Structural reform Australian-style: lessons for others? *1
Even in the post-war ‘boom’ years, Australia’s productivity lagged. Between 1950 and 1973, our annual productivity growth averaged 2½ per cent, compared to 3½ per cent for OECD countries as a group (Figure 2).
Figure 2 Australia’s relative productivity performance
The reasons for our relatively poor productivity performance, given the policy environment just described, are not hard to find:
Australia’s poor productivity performance, together with the declining terms of trade, translated into what seemed an inexorable slide in our comparative living standards. Whereas Australia was still ranked 5 in the world in 1950 in terms of GDP per person, we had fallen to 9thth by 1973 and to 15th by the late-1980s. It is sobering for Australians to consider where we might be today had we kept our prior course.
Wide-ranging ‘microeconomic reform’
Instead, Australia embarked on a sustained and comprehensive program of trade liberalisation and other structural reforms. In essence, the reforms freed up markets, promoted competition and generally sought to ensure that prices did their job of signalling costs and relative returns.
Structural reform could be said to have commenced with a false start in 1973, when the government introduced a dramatic 25% across-the-board tariff cut. However, the measure turned out to be a one-off. In conjunction with other events, the cut precipitated a backlash against reform and there were only ‘piecemeal’ further reductions in tariffs for over a decade.
Following the election of a new government in 1983, and with Australia’s economic malaise becoming increasingly apparent, the reform of border protection arrangements was reinvigorated — with the conversion or elimination of import quotas as well as reductions in tariffs themselves. At first, these reforms were introduced on an ad hoc industry-by-industry basis. Then in 1988, the government introduced the first in a series of phased reductions in tariffs across most industry sectors such that, by 1996, virtually all tariffs (other than for autos and TCF, which were on their own liberalisation paths) had fallen to 5 per cent or less.
The early 1980s had also seen the floating of the Australian dollar (facilitating subsequent adjustment to tariff liberalisation) followed by significant liberalisation of the finance sector, including the removal of exchange and interest rate controls.
Increased international competition in Australia’s traded goods sector led to pressures for reductions in input costs, notably in labour markets and (non-traded) public utility services. Previously, local firms had simply been able to pass excessive input costs on to consumers through accommodating ‘made-to-measure’ increases in tariffs. But now, faced with a government intent on reducing protection, local managers and their workforces needed to improve their own performance and get value from their suppliers.
In turn, pressure mounted for the reform of government policies and institutions that were impeding these changes, and an increasingly broad-ranging program of domestic microeconomic reform was hatched. The reforms ultimately embraced all product (goods and services) markets, factor markets (including the labour market), and the public and private sectors (Box 1).
Over the same period, macroeconomic reforms brought low inflation and greater stability, and tax reforms reduced distortions and improved business incentives. (These reforms played an important role in their own right, as well as complementing structural reforms, but are not the focus of this paper.)
In 1995, strands of the structural reform process were consolidated and extended in a coordinated National Competition Policy (NCP) agreed to by all governments in Australia’s federal system. Among other things, the NCP program entailed: an extension of anti-competitive conduct laws to cover previously exempt government and unincorporated enterprises; the review of some 1800 items of anti-competitive regulation; reforms to public monopolies, including ‘competitive neutrality’ mechanisms, certain structural reform requirements and prices oversight mechanisms where public monopolies were retained; and an access regime for network infrastructure (PC, 2005a).
If any single indicator could convey the extent of structural reform in Australia, it would be that essentially Australian measure of relative net protection levels, the effective rate of assistance (ERA). The ERA for manufacturing has declined from 25 to 5 per cent over the past two decades, while agricultural assistance has also fallen (Figure 3).
Figure 3 Falling effective protection
Equally, it would be hard to find more striking illustrations of consequent structural and behavioural change than the coincident rise in the trade intensity of Australia’s economy, from 27 per cent in the mid 1980s to 44 per cent in 2003, and the sharp increase in business R&D spending as a share of GDP (Figure 4).
Figure 4 Increased trade and R&D intensity
A more productive economy
As a consequence, important changes have been wrought in each of the areas previously identified as contributing to our poor productivity performance. For example, there has been:
These and other forces are reflected in the productivity performance of a range of industries. For example, multi-factor productivity (MFP) growth in electricity, gas and water jumped by 60 per cent in the 1980s; and the MFP growth rate in transport/storage and communications doubled in the 1990s. Empirical analysis by the Commission found that the price reductions and productivity gains in the infrastructure sector alone yielded a 2½ per cent gain in GDP. The reform program also contributed, indirectly, to sharp productivity improvements in wholesale trade and the finance and insurance industries, where business reorganisation involving the innovative use of ICT was driven by the heightened competitive pressures on customers as well as within the industries themselves, facilitated by a more accommodating industrial relations framework (Johnston et. al. 2000; Parham 2004).
At the aggregate level, Australia experienced a surge in MFP growth during the 1990s, averaging almost 2 per cent, more than double its previous rate (Figure 5). Australia’s MFP performance was also among the best in the OECD and its labour productivity growth exceeded even that of the USA. (OECD 2004b).
Figure 5 Australia’s productivity turnaround
a Percentage points change to average annual MFP growth 1980-1990 to 1990-2000
Accompanied by rising labour utilisation, this translated into annual growth in per capita incomes of around 2½ per cent in that decade, well above the previous average and that for the OECD as a whole (1.7 per cent). As a consequence, Australia has seen its position on the international per capita GDP scale rise again from 15th to 8th over the past decade or so (Figure 6).
Figure 6 Fall and rise of Australia’s economic ranking
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