My column in today’s Fin. I should say that I didn’t pick the headline, and am a bit allergic to the use of “flaws” in policy discussion. No policy is flawless, so describing one as “flawed” doesn’t really say anything.
<h3>Reforms are full of flaws</h3>
As priests and magicians have always known, words are powerful. The right word uttered at the right time can indeed work magic, at least if the hearers believe it. The magical power of words is particularly evident in politics. In Australia, no word is more powerful than ‘reform’.
‘Reform’ means little more than ‘a change in form’ and, much of the time proposals for reform involve the reversal of previous changes, also presented as reforms in their day. But such is the power of the word that opposition to reform is unthinkable.
Since the 1980s, belief in ‘reform’ has been, quite literally, an article of faith for the Australian policy elite. This faith was formed on the basis of the cathartic experiences of the 1970s, when the older faith in rational planning by the public sector proved unable to deal with the economic upheavals of that decade. Faith in reform has proved utterly impervious to contrary evidence. The only answer to the failures of reform has been to conclude that more reform is needed.
The failure of reform is most dramatically evident in the infrastructure sector, and particularly for utilities such as electricity, telecommunications and water. The vision for these sectors as revealed by the reformers of the 1980s was an appealing one. The lumbering, overstaffed and inefficient government monopolies that had provided these services for decades would be swept away. In their place, reform would produce dynamic, innovative and competitive markets
The promised benefits were appealing. Consumers would not only get lower prices, but they would be presenting with a panoply of choices. Efficiency would be improved by allowing the market to guide new investment decisions.
The result would be a more dynamic and efficient economy. In making the case for the ‘Hilmer reforms’ in the early 1990s, the Productivity Commission estimated they would raise national income by 5 per cent. Other estimates were even more optimistic
And, for a while, everything seemed to go well. The first electricity contracts signed for business customers in Victoria reduced prices by as much as 40 per cent. Reformers promised that full retail competition would extend these benefits to households and small businesses.
Privatisation seemed to offer wins all round. Not only did governments collect large buckets of cash, but private owners promised new investment and innovation.
The fruits of reform were seen in the productivity statistics. The growth rate of multi-factor productivity, historically around 1 per cent per year, accelerated to 2.4 per cent in the mid-1990s, according to estimates released by the Australian Bureau of Statistics. Advocates of reform, most notably the Productivity Commission, did not hesitate to label this a ‘miracle’.
None of these benefits has lasted. The productivity ‘miracle’ turned out to be a blip. Although reform continued apace after 1998, multi-factor productivity growth slowed and even reversed. The gains of the mid-1990s surge were wiped out, and productivity growth returned to its long-run average rate, or below.
Privatisation has been a failure, most obviously in the case of telecommunications. Telstra’s infrastructure investment policy has been driven by the desire to extract the largest possible benefits from the system of regulation. The problems of the National Broadband Network can be traced, almost entirely, to the need to work around the obstacles created by the failed privatisation of Telstra.
But the failure of reform has been most clearly evident for electricity. Electricity price inflation has been consistently high for the last decade, and has now reached double-digit levels.
Electricity restructuring was misconceived in almost every possible respect. The vertical separation of the industry into generation, distribution and retail sectors created massive and economically counterproductive risk.
Reform encouraged distributors to run down the ‘gold-plated’ networks they inherited from the public sector, then produced huge price increases to finance new investment when capacity problems re-emerged. And, even though the issue was on the table by the early 1990s, the reformers ignored the implications of carbon dioxide emissions.
Despite this and other failures, the incantation of ‘reform’ retains its magical power. The politically and economically disastrous privatisation program in NSW was justified entirely on the basis that it was needed in order that reform could continue.
It is, perhaps, too much to ask that such an appealing word should be abandoned. But can’t we at least admit that the 1980s reform program has had its day, and look for some reforms more appropriate to the 21st century?
John Quiggin is an ARC Federation Fellow in Economics and Political Science at the University of Queensland. He is the author of Zombie Economics: How Dead Ideas Still Walk among Us