I’ve called this address a Gen X reflection in large part because for this generation – born between 1965 and 1980 – economic reform has been the dominant issue in Australian public life. First, under Bob Hawke and Paul Keating. Then, under John Howard and Peter Costello.
My other generational starting point is to suggest that views on politics and policy tend to crystallise in the early years of adult life. For old Gen Xers like me, those years were the early to mid-1980s. By extension, the political coming of age of young Gen Xers corresponded more-or-less with the economic reforms of the early Howard years.
I turned 17 on the day Bob Hawke was elected in March 1983. I wrote a final-year high school essay on Hawke’s economic summit, was fascinated at university by the battle between “wets” and “dries” in the Liberal Party and went on to work at the Reserve Bank and for John Hewson (then Shadow Finance Minister), prior to joining The Sydney Institute as an economist towards the end of the decade.
To Gerard and Anne, it’s great to have the opportunity to address the Institute a second time, 20 odd years since I last worked in “the dungeon” downstairs.
For a long time, I resisted the conclusion that Australia had lost its economic reform mojo. That the legacy of individuals, ideas and institutions which propelled structural or microeconomic reform – the thing Paul Keating famously said the resident galah in every pet shop was talking about in 1989 – had fallen into serious disrepair.
Now I think there’s too much evidence to ignore. After roughly two decades of successful reform, Australia has lost its touch and, in some areas, gone backwards.
I don’t pretend this is a remarkable insight. Others have made the same point.
Tonight I want to discuss the underpinnings of successful economic reform and, by extension, suggest what has afflicted pursuit of a coherent, productivity-raising reform agenda more recently.
My reform model boils down to “3 Ps” – paradigm, politics and process. Get them right and the rest will largely take care of itself. Get one or more of them wrong and things start to sag.
By understanding what we once got right, we can hopefully identify the preconditions for righting the reform ship.
In this context, I want to examine the recent contribution to the economic reform debate by Professor Ross Garnaut, a giant of the reform era.(i)
If I were to summarise the Garnaut thesis, it’s that the biggest obstacle to public interest economic reform in Australia today is the power of private “vested interests” (including the mining industry).
Such interests, Professor Garnaut argues, have basically torn up the old rule book whereby pursuit of private interests in the public square was muted or constrained.
The implication is that policy makers should be more insulated (if not isolated) from business and community groups, and take their reformist cue from a chosen few. I’ll argue that the Garnaut thesis is both unconvincing as history and flawed as political-economy, if the goal is durable economic reform in the national interest.
ECONOMIC REFORM OVER THE LAST 30 YEARS – A BRIEF OVERVIEW
A potted history of economic reform over the last three decades goes something like this. Australia’s march toward a more market-oriented economy had some fits and starts in the 1960s and 1970s, but momentum really developed under the Hawke Government elected in 1983.
By the early 1980s, poor productivity, a deep recession and falling terms of trade had signified the exhaustion of the old economic regime. This regime was highly regulated, anticompetitive and redistributive. Its founding articles of faith were high protection, the White Australia Policy and centralised industrial relations – Gerard Henderson’s “Federation trifecta”, later expanded by Paul Kelly into the “Australian Settlement”.(ii)
Under Hawke and Keating, Australia started down the road of pro-competitive, structural reform of capital, product and labour markets beginning with the floating of the dollar in December 1983. This was followed by significant liberalisation of the finance sector, including the removal of exchange and interest rate controls.(iii)
Trade reforms were introduced initially on an ad hoc industry-by-industry basis, but in 1988 the Labor Government introduced the first in a series of phased reductions in tariffs across most industry sectors. Critical support for unilateral trade reform came from parts of business which were large net losers from the “protection all round” racket, in particular the mining industry and broad acre farming. With the 1991 tariff cuts, protection was heading down to levels last seen at the beginning of the 20th century.
Increased external competition led to inevitable pressures for reductions in input costs, notably in labour markets and high-cost public utility services like power, transport and communications. Flexibility in wage determination was introduced initially under the Keating Government and extended by the Howard Government after 1996.
The early to mid-1990s witnessed an increasingly broad-ranging microeconomic reform agenda best illustrated by national competition policy whereby all Australian governments undertook a coordinated program of reforms to infrastructure services, government businesses and anti-competitive regulation. State Liberal Governments were important co-authors of these reforms.
While my focus tonight is on microeconomic or structural reform, I should stress that macroeconomic reforms (improved monetary and fiscal policy frameworks) were key elements of Australia’s new economic model. Inflation targeting was begun under Labor and formalised by Howard and Costello.
The Howard Government’s fiscal reforms (debt reduction and the Charter of Budget Honesty) further moved Australia towards “best practice” macroeconomic policy frameworks, with the milestone also of efficiency-raising tax reform.
Together, these reforms laid the basis for Australia’s economic renaissance following decades of relative economic decline.
Underpinning this economic revival was a surge in productivity growth in the 1990s. Productivity growth averaged almost 2 per cent a year, more than double the previous rate. As a result, per capita incomes rose at a rate well above historical averages.
Australia’s economic performance also improved relative to other developed countries, reversing a long-established pattern. Having slipped from 5th in the world in terms of GDP per person in 1950 to 15th in 1988, Australia saw its international per capita ranking recover to around 8th by the early 2000s.
Hence, the dividends of reform were reaped via improved productivity and living standards. By the start of the Millennium, Australia had taken on the mantle of a “miracle economy” – managing to avoid recession through the Asian Financial Crisis of 1997-98, the United States “tech-wreck” and the international recession of 2001.
Since then, as we know, our living standards have continued to grow; indeed the noughties have seen a further period of uninterrupted economic growth. But underpinning higher prosperity has been higher commodity prices, not higher productivity. Indeed, the decline in our productivity and the rise in our terms of trade between 2003 and 2011 were almost equally unprecedented. (iv)
Australia’s mediocre productivity performance in the noughties has corresponded with a marked slowing in the pace of structural reform.
That’s not to deny that at least some of the forces contributing to lower productivity may be temporary.(v)
Nor do I pretend that the reasons for waning reform enthusiasm are anything other than complex. (vi) Indeed, there is a reasonable case that the job has become harder in some ways.
In part, this is the low-hanging-fruit theory – that by the 1980s policy distortions were so great that Australia was simply catching up with trends in other developed countries. Related to this is the truism that you can float the dollar or cut tariffs only once; then it’s done.
Similarly, one could argue that the remaining structural policy challenges are more “wicked”. Either they are institutionally more complex – cutting across the Federation with more and more “stakeholders” – or they are intrinsically more problematic.
The obvious example here is climate policy – where anything Australia does alone has miniscule impact on the environmental problem, but potentially significant negative impacts on our economy.
However, this doesn’t explain the pattern of reform backsliding over recent years. We have seen at least the partial restoration of anti-competitive regulation across a range of policy areas. Examples include:
• industry assistance policies where the Productivity Commission has been deliberately sidelined for political reasons
• more permissive anti-dumping laws, protecting less competitive firms at the expense of local user industries
• new sector-specific laws and regulations impeding competition in markets for coastal shipping, building and construction and telecommunications
• new bureaucracies created to parcel out “green” subsidies and pick low emissions technology “winners”
• new bureaucracies created to monitor and regulate private sector purchasing decisions on major projects
• new workplace laws, the defining characteristic of which is the revival of trade union privileges when trade unions represent around 13 per cent of the private sector workforce.
A number of these measures have found support across the political spectrum. The net result is a widening gap between the rhetoric and reality of structural reform in Australia.
So what explains this decline in Australia’s reformist credentials?
To help us understand this question, it makes sense to seek lessons from the earlier, successful reform era. Interweaving the reform fabric – giving it both strength and consistency – were a number of threads.
THE “3 PS” – PARADIGM, POLITICS AND PROCESS
They boil down in my mind, as I said, to the “3 Ps” – paradigm, politics and process.
By paradigm, I mean simply that successful structural reform begins with clear thinking and clear language. Australia’s reform hey-day was hard-headed in its recognition that productivity growth relied on more efficient production methods within firms and better allocation of resources across industries.
Microeconomic reform has two characteristic features – the sharpening of incentives to be more productive and the provision to firms of greater flexibility to adapt to change. Or to put it in Keating-speak: “we’ve got to clear all the bloody crap from the pipes, we’re blowing the pipes out”.(vii)
Unfortunately, today the use of the word “reform” from an economic perspective has become so elastic and debased as to be almost divorced from this historical understanding.
As Gary Banks observed in his final speech as Chairman of the Productivity Commission:
“Almost any policy proposal having an economic dimension has tended to be portrayed as “pro-productivity”, whether that is the case or not. As a consequence, the public has become confused or bemused, making it difficult to build support for policies and reforms that really would make a difference”. (viii)
Often, reform has been deemed synonymous with spending more money. At times, it has been applied to measures which run directly counter to a traditional focus on removing policy distortions and increasing structural flexibility. In short, we’ve let the crap build up in the pipes again.
If the thinking of our leaders on economic reform is muddled (or worse, deliberately misleading), is it any wonder that the pace and quality of reform have both suffered?
The second “P” is politics. Successful economic reform may well hinge on sound economics, but it is quintessentially a high political art.
There is simply no substitute for politicians “owning” the reform challenge, working out the trade-offs, understanding the detail and explaining the measures – day-in, day-out – to the wider community.
From Hawke and Keating to Howard and Costello, the pattern (albeit with backflips and blind-spots) was remarkably similar, aided by good-quality advice from the public service, a knowledgeable policy community and a broadly supportive press corps.
Somewhat cheekily, Peter Costello on the occasion of the 30th anniversary of the Industries Assistance Commission (the forerunner to the Productivity Commission) reminded the audience that it was not the economists in government or universities who made changes in government policy. It was the politicians. (ix)
The same story applies elsewhere. As Henry Ergas has observed, all the developed world’s major economic reformers – whether you are talking Roger Douglas, Paul Keating or Nigel Lawson – were first and foremost politicians.
The track record of alternative approaches to reform is decidedly more mixed.
Arguably, Australia’s recent experiences on carbon pricing and taxation reform have run into problems not because politicians intruded too much; rather, the political calculation to elevate non-politicians as high-profile figure-heads proved questionable as a strategy for successful reform.
Or as someone steeped in the reform era put it to me recently, the model of “economist as rock-star” has failed.
The third key ingredient of successful reform is good process.
Good process encompasses establishing the need for reform, communicating the problem, understanding possible remedies and building political support for change. The proposed solution then needs to be analysed and tested through extensive and meaningful consultation, not least with those most directly affected.
This reflects much more than governance imperatives in a democratic system. It reflects the recognition that knowledge is dispersed; that technocrats don’t have all the answers; that there are lessons to be learned from those outside government.
Yes, this takes time. But far from encumbering reform momentum, effective consultation has been shown to improve the prospects for durable reform.
Contrasting experiences can be seen most starkly in the respective fates of Howard era policies on tax reform and Work Choices. In the area I have some involvement with – resources taxation – the very different processes which surrounded the Hawke Government’s Petroleum Resource Rent Tax (PRRT) and the Resource Super Profits Tax (RSPT) capture the point well.(x)
From an institutional perspective, the Productivity Commission and its predecessors have provided the benchmark for good process on economic reform. Consultation is viewed by the Commission as integral to its business model; not a discretionary activity.(xi)
It doesn’t matter how many PhDs an institution has. Complex tasks should be approached with due humility. Good process, ultimately, is good economics and good politics.
For those who think I’m merely echoing the views of those who pay my salary, I would point to the comments of Ted Evans, Ken Henry’s predecessor as Secretary of the Treasury. He observed in early 2010, prior to the release of the Henry Tax Review, that:
“Consultation with stakeholders is a critical issue [as] Canberra does not have practical, hands-on experience of commercial operations and such knowledge is critical to good tax system design”.(xii)
Herein lies an important yet under-remarked cleavage in our reform-minded policy community.
On the one hand, there are those whose support for market-oriented reform is shaped and conditioned heavily by an understanding of the limits of human knowledge, including of so-called experts. This essentially Hayekian perspective views reform, at least in part, as an open-ended process where competing interests, ideologies and passions are weighed and assessed.
From this standpoint, consultation may be long and tedious, but it is critical to ensuring the relevance and integrity of policy advice. It is part of how policy makers learn.
The alternative view, also grounded in economics, proceeds from a rather different world-view. It embodies what has been called the “benevolent dictator school of welfare economics”. It tends to put much more faith in technocratic experts and their capacity to identify the one true path of reform.
By inclination, it takes a decidedly dim view of the involvement of commercial society in the policy process, looking where possible to insulate policy makers from those with “practical, hands-on experience of commercial operations”.
THE GARNAUT CRITIQUE OF THE REFORM MALAISE
This dichotomy, I believe, helps us in thinking about some recent contributions to the debate about economic reform in Australia, its past achievements and contemporary ailments.
One high-profile contributor has been Professor Ross Garnaut, formerly Bob Hawke’s economic adviser and more recently author of the Garnaut Climate Change Review commissioned by Kevin Rudd and expert adviser to the Multi-Party Climate Change Committee established by Julia Gillard.
As I said earlier, Professor Garnaut is a giant of the reform era. His understanding of Australia’s economic challenges and his policy advice contributed significantly to the pursuit of internationally-oriented reform by the Hawke Government (notably, the floating of the dollar and tariff cuts).
I should emphasise that I’m not contesting tonight the thrust of Professor Garnaut’s economic analysis as laid out in his 28 May Lecture, “Ending the Great Australian Complacency of the Early Twenty-first Century”. Nor do I contest his theme that the “long boom” has engendered policy complacency.
On a personal level too, I should say that Ross was one of my advisers at the Australian National University. He was always thoughtful and courteous in that role.
Where I part company with Ross is around his reading of recent events and the implications he draws –both positive and normative – regarding the Australian reform story.
To be sure, he makes cogent points about the importance of political leadership. (xiii) But the nub of the Garnaut thesis is that policy change in the public interest has become more difficult over time “as interest groups have become increasingly active and sophisticated in bringing financial weight to account in influencing policy decisions”.
Among examples cited in this context are the union campaign against the Howard Government’s industrial relations reforms, business campaigns against climate change policy reform from 2008 to 2011, the mining tax campaign of 2010 and the gambling industry’s campaign on poker machines reform in 2012.
Such groups, it is argued, “have come to feel less inhibition about investment in politics in pursuit of private interests”. Garnaut attributes this to a weakening of ideological and social constraints arising from pre-capitalist moral impulses which, he argues, had previously checked the pursuit of self-interest in the public square. Here he assembles a supporting cast comprising Max Weber, Fred Hirsch (author of the 1970s tract, The Social Limits to Growth) and contemporary economists Joe Stiglitz, Paul Krugman and Jeffrey Sachs.
As Albert Hirschman has shown, Professor Garnaut’s ideological formation is simply a modern take on an old idea that the market and capitalism harbour self-destructive proclivities, one with antecedents in both conservative and Marxist thought. It runs counter to the more benign view drawn from the Scottish Enlightenment whereby the likes of David Hume and Adam Smith saw the spread of commerce and industry as a powerful moralising agent and source of moderation, including in relations between states. (xiv)
In an Australian context, lamenting the lack of examples of where private interests have been asked to accept private losses “in the interests of improved national economic performance” over the past dozen years, Professor Garnaut suggests that:
“When asked, the response has been ferocious partisan reaction rather than contributions to reasoned discussion of the public interest in change and in the status quo”.(xv)
He appears to view the miner’s campaign of 2010 as Exhibit A of “uninhibited private interest pressure on the policy process”. To my mind, the Garnaut thesis has some serious flaws.
Firstly, I find the claim that Australian public policy has reached some type of “tipping point” based on interest group politics unpersuasive as history.
Policy making in most democratic societies at most times is conducted within a swirling mix of interests, ideology and passions. The very nature of democratic politics is the peaceful reconciliation of competing interests.
One can think of policy battles no less willing as those of recent times where private interests have mobilised resources and the latest communication techniques in promoting an alternative view of the public interest. The campaign by private banks against the Chifley Government’s nationalisation crusade in the late 1940s is an obvious example.
My own view is that the banks were on the right side of the argument and of history.
Moreover, the whole edifice of “protection all round” in Australia would seem to have been based on industries and unions using the political process to pursue private interests. How this was restrained by Protestant social norms or other pre-capitalist moral constraints is not entirely obvious.
As to the 2010 mining tax dispute, the suggestion that the mining industry rejected with ferocious partisanship a “reasoned discussion of the public interest” is, not to put too finer point on it, nonsense on stilts.
The industry took a constructive approach to the Henry Tax Review, conceptually in its public submissions and in offering to share with the Review both detailed commercial data and modelling. The official response was a stony silence. No reasoned discussion of the public interest was ever offered.
In the event, a complex and punitive tax which couldn’t be explained to the public was sprung on the industry, despite earlier assurances that no final decisions would be made prior to detailed consultation. Nor did the tax as designed receive anything approaching consensus support from reform-minded economists, including those with specialist knowledge of resources taxation. (xvi)
Again, you don’t have to take the word of the Minerals Council of Australia on this. Others, including Martin Ferguson, have placed on the record their dismay at the failure to consult and the divisive political agenda which accompanied the Resource Super Profits Tax.(xvii)
It wasn’t the mining industry that tore up the reform rule book. It was the Government.
Beyond interpretations of history, Professor Garnaut’s normative model of economic reform also appears problematic. This includes the elevation over commercial society of what he calls the “independent centre of the national polity”. This construct begs more questions than it answers.
• Who decides on membership of the “independent centre of the national polity”?
• How should we think about the motives and interests of political actors and their advisers?
• Is the “independent centre” prone to any vices which may counterbalance or overwhelm its self-proclaimed virtues?
• How does this tidy categorisation square with the benefits – both democratic and in policy terms – from competition in a free society over what constitutes the common good?
In closing, I return to the “3 Ps” as offering a better, more humble and more durable guide to successful economic reform.
Rather than assign standing in public debate based on arbitrary categories or where people work, surely the better place to start is to assess arguments against a traditional reformist paradigm.
Is there evidence to suggest a given policy or regulation increases or decreases the capacity of our economy to produce valued goods and services? Does it help blow the pipes out, or does it clog them up?
Ultimately, the same standard should apply to everyone – miners, anti-mining Greens and academics alike.
Secondly, let’s give politics its due, if for no other reason than to do otherwise is to let the politicians off the hook.
Politics will never deliver against an absolute ideal. But then again that’s not why we value it. As Bernard Crick wrote In Defence of Politics:
“… politics represents at least some tolerance of differing truths, some recognition that government is possible, indeed best conducted, amid the open canvassing of rival interests”. (xviii)
To seek to suppress or banish interests in public life is not politics. It’s the opposite.
Still, we tend to know “high political art” when we see it – where politicians are able to act as a creative force, not mere intermediaries. And let’s not forget Keynes’ dictum that the power of interests in the policy process is vastly overstated compared with that of ideas.
No one pretends economic reform is without political risk. But the reform era provides ample evidence of how calculated risks can bring their own rewards.
For Paul Keating, it was just part of his style – “downhill, one ski, no poles!”
Albeit more cautious, John Howard has stated that while promising tax reform almost cost him office in 1998, it was also the essential ingredient of victory.
And on process, I can do no better than to loop back to Gary Banks’ last speech as Chairman of the Productivity Commission. Having set out a long and compelling productivity agenda, he observed pointedly that good process in policy formulation – with proper testing of proposed solutions (including on the “detail” and with those most affected) – is the most important thing of all on the “to do” list.
So can Australia get its reform mojo back? My Gen X conclusion is a tentative, but hopeful, one.
We’ve been here before. We know what works. We just need to try it again.
ENDNOTES
I. Ross Garnaut, “Ending the Great Australian Complacency of the Early 21st Century”, Victoria University 2013 Vice-Chancellor’s Lecture, Melbourne, 28 May 2013.
II. See Gerard Henderson, Australian Answers, Random House Australia, Sydney, 1990. Paul Kelly, The End of Certainty, Allen & Unwin, Sydney, 1992.
III. As Ian Macfarlane points out in his 2006 Boyer Lectures, the financial reform process began while John Howard was Treasurer. Changes included the removal of all interest rate ceilings on bank deposits and the introduction of the tender system for the sale of Treasury notes in 1979, and Treasury bonds in 1982. Macfarlane describes the latter as “a major reform, which has not been accorded the recognition it deserves. It was second only in importance to the float of the Australian dollar in 1983.” Ian Macfarlane, The Search for Stability, 2006 Boyer Lectures, ABC Books.
IV. This point is made in Gary Banks, “Productivity policies: the ‘to do’ list”, Economic and Social Outlook Conference, Melbourne, 1 November 2012, p. 4.
V. The lag between the surge in capital inputs into mining and higher output is a dimension of the productivity story that has been explored in a number of studies.
VI. Among contributions which look at the changed parameters relating to the media, for example, are those by Lindsay Tanner, Sideshow, Scribe Publications, Melbourne, 2012 and George Megalogenis, “Trivial Pursuit”, Quarterly Essay 40, Melbourne, Black Inc., November 2010.
VII. Kelly, 1992, p. 389.
VIII. Banks, 2012, p. 6.
IX. I owe this anecdote to Jonathon Pincus.
X. The PRRT took a couple of years to be developed and a couple more to be refined, through intensive consultations with industry, before it was finally implemented.
XI. This section draws heavily on a volume of speeches by Gary Banks, An Economy-wide View: Speeches on Structural Reform, Melbourne, Productivity Commission, 2010. See also Gary Banks, “Industry assistance in a ‘patchwork economy’”, ACCI Annual Dinner, Canberra, 23 November 2011, p. 1.
XII. Australian Financial Review, “We’re right behind you, Ken”, 9-10 January 2010, p. 20. XIII. Particular reference is made to the role of Prime Ministerial charisma (Lyons and Hawke), the preparedness of leaders to disappoint their supporters (Lyons, Menzies and Hawke) and the capacity of leaders to explain policy choices to the citizenry (Hawke, Keating and Howard).
XIV. See Albert O. Hirschman, The Passions and the Interests: Political Arguments for Capitalism before Its Triumph, Princeton University Press, Princeton, 1977, as well as his later survey article, “Rival Interpretations of Market Society: Civilizing, Destructive, or Feeble?”, Journal of Economic Literature, 20(4), December 1982, pp. 1463-1484.
XV. Garnaut, 2013, p. 15. XVI. See, for example, Professor George Fane, “Reputation on the line”, The Australian, 31 May 2010.
XVII. It is a matter of public record that not only were the mining industry and State Governments not consulted about the proposed RSPT, the then Minister for Resources and Energy, Martin Ferguson, in his words, “was not properly consulted about it at all”. The industry accepted assurances from the Federal Government that there would be an opportunity for engagement, but as Mr Ferguson has stated “it didn’t occur … [in] the mining dispute we created our own mess because of a failure to consult”. The Hon. Martin Ferguson AM MP, Transcript press conference, 22 March 2013.
XVIII. Bernard Crick, In Defence of Politics, Revised Pelican edition, Melbourne, 1964, p. 18.
Dr John Kunkel is the deputy CEO on the Minerals Council of Australia.