When Goodwill is a Worse Threat than Hatred

In the past year 284 anti-Semitic incidents were reported in Australia, the second-highest on record, according to an analysis just released by the Executive Council of Australian Jewry.  These ranged from physical assaults and vandalism through to intimidating letters, emails and telephone calls, although as ECAJ acknowledges, none of the incidents caused serious harm or damage.

Nevertheless, if previous experience is a guide, these figures will be publicly deplored but secretly welcomed by the anti-discrimination industry, as further evidence of the need for more resources and stronger laws to combat prejudice and ethnic hatred.  We can expect to hear pious refrains of the kind beloved by the Human Rights Commissioner, that "racism is a continuing stain that has discredited much of our history and continues to infect our present".

Perhaps it is cold comfort to those who have been attacked or harassed, but what the figures really show is just how insignificant a phenomenon anti-Semitism is in contemporary Australia.  Even if each of the 284 incidents was perpetrated by a different pathetic individual, only 1 in every 65,000 Australians felt impelled to assail a Jew.  Jews in Eastern Europe would have thought themselves blessed to be living in such an inconceivably tolerant country.

Jews have lived in Australia from the very earliest days of European settlement.  Around a dozen Jewish convicts were on the First Fleet in 1788, and the first free settlers came some twenty years later.  Facing few of the barriers to their participation in political, social and economic life that then existed in nearly every other country, they prospered.

A small but steady stream of Jewish immigrants continued to arrive, and by the end of the nineteenth century synagogues were to be found in all capital cities and many regional centres.  Although it is impossible to know the exact number of Jews now living in Australia -- and as is the case with many other ethnic or religious groups there are considerable differences of opinion about how Jewish identity should be defined -- estimates suggest it is somewhere between 100,000 and 120,000.

Most Jews happily acknowledge the openness and tolerance of Australian society.  During the outburst of breast-beating from mainstream Christian churches in the Bicentenary year of European settlement in 1988, the Jewish faith was one of the few to unequivocally celebrate Australia's achievements.

A prayer composed by Rabbi Dr Porush, Minister Emeritus of the Great Synagogue, and read in synagogues around Australia began as follows:  "Lord of the Universe, with hearts full of joy and gratitude we come before Thee in celebrating the Bicentenary of Australia, to pray for the welfare and happiness of this great country and to give thanks unto Thee for the manifold blessings we have enjoyed therein since its foundation".  Maybe I am being unfair, but this does seem to contrast strongly with the sentiments that were then emanating from spokespeople for bodies such as the Anglican and Uniting Churches.

Yet at the same time, the highly accepting nature of Australian society is also a matter of concern to a number of Jews, who fear -- quite unjustifiably, I believe -- that it will ultimately lead to the disappearance of the Jewish community in this country through assimilation.  The importance of "resisting assimilation" was an issue for Australian Jews long before the introduction of political multiculturalism in the late 1970s.  Intermarriage is a particular cause of distress, even though it can also bring new members into the community.

This creates a paradoxical situation -- one that is faced by a number of ethnic groups in a society that is genuinely tolerant.  Certain community leaders seem to feel more threatened by the absence of any real prejudice than they would by at least a modicum of external animosity.

They respond in a variety of ways.  Some "find" anti-Semitism where it does not really exist, triumphantly claiming that their "discovery" is evidence of the "racist undercurrent" hovering just below the surface of Australian society.

One of the more ridiculous assertions of this kind was made earlier this year by Peter Wertheim, President of the NSW Jewish Board of Deputies.  He told a meeting of Anglican and Jewish leaders that Christian missionising to Jews was "abhorrent" and that it served to "sustain the virus of anti-Semitism in the bloodstream of Christian life".  I hold no particular brief for missionaries of any kind, but such comments are simply absurd.

An alternative tactic is to caution that however favourable things appear at present, they might suddenly change, with Australia becoming a hostile and unwelcoming place for Jews.  I first heard such warnings as a young teenager at high school in Melbourne, from religious instruction teachers worried about the consequences of Jewish boys dating non-Jewish girls.  Even then, such warnings struck me as being quite fanciful.  Tolerance and a sense of decency are deeply ingrained in the Australian national character, and it would take a great deal to dislodge them.

In my experience even Australians who might make disparaging generalisations about particular ethnic or racial groups can behave in surprisingly amiable ways when coming into contact with individual members of these groups in everyday work or social settings.  In other words, the unfavourable stereotypes do not predetermine the actual behaviour -- they are often held lightly, and kept in check by the strong sense that everyone deserves to be given a "fair go", no matter what their background.

So instead of concentrating on the negatives, assisting the ethnogogues and their supporters with a vested interest in greatly exaggerating the amount of racism and prejudice in Australia, we should turn the tables on them.  The real question is what is it about Australian culture and institutions that has led to a level of openness and tolerance matched by virtually no other country?  Strong anti-vilification laws and a vocal and over-funded anti-discrimination industry are almost certainly not the answer.

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Beyond Master and Servant: The New World of Non-Employment

During the twentieth century, when freedom's philosopher Friedrich Hayek was promoting the understanding of individual liberty and economic freedom, his position was being inadvertently undermined by a description of the operation of capitalism offered by an otherwise fellow traveller, the Novel Prize winning economist Ronald Coase.

This article demonstrates how particular explanations enunciated by Coase clash with some of Hayek's broad themes.  Specifically, it shows how the principles of economic freedom have not been applied to the internal operations of firms in market economies.  In effect firms, as described by Coase, are islands of command and control socialism dotting the seas of democratic, capitalist economies.  The existing model of free, market-based economies is one in which the market is restricted to operating between firms and fails to operate inside firms.

This state of affairs is ensured through common law enforcement of employment, and reinforced by government and institutional practices.  It finds its greatest manifestation in the management practices of firms.  In its most grotesque form it is found naked in employment regulation and industrial relations systems.

It is slowly being recognised that markets must operate inside firms, How this is done is a cause of great anxiety, confusion, experimentation, failure -- and, in some instances, success.  What scares corporate heads, analysts and investors is that when free markets operate inside firms the complex actions of many individuals inside the firm create outcomes that no central corporate planner can predict.  We therefore first need to look at what a firm is and how it creates and maintains its focus.

HAYEK AND COASE

Hayek's lifelong battle was as a proponent and defender of the classic liberal view that the free voluntary activity of many individuals making their own plans enables a complex social order to evolve.  This led him to focus on the role of government, or rather the limitation of the role of government.  Before and after World War II, liberals were faced with massive central planning and social engineering machines that taxed market activity to create welfare states.  It was not until politicians of the likes of Margaret Thatcher and Ronald Reagan began to translate Hayek's arguments into political action that the tide could be said to be turning.

It was not until the fall of the Soviet Empire that the idea of economic freedom of the individual appeared to win out over regulation by government central planners.

Coase's writings in the 1930s had a different focus.  Coase observed how businesses operated, and he described what he found.  Coase has had great influence, but for different reasons to Hayek.  The interest in this article is on the observations on the operations of firms in his article "The Nature of the Firm," said to be one of the most influential works in the history of economics (Hazlett 1997).  Coase both promoted understanding of what occurs in firms and also influenced how firms, in particular large corporations and government agencies, think of themselves and their internal structure and function.

Coase and Hayek have common ground in that they were both interested in the behaviour of humans as economic units.  However they studied economic behaviour from different perspectives.  Both supported the market system, but whereas Hayek looked at relationships between government and economy, Coase studied the functioning of individual entities within the market.

In the 1930s Hayek was starting to lay out his argument about the damaging effects of government central planning on the freedom of individuals in market-based economies.  At the same time, Coase was explaining that the essential functioning element of capitalist activity (over and above the individual), the firm, exists solely because of the ability of the individual entrepreneur/employer to centrally orchestrate the activities of the firm by controlling and limiting the freedom of individual employees.  (Hayek's concept of individuals included firms acting as individual units.)

Hayek had to fight for the acceptance of his view.  Coase's description of the firm, however, was taken at face value.

The outcome has been a dichotomy of intellectual debate and operational practice from those apparently "on the same side," over how best to make a capitalist economy produce the greatest sustainable and growing wealth for the population.  On the one hand, Hayek's views are gaining the ascendancy over those of centralised bureaucracy.  Yet amongst owners and managers of the firms, Coase's picture has been interpreted (probably contrary to his own intentions) as an intellectual justification for stopping individual liberty at the door of the firm.

The very elements in a community who have the most to gain from the application of market ideas, the entrepreneurs, have been silently but compliantly supportive of opposing forces by refusing to apply the principle of individual freedom to the internal operations of their own firms.  This criticism is not limited to private enterprise.  The concept of a firm embraces all organisational models in free market societies, including public service delivery agencies, semi-government and not-for-profit organisations as well as private for-profit businesses.

COASE AND THE FIRM

The most central and important observation of Coase, from which other observations flow, was his emphasis on transaction costs.  Coase reasoned that interaction between players in the market does not happen costlessly;  every transaction in an economy has a cost associated with it which has to be accounted for somewhere.  As transactions become more complex and too difficult for single individuals to undertake, organisations form (firms) to manage and contain the transaction costs.  As Coase said, "the operation of a market costs something and ... by forming an organisation and allowing some authority [an entrepreneur] to direct resources, certain costs [transaction costs] are saved" (Coase 1937:40).

Coase extended this understanding by observing the factors which cause firms to be held together.  He drew on the practices of entrepreneurs and managers and observed their capacity to control and direct the people working in the firm.  This control and direction is legally underpinned by the existence of the common law master and servant employment relationship.  Coase reasoned that if the entrepreneur did not have legal "right to control" the people working in the firm, then transaction costs could not be contained and (presumably) the firm could not exist.

We can best approach the question of what constitutes a firm in practice ... by considering the legal relationship normally called that of a master and servant or employer and employee. ... The master must have the right to control the servant's work.  We can thus see that it is the fact of direction which is the essence of the legal concept of employer and employee just as it was in the economic concept [of the firm] which was developed above (Coase 1937:53).

In this manner Coase tied the existence of firms to the maintenance of internal control through the master/servant, employer/employee legal relationship.  In so doing he postulated a direct interdependence between the very existence of markets and the legal right of one human to control another human.

It is important to appreciate the distinction between the ordinary idea of employment, that of a simple work-for-pay relationship, and the legal definition of employment.  The legal concept, dating from medieval times, hinges on the "right to control" an employee/servant by an employer/master (Phillips 1997).  Under common law definitions, the legal concept of "employment control" holds that the employee is a physical and psychological appendage of the employer -- unable, unwilling or not allowed to act in an independent manner.  In short, the legal right of an individual to act freely is removed when common law employment exists.  This removal of individual liberty to act and individual freedom to choose when being "employed" inside the firm is, according to Coase's understanding, essential to the operation of markets in capitalist economies.

At this point we see the clash between Coase's observations and Hayek's insistence on liberty in society.  Hayek says that for markets to operate, the freedom of the individual must prevail over direction imposed by central (government) authorities.

But Coase's observation in 1937 was that for markets to operate, the freedom of the individual must be subservient to that of the central (corporate/entrepreneur) authority.

This subjugation of liberty at work is a key legal tool used by governments seeking to use the market as an instrument of social control.  For example, control of firms through employment regulation is only possible if a master-servant relationship is found to exist in the work environment.  Anti-discrimination legislation seeks, in part, to manipulate social behaviour by imposing legal sanctions on employers/masters for failing to control inappropriate behaviour of their employees/servants.  Gaming and liquor control legislation has a presumption that these activities are controlled through licensed operators who are masters/ employers (Phillips 1997).

SCIENTIFIC PLANNING

The idea that the removal of individual liberty was essential to the existence of firms had a natural fit with dominant management theory and practice of the 1920s to the 1960s.  Coase had observed accurately! In particular, during this period mass production was organised around the principles of "scientific management", or "Taylorism", which endorsed the separation of "thinkers" (management) from "doers" (labour) (Cowen and Parker 1997:23).  Management acted for and on behalf on the entrepreneur under the delegated legal authority of the employer to direct and control the working lives and actions of the employees.

Although in decline, this concept continues to dominate and direct current management theory, thinking and practice.  The concept of labour not having a brain fits well with the arrogant, self-important view of elite establishment, who sought (and seek) to command and control societies.  The social control bureaucrats have common ground with command and control entrepreneurs and managers.

Hayek disagreed fundamentally with the establishment elite who sought to use the principles of natural science to design the world of human action.  He used the term "scientism" to describe the flawed approach of this social engineering elite.  However the "scientific" approach to management was based on the same principles of social engineering, but applied inside the firm, and passed without apparent comment.

"CONTROL AND THE FIRM"

Coase's explanations of transaction cost problems are valid and remain a key to realising why and how firms operate and underpin economic activity.  However it is not correct to believe that systems of internal organisation control are exclusively dependent on the subjection of human liberty through common law master-servant employment regimes.  Employment subjection is but one control model, and if principles of liberty and freedom are applied to the firm, "employment" should be seen as a brutish and debilitating form of control.  As a model for control, employment was not the best in 1937, nor should it be the preferred model in 1998 or beyond.

Hayek is more accurate.  Order will emerge and prevail and economic activity will be at its most robust when individuals are free to act for themselves.  Just as Hayek argued for limitation of government, so do parallel arguments hold valid for the limitation of management.  Central control of the individual by either a government or corporate elite is inferior to organisational methods which focus on liberty and the release of individual creativity and activity -- in societies and in firms.

CONTRACTUAL CONTROL

Arguing for the freedom of the individual in the firm is not an argument for the release of chaos.  Just as those who desire top-driven control of society do not understand Hayek's arguments, the command and control corporate elite fail to understand that order will prevail and performance will be improved when the individual is released from legal master-servant "control" regimes.

Internal control of a firm, and indeed any organisation, is comparatively simple when the thinking is shifted from the need to control people as humans (common law employment) to the need to control the direction of business through commercial contracts.  Commercial contracts require the entity needing services or products to know, understand and plan its own needs, to translate those needs into contractual understandings and seek others who can fill those needs.  When firms grasp the same commercial contractual understandings that operate between their business and other businesses and apply them to the internal people dynamics of their own business, the pathway to contractual control of firms becomes apparent.  This truth applies to government and private organisational models.

But in looking to such understandings being applied to people in the firm, the argument seems to return to the transaction cost problem originally identified by Coase.  It has become an accepted paradigm that the transaction costs associated with applying commercial contracts to labour will always exceed the marginal benefit.  This paradigm, however is wrong.  Commercial labour contracts can work despite the transaction costs.  Success is dependent upon the nature of the contracts and the quality of the administrative systems used.  This in turn substantially relies on people interaction systems, aided to some extent by technological progress.

The failure to understand the application of commercial contracts to people in the work situation comes from several factors.  These include a poor understanding of commercial contracts, poor understanding of their own business, lack of imagination and lack of developed systems to manage contractual arrangements.  In addition, government, legal, institutional and social structures present significant blockages to firms that wish to move from employment command and control structures to commercial contractual control of the internal operations of the firm.  The law, institutions and attitudes far too frequently drag firms that want to break free from command-and-control structures back into debilitating employment structures -- even though common sense tells the players inside the firm that "employment" is producing inferior results.

THE ACCOUNTABILITY PROBLEM

An important reason for why firms stick to command and control, common law employment regimes is the way employment helps management to avoid performance accountability.  Command and control employment regimes deliver to people working in firms systems, which avoid accountability being imposed on the individual.  When things go wrong -- for example workplace accidents -- individuals can say it is "the system" which has failed and not individuals.  Individuals at all levels are able to hide behind the corporate veil.

Corporations are peculiar beasts.  If they are wholly owned or controlled by a single individual or small group of individuals, the ultimate entrepreneur-controller can normally be identified.  Media, retail and manufacturing barons come readily to mind.  In these instances, command-and-control legal employment systems could be seen to fit the nature of the organisation.  More commonly, however, corporations have divested control through public or private listings into structures in which the power of any individual is frustrated by competing individuals.  No one individual controls the corporation.  "Management" assumes the authority of the entrepreneur, but is really nothing more than a collective of employees.  Corporate control is effectively undertaken by this elite controlling other employees.  This is even more obvious in the case of government instrumentalities and public service structures, where ownership is diffused among the collective public.

The avoidance systems that follow are well entrenched and developed, particularly in large firms, The larger an organisation becomes, the more removed is the entrepreneur/employer from daily decision making.  Top-driven command systems develop in which the employer's authority is legally delegated down the line to managers.  Managers act on behalf of the employer as if they were the employer.  In truth, managers (delegated employers) are employees and have more self-interest in common with other employees than they do with the actual employer.

The primary human dynamic which functions as a consequence is that all employees, whether managers or otherwise, seek to ensure that they cannot be accountable, because at law they remain "servants" -- employees not responsible for their own actions.  They are controlled.  This causes the top of the management pyramid to distrust lower and middle management and operationally constrict their freedom.  The outcome is the strangulation of creativity and performance.

The international mining giant Rio Tinto (then called CRA Limited) recognised the accountability problem in their own organisation in the 1980s (CRA 1995).  In a harsh analysis they said of themselves that "the tap-root of sluggish organisational functioning has to do with the withered sense of accountability ..." (CRA 1995:5).  Rio Tinto began a reorganisation program which has at its core the driving down of accountability to each appropriate levels.  Managers (employees) are held accountable within the work descriptions.  The centre is limited in its ability to override managers' authority (Swain 1995).

GOOD CONTRACTS ARE NOT "EMPLOYMENT CONTRACTS"

Good commercial contracts are simple.  They

• Are clear, up front and understood by both parties;
• Express the intent of equal parties;
• Bind both parties to agreed action;
• Impose pre-agreed sanctions for breaches;
• Cannot be changed without the agreement of both parties;
• Do not have to be written and are most often verbal;

And most importantly

• Have short lives.

These simple elements of commercial contracts sustain normal commercial transactions and contain transaction costs.  The contractual principles are readily applicable to people engagement.

Support for these principles should not be confused with the "employment contracts" which are currently and commonly attempted but which are really a bastardisation of commercial contractual understandings.  "Employment contracts," by their nature, describe agreements within the structure of master and servant, delineating legal relationship between non-equals.  They are a reworking of form rather than a change of substance.  These "contracts" frequently contain hidden and undisclosed requirements and most often give the "employer" the right to change the contractual terms without agreement from the "employee".  These are not in reality contracts, but master-servant control agreements written in a modified language.

THE PROBLEM OF PERMANENCY

Two interrelated barriers that flow from a poor understanding of contracts block the application of individual liberty in the firm.  One is the social contract imposed on firms by employment regulation.  The other is the desire of management for stability in people engagement.  Both can be summarised in one word:  permanency.

Permanency is an unnatural state of affairs in market operations.  Each time an individual purchases an item from a shop the contract comes and goes quickly.  A single purchase does not create a contractual obligation on the buyer to undertake repeat purchases, or on the seller to continue to offer items for sale.  Even in large businesses dependant on the supply of raw materials, long-term contracts are not necessarily signed.  Long term contracts drive down competition and ultimately limit supply.  Businesses learn to keep their options open for suppliers.  What drives the market is the commercially interdependent needs of all parties, governed by offer and acceptance of contract subject to availability, service, quality and price.

The desire for and imposition of permanency in people engagement within firms is destructive of the market and breeds a culture of complacency and non-performance.  In effect, the desire for permanency reflects a desire for the removal of individual liberty.  The perversions of human behaviour that Hayek predicted would occur with top-driven command and control economies, likewise occur with top-driven command and control firms.

The harsh but liberating reality of markets is that nothing is permanent.  What markets have are ongoing (but changing needs).  The satisfaction of ongoing needs can create an illusion of permanency;  however, this is critically different to a permanency created by legal dictate.  This reality must be accepted and embraced by all parties for the lift in liberty and performance it delivers.  In attempting to create permanency, market realities are removed.  When markets are prevented from operating inside firms, the inevitable corruptions develop of internal monopolies, accountability avoidance and protection of misbehaviour, all leading to diminution of performance.

THE MARKET PREVAILS

Ultimately, the only way to overcome problems resulting from employment regimes that deny individual freedom is to fix the problem at the root.  Markets must be invited to operate inside firms.  This can only be fully achieved by removing the master-servant employment model and replacing people engagement arrangements with the very thing that drives economic activity:  the common, well known, everyday understanding of commercial contracts.

This would perhaps interest Coase.  He would be interested in the concept of markets in the firm and the firm being internally driven by commercial contracts.  As he recently said of the impact of new technologies on contract methodologies, "So that's what I'm interested in now.  By improving the way the market works, you can produce immense benefits. ... Without the ability to make efficient contracts, you can't use these new [technologies]" (Hazlett 1997:30)

Creating systems for the cost-effective management of people engagement contracts inside firms is the key to understanding markets in the firm.  However, if transaction costs cannot be kept below the benefits, then "master and servant" is forced to prevail in the firm and Coase's original analysis remains valid.

In the existing legal environment, many operational models exist where management thinking attempts to conduct human relations outside the master-servant model, but is constrained by the legal framework.  The working of markets inside firms will and does vary from circumstance to circumstance.  Some legally supported models have emerged.

In one example in Australia, a model of transaction cost management in people engagement, was created in the Odco High Court judgements.  In this Odco system, people (workers) are supplied to user businesses through the medium of a contracts administration agency.

• No contract exists between the worker and the business where the worker works.
• Engagement is daily hire and at law no master and servant "employment" exists.
• The workers exercise legal "control" of themselves
• The contracts can be changed daily for every worker.
• The user business does not "control" the worker but controls the business results through the terms of contract which it is prepared to accept.
• The system operates on offer and acceptance of contract.
• The transaction costs are known and contained in the negotiable fee the administrator charges the user business.

Through Odco arrangements, businesses have the external market penetrating their internal operations, possible because the transaction cost problem is managed.

Other legally supported models of non-employment exist where the contractual relationship is direct between the user business and the non-employee.  In these models, the user business must develop its own internal systems for contract management to keep the transaction costs within affordable levels.  This is the challenge facing government and local councils in compulsory competitive tendering.

CONCLUSION

For the full flowering of human creativity and productivity, the individual must be delivered both legal and actual liberty.  In the market place this is achieved through commercial contracts.  When the market is restricted to operating between firms and fails to operate inside firms, firms and in turn market-based economies will underperform.

Legally defined "employment" is by its nature and operation concerned with the suppression of human liberty.  As a method for the achievement of great things with people, in firms and societies, "employment" is a poor model.

REFERENCES

• Coase, Ronald H. 1937, "The Nature of the Firm," reprinted in Ronald H. Coase, The Firm, The market and the law, University of Chicago Press Chicago, 1988.
• Cowen, D. and D. Parker 1997, Markets in the Firm, Institute of Economic Affairs, London.
• CRA Ltd 1995, Modified Stance on Industrial Relations, issued by McIntosh & Company and Baring Securities (Aust.) Limited.
• Hazlett, Thomas 1997, "Looking for Results:  An interview with Ronald Coase," Reason 28(8):40-46;  reprinted in Policy 13 (4) (Summer 1997-98):24-30.
• Wood, Richard 1997, "What's in a name?  The Vexed Question of Employment", Backgrounder 9(3).
• Swain, Pam 1995, Strategic Choices.  A study of the interaction of Industrial Relations and Corporate Strategy in the Pilbara Iron Ore Industry, School of Management, Curtin University, Perth.

____________________

A useful source on Hayek's position is the educational resource package produced by the Atlas Economic Research Foundation, Sussex, UK, 1988

The Odco Judgements involved six judicial considerations.  The primary judgement is that of the trial judge, Mr Justice Woodward, in the action Odco v BWIU & Ors, No VG151 of 1988, in the Federal Court of Australia (unreported), 24 August 1989

This article first appeared in the Winter 1998 edition of Policy, a magazine of the Centre For Independent Studies.

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Submission on Proposed Labelling Provisions for Genetically Modified Foods under Food Standard A18

Submission

INTRODUCTION AND SUMMARY

Australian and New Zealand Health Ministers meeting as the Australia New Zealand Food Standards Council (ANZFSC) on 22 October sought submissions on the labelling provisions of the draft standard A18 covering Food Produced Using Gene Technology.

Regulation should be tailored in response

• first, to the level of risk of the untoward occurring;
• secondly, to the degree that the incentives in the remedies of the normal operations of law inadequately encourage appropriate care;  and
• thirdly, to the degree that a government expert body can be better informed of dangers and how to avoid them than commercial organisations.

Our recommendations are made cognizant of public concerns on the GM technology but in the light of well founded principles adopted in all jurisdictions designed to reduce regulation.  The recommendations are as follows:

First, the definition of GM products falling under the regulatory oversight of the Gene Technology Regulator (GTR) should exclude those products that involve modification solely within an existing species.  Confining the regulatory oversight to where genes are introduced from a different species will reduce the regulatory costs and improve the regulatory focus of both Government and industry.  It will do so while retaining oversight on those product modifications that pose risks not seen with traditional breeding techniques.

Secondly, we agree with the eminently sensible provision in the Editorial Note in Clause 1 which says,

"a food derived from an animal, which is not itself a product of gene technology but which has been fed on a food produced using gene technology, is not a food produced using gene technology merely because of the feed used."

Thirdly, we favour no mandatory requirement on food suppliers to indicate whether their produce contains GM inputs.  This will allow suppliers to respond to consumer needs rather than regulators determining these needs.

Fourthly, a label "Not sourced from GM products" could be adopted where there is an agreed upper level of possible GM content (say 3% or the level that is adopted in the EU or Japan).

Fifthly, GM-free could be maintained as a label if the supplier is confident that the goods do not contain any GM sourced inputs.

FOOD LAWS INFORMATION IN CONTEXT

Regulatory Approach to Food

The buying and selling of food, like that of most other goods is a transaction offering mutual advantages to both parties.  There is no requirement on buyers, confronted by many alternative offerings, to purchase a particular product.  The seller is in a highly competitive environment and must appeal to sufficient numbers of buyers.

Sellers, if left to determine for themselves the content of the label on their products, subject to the requirement of accuracy, will respond to the needs of their actual and prospective customers.  Their labels will seek both to inform and entice the buyer who has some 30,000 lines to choose from in a supermarket.

Food regulations are primarily aimed at ensuring the product is safe to consume.  Labelling provisions reinforce this.  Thus, with packaged foods, in the interests of consumer health, information must be included on the label about additives to the food which enhance its taste, improve its texture, facilitate a longer shelf life etc..  However, in general, a therapeutic claim cannot be made ⁽¹⁾.

Food regulation in legal terms has migrated over the past century from caveat emptor "let the buyer beware", to caveat venditor, "let the seller beware".  As with most shifts in legal liability, there are good common-sense reasons behind this change.  Chief among these is the change from the preponderance of fresh food purchases to packaged food.

In the case of fresh food, it was just as easy for the buyer to satisfy himself of the quality, wholesomeness and freshness of the product as it was for the seller.  By contrast, packaged food has undergone processing.  Its components cannot easily be determined by the customer and it makes sense for the liability for selling goods of below the mutually expected quality to fall upon the seller.

Food as an Experience Good

Food can be described as an "experience" good.  When a particular line is first bought the consumer is unlikely to be convinced it meets her taste and other requirements.  It might be argued, given this initial state of ignorance, that a seller has an incentive to mislead the consumer about the product.  Indeed, although only truthful claims are permitted regarding a product's qualities, some "puffery" (statements like "the world's best chocolate bar", "the tangiest lemon drink") is perfectly acceptable.

However, a new product line involves considerable marketing and formulation expense and no seller could survive on one-off sales.  Hence the seller must attempt to gain repeat sales.

This need to gain repeat sales means there is less chance of major disappointment where a consumer buys food than with durable consumer goods.  It follows that the need for government regulations requiring information is correspondingly reduced.  In addition, where mandatory information is required, this may reduce the available space for information that the seller considers to be more important to the buyer.  In such cases mandatory labelling requirements can detract from consumer benefits.

Labelling Information:  Regulation and Voluntary Provision

Notwithstanding the relatively low costs of a disappointing food purchase, the demand by the regulatory authorities for mandatory information on a food label has been increased considerably over recent years.  This has extended beyond standard physical characteristics and, largely in response to pressure groups, it is also to enhanced consumer awareness and concern with dietary matters.  The focus of the information requirements demanded has been to guard against deceit (food contents, weight, water content) or to ensure people with allergies to certain components are warned in advance of their inclusion in the product.

There are sound reasons both for verifying that a particular food offering is wholesome and for placing particular requirements on its label regarding ingredients and additives.  Some manufacturers are likely to have less knowledge than a specialist government health agency about consumer reaction to an additive.  In some cases, a manufacturer may wish to market a combination of products, which, though wholesome in themselves, are known to have adverse effects when blended together.  Although in such cases liability law would provide redress and therefore cause suppliers to exercise appropriate caution (and potential loss of reputation is a very effective incentive), it is considered preferable to prevent the mishap before the event and require prior approval of the product.

Similar considerations apply with labelling to prevent inadvertent consumption of those with allergies to the product.

Nevertheless, regulations add costs to production that are eventually paid for by consumers.  They also bring costs for regulatory policing that are largely paid for by taxpayers.  In recognition that much -- perhaps most -- regulation detracts from, rather than adds to, national well-being, regulatory reviews under National Competition Policy, adopt a presumption against the need for regulation.

The mutuality of the buyer and seller relationship and the highly competitive environment for food sales means that sellers will respond to market requirements both in the content of their offerings and in describing them.  Beyond a requirement that claims be truthful, there need be little regulation of this to prevent consumer deceit.

If consumers have a need for a particular feature from a food, in a competitive market suppliers will provide this.  It might be argued that this response will be inadequate in some circumstances, hence the requirement of labelling to provide fat, carbohydrate, and protein content.

However, in the main these requirements simply led a labelling trend that was previously in train in response to consumer wishes.  Thus, various forms of sugar free confectionery have been brought to the market to respond to consumer needs as have a variety of "healthy" breakfast cereals.

Moreover, suppliers have over time responded to consumer needs even where these are of a minority nature and cover features of no scientific worth.  Thus, halal and kosher meat are readily available to those who (in Australia) comprise a tiny minority wishing to avoid certain products or preparations on religious grounds.  In these responses, suppliers weigh up the additional costs of the labelling (and more importantly the product segregation and modification that accompanies it) with the benefits that consumers wish to see.

In line with the strictures set out in this submission's Introduction, we consider regulatory oversight should be confined to those products where there may be genuine risk and where regulation might make a difference.

LABELLING COSTS

The KPMG Report's Findings on Costs

It is necessary to preface any discussion of the proposed labelling laws with the reminder that the products concerned are perfectly safe.  Either they have been developed by the same processes that have given the world a safe and abundant food supply or they have been specifically approved on scientific advice as safe.  Some jurisdictions have adopted criteria of "substantially equivalent" as a test beyond which specific regulatory approval may be required.  Australian and New Zealand Health Ministers have indicated that they wish to adopt a more stringent regulatory approach than this.  That disposition reflects the view that the public wishes to be informed, even if the products are safe.

The work undertaken by KPMG evaluates the cost of mandatory GM labelling.  It estimates that the requirement would mean auditing and testing between 18,000,000 and 48,000,000 streams of assessment.  KPMG identify several different types of cost:

• Set-up costs
• On-going monitoring costs
• Indirect costs like training and levies to pay for industry supervision
• "Opportunity" costs including affect on market shares from making a labelling statement, need to redesign products, and loss of confidence among consumers.

Product costs are estimated to increase by 5-15% and an additional 3% for compliance.  Such estimates are not inconsistent with those published by MacKenzie in the New Scientist ⁽²⁾.

The bottom line estimate for Australia from the KPMG study is $3 billion in the first year, reducing to $1.5 billion per year.

Other Costs Estimates from Mandatory Labelling

MacKenzie, quoting research from Wye College, says US soya bean processors charge 6-9% for segregating beans for their protein and oil content, and Brazilian soya beans are distinguished between GM and non-modified at a premium of 10-15%.  However, these costs are based on a tolerance for GM contamination of around 1%.

The original data on which much of Mackenzie's report was based estimated that Identity Preservation (segregation) can add as much as 150% to costs.  It also cited cases where some tolerance is permitted, with costs as little as 0.1%.  These cost variabilities underline the difficulties involved in attempting to quantify the effects of a regulatory solution and to ensure that solution is compatible with any benefits it might bring in terms of consumer choice.

All the evidence therefore points to a wide range of costs likely to emanate from mandatory labelling.  These reflect the great array of products and the manner in which they are presently handled.

Some products are carefully graded and monitored from grower to final consumer.  McDonald's fries and hamburger beef and foods offered by many other fast food outlets are cases in point.  The total segregation of these products' inputs is required through the chain for quality control to ensure as close a consistency as possible in the final product.

In such cases, the administrative costs of mandatory labelling could be low.  The final seller is already undertaking a considerable surveillance of the product at all stages of its production.  However, even in these cases the firms set their own levels of tolerance for blemishes and presumably do not involve themselves in total testing at each stage.  They certainly would not test for material that is substantially equivalent in all features to the required input.

Costs Stemming from Market Versus Regulation Induced Requirements

The KPMG report may have overstated some costs.  Costs are of two kinds:  those that the consumer and producer willingly incur (and the consumer eventually pays), and those that the consumer is made to incur.  Where producers in response to consumer demand provide more information and as a result need to undertake more control and additional gradings, the costs are offset by the value the consumer places on the increased information.  These costs are recouped in higher prices and all parties benefit.

Information provided as a result of this consumer-oriented outcome is no more a (wasted) cost than the costs involved in flavour enhancers, preservatives and robust packaging.  By contrast, information mandated by government has no such market test of its worth.  Commonly, the information is mandated in response to contemporary and ephemeral health fads, as was the case with additives.  Usually it is associated with prevention of deceit.  More often than not the mandatory information is not valued by the great bulk of consumers and is a deadweight cost.

Kellow ⁽³⁾ points out that many of the claims made of foods being "organic" are absurd since the point of obtaining purity is to eliminate the organic residues.  That said, if the consumer genuinely demands a particular feature, suppliers will meet these demands.  "Genuine" demand is that which is backed up by a capacity and willingness to pay.  We see no end of products the demand for which our predecessors would have considered frivolous, even antinomian, like bottled water and range fed beef.  But demand by the consumer backed by a capacity to pay any extra costs entailed is the ultimate arbiter of worth.

In this respect there are benefits in the ability of suppliers to make the claim "GM free".  Even if the most authoritative scientists and the vast bulk of consumers see little or no value in such a claim, if some consumers value it then it has worth.  We see analogous statements on food that is halal or kosher.  Consumers of these foods are willing to pay a premium for them.

There is however an important difference between this and the GM food issue.  In the case of people wishing to specify a specific form of killing of their meat, a form that would not be objectively considered superior to modern slaughter, they do not insist on all meat being segregated.  They merely insist, quite appropriately that the meat they consume corresponds to these production methods.  As such the increased costs are borne largely by themselves.  Only to the unlikely extent that their requirements deny some scale economies can there be said to be any costs imposed on other users.  And even if there were some such costs, the minorities' requirements would remain legitimate.

The voluntary labelling of halal and kosher products raises issues addressed in Clause 10(e) of the proposal.  This argues that,

"the provisions ... may specify additional labelling or other information requirements in relation to food produced using gene technology listed in column 1 of the Table where ... the genetic modification may raise significant ethical, cultural or religious concerns regarding the origin of the genetic material used in the genetic modification".

With regard to religious objections to GM foods, there appears to be no concern among mainstream Christians.  Indeed Bishop Sgreccia, Vice President of the Vatican's Pontifical Academy for Life, following a two year study by his members has said,

"We are increasingly encouraged that the advantages of genetic engineering of plants and animals are greater than the risks.  The risks should be carefully followed through openness, analysis and controls, but without a sense of alarm." ⁽⁴⁾

Similarly, the premier Indian geneticist, Professor M S Swaminathan has not indicated religious concerns with the technology on behalf of Hindus, while two predominantly Muslim nations, Malaysia and Indonesia, have embraced the technology.

We have previously published a ball-park cost estimate for GM segregation of around $1 billion per annum.  This was based on an estimated average 6% increase in the cost of food handling largely representing the dual system required to ensure segregation of foodstuffs.  The estimated 6% average is a blend of figures ranging from negligible costs where rigorous quality control of the product already occurs to costs approaching 50% of the basic food where the product is homogenous and presently has no need for segregating by source.

In few cases will the costs be negligible:  even where agricultural produce is subject to strict gradings -- and the number of wheat grades has risen from 3 to two dozen over the past 20 years -- there is seldom a requirement for strict segregation.  With grading all that is normally important is that the produce meets certain standards, like protein, moisture content etc.  The proposed labelling provisions for genetically modified foods are much more rigorous:

• there is no provision for minor impurities
• unlike grade specifications, there is no possibility of offsetting grades
• in many cases there is no objective test to demonstrate the food is GM free and in other cases specific tests will need to be developed

For these reasons the costs may be greater than the industry expects and some major producers have indicated that they can never make a categorical statement, "GM free", since this would entail constant tests due to there being no possibility of verifying the precise source of every grain.

It is not good regulatory practice to insist on absolute levels of purity.  All things have some level of impurity and food may contain inputs in trivial quantities that might be harmful if consumed in large quantities.  GM is becoming widely adopted across a great many plant species and few processed foods will in future be able confidently to carry a claim "free from genetic modification", especially once food additives and processing aids are included.  Given that much GM derived food is "substantially equivalent" to non-GM food, it may even be difficult to make such absolute claims about the main product inputs.

The Response of Health Ministers to the KPMG Report

Health Ministers did not accept the KPMG cost analysis, arguing that it did not have regard to:

• changes to the draft standard made after KPMG was commissioned;  and
• the exercise of due diligence in compliance.

The Health Ministers said, "The draft Standard clarifies the definition of genetically modified food for the purpose of labelling.

"Due diligence in compliance with the Standard relies on appropriate documentation throughout the supply chain.  Testing would only be required where verification of documentation was needed (i.e. where the paper trail is unreliable)."

The effect of these two disagreements is difficult to assess.  The former statement is unlikely to have a substantial impact, especially since, as discussed later, the standard as presently defined is extremely onerous.

With respect to the latter, the effects are likely to be minor:  whether or not testing is required a reputable business would need to fully satisfy itself of the accuracy of a statement prior to making it.  And if there is to be no tolerance of GM product that might inadvertently be part of the overall mix (because a supplier has included it with a more substantial load, it has been transported in containers that previously transported GM product, traces of which remain, and so on) the supplier will need to continuously test the product at each stage.

This gives rise to an unintended consequence, which was not addressed by either KPMG or the ministers.  The spotlight on GM foods means the penalty for making no statement, or making a statement "free from genetic modification" incorrectly, is likely to be severe in terms of publicity and consequent opprobrium.  Thus, major firms with strong brand names and reputations are likely to be risk averse in sourcing product inputs.  They are likely to avoid smaller suppliers who usually have less investment in reputation than larger well known firms.  Aside from reducing opportunities for small businesses -- and especially start-up businesses with no reputation -- the result may be a reduction in competition.  As the Productivity Commission has demonstrated ⁽⁵⁾, competition is vital to productivity growth.

Implications of Onerous Labelling Laws on Competitiveness

It is therefore quite onerous to require foods to include a "genetically modified"/"may contain" label if it does, or may, contain GM ingredients.  Such provisions may require all the ingredients to be tracked from field to plate.  It may result in the new technology being forestalled.

Denial of lowest cost inputs to Australian food producers and denial of the most productive varieties to growers is particularly serious for Australia.  Some argue that "GM free" could become a positive marketing tool for Australia.  Some even maintain, quite incorrectly that specific sales have been made on the back of this claim (in particular canola to Europe which displaced Canadian canola, allegedly because the latter could not be guaranteed to be GM free).

The enhanced competitiveness of GM products means denial of the technology to a world class and low cost agricultural producer like Australia, and would mean a loss of competitiveness.  The vast variety of minor changes to productivity from GM crops and the importance of agriculture to this country means failure to adopt the technologies would have an outcome well beyond the local level.  Indeed, the impact would be evident beyond the agricultural sector.

Although there is no suggestion in official circles of banning the technology (though many of the voices most strident in the debate seek this), onerous labelling provisions could have an effect similar to a ban.  If the labelling were to require attention to be drawn to a feature of the product's derivation that is totally irrelevant to its composition, consumers may seek to avoid the product.  Consumer avoidance may be even more likely to the degree the information is required by Health Ministers, with the inheritantly strong inference this contains that the product is not wholesome.

REGULATORY PROPOSALS

There are some specific matters covered in the proposal which we wish to address.

First, the regulation should be confined further than is proposed.  The definition in the first part of Clause 1 is too wide.  That definition says

"a food produced using gene technology means a food which has been derived or developed from an organism which has been modified by gene technology, and includes any substance regulated as a food additive or processing aid.

It should be confined only to those aspects of the technology that pose risks not commonly seen with traditional breeding techniques.

It may be useful to classify GM into two sorts of technologies:  those involving manipulation of genes within a species and those involving the introduction of genes from another species.

In the main, Genetic Modification is expediting the traditional cross breeding that has allowed mankind to feed itself.  GM employing genes from the same species does nothing that traditional breeding methods cannot do in a laborious and time consuming way by cross breeding and back-crossing.  In short, it effects changes to a species much more rapidly, more precisely, usefully, and surely even more safely.

All plants have their natural poisons to deter predators and the intensification of such natural poisons through selective breeding or GM techniques could have a harmful effect on consumers.  But the risks are less from manipulating the genome of a particular organism.

Where GM involves introducing genes from an entirely different species, arguably this means a more radical change to the species DNA.  Under such circumstances additional oversight with more comprehensive labelling is more readily justified.

Not only is the intra-species modification no more likely to create risk through GM technologies than through traditional approaches, but public concern with the technology stems from well publicised anxieties that GM products will be developed containing genes introduced from alien species.  Pig genes in GM tomato paste is a case often cited.

It follows that the definition of GM products falling under the regulatory oversight of the GTR should exclude those products that involve modification solely within an existing species.  Confining the regulatory oversight to where genes are introduced from a different species will reduce the regulatory costs and improve the regulatory focus of both Government and industry.  It will do so while retaining oversight on those product modifications that pose risks not seen with traditional breeding techniques.

Secondly, we agree with the eminently sensible provision in the Editorial Note in Clause 1 which says,

"a food derived from an animal, which is not itself a product of gene technology but which has been fed on a food produced using gene technology, is not a food produced using gene technology merely because of the feed used."

To do other than this would open an unmanageable vista of regulatory oversight and offer no possible advantages other than a simple pandering to ill-informed opposition to any innovation in this field.

The digestive systems of animals bombard their with sufficient potency that it is radically transformed prior to forming part of the organism which humans, in turn, would consume.  Animals' feed content, unless it was a poison, could not adversely impact on its nutrition to humans and certainly could not, in the definition the draft uses, "alter the heritable genetic material of living cells or organisms".

Thirdly, the Standard needs to offer consideration of a threshold of where a good is GM.  Earlier we pointed out that it is bad regulatory practice to insist on absolute levels of purity.  In the case of GM inputs into food, the requirement for purity is not even targeted at a health concern.

The bulk of the costs involved in making a claim "GM free" is verification of the paper trail.  GM products will only be adopted where they are superior to the alternatives.  But the superiority is unlikely to be overwhelming and, like organic produce, non-GM products will continue to be available if there is a sufficient market segment prepared to pay a premium price.

Thresholds are commonly used in all regulatory procedures.  Whether it is "pure wool" or "handicraft" goods or even "Made in Australia", some toleration is essential if consumers are to be able to exercise their preferences without being obliged to pay an intolerable price.  Without this, an absolute standard will severely constrict the availability of products as the technology is extended into increasing varieties of basic foods.  Allowing thresholds will enable the products to be marketed under a variety of banners including an absolute "GM free".

All things have some level of impurity and food may contain inputs in trivial quantities that might be harmful if consumed in large quantities.  GM is becoming widely adopted across a great many plant species and few processed foods will in future be able confidently to carry a claim "free from genetic modification", especially once food additives and processing aids are included.  Given that much GM derived food is "substantially equivalent" to non-GM food, it may even be difficult to make such absolute claims about the main product inputs.

We favour the adoption of a spectrum of labels being permitted, largely driven by market rather than regulatory requirements.  The labelling issue under control of the Health Ministers should properly be confined to the area of their Ministerial accountability:  that the food on offer within jurisdictions is safe.  The movement of Health Ministers into consumer and industry policy takes them outside of their area of expertise and could undermine their credibility within that core area.

We favour no mandatory requirement on food suppliers to indicate whether their produce contains GM inputs.  This will allow suppliers to respond to consumer needs rather than regulators determining these needs.

Beyond this we favour the possible use of different labels should suppliers wish to use them.

A label "Not sourced from GM products" could be adopted where there is an agreed upper level of possible GM content (say 3% or the level that is adopted the EU or Japan).

"GM-free" could be maintained as a label if the supplier is confident that the goods do not contain any GM sourced inputs.

---

ENDNOTES

1.  This provision is becoming increasingly strained both as a result of producers responding to the consumer's increasing health consciousness and because some foods are "healthier" than others.  Some even have demonstrable therapeutic qualities like the prevention of osteoporosis;  GM techniques are likely to create more such products.

2. How to Price What We Put on Our Plate, Debora Mackenzie, New Scientist, 27 February 1999.

3. Risk Assessment and Decision-Making for Genetically Modified Foods, Richard J. Wood, Biotechnology Backgrounder, Oct 1999

4. St Louis Review Oct 12 1999

5. Macreconomic Reforms and Productivity, Productivity Commission, November 1999.

Million locked out of jobs

The union push for more labour market regulation will just make it harder for the unemployed to find work.  The proof is in America.

Australia is now seeing a strong push from unions to extend labour market regulation -- especially through increasing the coverage of State industrial tribunals.

More labour market regulation is the last thing the nation needs.

The latest budget forecasts only expect the unemployment rate to just fall below seven per cent -- after seven years of strong economic growth.

Which shows how poorly the highly-regulated Australian labour market performs.

Of Australians of working age population (15 to 64), about 69 per cent are in employment.  Yet 77 per cent of Americans of working age are in employment.

If Australia had the same employment/population ratio as the US, one million more of us would have jobs.

Let us think about the implications of that for the moment.

If one million more Australians had jobs, government revenue would be higher and government welfare expenses much lower.

Governments would find it much easier to fund schools, hospitals and spending on roads, bridges, etc. and top up the income of low-income households.

Many more Australians would experience the sense of worth and achievement that comes from employment.

One million more Australians in employment:  something worth achieving, surely?

Not if the typically stilted debate about Minister Reith's rather limited "second round" reforms are any indication.

It seems the same old ideological wars are being fought in much the same old ways.  There is a little or no movement at the station.

Until the mid 1970s, Australia and the US had very similar employment/ population ratios.

In both countries, the proportion of those of working-age in employment had climbed from 63 per cent in the late 1940s to the 66-to-68 per cent range depending on economic conditions.

Then a sharp divergence set in.  In the US, the ratio hit 71 per cent, before dropping back to 68 in the recession of the early 1980s and then rising steadily, apart from a small dip in the early 1990s.

Australia's ratio declined steadily, then dropped to a low of 63 per cent in 1980s recession -- a level not seen since the late 1940s -- rose to 70 per cent in the late 1980s, fell sharply to 65 in the recession of the early 1990s before rising again.

Australia's labour market institutions clearly coped much worse than those of the US with economic cycles.  They were also far less successful at dealing with the entry of women into the workforce.

What is the difference in labour market institutions between Australia and the US?  The biggest difference is that we regulate employment relations far more than they do.

Not in matters such as occupational health and safety or anti-discrimination law -- where laws in the two countries are comparable -- but in wages and conditions.

If the point of such regulation is to benefit Australian workers, it is patently not working.

Australian workers earn less on average than American ones.  We have similar rates of working poor.

On the US comparison, one million less Australians are workers than could be.

Why should we deregulate the Australian labour market?  I can think of about a million reasons.

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NGO's: Lazy Activism

The NGO show at the World Trade Organisation meeting in Seattle last week reminds me of the Irishman who, ten minutes after hitching a ride, taps the driver on the shoulder and asks, "you wouldn't be goin' t'other way would ya?"  So it was with the likes of Greenpeace and Community Aid Abroad and the Australian Conservation Foundation.  They hitched a ride with the WTO in order to showcase their own organisations, which by and large are against free trade and development.

The Greenpeace message came wrapped in a condom, "When practiced responsibly, Safe Trade can prevent various infectious global problems such as poverty, deforestation, desertification, pollution, and the exhaustion of species, natural resources and habitats".

Community Aid Abroad concentrated on the citizens' voice, appealing to "an Australian community standing against global corporate tyranny and the threat posed to democracy, environment, and consumer choice by the WTO".

The ACF wondered whether people would "be forced to eat genetically modified foods without their knowledge, and whether the "mindless free trade agendas" would "undermine the capacity for a nation to properly protect native forests, dolphins and turtles?"

How is it that some interest groups claim a moral superiority over the democratically elected government representatives with whom they compete for public attention and approbation?  How can they be right all the time and governments wrong?  The fact is they seek to undermine the legitimacy of democracy by suggesting an inherent bias against the dispossessed.

For example, the calendar of events for the NGO's at Seattle was more extensive than for WTO ministers.  It included an International Women Workers' forum, A Family Farmers' summit, an Indigenous Peoples' forum, a Peoples' Tribunal, an Ecumenical Worship Service and the one that really caught my eye, "Corporate Accountability:  who rules?"  The latter begs the question;  to who are the NGO's accountable?  Do they really represent the people on whose behalf they claim to speak?  Certainly the elected representatives of poorer nations do not think so.  They resent the impediments that NGO's seek to place on trade, making it harder for these nations to trade their way out of debt.

The WTO consists of 135 member nations, its power derives from the agreement of mostly democratic governments to expand the areas of free trade and resolve trade disputes of member countries in agreed products and services.  On what basis can NGO's demand a place at the table alongside the Ministers?  Did they win an election of the whole of the people, including women, indigenes, family farmers and the religious?  Or do they practice the lazy politics of advocacy?

NGO's consist of mail-order memberships of the wealthy left, content to buy their activism and get on with their consumer lifestyle.  These people take out insurance against global capitalism, just in case democratically elected governments fail to tame the beast.  The insurance strategy does not entitle them to a place at the negotiating table alongside governments.  To do so is to deny governments their legitimacy.

The measure of legitimacy in democracy is an agreed set of procedures for election to ensure a fair contest.  Should the same test be applied to NGO's?  If groups are to have representation at public forums they should be accountable to their members.  NGOs' have a responsibility to their membership for the views they expound on their behalf.  The mechanisms by which voluntary associations are held accountable are not visible, the very criticism these organisations level at the WTO.

Governments should not too readily anoint groups that claim to represent interests.  They should not cede legitimacy to interest groups.  The formal democratic mechanism is being eroded by the status afforded NGO's at government forums.  Their claim to a moral superiority is baseless.  Governments, of course know this, but nevertheless think they are a useful conduit to voters.  That they may be, but they are also irresponsible bodies and must not be given a status they do not warrant.

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High Income Mobility in the US

Letter to the Editor:

Antonia Feitz's claims (Letters 1/12) that the bottom 60 per cent of the US population have seen their incomes decline since 1979 and that 60 per cent of all US jobs created in that time paid less than $7000 are incorrect.

According to US Bureau of Census figures, the average income of households in the bottom 20 per cent have remained static, those of the next 40 per cent have increased marginally.  But income mobility is very high -- people do not stay at the bottom.

A University of Michigan panel study found that it was people who were in the lowest 20 per cent of income in 1975 who made the biggest gains in income over the next 16 years.

According to the 1999 Economic Report of the President, median hourly wages have remained about $11 an hour since 1979, while average workweek has remained about 35 hours since the mid 1980s, so it is quite impossible for 60 per cent of the almost 33 million jobs created in the US since 1979 (a growth of over 30 per cent) to have paid less than $7000.

Similarly, Jared Pearson (Letters 1/12) in his fulminations against unelected corporations seems to be quite unaware that the WTO is an organisation of governments, most of whom are elected.

Business representatives have observer status only, unless governments chose to include them in their delegations.  The campaign against the WTO is, alas, dominated by such misinformation.

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Comments on the Commonwealth Interim Office of the Gene Technology Regulator's Discussion Paper

"Proposed national regulatory system for genetically modified organisms:
How should it work?"

Please note that the paper to which these comments are a response may be accessed:  here.

GENERAL ISSUES

We have sympathy with the thrust of the changes proposed in the above paper.  We see the paper as a response to public concern about a new series of products, and a need for reassurance that the products are safe.

Even so, we do have concerns that the proposals may be excessive regulation.  Regulation should be tailored in response

• first to the level of risk of the untoward occurring;
• secondly to the degree that the incentives in the remedies of the normal operations of law inadequately encourage appropriate care;  and
• thirdly to the degree that a government expert body can be better informed of dangers and how to avoid them than commercial organisations.

Our concerns are in the context of the clear scientific advice that the GM techniques are benign or at least pose no greater threat than the "natural" genetic modification referred to in section 2.5 (p.16) of the paper.  In this respect, we may wish to provide further comment as the proposal progresses to advise about the level of oversight it entails.

We would expect these matters to be rigorously assessed under regulatory review and national competition policies that have been implemented by all Australian jurisdictions and agreed by COAG.

The legislative or alternative regulatory vehicle through which the proposals are implemented should also be sunsetted.  This is of particular relevance to GM technology since its wide adoption is relatively new.  The technology's risks may be recognised as being negligible and the rationale for special, or indeed any, regulatory control would then disappear.

SPECIFIC MATTERS

There are four specific matters covered by the paper where we would wish to offer advice at this stage.  These are:

• the relationship of the proposed Gene Technology Advisory Committee (GTAC) with the existing Genetic Manipulation Advisory Committee (GMAC);
• the definition of what constitutes GM products for the purpose of the legislation;
• the appropriate administrative arrangements;  and
• the suggested provision for jurisdictions to be able to "opt out" of an approval.

THE CREATION OF GTAC

Our understanding is that GTAC will be introduced as part of a process under which the existing voluntary scrutiny, where GMAC plays a key role, is transformed into a mandatory system of approval.  The information before us does not indicate that GMAC is to be replaced and not continued in some form.  We suggest this be made clear to avoid perceptions of excessive regulation.

THE DEFINITION OF GM PRODUCTS

GM products will only be approved where they are safe.  This has led some jurisdictions to adopt a criteria of "substantially equivalent" as a criteria beyond which regulatory approval may be required.  With respect to food, Australian and New Zealand Health Ministers have indicated that they wish to adopt a more stringent regulatory approach than this.  That disposition reflects the view that the public wish to be informed, even if the products they consume are safe.

In this respect, the public concern appears to be well publicised anxieties that GM products will be developed containing genes introduced from alien species.  Pig genes in GM tomato paste is a case often cited.

It is uncontroversial that GM, through traditional breeding techniques, is the pathway through which most modern foods and pharmaceuticals were developed.  Much of the new technology simply seeks to promote and expedite this approach.  Genetic modification within a genus is a test tube way of following traditional breeding techniques.

It follows that the definition of GM products falling under the regulatory oversight of the GTR should exclude those products that involve modification solely within an existing species.  Indeed, the exclusion could be wider than this since traditional breeding measures sometimes succeed in introducing new genes from related species.

Confining the regulatory oversight to where genes are introduced from a different species will reduce the regulatory costs and improve the regulatory focus both to the Government and industry.  It will do so while leaving oversight with those product modifications that pose risks not seen with traditional breeding techniques.

ADMINISTRATIVE ARRANGEMENTS

The foregoing raises the question of appropriate ministerial control over the regulations.

The proposal does not specify the composition of the Ministerial Council which is to oversee the GTR.  It does argue that the Council should not be permitted to override any individual decision on an organism by the GTR, a position we strongly support.

It further argues GTAC members should be appointed by the Commonwealth Minister for Health (following consultation with other Commonwealth and State Ministers).

The composition of the Ministerial Council requires further consideration.  Health Ministers oversee human safety and would have strong claims to carriage of the issues;  yet the GM controls are often concerned with requirements to provide the appropriate level of public information.  They may also have a bearing on environmental matters and they clearly have a major influence on agriculture and other branches of industry policy.

It is important to avoid having the authority of Health Ministers extended beyond that of their ostensible expertise.

OPT OUT PROVISIONS

The proposal under section 4.9 addresses the possibility that a state or territory could opt out of allowing sale of a product that had been approved by the GTR.  Such a proposal has far-reaching implications for the Australian Constitution (s.92 freedom of trade) and for the mutual recognition provisions of CER with New Zealand.

It would set a precedent that could undermine co-operative federalism and should be dismissed from any further discussion drafts.

Black Truths

Book Reviews

The Story of Black History
by Roy Kerridge
Claridge Press, 72 pages

[Most easily obtained through www.amazon.com]

Roy Kerridge is that most annoying of commentators on a controversial subject -- one who actually knows what he is talking about.  There is probably no white writer with a more intimate and informed knowledge of how English black communities really function.  He was raised by a black family and grew up in black London where his stepfather was secretary of the "African League" and editor of The African Voice.

While this book is mainly about the English experience, its lessons are important for Australia and all other Anglomorph countries with flourishing multiculturalism and race-relations industries.

It is difficult for libertarians to say that anything should be compulsory reading, but The Story of Black History should surely be obligatory for anyone who wants to make a constructive contribution to, or say anything informed about, race relations today.  It is particularly recommended to certain of the buffoons in clerical collars who might like their words on race relations to have some constructive content or at least some relationship to the facts.

It cuts a devastating swathe through cant and politically-correct lies, though it is alarming and depressing in its revelations of just how deep institutionalised lying has now gone, and of the extent to which black people are being pressured to live in a mythology of falsehoods.  Though the implications are chilling, and one may -- and should -- feel outrage at the perversions of truth documented here, there is a kind of appalling fascination in the intellectual and historical rot that Kerridge turns over and exposes.

One of the major points which The Story of Black History makes is that real black history is not a monolithic thing and, despite the patronising assumptions of race relations and black history industries to the contrary, black people in Britain are not anything like a single, homogeneous mass.  The heritages of African and Caribbean migrants are quite different.  So are the cultures of, for example, Jamaica and Barbados.  Nor is the experience of blacks in Britain and America the same, though British blacks are now under the overwhelming cultural pressure of Hollywood mythology.  Kerridge recalls growing up in black London:

The Trinidadians soon allied themselves with Creoles from Sierra Leone, West Africa ... the few Jamaicans we met seemed very odd fish, with their baffling allegiance to God, Queen and Commonwealth ...

Kerridge asks why, if it was true that blacks were brought to Britain to do the jobs that whites didn't want, as "black history" claims, were working-class whites not overjoyed to see them, and did not greet them with cries of:  "Here, take my job!"

He continues:

As I remember it, from my schooldays in the "African League" every boatload of West Indians that arrived in Britain was met by eager con-men from West Africa or Trinidad out to fleece and bamboozle the newcomers ... My friend Virginia Farmer ... spent her first night in London shivering on a station bench as she "waited for the man to come and tell me where to live and get me a job".

Apart from the complexities of West Indian and black American culture, Africa is not -- how odd that one should be need to be told this! -- one country with one language or set of customs.  Kerridge points out, in regard to the mythical "Africa" which exists as a kind of country of the mind:

Until recently, the "African language" proclaimed by "African Americans" was Swahili, an Arab-pidgin used originally by slave traders operating from Zanzibar.  The language (never learned, but often quoted) accorded well with the general "pro-Islam" slant of the New Africans.  Now, after thirty years of glorifying Arabs and Islam, the neo-Africans have at last become dimly aware of the vast Arab involvement in the African slave trade.  Yoruba is replacing Swahili as the "African language" ...

Hollywood and American television add another layer of fantasy and distortion.

Kerridge is a brilliantly economical writer, and one of the feats of this small book is to indicate just how complicated real black history actually is.  Sophisticated neo-Africans, he points out, disown as "low" the genuine African traits which are still to be found in some black American communities.  How ashamed they would be of the black American pastor who greeted him in Louisiana with joy as

A man from England, home of our mother-church, the great Church of England!

Whites who commiserate with blacks over the legacy of slavery may provoke nothing but embarrassment.

The products of the "black history" industry do not seem helpful preparation for life.  Rather, it seems an engine for inculcating paranoid fantasy.  The result of false mythologising is layers of confusion that can shade into outright madness.  There is, for example, the weird history/ cult of Nubianism.  This seems to have little to do with the real black Kushite kingdom which had some important interaction with Pharoanic Egypt, including supplying a Pharoanic Dynasty.  It claims rather that

Nubians are super-beings made in Africa in ancient times by immortals from space adept in arts of genetic engineering, wrongly called God.

There is something terribly wrong when this nonsense seems to be practically beyond criticism and has actually attained a kind of academic status.

I can attest to his from personal experience:  while I was in Britain recently, a television programme was screened in which a "black history" academic solemnly informed us that Cleopatra was black.  Not only is there not a shred of evidence for this (Cleopatra was a Ptolemy, of a Greek dynasty installed following Alexander the contemporary writer paid tribute to her "white breasts" -- and she can hardly have been two-tone.

Kerridge points out that:

Knowing no history, the white English cannot counter-attack the diatribes of Nubian historians, since for all they know the Nubians are telling the truth.

Much of what he writes has devastating implications about the teaching of all history today.

Nation of Islam literature printed in America and distributed in Britain admonishes against eating foods associated with American slave-mythology, such as "deer, possums, coons, turtles or hominy grits", which few British blacks would be inclined to eat anyway.  One bizarre result is that many black (like some white) British schoolchildren now quite literally do not know what country they are living in.  When taught by Nubianism and Nation of Islam that "the white man is the devil", the effect on some blacks:

instead of making them ferocious [is to make them] feel timid and nervous in the presence of white people.

This stuff is, in short, a form of abuse and damage to the people who are subjected to it.

Kerridge writes with wit and grace as well as knowledge, making this book in its way delightful as well as horrifying.  By writing and publishing The Story of Black History, he and Claridge Press have performed a brave public service, and not only blacks should be grateful.

Perils of public ownership

Address to the Energy Market Regulation Conference
Melbourne, 1 December 1999

PRIVATISATION

With the completion of the Victorian process, the hiatus in privatisation has been filled with events in other States.  The blowtorch is on NSW and Queensland with the Financial Review being unkind enough to have assembled a table of losses caused by unwise decisions of bureaucrats and, in Queensland's case, subsidies.  The losses run to $1.6 billion, three quarters of which are due to poor contracting by the state authorities.

The other action is in South Australia, where, perhaps partly because of losses by private and public sector businesses alike, the field for ETSA is thinning out faster than a Grand Prix race on a wet afternoon.

But it is the well-publicised losses, especially the Pacific Power/Powercor debacle, that has brought Treasurer Egan gingerly to once again unfurl his banner and re-enter the NSW privatisation debate.

PUBLIC OWNERSHIP AND REGULATORY NEUTRALITY

The Electricity Code, together with the Hilmer competition reforms, was largely written in an era when we kidded ourselves that the ownership structure -- private or public -- was irrelevant.  Corporatisation was considered to offer all the advantages of private ownership while retaining the family silver.  The adoption of a corporatisation model implied the need for clear commercial objectives, such as the requirement for acceptable rates of return, effective performance monitoring and competitive neutrality in input and product markets.

Part and parcel with this, at the heart of the competition policy reforms has been the requirement for a jurisdictional split between the government as regulator and the government as market operator.

While naked intervention to support a state business against private sector competition is not apparent, the outcome of the corporatisation approach has been mixed.  The corporatised entities have certainly showed improved commercial orientation and have downsized and aligned their outputs better to the needs of the customer.

Market prices at some two thirds the new generation price levels have been one frustrating (to the generators) source of stability in the main NSW/Vic market.

The low prices are illustrated in the following chart.

The basic trends in these prices reflects the reality of an over-supplied market.  The Victorian generators claim the state owned nature of the NSW generators causes them to bid on a market share rather than profit maximising fashion.  There may be something in this but the overwhelming cause of the low prices is excess capacity.  Whether that excess capacity would be more readily placed in cold storage by a private sector operator is a difficult question to answer.

The Victorian private sector generators have maintained that their publicly owned competitors in NSW are behaving uncommercially as a result of their ownership structure.  They have also maintained that the NSW Government is recouped from the vesting contracts and the retail and distribution sector, and from the 0.55c/kwh levy on contestable customers.  Even though the ACCC has now forced some reduction in NSW vesting prices, the reduction was rather less than expected and takes place with a delay that is a handy bonus to two year's profits.

Overall payments of the NSW electricity industry to the Government have been maintained.

Distributors in Victoria, NSW and South Australia have produced solid profit performances on the basis of their regulated prices.  Victorian generators have found themselves losing money as the price war has impacted on their heavy levels of debt.  The NSW generators have been cushioned by being somewhat undercapitalised but nonetheless have found themselves in distress is evident from the Auditor's 1998 report.

The NSW Auditor in last year's report noted that the generators had shown a steady declining return on average equity from 15% to 10% to 3% in the three years to July 1998.  In 1998, Macquarie and Delta had gross profits of around $55 million and Pacific Power about $44 million.

The 1999 results are not yet fully published -- only those of Delta were available at the time of writing.  Delta's results, are quite outstanding.  The business has increased its profits by almost 10%.  This stands in contrast to its expectations of a profit decline from $55 million to less than $20 million.  Macquarie also appears to have bettered last year's profits.  Nonetheless, the NSW generators remain in trouble -- the settlement against Pacific Power is equivalent to $200-$300 million on most estimates, which would account for 5-6 years of profits!

In one important sense, the NSW Government has had some success in shielding itself from the adverse effects of the price war on its own revenues.  But it has done so by grabbing back from the NSW consumer some of the benefits of that price war.  And it remains the case that the dividends it receives from its investment are far less than those it would obtain from retiring debt.  And, as the Pacific Power/Powecor result shows, existing dividend stream is far from secure.

IMPLICATIONS OF GOVERNMENT OWNERSHIP

Although corporatisation has proven to be an improvement on the structures presceding it, some of the deficiencies of the model are illustrated by the NSW performance.  The deficiencies are:

• the temptation of the government to use the boards to reward faithful retainers.  The worst example of this over the years has been the ABC.  But in the electricity industry we saw some of the outcomes of this in NSW.  The initial board of energyAustralia received a management endorsed consultancy study reportedly recommended a cut its workforce to 1,800 from 3,800 (which is already a reduction from 4,500).  The response of the board of energyAustralia in rejecting the report and dismissing the CEO does not appear consistent with the hard-nosed commercial framework within which businesses should operate.  Eventually, the NSW Treasurer replaced the energyAustralia board for this and other shortcomings
• The conflicts of interest the minister/shareholder has with the different competitive responses of the companies under his ultimate control and his duty to ensure the best possible return for his shareholders.  Rob Lucas, the SA Treasurer relates the difficulties he faced as a shareholder to be told the plans of one of his generating businesses and subsequently to learn of similar plans by another and other action to mitigate the same problem by ETSA.  Aside from the difficulty of confusing oneself with who had what plans and inadvertently revealing the commercial secrets of a competitor, the shareholder is in a dilemma:  if he tries to prevent expenditure that would be unwise in view of the competitive environment he destroys the vertical and horizontal disaggregation on which the efficiency promoting competitive tensions are based.
• The minister as shareholder will often have a temptation to exercise influence on the business to promote a particular political line.  I recall myself as a senior official in Victoria fronting one of the then corporatised businesses to persuade the CEO to allocate funds to burying some power lines.  As an emissary of a shareholder minister, my remonstrations would clearly carry much more weight than those of a normal lobbyist.  This is even more likely where, as in Queensland and, at least arguably in Western Australia, the Minister/shareholder is also the regulator.
• The attitude to risk will tend to schizophrenia.  On the one hand the lack of a genuine shareholder and credit watchers may induce some adventurism on the part of the firms.
• There are criticisms that the NSW generators are less cautious about insuring against major risk events than private Victorian generators.  Thus, if a VoLL of $25,000 were to occur, the loss of Macquarie assuming its 4640MW is 75% contracted at $30 is $521 million.
• Great Southern Energy is reputed to have paid nearly twice as much for Wagga gas offered by either AGL or other bidders.
• And it appears the government owned retailers and generators in NSW and Queensland have been unfortunate in their contracting.

On the other hand, Treasury owned firms are likely to have considerable oversight by Treasury officials of their strategic plans.  Almost by definition this means excessive caution since the rewards for risk taking are not present.

BENEFITS OF PRIVATE OWNERSHIP

GENERAL ISSUES

All the evidence is that the provision of goods and services is more efficiently undertaken by privately owned businesses.

There are many reasons why this should be so.  Not the least of these is the intrinsically greater flexibility of private sector bodies, motivated by the goal of maximising shareholder wealth, to adapt their products to shifting consumer needs and to pare unnecessary costs.

In competitive markets, commercial rivalry will force lower costs to be passed on in lower prices.  Private firms that forego opportunities to reduce costs puts at risk their viability.

By contrast, Government owned businesses are able to survive without such a heavy focus on these costs because they do not face the threat of takeover by others able to spot and implement the opportunities for profit by making savings.

In addition, private ownership markedly reduces the risk of government interference in the terms and conditions under which goods and services are provided.  This better allows the operation of the competitive market conditions that all states and territories have agreed to under CoAG.

Hence, while in principle there is no reason why private rather than public ownership should offer better outcomes to the consumer, the former is spurred more forcefully by profit considerations that require a very close customer focus.  Private businesses flourish when they can establish and hold customer loyalty and avoid poor reputations.  Indeed, the reform process in the Australian electricity industry was stimulated by observations of increased efficiency and lower costs observed in the mainly privately owned US industry and by the gains that were rapidly being seen in the newly privatised UK industry.

Measures that result in excessive costs being carried will fall on the customer.

The initial means of eliminating these excessive costs have been to transform the previous engineering based dispatch to one which embraces the total operations in a market and to require lower prices and efficiency gains by price regulation.

SPECIFIC IMPROVEMENTS ATTRIBUTABLE TO PRIVATE OWNERSHIP

In Victoria, prior to privatisation, resolute government action from 1990 resulted in considerable savings in costs and improvements in efficiency.  Yet, in the period post privatisation of most of the businesses, further substantial improvements were brought about as a result of the focus on increasing shareholder value.  As illustrated below, this cost reduction process had not been at the expense of customer service.

Distribution Service

In the case of distribution, outage time is a useful measure and the outcome has been mixed, depending on whether minutes off supply or number of outage occurrences are counted.  On the ESAA data, using minutes off supply, outage time in Victoria has shown the most marked improvement and stands well below that of the other states.

Generation Service

Privatisation generally brings about a more coordinated meeting of demand at affordable costs.  Generally speaking, the Australian ESI -- public and private -- has shown a marked improvement in recent years.

The normal measure of service in generation:  availability to run, saw a particularly strong improvement in the corporatised Victorian system which has been maintained in the subsequently privatised system

Generation Productivity

Labour productivity has generally improved across all states but the most marked improvements have been in Victoria (Tasmania's improvement on the data is partly due to the completion of the building program).  Labour productivity has almost trebled in Victoria, with most of the big gains made prior to privatisation -- most in fact made during that ruthless labour-shedding administration of Joan Kirner!

Distribution Productivity

The really spectacular gains in distribution business productivity have been made under the privatised Victorian system.  To some degree these figures are due to outsourcing, which has been more radical in Victoria but there are also businesses that have not markedly reduced their workforce, TUA being one, because they have diversified into synergistic areas (in TUA's case transmission construction).

Even the Kennett Government baulked at tackling the excess labour hoarding in the distribution sector and it was left to the new owners to achieve the rationalisation that the chart demonstrates.  But since corporatisation, the NSW electricity businesses have also moved rapidly to reduce their staffing levels.  Each of the six retail businesses has reduced its workforce by 10-25 per cent.  Even so, it is the privatised Victorian system that has led the pack.  Only as recently as 1994, Victorian manning levels were comparable to those of South and Western Australia but now are 20-30% lower.

As in generation, the rationalisation of labour was accompanied by an improvement in the normal measures of meeting consumer requirements.  And from the publicly available information, it has also been accompanied by increased profits.

CONCLUDING COMMENTS

All the evidence is that privatisation and competitive markets together bring about major gains for consumers, shareholders and, where assets are sold by governments, the taxpayer.

Private ownership is preferable both because of its more concerted focus on profiting from consumer satisfaction, and because it removes the industry away from political direction.  These conceptual advantages have been amply proven by the Victorian experience.