Structural reform Australian-style: lessons for others? *1

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Structural reform Australian-style:
lessons for others? *1

Gary Banks

Chairman, Productivity Commission

The Government’s commitment to reform, its willingness to commission expert advice and to heed it, to try new solutions, and to patiently build constituencies that support further reforms, is … something that other countries could learn from. OECD, Economic Survey of Australia, 2004.


Australia has undergone sweeping structural reforms over the past two decades that have helped transform its economic performance.

To most economists, especially in international economic agencies, the reforms themselves would no doubt appear unexceptionable. In the broad, they typically apply conventional prescriptions for improving growth by removing policy-related distortions and impediments to a well-functioning market economy. However, given the magnitude of the reform requirements in Australia, and the entrenched political obstacles to reform, the manner in which the reforms were introduced and sustained may be of wider interest and relevance.

My purpose in this paper therefore is not to focus on the why of reform, which I shall take to be understood in this company. Rather, I will briefly outline what reforms were undertaken in Australia and provide some indication of their outcomes, before focussing on aspects of how we went about it.

I will look in particular at some institutional innovations that appear distinctive to Australia and which have attracted the attention of a number of other countries — both developed and developing — as well as within international organisations concerned with promoting economic development.

Paradise lost – and (partly) regained

Economic reformers in Australia often observe that our country had the highest per capita income in the world at the dawn of the twentieth century. This was partly luck: the result of having a small population blessed with abundant natural resources fetching very high world prices. But it was also attributable to a set of laws and institutions inherited from Britain that favoured productive endeavour (and an influx of adventurous spirits to benefit from them).

Like some others in that privileged position (Argentina, New Zealand), Australia’s position on the global income ladder steadily declined in succeeding decades, beyond what might be justified by the fortuitous nature of its starting point.

A head start forfeited

In retrospect, the causes of our relative decline seem fairly clear. Just as Australians have been blessed with special resource advantages, we managed to devise some special institutions that, whatever their merits in the short-term, ended up significantly handicapping our economic performance.

As the respected Australian journalist Paul Kelly has chronicled, Australia’s structural policies following Federation in 1901 were shaped by a social compact that came to be known as the ‘Australian settlement’ (Kelly, 1992).

  • Trade barriers were erected to foster domestic manufacturing activity and employ the (white) immigrant labour at the relatively generous wages and conditions that were determined Australia-wide by the Industrial Relations Commission.

  • Those states of the Federation most disadvantaged by this were compensated over time through fiscal redistribution from the Federal Government.

Meanwhile, in all jurisdictions, statutory government monopolies were created to provide public utility and other services at ‘fair’ prices to the expanding populations.

The regime was highly regulated, anti-competitive and redistributive: captured nicely by the expression ‘protection all round’ — a policy that for much of the last century had bi-partisan support and wide community acceptance.

For many years the economic costs of this regime were masked by the performance of our broad-acre agricultural and mining industries. Until the early 1970s, Australia was still managing to ‘ride on the sheep’s back’. The terms of trade favoured our primary commodities, and we had benefited from a world-wide expansion in demand following the War. Australians enjoyed close to full employment with incomes still higher, on average, than those in most other OECD countries.

But we were riding for a fall. During the 1970s, the prices we received for our commodity exports commenced a long decline, while the costs of imports began to rise. The resulting terms of trade deterioration (Figure 1) would, in turn, expose the underlying problem of Australia’s poor productivity performance.

Figure 1 Australia’s terms of trade

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:

  • a fragmented, high cost manufacturing sector, focussed on the domestic market;

  • indulgent, inflexible work practices, powerful unions and lack-lustre management;

  • outmoded technologies, low rates of innovation and skill development; and

  • high cost infrastructure services like power, transport and communications, which effectively taxed business users, while cross-subsidising households.

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).

Box 1: Two decades of economic reform

Trade liberalisation — reductions in tariff assistance (that began in 1973) and the abolition of quantitative import controls — mainly in the automotive, whitegoods and textile, clothing and footwear industries — gathered pace from the mid 1980s. The effective rate of assistance to manufacturing fell from around 35 per cent in the early 1970s to 5 per cent by 2000.

Capital markets — the Australian dollar was floated in March 1983, foreign exchange controls and capital rationing (through interest rate controls) were removed progressively from the early 1980s and foreign-owned banks were allowed to compete — initially for corporate customers and then, in the 1990s, to act as deposit taking institutions.

Infrastructure — partial deregulation and restructuring of airlines, coastal shipping, telecommunications and the waterfront occurred from the late 1980s. Across-the-board commercialisation, corporatisation and privatisation initiatives for government business enterprises were progressively implemented from around the same time.

Labour markets — the Prices and Incomes Accord operated from 1983 to 1996. Award restructuring and simplification, and the shift from centralised wage fixing to enterprise bargaining, began in the late 1980s. Reform accelerated in the mid 1990s with the introduction of the Workplace Relations Act 1996, further award simplification (through limiting prescribed employment conditions in enterprise bargaining agreements) and the introduction of individual employment contracts (Australian Workplace Agreements).

Human services — competitive tendering and contracting out, performance-based funding and user charges were introduced in the late 1980s and extended in scope during the 1990s; administrative reforms (for example, financial management and program budgeting) were introduced in health, education and community services in the early 1990s.

National Competition policy’ reforms — In 1995, further broad-ranging reforms to essential service industries (including energy and road transport), government businesses and anti-competitive regulation was commenced by all Australian governments through a coordinated national program.

Macroeconomic policy — inflation targeting was introduced in 1993. From the mid 1980s, fiscal policy targeted higher national saving (and a lower current account deficit) and, from the mid 1990s, concentrated on reducing government debt, primarily financed through asset sales (privatisation).

Taxation reform — capital gains tax and the dividend imputation system were introduced in 1985 and 1987, respectively. The company tax rate was lowered progressively from the late 1980s. A broad-based consumption tax (GST) was implemented in 2000, replacing the narrow wholesale sales tax system and a range of inefficient state-based duties. And income tax rates were lowered at the same time.

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:

  • a marked decline in high cost labour-intensive or standardised manufacturing activities and a rise of ‘elaborately transformed manufactures’ (PC, 2004). (For example, textiles, clothing and footwear production has fallen in real terms by 40 per cent since 1985, but the manufacturing sector has grown by 40 per cent over the same period);

  • major changes in work practices in all sectors, including to accommodate new technology;

  • a rise in the intensity of business R&D, and increased innovation generally, with Australia having one of the highest rates of ICT uptake among OECD countries in the past decade (OECD 2004a)

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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