also liberal and free-wheeling.

The bill is therefore a comprehensive assault on the culture, commerce and intelligence of the IT community:  a combination that screams the Coalition's lack of understanding of, and even hostility to, them and their concerns.

Faced with a hostile regulatory environment, the best and brightest will migrate to the US -- a country not afraid of the future.  In one fell swoop, Australia will move from being one of the two or three most Internet-enabled countries in the world to an also-ran, more restrictive than Singapore or Malaysia in its attitude to the Net.

On the 17 May, the Canadian broadcasting authority announced, after a 10-month review, that it would not be regulating the Internet in anyway.  Canada understands the competitive pressures, difficulties involved and capacity of existing mechanisms to deal with content issues;  why doesn't our government?

The Bill is widely regarded as an attempt to secure Senator Harradine's vote -- though it clearly has not worked for the goods-and-services tax.  Senator Alston is already responsible for the single most outrageous decision of the Howard Government -- the free gift to current TV proprietors of digital TV rights, at the expense to taxpayers of many millions of dollars in forgone auction revenue and to consumers in the frustration of new media entrants.

Also widely regarded as a policy bribe, it also failed -- my study of TV News Federal election coverage on the ABC and commercial stations found TV news coverage was favourable to the ALP on all of them except Nine, where it was broadly balanced.  But at least that policy pay-off did not damage an existing industry.  This latest policy stupidity has the capacity to seriously degrade the Australian IT industry as a vibrant economic force.

The government says the proviso that the measures be technologically feasible and commercially viable will protect the industry -- but such pious hopes remain to be tested on the ground and in the courts.  Looking very much like a patch-up job, the provisions raise the question of technologically feasible and commercially viable to whom?  What is commercially viable to Telstra BigPond may well drive smaller ISPs out of business.

But then, there is a long history of regulation protecting the big guys against their smaller competitors by raising costs.  When and what is the test of commercial viability -- after X number of ISP's have been driven out of business?  What strikes some judge as viable?  Properly designed regulations should be inherently technologically feasible and commercially viable.

Our children may or may not need protecting from naughty pictures beyond the capacity and duty of their own parents to provide.  They certainly need jobs.  Nanny Alston's ludicrous and destructive extension of the Nanny State will not stop Net porn, but will stop Net jobs.

A Victim of the Shame Game

Should Australia take any notice of criticisms from United Nations committees?

Earlier this week Sir Ronald Wilson said that the Government's rejection of an attack on its Wik legislation by the UN Committee on the Elimination of Racial Discrimination (CERD) was "offensive".  Sir Ronald, a former president of the Human Rights and Equal Opportunity Commission, warned that Australia's international reputation was at risk.

The "international embarrassment" card is a common tactic of activists who have failed to get their own way with Australian parliaments or the public on issues from Jabiluka to children's rights, and greenhouse emissions to native title.

The activists pretend that the international bodies who have censured us are made up of well informed and impartial people with sound judgement.  But many of the UN committees are little more than extensions of the activists' own networks, comprising a convenient mix of ideological enthusiasts, pliable bureaucrats, and cynical entrepreneurs with an eye for the main chance.

While the Howard Government was right to dismiss the CERD report as "insulting" and "unbalanced", perhaps it should also have pointed out that the committee itself is unbalanced.  Although its eighteen members theoretically serve in their personal capacity, they are nominated by their governments, and more than half come from countries without a tradition of accepting the autonomy of individuals who are put forward to join international organisations.

Members include people who were nominated by current communist regimes, such as Cuba and China, people originally nominated by former communist states, and people from a number of countries with a truly nasty record on human rights and the treatment of minorities.  Some of them have views which would be totally rejected across the whole spectrum of Australian political opinion.  For instance, Agha Shahi from Pakistan is a strong supporter of his country's nuclear weapons program who is passionately opposed to the signing of the Nuclear Non-Proliferation Treaty.

And the CERD does not even take seriously the very convention whose provisions it is supposedly overseeing.  The International Convention on the Elimination of All Forms of Racial Discrimination -- which was adopted in 1966 -- is a universalist and integrationist document, specifically intended to break down all racial and ethnic barriers.  The convention is clearly at odds with the identity politics which have become prevalent in many liberal democracies in recent years, although this is not a development that the UN committee bothers to condemn.

And while the convention allowed for special measures designed to assist disadvantaged groups, it warned that these must not "lead to the maintenance of separate rights for different racial groups" and that the measures must not continue "after the objectives for which they were taken have been achieved".  The affirmative action and preferential treatment policies that a number of western countries have adopted are arguably in breach of these conditions, although once again, the CERD shows little interest in such matters.

People who believe that Australia's domestic policies are really likely "to shame us in the eyes of the world" also seem to think that the rest of the world is carefully focused on us, taking diligent note of all our peccadilloes.  This fallacy is readily dispelled by scanning the international media, either in situ, or on the Internet.  The rest of the world seldom gives us much thought, except as a sporting power or tourist destination.

When the CERD report was released a few weeks ago I checked over a dozen English language newspapers in Europe, Asia, North America and South Africa on the Internet.  Only two, England's Daily Telegraph and Hong Kong's South China Morning Post, carried any mention of the report.

In both cases, the stories were sourced from Sydney, rather than from Geneva where the CERD report was actually issued.  In other words, what really triggered the stories was not the report itself, but the way it was being used by Australians who were playing the "international shame" game in order to push their own agenda.

However, there is one way to cause embarrassment for Australia.  This would be to take seriously those who attempt political blackmail by invoking threats of a non-existent "world opinion" directed against us.

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Aunty's poor record on bias

Letter to the Editor:

If bias is unmeasurable, as Hugh Mackay and Stephen Braun claim (Opinion 13/5), then media organisations such as the ABC cannot be held accountable -- they can be as biased as they like because it is "all in the eye of the beholder".

My election study found that news coverage shifted in interesting ways.  Nine's coverage became more favourable to the Coalition after Kerry Packer endorsed John Howard while the ABC's coverage became much more balanced after their coverage became the subject of controversy.

TV News coverage is supposed to be a stand alone product, so should be subject to stand alone scrutiny.  As for measuring bias, my study found the ABC's TV News coverage of the waterfront dispute systematically left certain matters out in ways whose effect was to put the MUA in a more favourable light and Patrick and the Government in a less favourable one.  Clear evidence of bias.

United we own, united we fall

Also published in the Adelaide Review, June 1999

Did you know that the United States started off communist?

Both the original Jamestown settlement, and that of the Plymouth colony of the Pilgrim Fathers, started off with all property held in common.  The settlements were inspired by religion, and such communal property was held to be the way to replicate the original state of man, free of the corruptions of private property (and a way of ensuring the investors back in England got a return).

They starved, of course.

In each case, nowhere near enough food was produced to feed the colony and most of the colonists succumbed to starvation and disease.  Colonists bought or begged food from the neighbouring Indians.

In each case, the colony was only saved because a newly-arrived official from England identified the problem -- everyone received an equal share regardless of how much or little they worked or improved things, so needs greatly exceeded work done.  Both officials promptly privatised the land, distributing blocks to each surviving family.  In each case, as families were able to keep the fruits of their labour, food production boomed.  So much so, that the colonists were soon selling corn to the local Indians.

China's Deng Xiaoping achieved the same result with his 1979 decollectivisation of agriculture, kicking off the long Chinese boom.

When Boris Yeltsin said the Soviet experiment was over, he also said it would have been better if it had been tried on a small-scale first.  To which the Americans could reply -- "yep, and we did;  but we got over it".

The early Americans found that even religious enthusiasm, tied to the whips of hunger, in a small community, could not make communism work -- and the original American colonists had no fall-back of developed institutions and productive capital to tied them over.  So they swiftly starved -- until the rules of property were changed.  And these patterns have keep repeating themselves.  Collectivisation of agriculture resulted in mass death in the Soviet Union, in China, in Cambodia, in Ethiopia.  Ethiopia being a land of unreliable rainfall, the peasantry had long been used to keep back seed grain in sufficient quantity to tied them over.  Mengistu, the Ethiopian leader, said that such "hoarding" was "bourgeois accumulation" and confiscated their stores.  The rains failed, as they did regularly, and the people starved by the hundreds of thousands:  men, women and children.  It was not drought that killed them, but the ideological delusions of their own government.  However, to the Mengistu regime, death was clearly preferable to the "sin" of bourgeois accumulation.

It has been one of the terrible delusions of the twentieth century that one can change human nature by changing the rules of property.  Homo sapiens are the product of millions of years of evolution, and thousands of years of social and cultural evolution.  Human behaviour, in its essentials, does not actually change all that much.  The suggestion that it is somehow completely malleable by changing property relations is a nonsense, but a nonsense which has killed tens of millions of people this century.

Even now, North Korea hovers on the brink of starvation.  Again, it is not nature that is killing them, but yet another failure of collectivised agriculture.  Whether the Pilgrim Fathers, Russians, Chinese, Koreans or Ethiopians, regardless of race or culture, collectivised agriculture is a failure.

So, if we know it does not work, why are we currently inflicting it on indigenous Australians?

Land granted to indigenous Australians by various land rights Acts typically provides that land as communal, inalienable freehold.  The land is held in common and can't be sold.  All the owners receive the benefit regardless of how little, or how much, effort they put into it.

Sound familiar?

The Australian welfare system ensures no one starves, but the land (now more than 15 per cent of Australia) is certainly not used to best advantage.  In particular, it is not being successfully utilised to wean indigenous Australians off welfare -- the welfare dependency that Aboriginal community leader Noel Pearson denounced so strongly recently.  The creation of the special category of "indigenous freehold" gives very limited entry into ordinary commercial life, participation in which is the only genuine route to indigenous independence and advancement, the only way out of poverty and dependency.

There were about 300 indigenous cultures in Australian when Europeans arrived, cultures which varied greatly in ideas, beliefs, practices and language.  The notion that there is a single Aboriginal identity, single Aboriginal people, a typical Aboriginal form of ownership, a single Aboriginal culture are all post-colonial abstractions.  The creation of "indigenous freehold" represents the law imposing a lowest common denominator indigenous pseudo-culture -- far more of a fantasy of social justice than anything genuinely indigenous.

Worse than that, it actually denies to owners differentiated by "race" -- that stupid, empty concept -- the full advantages of property ownership the rest of us take for granted.  We can buy and sell our property, we can individually benefit directly from the care and use we invest in it, but apparently our indigenous brethren are to be "protected" from such snares and temptations for their "special land".

And we call this imposition of a second-rate form of property "social justice".  I can just see the "stolen ownership" report of 30 years from now, with apologies being demanded from the government of the day by progressive opinion for policies that current progressive opinion deems so wonderful.  At least with the "stolen children" the intent was to give them the full benefit of participation in wider society, not isolate them from it.

But then, weren't there a few progressives who told us that Joe Stalin was a good bloke and Mao a giant of social justice?

Activists are Playing the Shame Game

Small children invariably see themselves as the centres of their little worlds, believing that everyone is fascinated with all they do.  The threats of international embarrassment that many environmental and social activists trot out when they fail to get their own way with Australian politicians or the public depend on a similar immaturity.

Either innocently or cynically, the activists confuse the outrage they can mobilise amongst their own networks of supporters in other countries with more general opinion on particular issues.  So they issue stern warnings that "if we mine uranium at Jabiluka, Australia will be an international laughing stock", or "unless we implement all the provisions of the United Nations Convention on the Rights of the Child, we will be condemned by world opinion".

In reality, the rest of the world rarely gives us much thought, except as a sporting power or tourist destination.  This was brought home to me during a three week trip to the United States from which I have just returned.

Americans tend to be favourably disposed towards us in a superficial way.  But they are remarkably uninformed about Australia and do not seem overly interested in remedying this ignorance.  Most people I spoke with had a university education, yet few had any idea where Brisbane was, let alone Jabiluka.

Always on the lookout for news from Australia, I read a variety of national and local papers in the cities I visited, from The Wall Street Journal and USA Today to the Tucson Citizen.  I also watched a lot of television news.  I did find an obituary for the painter Arthur Boyd in the Los Angeles Times, but apart from sporting stories, this was the only specifically Australian item I saw.

While the US media were preoccupied with the release of the three American soldiers from Yugoslavia, I never came across any mention of the two Australian CARE workers being held by Milosevic on spying charges.  Indeed, I did not meet a single American who had even heard of their detention.

In part, this is a consequence of the parochialism of the American press and public, a rather alarming trait in the world's only superpower.  Contemporary America seems to have turned the old environmentalist maxim on its head -- thinking locally while acting globally.

But parochialism is not the only reason why Americans are largely indifferent to what goes on in Australia.  Even when the American press does run international stories in which Australian interests or actions could be expected to feature, we are frequently overlooked.  There was a fair amount of coverage of East Timor while I was in the US, but hardly any reference to Australia's involvement in the crisis.

As David Horowitz -- a leader of the New Left in the 1960s and early 70s, and now a prominent conservative -- told me with a dismissive wave of his hand when I tried to talk with him about Australian issues, "you guys are pretty unimportant in the overall scheme of things".

Certainly, there is something to be said for not being newsworthy.  After all, when Chinese express the hope "may you live in interesting times", it is meant as a curse, not as a blessing.  Part of the reason why we are so boring to the American -- and world media -- is that comparatively speaking, we are doing rather well.v Although many greens like to think otherwise, whatever mistakes we have made in managing Australia's natural environment, they are as nothing besides the ecological catastrophes in parts of Eastern Europe or Africa.  And as distressing as many of our social problems may be to those who are affected by them, they are small beer compared to most other countries, including America itself.

Perhaps some activists would argue that Americans represent a unique case, and that the rest of the world is carefully focused on Australia, taking diligent note of our crimes against nature and human decency.  They might point to events such as United Nations committees moving to place Kakadu on the World Heritage "in-danger" list because of Jabiluka, or condemning the Howard Government's amendments to the Native Title Act as being racially discriminatory.

But many of these United Nations bodies are little more than extensions of the activists' own networks, comprising a convenient mix of ideological enthusiasts, pliable bureaucrats, and cynical entrepreneurs seeking to enhance their personal standing by enlarging the reach of their committees.  When the UN Committee on the Elimination of Racial Discrimination handed down its report attacking Australia a few weeks ago, hardly anyone bothered to inquire into the background of its 18 supposedly "expert" members.

These include people nominated by current communist regimes, such as Cuba and China, people originally nominated by former communist states, and people from other countries whose human rights record leaves a great deal to be desired.  Some of them have unwholesome views -- for instance Agha Shahi from Pakistan, a strong supporter of his country's nuclear weapons program, is passionately opposed to Pakistan signing the Nuclear Non-Proliferation Treaty.

Nevertheless, according to Labor's Daryl Melham, the report produced by this dubious bunch showed that the Howard Government had "shamed us in the eyes of the world".  But the world wasn't looking.  I checked over a dozen English language newspapers in Europe, Asia, North America and South Africa on the Internet, and only two, England's Daily Telegraph and Hong Kong's South China Morning Post, carried any mention of the UN report.

In both cases, the stories were sourced from Sydney, rather than from Geneva where the UN report was actually issued.  In other words, what really triggered the stories was not the report itself, but the outbursts by Melham and others who were trying to play the "international embarrassment" card in order to push their own agenda.

Of course, there is one way that really would make a laughing stock out of Australia.  That would be to take seriously those who attempt blackmail with threats of a non-existent international opinion directed against us.

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Low tactics mar towering opinions

Noel Pearson has the courage and political maturity to speak out against the deleterious effects of welfare on indigenous Australians and what is his reward?  Personal abuse by Pat O'Shane ("Pain but no gain for Aborigines on Pearson's posture", Opinion, May 11).  O'Shane agrees there are deleterious effects wrought on people by the uncritical application of welfare policies.  She also agrees we need critical analysis of such policies and can't resist drawing our attention to her own past soundness in this regard.

But suppose Noel Pearson was completely wrong in what he said, what would that imply about him as a person?  Absolutely nothing.

Yet O'Shane, like many Australian commentators, apparently cannot separate disagreement about ideas from personal attack.  Such personal abuse is hardly a necessary part of public debate.

One can disagree with someone about an issue -- even think their ideas or policies are stupid -- without it following that you think they lack intellectual integrity or are morally deficient.

Indeed, since the quality of an opinion and the quality of a character are completely independent, even if you proved to any reasonable person's satisfaction that someone was a creep without any sense of personal honour that would imply nothing at all about their opinions on any issue under the sun.  Even dishonourable creeps can be completely correct about issues of public life.

So, such a style only makes sense if one somehow believes that the quality of a person does determine the quality of their opinions:  if you believe that proving X is a creep does indeed show that X's opinion is wrong.

This is -- except in those cases where it casts doubt on whether they believe what they say -- a very strange thing to believe.

But, suppose you do believe such a thing, what does it imply?  That opinions maketh the person.

So a person with good opinions is a good person.  Displaying good opinions is proof that you are a good person and disagreeing with such opinions is proof that you are a bad one.

Suddenly, all is revealed.

What we see in the behaviour of O'Shane and her ilk is a defence of their moral assets.

If certain marker opinions shows one's status as a good person, to accept debate about such opinions undermines their ability to provide status, because it raises doubt as to their actual worthiness.  To preserve the moral asset and to punish transgressors, one is driven immediately to personal abuse and attacks on integrity as an argument style.  The greater the moral vanity -- the greater the use of particular opinions to display your high moral status and to mark yourself as a member of a moral vanguard -- the greater the bitchiness and personal nastiness to opponents.

Thus the self-identified progressives' fervent tendency to attempt to "prove" opponents are racist, label them as traitors to their community or in any other way mark them of as people of no account -- anything to avoid serious debate about the actual issues.

This is an attitude deeply inimical to reasoned debate and the functioning of democracy.  It is the point neither the more simple-minded critics of political correctness nor the people whose position might be characterised as anti-anti-PC quite grasp.

It is perfectly true that, outside the academy, there has been no explicit censorship of politically incorrect opinions, though it is worth noting that someone whose opinions are well-represented in public debate may not be aware of how much contrary opinions are filtered out by various gatekeepers.

There has, however, been a concerted attempt to delegitimise certain types of opinion and to avoid debating issues on their merits, a problem particularly rife for issues such as multiculturalism, immigration, indigenous affairs and the environment.

This undermining of reasoned debate is the main harm that rampant moral vanity and moral status-seeking -- and the political correctness which flows from it -- have done to public debate in Australia.

Use of personal abuse and unwarranted attacks on people's intellectual integrity of the sort O'Shane has unleashed on Pearson are not contributions to debate but attempts to close them down and to buttress the moral vanity of the abusers.

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Less Fuss, but Few Gains, as Goose is Plucked

At the Australian Unlimited dinner, the Prime Minister has reminded us, that the GST debate was ignited just before his election to Parliament with the 1974 Aspery Report.  It has dominated Parliamentary proceedings for the past two years.  Will the GST finally be torched in the next two months?

In making the GST the centrepiece of its tax reform program, the Government gave immense power to minorities in the Senate.  And oh how they have basked in this!  Senator Harradine arrogates to himself all the dignity of the great custodian of national morality.  He uses his balancing vote to extract greater taxes and regulatory influence from those he thinks can afford the costs to those he thinks of as poor as well as to the mendicant state he represents.

Never mind that the concessions he wants will only reverse the progress towards diminishing the numbing hand of government, progress which has insulated Australia from the backwash of the Asian crisis.  Never mind that the changes he and the Democrats want will introduce a complexity in the tax system, the combating of which is a main goal of the GST.  Never mind that his demanding legislation against internet porn would cripple the IT industry and still fail to stem the inflow of noxious web traffic.

Senator Harradine has only the slightest understanding of how an economy works and the consequences of taxes and regulations designed to help one group on the activities of those adversely impacted by them.  And no mainstream politician dare reveal his cant for the humbug it is.

A GST means the taxpayer goose makes less fuss as it is being plucked but offers only slender efficiency benefits.  It just shifts taxes rather than allowing reductions, which require lower spending.  For every GST winner there must be a loser unless the shift generates a productivity dividend.  Such a dividend may result from a net decrease in the distortion on demand and supply when a low tax rate on almost all goods and services is substituted for higher and variable rates on goods.  But the more the exceptions and offsetting concessions, the less likely is such a dividend.

The point about a GST, and the cause of an apostasy on behalf of previous champions like former Treasury Secretary John Stone, is that it offers a means of raising revenues relatively more easily than existing taxes.  We are nearing a limit of toleration for the tax rates on goods and raising more taxes on income faces both a voter backlash and a potential harmful loss of competitiveness.

While a disadvantage of the tax to those seeking smaller government, this is the very reason why ACOSS lent support to the concept almost a year ago.  They, like Fergus Ryan, the Chairman of the Business Coalition for Tax Reform, saw the existing system as unable to raise adequate funding.  Mr Ryan said, "If we stick with our present tax system what hope will we have to meet the even greater demands in ten, twenty or thirty years as the proportion of non-working and non-taxpaying people grows?"

Hence a GST offers the panacea to tax growth but tax growth is a meretricious goal to those who seek smaller, not larger, government.  If governments have the ability to tax, especially in ways that don't cause the geese to squeal, they will find any number of worthy spending directions.

This brings us back to the irony of the current GST debate.  Those purporting to champion the poor and seeking increased revenues are the very ones jeopardising the prospects of a GST, which offers them the best chance of raising the necessary revenue.  For others, the GST is not fundamental to tax reform and its increased taxing capacity makes it dangerous.  This suggests it should be abandoned unless it is applied universally, thereby offering efficiency dividends.

Abandonment is not time wasted.  Lord Skidelsky, the Tory Treasury spokesman recently reminded us that politicians get elected to override individual preferences and those like the Swiss, whose Parliament sits for only three months a year, do less of this than others.  In the event of no GST, one service the debate has rendered Australia over the past three years is that it has diverted a great deal of political energy away from undermining the wealth creating process.

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Nuggets of Misinformation

None of us can independently verify everything we read or hear, so we must take on trust nearly all the information we receive.  This makes us vulnerable to factoids, the dross of the information age and the stock-in-trade of activists and lobbyists.

Factoids are statements that are either misleading, or about matters that are essentially unknowable.  But through frequent repetition these pseudo-facts become accepted as true, distorting our view of the world and its problems.

Examples of factoids are claims that between 50 and 100 plant and animal species are becoming extinct every day;  or that over a third of the pregnancies that occur across the world are unwanted;  or that 10 per cent of the population are homosexual.

Take the figures for extinctions, for instance.  There is great scientific disagreement about the number of species of animals, plants, and other organisms on earth.  Around 1.8 million species have been catalogued so far, and estimates of the total number vary from 4 million to 100 million.

No-one has any idea about how many of this unknown number of species are really becoming extinct.  But as sceptics have pointed out, if extinctions really were taking place at anything approaching the rate that environmentalists claim, we could expect to see far more documented extinctions than have actually been observed.

The situation is not much better with the figures often cited for domestic violence.  In the past, government and professional organisations have endorsed the claim that one in three women have been beaten by their male partners, despite a warning from the Australian Law Reform Commission that "it is probably impossible to obtain a reliable picture of domestic violence".

So what is the origin of this factoid?  It comes from American research carried out in the mid-1970s by sociologists who interviewed over 2,000 people who were married, or in a de facto union.  28 per cent said they had experienced an act of violence from their partner at some stage in their relationship.  But the researchers defined violence expansively, so that it covered anything from throwing something without hitting anyone, to using a knife or a gun.

The sociologists, good victim-makers as most of them are, clearly wanted to show that domestic violence was even more prevalent than their research indicated.  They suggested their figures were too low, because many people would be unwilling to admit they were aggressors or victims.  Perhaps;  although it is equally likely that people falsely claimed to be victims, or even aggressors.

But even if this research was faultless, American findings do not necessarily apply to Australia.  There are a number of relevant differences between the two societies, and the study showed considerable racial and ethnic variations in the incidence of domestic violence.

The study also found that the level of violence by wives against husbands was not much less than the level of violence by husbands against wives.  The figure of 28 per cent covered both types.  And when it came to severe violence, "husband beating" was slightly more frequent than "wife beating".  But such facts could not be accommodated in the one-in-three-beaten-women factoid, and so they remain virtually unknown.

Sometimes the creator of a factoid admits it is a fabrication.  In the mid-1980s, when Ronald Reagan was the US President, the claim that 3 million Americans were homeless was widely quoted as a sign of his administration's meanness.

But then Mitch Snyder, an advocate for the homeless who had supposedly calculated the 3 million figure on the basis of a national survey, confessed he had invented the number.  He thought that at least one per cent of Americans had to be homeless -- after all, what kind of problem is it, if not even one per cent of the population are afflicted?

This gave him 2-and-a-bit million, which he rounded up to 3 million because he felt sure that homelessness was getting worse under Reagan.  Snyder cheerfully justified his action, claiming that no-one took an issue seriously unless numbers were provided.  But even Snyder's confession did not demolish the factoid, and "3 million homeless" still gets trotted out as part of Reagan's legacy.

Some activists' enthusiasm for their factoids prevents them from seeing that dodgy figures could actually be harming their own cause.  A number of informed observers believe that highly inflated statistics for landmines have made many people feel the situation is so hopeless that there is little point in making donations to charities engaged in landmine clearance.

In the early 1990s, when international organisations first began focusing on the landmines issue, there was no way of making a reliable estimate of the number of these weapons.  So the figures were just plucked from the air.

The United Nations and some other lobbying agencies still use an estimate of 110 million uncleared mines in around seventy countries.  They add that at current rates it will take more than 1,100 years and US$33 billion to remove the ones already planted.  For good measure, they often round out this dispiriting picture by claiming an additional twenty landmines are laid for each one cleared.

But after many years of practical experience, a number of organisations actually involved in removing mines say that these figures are wildly exaggerated, and that the total number of uncleared landmines in the world is probably less than 2 million.

The Halo Trust, a British charity, states that its surveys show a maximum of 165,000 landmines in Mozambique, as against the UN figure of 3 million.  For Angola, where official figures vary between 9 and 15 million, a mine clearer recently pointed out that the lower number would still require four jumbo jets full of landmines to have arrived every day for the past twenty years.

The moral arguments for many of the causes that arouse contemporary concern can usually be made without resorting to factoids.  It is a measure of the contempt that lobbyists often have for the general public that they are willing to be so cavalier with the truth.

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Lucky Bill marches on, all the way to Kosovo

In the spirit of Rousseau, the President goes to war

Bill Clinton is a lucky man.  He came to office with the Cold War won and the United States the only remaining superpower.  He was then saddled with a Republican Congress which balanced the Budget and frustrated his more stupid policy adventures, had Alan Greenspan to manage monetary policy and reaped the benefits of a long boom, the foundations of which were laid under Carter, Reagan and Greenspan's predecessor Paul Volker.

And when he did get into trouble over a spot of perjury, he was faced by a prosecutor whose apparent narrow-minded Puritanism was no match for economic success, shameless manipulation -- including strategically timed bombing of Sudan and Afghanistan -- and the support of a Democratic Party and American left willing to, in the words of one downcast liberal commentator, mortgage their integrity at the altar of Clinton's "loathsome legalisms".

And there is a statute of limitations on rape.  So, while American official feminism squirms with having supported a President to evade the consequences of lying under oath about behaviour which, if done by a conservative, would have led to huge screams of "unequal power" and who is now, thanks to public revelations by Juanita Broaderrick, widely believed to be a rapist, Clinton marches on.

All the way to Kosovo, where Bill the Lucky has convinced NATO to commit to military action not to stop aggression, not to protect some overriding national or collective interest, but simply to stop an internationally recognised government behaving badly within its own borders.

It is not a war of self-defence, but a war of intervention in the internal affairs of another state.  A war to express our values within someone else's country.

If we in the West are going to go to war merely because of our values, unrestrained by any sense of national interest or the constraints of national borders, then we must become warmongers par excellence, since the potential for other states to affront our values -- from environmental destruction through "female circumcision" to lack of democracy -- is almost endless.

Far from imposing a moral order on the world system, moralistic intervention Kosovo-style creates a moral chaos, by overriding the only real ordering constraints in the international system on the use of power -- that action will be comparable to the national interest at stake and that borders will restrain action.  Interests and borders are clear, knowable and limited in nature.  Free-floating values are unlimited in their claims.  A West which uses its immense military predominance merely at the service of currently fashionable values is a West profoundly dangerous for anyone else to attempt to live with.

Even worse, how can we protest if others do the same?  What can we then say to Russia, for example, if it intervenes in the Baltic States to stop what it claims is the "ethnic cleansing" of Russians.  Surely the claims, the Russians could retort, of their kith and kin are even greater on them than those of the Kosovars on the West?  Unimpeachably true.  The action against Serbia has already greatly boosted anti-Western sentiment in Russia -- after all, we did not punish Croatia for its expulsion of up to a million Serbs.

Such moralism unconstrained by a sense of appropriate limits to action is Jean Jacques Rousseau's overriding "general will" -- a general will against which there is no appeal -- brought into international politics.  It is a tradition which, precisely because of its conjunction of universalist pretension with a refusal to acknowledge limits, is profoundly conducive to tyranny and mass murder.

Rousseau's intellectual heirs include Lenin, Stalin, Hitler, Mao, Pol Pot and Mengistu:  Rousseau's Leninist and Nazi heirs have murdered 131 million people, or 78 per cent of the 169 million people slaughtered by their own governments this century.

Clinton's Kosovo adventure is Rousseuian in another sense:  its failure to seriously match actions to likely consequences.  It was always blindingly obvious that, if the intent was to protect the population of Kosovo from the Serbian police and military, then only ground troops could do that.  Air attacks alone removed constraints on Slobodan Milosevic's actions and positively invited him to make a thorough job of the "ethnic cleansing".

But a good Rouseauian is not bothered by such boringly pedestrian calculation of consequences -- the noble intention is all, and life will, of course, conform to the patterns the Rousseauian sage has already identified.

Americans, as heirs to their own Revolution, used to be largely immune to the Rousseauian delusions of the heirs to the French Revolution.  In the 1960s, however, as the baby boomers where going through university, Rousseauian ideas, in Marxist and other forms, pervaded the intellectual consciousness of a generation radicalised by the Vietnam War.

Draft-evader Bill may not have inhaled the green stuff, but could hardly have avoided the transmitted ideas of Jean Jacques (who, as it happens, was also a notorious breaker of trust and eschewer of obligations in his personal life).

So there we have it, the adventures of "Bubba Rousseau", Rousseau as Southern good 'ole boy.  A President who is a breaker of trust -- an accused rapist, a self-confessed adulterer and perjurer, and a warmonger.  Someone whose progressive moralism is unrestrained by any actual morality, but who is adept at using the language of high purpose to cover selfishness and egoism and whose lack of constraint unleashes moral chaos on the world.  A fortunate heir of others' labours debauching the legacy.  The first baby-boomer President.  What a wonderful example of the species.

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Deregulation of the Australian Dairy Industry

Submission to the Senate's Rural And Regional Affairs and
Transport References Committee Inquiry into Deregulation
of the Australian Dairy Industry

SUMMARY

• The dairy industry has enjoyed some welcome prosperity over recent years following a slump in demand and low prices after the UK entered the European union (EU).  Restricted access to international markets and heavily subsidised EU output displaces efficient production from other markets.  The industry would be unwise to depend on an early improvement in overseas market access.
• The domestic market is experiencing only slow growth.  For liquid milk, some increased growth might be expected with deregulation and the resultant lower prices/improved quality and product diversity.
• A viable industry must adopt the latest technology.  World agriculture is on the cusp of a revolution with the explosion in availability of genetically modified plants.  Genetically modified livestock may follow.  Australian farmers have long proven to be open to new ways of improving their productivity.  The more important challenge is to the present approval processes and, perhaps, labelling requirements.  Rapid approval of new products is essential if Australian farmers are to have early access to technology -- particularly from North America.
• In the context of these changes, the Competition Principles Agreement is the catalyst to remove the domestic marketing support scheme (DMS).  In a major sense, the removal of this scheme finally consummates the creation of the Australian Federation for the dairy industry!  DMS requires the artificial separation of milk into two markets.  The segmentation of the national market under the state marketing arrangements appears to be contrary to section 92 of the Constitution.  Either the industry will deregulate at an early stage or a High Court challenge will require this.  This is one reason why it is unlikely that other States could continue with their present regulatory measures if Victoria were to deregulate unilaterally.
• The removal of the Domestic Market Support scheme will bring an acceleration of the restructuring trends the industry has faced throughout its history.  It will bring increased efficiency and improved consumer orientation of the industry.  Although forecasts of the direction of structural change can never be precise, parts of Australia, particularly Gippsland in Victoria and Tasmania, are well suited to dairy production.  These regions are likely to experience growth both in primary and secondary production.  Other areas where dairying is dependent on protection afforded by the high prices of the domestic market support scheme are likely to see a contraction.
• Measures canvassed to facilitate the transition include a $1-1.5 billion fund.  We believe such funding is neither necessary nor achievable.  Our preferred position would be to have a three year phase-out of the existing dual price scheme.  Compensation to those with fresh milk quotas might be contemplated but should be based on a discount of the price at which that quota is presently traded.

INTRODUCTION

The Industry's Characteristics

Milk production is critically dependent on natural inputs.  Unlike most industries -- and even an increasing number of agricultural industries -- milk is best produced where natural climatic factors are propitious and land is relatively cheap.  Rainfall and a temperate climate with a long growing season for grasses are crucial.  Hence, parts of Australia, along with New Zealand, are ideally suited to the industry.

Traditionally, fresh milk has not been able to be stored for long periods and its production close to major markets has enjoyed natural barriers to competition.  This is changing somewhat with the higher market acceptance and improved taste characteristics of UHT milk, but is likely to remain significant.

The industry's derivative products -- butter cheese, powdered milk etc. -- account for half its production and are readily preserved and traded.

The Industry's Output

With the accession of the UK into the European Union, Australia lost its then most important export market.  Annual milk production fell from over 7.5 billion litres in 1970 to less than 6 billion litres at the start of the 1980s.  Since then production has steadily risen to over 9 billion litres.  Of the Australian output, over half is exported with the remainder split evenly between drinking milk and manufactured products.

Australia, with some 12 per cent of the world export market, is a major supplier.  Our market share is achieved notwithstanding the protectionist policies of other countries and the considerable export subsidies of the European Union.  According to the Australian Dairy Corporation, production costs in Australia are less than two thirds of those in the EU and three quarters of those in the USA.  New Zealand has a slightly lower cost structure than Australia.

Australian average costs tend to be boosted by production in areas not well suited to the industry.  The parts of Australia ideally suited to milk production happen to be predominantly located in Victoria -- specifically the Gippsland region, which dominates the industry -- and Tasmania.  Areas in South Australia and New South Wales also have conditions supportive of a vigorous industry.

Both in terms of herd size, averaging about 150 dairy cows per farm, and production per cow, output per farm has been increasing.  Average herd size is considerably below the level at which economies of scale are exhausted.  This is believed to approach a herd size of 2,000.  Production per cow has increased by 40 per cent over the past twelve years.  This is now reaching the maximum level readily achievable with existing strains but there will doubtless emerge prospects for increased output as genetic technology develops.  These prospects are likely to become significant over the next few years, first in respect to grasses and perhaps subsequently with the animals themselves.

The number of dairy farms has halved to about 14,000 over the past 25 years, over 8,000 of which are in Victoria.

Victoria's share of national production is currently 62 per cent and has been increasing.  This is a reflection of some liberalisation that has occurred and the trend away from fresh milk consumption.  That latter trend may partly reflect Australia's changing population age profile but is also a reflection of health concerns regarding cholesterol.  The industry's response has been to increase output of reduced fat milk and to find new fresh milk markets, especially flavoured milk.  These product categories have grown from 10 per cent of fresh milk to almost half of the total during the past 12 years.  Their growth is itself attributable in large part to the stimulus of increased competition in the industry.

The industry has also increased exports of liquid milk, largely in the form of UHT, though these still comprise only 3-4 per cent of domestic fresh milk sales.

Export production, which accounts for half of raw milk production, is valued at close to $2 billion.  Exports are dominated by cheese, powdered milk and butter and are largely to Asia.  Having hit a low point in the early 1980s, Australian exports have digested the loss of markets resulting from Britain's accession to the European Union and have been increasing rapidly over the past 15 years.  The Asian crisis has not markedly reduced export growth, though prices have fallen.

The figure below illustrates the trends in production and utilisation.

Figure 1

Source:  Australian Dairy Industry Corporation

Australian producers have long been hostage to the exorbitant subsidies offered to dairy farmers in other developed countries.  In the case of the EU, they suffer the double whammy of negligible market access and EU subsidised exports capturing over 40 per cent of world trade and suppressing prices as a result.

Attempts to improve these market situations have been a major focus of Australian (and New Zealand) trade diplomacy for the past 30 years.  This has brought no relief in the case of the EU, though Japan, as a result of shifting domestic tastes now constitutes a major market for Australian dairy products.  While diplomatic initiatives are of considerable importance to allowing an efficient Australian industry to grow, it would be unsound, especially for a nation of Australia's small size, to attempt to offset protectionist effects by domestic subsidies.  Our industry must live with the competitive environment that is in place, while diplomatic pressures are maintained to improve that environment.

REGULATORY ARRANGEMENTS

The Measures in Place

Across Australia, the dairy industry has been closely regulated over many years.  Regulations have set prices at the farm gate, for cartage and in the retail outlets.  The key aspect has been a dual price system with fresh milk receiving a high price and other milk usages being left to market forces.  In States with a quota system, (NSW, Queensland and WA) the high price is dependent on owning quota (which can be traded).  The other States pool the milk with farmers receiving the premium price for the fresh milk sales.  These regulatory arrangements have been supplemented by formal and informal measures preventing inter-state sales.

The dual price system differs from state to state.  The market milk price varies:  it is 58 cents per litre in Queensland, 51 cents in NSW and 49 cents in Victoria.  Milk for manufacturing purposes commands a price of about 24 cents per litre.  This price differential is moderated somewhat by levies on fresh milk (about 1.9 cents per litre) and on manufactured milk for domestic consumption (around 3.7 cents per litre).  The funds from these is directed to farmers for the milk they supply to manufacturers of dairy products.

Milk is, of course, a homogenous product and there is no difference between the product directed to the fresh milk market compared with that going to manufactured products (or going to the fresh milk market without a quota for the premium price).  As a result of these factors, the producers receive markedly different prices for their output.  Those farmers in States where fresh milk comprises a high share of output receive much higher prices.

Based on the NSW Dairy Corporation estimates, without allowing for the moderating influence of the levies, the average price received by Victorian farmers was 64 per cent of that received by those in NSW and Queensland (Tasmanian milk producers fared even worse, receiving only 59 per cent of the NSW/Queensland price).  Figure 2 below illustrates the average prices received.

Figure 2

Decomposed into their two sub-parts, these prices are as shown in the table below:

	Market Milk	Manufactured Milk
NSW/ACT	50.9	25.1
Vic	48.1	22.7
Qld	58.9	24.0
SA	51.1	21.8
WA	53.3	25.6
Tas	54.9	20.4

This price disparity, as well as bringing about a considerable inefficient distortion in the industry nationally, represents a considerable burden on the Australian consumer.  Milk producers, through the monopoly arrangements they have persuaded governments to underwrite, are engaged in price gouging of the Australian fresh milk consumer.  Such actions almost certainly result in reduced consumption of milk products.

Within Victoria the Dairy Industry Act (1992) governs the industry.  Sale of dairy products has been progressively liberalised.  The key regulation remaining is the dual price system which was ostensibly intended to ensure sufficient supplies of market milk while offering "equitable" returns for farmers.  The market for milk products is (and probably always was) sufficiently mature for no economic regulation to be necessary.  As for the need for "equity" for producers, the search for the "just price" outside of the forces of demand and supply has a long and ignoble history.

General Government Regulatory Policy

The regulatory arrangements that allow the vast price dispersion of dairy products to occur are not compatible with those agreed to by Heads of Government in instituting the national competition policy reforms.  Under the Competition Principles Agreement -- 11 April 1995, Governments agreed:

5.(1) The guiding principle is that legislation (including Acts, enactments, Ordinances or regulations) should not restrict competition unless it can be demonstrated that:
(a) the benefits of the restriction to the community as a whole outweigh the costs; and
(b) the objectives of the legislation can only be achieved by restricting competition.

These matters complement the regulation review procedures that are in place in most States.  The Victorian Subordinate Legislation Act 1994 requires economic analysis and public scrutiny of all substantive regulations via a Regulatory Impact Statement ⁽¹⁾.  This applies to all existing regulations, which expire ten years after their enactment, and to new regulations.  The Act draws attention to the possibility of regulatory failure and seeks to ensure that any regulation that is deemed necessary is the most efficient solution to the identified problem.  Other States have similar provisions.

Incentives for the Government to Meet the Obligations

Governments have a general incentive to allow increased application of market forces simply because this allows greater wealth creation.  The regulation review procedures that pre-dated the competition policy are testimony to the recognition of this.

Further disciplines to review competition within the deadlines set by the competition policy have been established by competition payments.  These recognise that there is a national dividend from competition reform and that, at a governmental level, the Commonwealth rather than the States obtains the greater share of this because of the structure of Australia's tax system.

Hence, under the NCP Agreements, the Commonwealth agreed to make special payments to States and Territories that made satisfactory progress in implementing the national competition policy reforms.  If a State or Territory does not take the required action within the specified time, its share of the payments will be withheld.  The National Competition Council (NCC) program is to assess whether the conditions for payments to the States and Territories, have been met.  The first formal assessment was made prior to 1 July 1997, and basically required only that at program be in place.  The next assessments are to be made prior to 1 July 1999 and 1 July 2001 and will examine the outcomes of reforms in greater detail.

The money which has been allocated to these special payments is set out in Figure 3 below (estimated nominal $ million).

Figure 3:  Competition Payments

Source:  National Competition Council Brochure (October 1996)

The NCC has indicated the matters that can be taken into consideration in establishing interventions in the public interest.  The criteria for doing so adopt a deregulatory approach but make clear the ultimate objective is not competition per se but using competition and deregulatory measures to enhance the community's living standards and employment opportunities.

Under Clause 1(3) of the CPA, several issues may be taken into account in determining what constitutes the "public interest".  These cover a wide range of matters including:

• (d) government legislation and policies relating to ecologically sustainable development;
• (e) Social welfare and equity considerations including community service obligations;
• (f) government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity;
• (g) economic and regional development including employment and investment growth;
• (h) the interests of consumers generally or of a class of consumers;
• (i) the competitiveness of Australian businesses;  and
• (j) the efficient allocation of resources.

The NCC noted ⁽²⁾ that there were no weightings to these particular provisions.  It argues that the onus is on those promoting an exemption of an arrangement to demonstrate that it will be a superior approach.  In this respect, the NCC draws attention to the "net public benefit" test applied by the Australian Competition and Consumer Commission (ACCC).  The ACCC approach is that, unless there are clear arguments to the contrary, competition is to be enhanced in order to meet the objectives of the Trade Practices Act (TPA) on which the competition reforms are largely predicated.  The TPA's objective is to "enhance the welfare of Australians through the promotion of competition".

Other Pressures for Deregulation

As well as controlling price within their home States, the different State dairy industry acts allow the State dairy industry authorities to control exports out of their State jurisdictions and promotional activities.

These dairy industry regulations are clearly out of step with those required to generate efficiency and cause resources to be maintained in farming activities that would otherwise be non-viable, while preventing expansion in areas that are well suited to the activity.  It would be exceedingly difficult to make a persuasive case for an exemption from general competition rules on any of the public interest grounds of the Competition Principles Agreement.

Indeed, the provisions that prevent the sale of milk between the different States is contrary to section 92 of the Constitution which requires that trade between the states shall be free.  The de facto cartelisation of milk sales and production with the various State dairy boards, and the cross payments to producers in the more efficient States, has meant that no major interest group has seen a benefit in challenging the inter-State restrictions.  With the deregulation that has already taken place, and the rise of major milk manufacturing businesses, this situation is unlikely to persist.  A High Court challenge to restraints on trading between the States would be likely to succeed.

The major urban markets for fresh milk enjoy a natural distance related degree of protection.  Although producers in the south east of the nation are lower cost, it would be difficult for them to displace fresh milk from the farms located close to the major metropolitan areas of Sydney, Brisbane or Gold Coast (or from Perth).  However, that location protection is likely to come under increasing pressure as a result of a greater acceptance of UHT milk sourced either from inter-state or from New Zealand.

The competition policy is driven by a well-established belief in the potency of open markets and less government intervention in bringing efficiency.  And it is only by having efficient production that industries can be sustained.  Change is a major feature of economies which globalisation has accelerated.  The change itself is due not to some ideological beliefs but in response to the shifting preferences of consumers and the need for producers to respond to them.  Improved information and the competition of all goods for a share of the consumer dollar has meant that no industry can regard itself as stable.  To survive, all industries must adapt to the market.  Nations which turn their backs on market forces and technology trends will face lower living standards than their citizens would wish to have.  And it is the individual operators within the industries, and those contemplating entry, not governments, which are the standard bearers of the change and efficiency enhancements.  Protecting industries from change is a recipe for impoverishment.

These matters may assume greater importance in the future with genetic modifications of crops and, perhaps, livestock.  While at present grasses are not believed to be a priority of genetic plant research, they will doubtless become so.  Genetic modification is likely to allow a saving in inputs like fertiliser, weed control and water.  In North America, genetically modified plant varieties are likely to dominate crops like soy, maize and canola by next year and will rapidly become important throughout the food chain.

At the present juncture, the Europeans have taken a cautious approach to these new varieties and are likely to find the competitiveness of their rural industries further deteriorating.  It is vital that a nation like Australia, with primary production occupying a key place in our overall economy, rapidly embraces the new technologies being developed.  Both here and overseas, genetically modified organisms are likely to bring a vast increase in production from existing farmland and to bring infra-marginal land into production.  This will place downward pressure on prices and farm jurisdictions that reject the new technology will face severe difficulties.

The explosion of new strains based on genetic modifications will mean Australia must expedite approval processes.  Although improvements in this area have been seen over recent years, Australian agriculture in dairy and elsewhere will suffer if our approval processes seek to duplicate those of overseas, especially in North America, on the spurious grounds that there are unique features of the soil and other aspects of Australia.  The new technologies call for a reinvigoration of the policy of automatically adopting the approvals of selected overseas authorities.

IMPLICATIONS OF MARKET DEREGULATION

Different State Effects

The relative efficiency of milk production can be gauged by the share of premium priced milk on a state by state basis.  This is illustrated in the Figure 4 below.

Figure 4

Market milk, according to the latest NSW Dairy Corporation estimates, accounts for only 7.6 per cent of Victorian production, and 10.2 per cent of Tasmanian and 26.7 per cent of South Australian.  The other States' producers are heavily dependent on the regulated premium price.

Victorian farmers benefit in the short term from the regulated price, which doubles their revenues on 7.6 per cent of their production.  They also benefit (by about $6,000 per farm) from cross-payment by inter-state farmers and manufacturers.  Overall, ABARE estimates ⁽³⁾ that this will mean a reduction in incomes of about 4 per cent.  Nonetheless, Victoria as a whole is in a strong position to benefit from deregulation.  The immediate outcome will be both a reduction in price in fresh milk, and some increase in the price paid by manufacturers, which are lower than in the other two eastern States.  The reduced price of fresh milk would be expected to boost demand.  Moreover, Victorian milk would be expected to make some inroads into the State markets of NSW and Queensland, in the process reducing the price differential between market and manufacturing milk.

The State reviews in Queensland and NSW have acknowledged that their domestic industries would be forced to follow Victoria's lead in the event of deregulation.  Although transport costs are an impediment to inter-state trade in fresh milk, some sales would be made by a Victorian industry fully unleashed to sell in markets where the price is double that available within the state.  These pressures will force reductions in the regulated prices and undermine the two price system.

Hence, even if other States resisted deregulation (and forfeited competition policy payments as a result) the subsidies their dairy farmers obtain will be eroded.  The size of their industries will contract and, especially in the manufactured products, production will migrate to Victoria and Tasmania.  The cautious political announcements on deregulation in other States recognises that it may be better to grasp the nettle of deregulation once Victoria has done so and have the industry rationalise in an ordered manner rather than be gradually choked.

Deregulation will also bring milk inputs into line with their real price.  The anomalies created by the dual price system are apparent in products like flavoured milk, where producers are obliged to source their inputs at fresh milk prices.  Milk generally, and especially flavoured milk, competes in the general beverage market.  Although these product lines have been growing strongly, with a 20 cent per litre reduction in their input prices resulting from deregulation, their growth would accelerate.

There has been considerable comment on the effects of different deregulatory moves on prices to the consumer.  In Victoria, deregulation of retail margins did not bring a fall in consumer prices.  In NSW, the retail deregulation in 1998 led to claims by the Minister that supermarkets had increase prices.  While these claims have proved to be ill-informed, supermarket prices were relatively unchanged, retail margins in other outlets have tended to increase.  A similar pattern occurred in New Zealand with deregulation of the fresh milk market in 1993.

Following deregulation, however, there was a vast increase in the variety of milk products being made available and a new enthusiasm for promoting milk by retailers able to obtain a commercial margin on their sales.  In both cases, the previous regulation had led to a reduction in consumer choice and satisfaction, a reduction that is not easily measurable in standard price comparisons.  Deregulation therefore brought increased benefits through allowing sellers profitably to meet consumer demands.

Impacts on Rural and Regional Communities

The trend in production has seen the industry migrate to the most efficient locations.  At the present time Victoria is responsible for some 73 per cent of non-market milk dairy output and Tasmania a further 7 per cent.  Deregulation is likely to see increased concentration of production areas.  This may not mean the demise of production for other than the fresh milk market in areas other than Gippsland and northern Tasmania, the two areas of most obvious comparative advantage.  Deregulation may well result in other areas assuming greater importance, in part because their favourable location close to major fresh milk markets allows them to obtain a higher average price for their product.

Economic models can be built incorporating different costs to offer insights into the future industry structure.  Such models, however, have considerable limitations when used to project changes from a major modification in regulatory arrangements.  Such marked modifications would include the significant change in marketing arrangements that deregulation will bring (or that technological change will force, albeit at a slower pace) makes industry location predictions difficult.

Although deregulation will mean considerable change to the industry, the positive aspects of this for rural Australia must be recognised.  These include an increased rate of migration of primary and secondary production to areas where the activities can flourish.  This is likely to mean expansion of employment in certain parts of Australia.  Other parts will see a continuation -- possibly at an increased pace -- of the long process whereby dairy farms have been converted to wine, broadacre or other farming activities.

Compensation to the Industry

The industry is seeking restructuring assistance, one way or another underwritten by the Commonwealth Government.  There is a case for such assistance where suppliers have quotas that enable them to earn premium returns.  That case exists notwithstanding the fact that the quotas should not have been present in the first place.  After all, quotas have created a property right and these rights should not lightly be abrogated.  Estimates as to the sums involved vary between $1 billion and $1.5 billion.

That said, there are many reasons why no compensation should be offered.  Not the least of these is that buying out quotas is a highly unusual procedure for the Commonwealth Treasury and one that they rightly resist.  Such action sets considerable precedents.  We have seen with analogous cases on the waterfront that the money dispersed to powerful bodies has had little effect in bringing about the necessary rationalisation.  Moreover, tradable quotas are present only in three of the States and quota values have fallen markedly as the industry recognises the inevitability of change.

The normal process by which an industry is eased into a more deregulated structure is to offer a phase-in of the competitive gales.  All manufacturing industries have faced a gradual reduction in tariff assistance over the past 25 years.  Average tariffs on manufactures have been reduced from 28 per cent to about 3 per cent.  The means by which the impact of these measures has been softened is through gradual reductions in assistance.  The dairy industry would be best advised to explore such measures rather than seeking direct assistance.

---

ENDNOTES

1. See Regulation Impact Statement Handbook, Office of Regulation Reform, Department of State Development, Government of Victoria.

2. Considering the Public Interest under the National Competition Policy, National Competition Council, November 1996.

3. Topp V., Dairy Outlook to 2003-4, OUTLOOK 1999, ABARE, Canberra, April 1999.

Saving Budgets

What has the Coalition Government been up to in its Budgets in the last three years?  Reading them again it is clear that the single most important issue has been to balance the budget;  the rationale has been to improve the nation's savings.  The nation's key economic weakness continues to be an ability to spend and borrow, and an inability to earn and save.  The real economy, the one in which we trade with the rest of the world, is no longer our oyster.  No one owes us a living.  We have a high structural deficit on current account, which consists of an intermittent trade shortfall and a large debt-servicing component.  If the deficit climbs too high it may affect our ability to continue to borrow;  it may affect our ability to trade.  Australia needs amongst other things to save more.

What has the Government been doing about this?

The government sector has a part to play in the national savings and spending/ investment debate.  By and large, although not slavishly, a government should live within its means, if only because it is a proxy for the taxpayers, who should live within their means.  In this regard the Government moved swiftly in its first Budget in bringing its own into balance.  The Budget deficit for 1995-96 was reportedly $10billion, at a time when the economy had been growing for five years.  The political rhetoric at the time was appropriately severe for an incoming government, scolding the former government and righteous in its determination to repair the damage.  The Budget was balanced within 18 months.  It is now well in surplus.  In other words the repair was effected very quickly, which leads one to suspect it was not the stuff of crisis, more a reasonable return to the surplus that the previous government had produced from time to time.

Therein lies the problem, the temporary nature of government financial management.  The present surplus may well be dissipated in a time similarly short as its creation.  Are there any remedies?  One measure is the Charter of Budget honesty, which requires the Heads of Treasury and Finance to sign a document outlining the Commonwealth's Budget position prior to an election.  This is a useful tool for scrutiny of government financial management.  It increases the chance that government will not spend taxpayers' money to buy votes.  Such a regime may improve the chance that governments' are rewarded for good management, not bribery.

The Commonwealth had also accumulated a great deal of debt by running deficits more often than surpluses.  Those debts have been reduced considerably by the sale of government assets, most notably the part sale of Telstra.  Had any of the moneys raised by the sale of Telstra been used to fund current spending, either in the hands of the government or in the hands of the taxpayer, as tax cuts the effect would be wholly unacceptable.  Instead some was devoted to the establishment of the Natural Heritage Trust, and the remainder used to retire debt.  The next time governments need to retire debt there will of course be no access to asset sales.  There won't be any left to sell.  The tools for managing public debt have therefore diminished.  The one that remains, running a balanced budget (on average) will have to be constantly monitored.

The other side of the savings debate is the savings, which taxpayers make.  In this the government's performance has been less satisfactory.  The Government opted for a 15% tax rebate on savings, subsequently scrapped in favour of tax cuts.  These moneys were essentially those that Labor proposed to be paid as an employee co-contribution to the compulsory Superannuation Guarantee levy.  The savings gained from the tax pool are now to be returned to the taxpayer by means of a tax cut.  Labor tried the same ploy for the1993 election.  Returned to government, it had the good conscience to direct the moneys to a compulsory savings vehicle.

The Government assumes that a lower level of government spending and taxing will improve the nation's savings.  It's boast, that spending is to reach 24% of GDP by 2001, down from 27% in 1995, has little to do with the savings issue.  Less money passing through the hands of government increases the choice for taxpayer spending or saving, it does not create savings.  Short of a prolonged recession or defeat in a war the savings ethos is long gone.  In a world of easy access to credit, regardless of price, the ethos is not likely to return.

One area where the government may place a permanent mark on the future prosperity of the nation, in addition to its Charter of Budget honesty and its balanced Budget and debt retirement via asset sales, is an enhanced and renewed effort at lifting private savings.  In the unlikely return to the frugality of earlier times, a bit of compulsion like Labor's Super Guarantee would be a good thing.  The government's preference for a wider array of savings vehicle, like Retirement Savings Accounts, and its lifting of the preservation age to 60 by 2025 are reasonable measures to improve the possibility of higher savings but they do not guarantee it.  It would be better to take the savings debate out of the temporary file that governments like to play with for appearance sake and shift it into the permanent and untouchable one.

The Coalition's fourth Budget, assuming it is not knocked for six by a Senate refusal to pass the GST should lay down a permanent marker in the savings debate.  It will be rewarded at the polls for so doing.

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