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Time for the 'reform' mantra to be modernised

By Nicholas Gruen - posted Wednesday, 24 September 2014

By the time economic reform matured as a political project – let's date it from Paul Keating's announcement about its popularity with the resident galah in every pet shop – it was already on the slide into the kind of ideological formula of mercantilism that Ken Henry so powerfully critiqued earlier this week.

Australia was a standard-bearer in areas like trade and agricultural protection, the two airline policy and shopping hours. There, with the stroke of a pen, we swept away the detritus of a century's ad hoc political favouritism. And unlike our peers in the Anglosphere, we also expanded funding for the safety net – bolstering equity.

But beyond that, as we've learned (or have we?), considering policy alternatives against a criterion as crude as how 'free market' they are doesn't work so well. In infrastructure, utility and financial reform, where monopoly and asymmetric information problems abound, regulation remains inevitable and new rent seeking political pathologies lie in wait for those unpicking the old ones. Here our reform efforts brought forth excessively priced toll-ways, desalination plants and airports with the political and official insiders championing the changes parachuting into lucrative careers with the corporate beneficiaries of their reforms to lobby their successors. We've seen massive over-investment in electricity transmission and under-investment in other infrastructure.


And yet our policy elite speak as if 'reform' is well articulated and will take us back to the glory days of the 1990s Australian 'reform boom' that preceded the subsequent resources boom. "Gary Banks' List" assembled by the former Productivity Commission (PC) chairman – is a canonical PC endorsed reform 'to do' list. It was – tellingly enough – cobbled together some months after Glenn Stevens assured a Parliamentary Committee of its existence. John Edwards recently suggested, only slightly exaggerating, that its adoption wouldn't make a measureable difference to growth.

With national income falling in the most recent national accounts, here are some contemporary challenges and opportunities absent from the list – all of which escape prevailing reform formulas:

  • Policy discussion typically conceives of markets as comprising competitive firms subject to state regulation. In areas like education, health, aged care, city planning, research and legal services, output is better thought of as the joint product of competitive and collective (collaborative and regulatory) activity. Each sector requires the evolution of quite different institutions in which public and private, competitive and collaborative considerations concatenate at every level from high policy down to the life world of workplaces.
  • While wealth management fits well into the previous paragraph, the public private partnership that is banking is a special case. It remains not just profoundly pro-cyclical but unstable and will remain so under all likely post crisis reforms.
  • How do we deliver useful professional knowledge while ensuring that that knowledge serves the interests of consumers. How to we minimise the typical abuses of professional power including restricting entry? What institutions could help consumers identify the best professional services?
  • How do we optimise the free-rider opportunities to which modern ICT gives rise? Lateral Economics recently published a report suggesting large economic gains (around $16 billion annually) with few losers from more thoroughgoing and insightful open data policies.
  • Personal information management services (PIMS) will generate similar gains. The UK leads the world with legislation vouchsafing citizen rights to the data firms collect on them and with numerous corporates like Google, Mastercard and Lloyds Bank partnering with government agencies like the Office of Fair Trading to pioneer the necessary infrastructure. First mover advantages will enable UK businesses' to roll out PIMS to the world. What are we doing? No so much.
  • More generally, how might the internet and its epiphenomena (peer production, social media, big data, mobile computing, the internet of things, wearables, 'nearables' and so on) reshape the public policy of infrastructure and public goods?
  • How can we incubate the skills and relationships necessary (perhaps outside government) to rebuild damaged social capital in communities with mores and perspectives different to those within dominant institutions?
  • With our polity increasingly distracted and immobilised by the populist alarums and excursions delivering eyeballs to screens and clicks on links, how can we evolve democratic institutions within which real civic deliberation might be encouraged as it is in juries?

Economists have identified a "middle income trap" into which many countries have fallen like most in South America. Industrialisation gives them the institutional 'arteries' of a functioning modern political economy, but not the 'capillaries' if you will – traditions of social trust, peaceable dispute resolution, property rights, competent, non-partisan officials and strong anti-corruption institutions. Perhaps we're in our own trap in which we can't escape the mental world of the glory days of 1980s reform.

We have only glimmerings of the answers to the questions posed above. But that's what finding one's way to the future is always like. And building on those glimmerings is our only way to build on our proud legacy as a standard bearer for neoliberal reform – by moving beyond it.

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This article was first published in the Australian Financial Review.

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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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