Economic Imperatives, Political Constraints

Microeconomic Reform in Australia
Peter Forsyth (ed.),
Allen & Unwin

GIVEN that microeconomic reform is the term on the lips of every politician, economist and self-appointed media commentator, it is odd that Microeconomic Reform in Australia is the first book to provide a thorough and rigorous examination of the area.  Its 15 essays cover the gamut from general areas such as tax reform and the labour market through to specific industries such as telecommunications and agriculture.

All of the contributors are senior academics but through careful editing and a comprehensive exchange of papers, the book avoids the ivory-tower trap.  It is, in fact, what it sets out to be:  authoritative, informative and scrupulously non-partisan.

The contributors are well aware of the realities of the political world.  The opening essay, by the editor, details the problems generated by the prospect of change.  Australia's political system, he notes, almost seems designed to frustrate a reformist government:  a bicameral parliament with the Senate usually controlled by a minor party, a federal system, and an electorate which is highly sensitive (perhaps over-sensitive) to the costs of change.

Yet the economy desperately needs change if Australia is to stay in the race.  How can a government reconcile economic imperatives with political constraints?  Forsyth points to a number of ways:  it can simply buy off the "losers" (with redundancy payments, for example) or look only at reforms which have little organised opposition (such as rail freight co-ordination).  But there are few easy options.  It is in the nature of microeconomic reform that the benefits are diffuse while the costs (or imagined costs) are concentrated.

Forsyth suggests that in many cases a two-step process may be the most feasible method:  an initial burst of reform to address immediate problems in an organisation or sector, with losers being compensated, followed later by structural reforms which are made easier because the process of change is seen to have already begun.  He draws on the British experience of privatisation:  an efficiency drive, followed by deregulation and privatisation.  He makes clear, however, that once-off changes are not in themselves sufficient:  the point of reform is to turn a static situation into a dynamic one, to turn change into a process of adaption and competition.

REFORM SHOULD BE ONGOING

Rolf Gerritson is less sanguine.  He believes that the successes to date arose from extraordinary circumstances, with financial deregulation in particular having widespread support.

Another example, the deregulation of agriculture, was successful precisely for the opposite reason:  the Hawke Government concluded that it could not win the farmers' political support under any circumstances, and that therefore it may as well go ahead on "public interest" grounds.

Gerritson argues that in recent years the deregulatory thrust of the HawkeIKeating Governments has deteriorated from rationalist to incrementalist.  A further move towards large-scale government intervention is possible, even probable, because "the Government defines microeconomic reform as a number of specific outcomes instead of a continuo~lps rocess.  Consequently, it focuses vn policy agenda management rather than permanent policy processes".

This is a theme which echoes through the book.  In his essay on tax reform, Matthew Benge is more explicit in the view that the Government, while having made progress, has by no measure gone far enough.  He cites the introduction of the capital gains tax and full imputation as important steps in removing the distortions of the system, particularly for investment.  The key problem now is the ramshackle structure of wholesale taxes, especially the "cascade" effect that it has on business.  He cites research showing that about half of the current wholesale sales tax base is made up of taxes on business inputs;  the impact on the wider economy is obvious.

He explicitly endorses a New Zealand-style Goods and Services Tax (GST), which would have the major advantage of relieving business inputs from taxation and removing the anomalies of the wholesale tax system (although the essay was written before Dr Hewson announced that food would be exempted from the GST).  If a GST allows for a major cut in income tax rates, so much the better.

He accepts that tax reform is a political minefield but concludes that "it seems hard to reach the conclusion that the Government's reforms have been so successful in rebuilding the income tax base that further reform is unnecessary".

Clearly, the most successful example of reform has been the deregulation of the financial sector, examined by Robert Ackland and Ian Harper.  For the most part, deregulation had the effects predicted by the Campbell Inquiry, although the failure of foreign banks to perform well has been a surprise.  But greater efficiency was not really the reason for deregulation, say Ackland and Harper:  it was done because the regulatory structure was impeding the conduct of monetary policy.  They recognise that there are still problems, with the market dominated by a small number of big players.  The answer to such a situation, however, lies in using existing anti-monopoly powers rather than re-regulating.

Jeff Borland, Bruce Chapman and Malcolm Rimmer look closely at the labour market, noting at the outset that it is an area where desirable microeconomic reform can have adverse macroeconomic consequences as -- by definition -- deregulation means that the Government no longer controls wages.  While there is a broad consensus among the players of the need for greater flexibility in the labour market, there is conflict over whether the focus of bargaining should be at the enterprise level or through large employee associations.  This is an area where there is no compromise solution and where the "losers" cannot be easily compensated.  The authors note that there are more questions than answers in the debate, and the long-run outcome of reform in either direction is unclear.

OPENING UP COMPETITION

In a careful analysis of Government Business Enterprises (GBEs), Simon Domberger notes that they account for 10 per cent of the economy's total wage bill and 19 per cent of its capital stock.  Reform, however, has been more a matter of talk than action, and most GBEs remain insulated from competition.  Domberger argues that there is little to gain in transferring a statutory monopoly from the public to the private sector;  the key is to corporatise or privatise in such a way that competition is created, such as by breaking up a large enterprise.  He believes that Canberra's enthusiasm for public sector reform has waned in the past few years, mainly because of the danger it might represent to the control of wages under the Accord.

Forsyth looks in detail at transport, an area in which reform could bring major advantages.  While there has been some progress, such as greater efficiency in the rail system, he argues that "there is no evidence of a comprehensive attack on the deficiencies of the sector ... reforms so far are distinctly ad hoc".  The reform of the waterfront, with the Government offering generous redundancy packages to cut manning levels, has been useful but without the introduction of greater competition the gains might soon evaporate.  In most cases of transport reform, says Forsyth, the Government has been a passive player, responding mainly to external pressures (although domestic airline regulation is an important exception).

One of the most interesting essays is Rodney Maddock's piece on telecommunications, tellingly titled "The long march from duopoly to duopoly".  Telecommunications reform has been the slowest process of all, beginning with the Davidson Report commissioned by the Fraser Government.  Nine years later, its deregulatory thrust began to be accepted, although political considerations led to a compromise which seemed to combine the worst of all the options.  "A regulated duopoly," states Maddock, "reduces many of the benefits that might flow from competition, while allowing the Government to impose a specific tax (licence fee) on one company in the industry.  It is quite inconsistent with what we have been promised by microeconomic reform".  He points out, however, that Telecom's performance over the past decade has improved, due to the possibility of competition -- although this ma) be an argument for more change rather than less.

Bob Gregory offers a concluding essay in which he returns to a basic question:  will the demand for microeconomic reform continue?  There are, he says, two scenarios.  The first is that the demand for reform will grow as Australian living standards fall:  a sort of enforced economic Darwinism.  The opposite is equally plausible:  if change becomes associated with job losses rather than economic growth (as has apparently happened in New Zealand), then calls for protection and large-scale government intervention may ultimately prevail.  The contributors to Microeconomic Reform believe that reform must not only continue but accelerate, although they are realistic enough to know that the course Australia will take is not yet clear.