Australia's experience driving economic growth through competition policy reforms speech

Introduction

I am delighted to be here under the heading of “Making markets work for development”. I have a passionate interest in “Making markets work”, and in “economic development”.

In the 1960s, 1970s and early 1980s Australia was an insular, highly regulated economy, with many public sector monopolies, contributing to low productivity and growth and poor comparative economic performance.

From the 1980s and 1990s Australia’s economy was transformed by a broad reform agenda, particularly Australia’s National Competition Policy, into an open, dynamic, flexible and high productivity economy.

I believe Australia’s experience with its National Competition Policy is of wider relevance, particularly when considering the best path for economic development. My discussion today will, therefore, cover three areas:

• First, an insider’s view on the competition policy reforms in Australia and the changes made.
• Second, the benefits of the reforms, in terms of driving growth, and productivity
• Third, I will discuss the relevance of Australia’s National Competition Policy reforms to economic development.

Competition policy reforms in Australia and the changes made

Around 1900 Australia had the highest level of labour productivity in the world, which reflected a relative abundance of natural resources and a small population.

After 1900 Australia’s productivity performance deteriorated as governments progressively traded our high starting position for “national development”, involving high protective trade barriers and the development of economic infrastructure through government monopoly ownership.

By 1950 Australia’s GDP per hour had slipped to 81 per cent of the level of the productivity leader, the USA, but we still ranked 4^th among the group of 22 developed or high income countries.

By 1983 Australia had slipped to 14^th, as shown in Exhibit 1[1].

Per capita GDP (PPP) ranking in OECD.
Source: see footnote 2
Exhibit 1 Australia's relative decline

The policy settings that lead to this relative decline involved affording preferment to certain industries via quotas, high tariffs and subsidies; prescriptive approaches to the regulation of product and factor markets; inflexible work practices; government-owned infrastructure monopolies that saw high cost utility services; and heavily regulated export sectors in agriculture and mining [2].

By the 1980s Australia’s productivity performance relative to other OECD nations was poor, as shown in Exhibit 2.

%, average annual rate, OECD countries
Source: OECD Data, referred to in  Giuseppe Nicoletti and Stefano Scarpetta, “Regulation, Productivity and Growth:” OECD evidence”, Economic Policy Vol. 18 No. 36 (abril 2003), pp. 9-72.
Exhibit 2 Total factor productivity growth, 1980-90

The world was globalising and Australia was not keeping up. Instead of competing domestically and internationally a growing number of Australian businesses put their efforts into lobbying government for support to cover their cost disadvantages.

The realisation of the need for change came slowly. It was helped, of course, by a growing international realisation by economists and others that governments generally had overestimated their capacity to replace the effective workings of the market.

In the early 1980s there was gradual change in trade reform as tariff quotas were phased out and some very high tariff levels were lowered.

The largest early changes were in the financial sector. In 1981 interest rate controls were removed and some bank lending restrictions were withdrawn. In 1983 the Australian dollar was floated, and then new bank licences were issued.

In the mid 1980s there were important tax reforms which lowered marginal tax rates and broadened the tax base. It was, however, from the late 1980s that the wide ranging microeconomic reforms began.

In 1988 the Government announced that by 1992 tariffs above 15 per cent (and there were many very high tariffs) were to be reduced to 15 per cent; and in 1991 it announced that all tariffs would be reduced to 5 per cent by 1996.

From the late 1980s and early 1990s there were some early reforms in telecommunications, electricity, water, road and rail. In 1991 the Australian Commonwealth, State and Territory governments reached agreement on the need for a national competition policy and later commissioned an independent Committee of Inquiry into a National Competition Policy for Australia (which reported in August 1993).

As the NCP Report itself said, the need for such a policy was driven by three factors:

• The need for Australia to become an integrated single market able to compete internationally, rather than an economy limited by State and Territory boundaries.
• Recent micro-economic reforms had shown that the Trade Practices Act (which preceded the current Competition and Consumer Act) was too limited in its application, with coverage depending on ownership or corporate form, and
• It was seen that the early reforms begun since the late 1980s were being progressed on a sector-by-sector basis without the benefit of a broader framework covering both economic principles and political governance[3].

Overall, there was a recognition that if Australia’s economy was not competitive domestically it could not compete internationally. The NCP Report said that “Australia Competition Policy is sometimes seen as solely comprising the....Trade Practices Act...(however) the relevant field of policy interest is much wider..... The Committee has considered competition policy in terms of six specific elements....”[4]. These are listed in Exhibit 3.

First, it recommended some changes to Australia’s competition law, but more importantly recommended the competition laws apply universally to all business activity in Australia. This largely involved extending the competition law to cover unincorporated enterprises and government business enterprises.

Second, it recommended a comprehensive review and subsequent reform of all Federal, State and Territory legislation that regulated markets or restricted competition. If the public benefit of any legislation did not outweigh the competition detriment, the policy should be overturned, with the onus of proof on those wanting to maintain the competitive determent in the existing legislation.

Third, it recommended the structural reform of public monopolies, including separating out those parts that could viably operate in competitive markets, and breaking these potentially competitive activities into a number of smaller, independent business units before selling them. 

Fourth, it recommended introducing a third party access regime to promote competition in markets that needed access to infrastructure which had the potential to create bottlenecks, such as electricity and communication wires, pipelines, railways and ports.

Fifth, it recommended independent pricing oversight to limit monopoly pricing or behaviour of any remaining public monopolies.

Finally, it recommended fostering “competitive neutrality” between government and private businesses when they compete. For example, the cost of debt should reflect business risk, and government businesses should operate in the same regulatory environment as competitors, pay tax, and be expected to earn a commercial rate of return.

The reforms that followed were fundamental. As shown in Exhibit 4, many sectors were utterly transformed by the reform process. The telecommunications, rail and electricity sectors, for example, became unrecognisable, and Australia introduced world leading rural water reforms (although not without considerable effort, and they are still not yet complete).

The reforms that followed, however, ran far deeper than these headline changes to the main infrastructure sectors.

Around 1800 individual pieces of restrictive legislation were identified and listed for scrutiny. Approximately 85 per cent of this legislation was reviewed and where appropriate reformed, and so change flowed widely across the economy. Exhibit 5 provides ten examples of the many changes achieved in various States of Australia.

1. Considerable deregulation of retail trading hours so stores can essentially open when they choose.
2. Reduced controls on liquor licensing that previously provided protection to the hotel industry, or required patrons who drink to also consume a meal.
3. Reduced business licensing ‘red tape’. For example, NSW repealed 72 business licence categories.
4. Streamlined development assessment process, such as for major infrastructure and other projects of significance.
5. Reduced restrictions on the legal profession. For example, allow legal firms to advertise, incorporate and to form multi-disciplinary partnerships; remove legal profession’s monopoly on conveyancing.
6. Reduced restrictions on health professionals. For example, introduced a nurse practitioner classification with authority to seek some diagnostic and pathology testing; removed restrictions on ownership of medical practices.
7. Free up grain marketing. For example, end an export marketing monopoly for barley, and other grains, and a State domestic marketing monopoly for rice.
8. End marketing restrictions on eggs and poultry. For example, end centralised compulsory price fixing, contract approval and supply restrictions.
9. Remove dairy controls. For example, remove wholesale and retail price controls and supply management.
10. Modernise a range of fishery management controls. For example, phase out non transferable licences, introduce full cost recovery, introduce greater flexibility.

Exhibit 5: Ten examples of the many changes achieved in various States of Australia.

The benefits from these reforms in terms of productivity, growth, incomes and Australia’s overall economic standing

An important reason the reforms came about were the gains forecast in 1995 by the then Industry Commission. These were substantial, and are shown in Exhibit 6.

Source - Industry Commission Report, 10 March 1995

These estimates of gains were said by the Industry Commission to be “outer envelope”, or the maximum effects. They assumed that the reforms are fully implemented and that the economy had fully adjusted to the reforms.

Looking back, there is no reason that I see to question these sizeable numbers.

I would, however, approach any assessment of the actual gains from the reforms from three angles, as follows:

• The 'after the event' assessment of growth and income gains
• Specific sector gains
• The possibly less scientific overall and 'feel good' effects.

The 'after the event' assessment of growth and income gains

In 2005 the Productivity Commission calculated that some selected NCP reforms had boosted Australia’s GDP by 2.5 per cent above levels that would have otherwise prevailed[5]. The modelling was selective in that it only covered the sectors shown in Exhibit 7, which also shows each sector’s contribution to this result.

Percentage points
Source – Australian Productivity Commission
Exhibit 7 Contribution to GDP growth

In 2011 money this represents an enduring benefit of US$33 billion.

While the sectors shown in Exhibit 7 were the main sectors affected by the NCP reforms, there were effects across all of the economy, as shown in Exhibit 5, and the 2005 calculations excluded the all important dynamic efficiency gains. The modelling also did not pick up the impact from reforms undertaken after 2000 or the impact of earlier reforms not realised until after 2000.

Indeed, the Productivity Commission stated that the implication of these omissions is that “the total boost to GDP from the reforms will ultimately be considerably larger than the (2.5%) estimate which emerged (from its) modelling.”

One argument made against the reforms was a concern that they would advantage the wealthy and disadvantage the poor. Some argued that those Australians on low income, or that Australians living in rural or regional areas outside the cities, would be worse off.

The Productivity Commission, therefore, also incorporated a distributional component into its modelling. This showed that the benefits from the reforms flowed broadly among Australians. Real incomes rose across all income brackets, as shown in Exhibit 8, although the average income gain was not equal.

% change, 1989-90 to 1999-2000
Source – Australian Productivity Commission
Exhibit 8 Increase in real incomes from NCP reforms

Some specific sectoral gains

While it is not possible to isolate the impacts of the NCP reforms from many other factors, it is telling that in a number of areas targeted by the NCP reforms there were significant price reductions, as follows:

• In the electricity sector, average real prices Australia-wide fell by 19 per cent between the early 1990s and 2004.
• There were substantial reductions in rail freight rates in the second half of the 1990s, ranging from 8 per cent for wheat up to 42 per cent for some coal traffic.
• Between 1996 and 2003, average telecommunications charges fell by 29 per cent for business and 17 per cent for households.
• After deregulation in 2000 the average retail price of milk fell by 5% in real terms despite the imposition of an 11 cents a litre industry assistance levy to assist dairy farmers in the transition.

It must be acknowledged, and it is not surprising, that there was a net employment reduction across all infrastructure sectors of 31,000 between 1990 and 2003, as shown in Exhibit 9. This Exhibit also shows the effect of privatisation.

'000 employees
a. Comprises electricity, gas, water, road transport (including passenger services), rail, telecommunications, and postal and courier services.
Data source: ABS (Survey of Employee Earnings, Benefits & Trade Union Membership, Cat. no.  6310.0, unpublished data).
Exhibit 9 Employment changes in infrastructure industries^a, 1990 to 2003

It should be noted, however, that the declines occurred in the first half of 1990s, and were then followed by increases. Indeed, after declining by 50,000 jobs between 1990 and 1995, total employment in the infrastructure sectors increased by 19,000 in the subsequent eight year period.

There were other effects which could be seen as negative, but which were in fact intended. For example, urban water prices increased, in some cases significantly, as it was recognised that artificially low water prices encourage excessive consumption of a scare resource, and blunt investment signals.

The overall and 'feel good' effects

When looking at aggregate numbers it is hard to determine cause and effect. Nonetheless, a number of studies have largely attributed what follows to the NCP reforms [6] and the other pro competition changes such as the tariff reductions.

By 2005 the NCP reforms had contributed significantly to a productivity surge that has underpinned 13 years (now 21 years) of continuous economic growth. Australia’s productivity performance went from being one of the worst in the OECD to one of the top performers, as shown in Exhibit 10.

Percentage Points, difference between average annual growth.
Source: OECD Data, referred to in  Giuseppe Nicoletti and Stefano Scarpetta, “Regulation, Productivity and Growth: OECD evidence”, Economic Policy Vol. 18 No. 36 (april 2003), pp. 9-72.
Exhibit 10 Total factor productivity growth, 1990-2000 vs 1980-1990

This relative productivity performance also translated into a strong relative growth performance, as show vividly in Exhibit 11 [7].

Percentage points, difference between average annual growth.
Source: OECD
Exhibit 11 Real GDP growth, Australia vs OECD

It is also worth noting that the rate of increase in per capita incomes in the second half of the 1990s was as high in Australia as at any time in the 20^th Century, and that unemployment was at its lowest level in three decades. While, as previously stated, cause and effect is difficult to determine, the tangible benefits and then the overall dynamism generated by the reforms must take significant credit.

Indeed, there was a clear 'feel good' effect. As Exhibit 12 shows, by the late 1990s Australia had regained its per capita GDP rating and in 2008 it still ranked 5^th.

Per capita GDP (PPP) ranking in OECD.
Exhibit 12 Australia's relative decline and resurgence

I think it is possible to argue that such a relative positioning puts a collective “spring” in a nation’s step.

The relevance of Australia’s National Competition Policy reforms to economic development.

At the beginning of my career, and prior to becoming involved with Australian’s National Competition Policy reforms, I was heavily involved in economic development.

In one way or another I worked as a development economist in around 15 developing countries in Africa, Asia, the Pacific and the Caribbean.

Recently, just prior to taking my current position, I was again on a part time basis working in economic development in the Asian region.

Combining this background with my Australian experience leads to the following personal observations.

First, I see pro competition policies providing even larger gains for developing countries. Not only do such policies drive growth but they also can improve governance, allow new market entry for those who otherwise may have few opportunities, and they can drive rapid introduction of new technology.

Second, experience says there is rarely any merit to the “national champions’ argument. We still hear this argument in Australia.

The argument is that a country needs strong, large, domestically owned companies for its economy to thrive. They are, however, only of benefit if they achieve their status by out-competing their local opposition.

If governments grant them this status they will generally become bloated and lazy, and overcharge their customers.

Creating “national champions” is the opposite of promoting competition, and has the reverse effects.

Third, it follows that particularly in developing countries competition policy needs to go well beyond narrow competition law enforcement. Monopolies need to be dismantled, competition needs to be introduced into new areas and competition law needs to cover state owned enterprises.

Finally, competition agencies in developing countries will usually need to have a larger advocacy role to take on vested interests and government restrictions. This can be a challenging role.

A courageous story of leadership by a competition agency head from Papua New Guinea illustrates this.

Papua New Guinea is a country that I have lived in and visited many times.  It has a population of about six and a half million people, and currently enjoys high rates of economic growth;  over 7 per cent each year for the past three years.  But it is extremely rugged, and the vast majority of the population lives in small centres and villages, making communication difficult.

In 2005, the state-owned Telikom was the only provider of mobile telecommunications services in PNG, with a network that had about sixty thousand subscribers.  Telikom’s network did not serve the vast majority of PNG’s population.  It was widely recognised that a national mobile network, or at least something approaching it, would be a boon to PNG.  To achieve this, the then Government decided as part of a wide ranging reform agenda to introduce competition in mobile telephony to the country.

The PNG Independent Consumer and Competition Commission, and its CEO, Thomas Abe, steered the Government’s decision to implementation in circumstances that tested their professionalism as Telikom, and high level members of a new Government, fought the move strenuously.

Two new providers, Digicell and Greencomm, won the right to offer mobile services in PNG. 

The economic and social outcomes of introducing competition were then plain: Digicell very quickly put up 600 cellphone towers, many of them in very rugged country, that provided service to around 1.3 million people.

I saw first hand that the improved telecommunications literally opened up the world to those who needed it most.  Weak infrastructure was replaced with new services, allowing people living in remote areas to access mobile banking services, schools and hospitals; and providing entrepreneurs with better information to do their current business and get involved in new businesses.

In this example, competition policy delivered for the people of PNG.

Conclusion

Australia’s National Competition Policy reform agenda shifted the tenor of debate on the relevance of competition in Australia from the margins to the centre. But there is still an active debate on the relative merits of free market discipline.

Sustaining public and political will for economic reform and placing overall economic gain ahead of vocal vested interests requires constant vigilance and advocacy. Competition authorities have a key role here – both in enforcing competition laws without fear or favour and in advocating the benefits of competition across the economy.

I believe competition reform is the only way to ensure economic growth and to see that national living standards are sustained in the long term. I also believe that this is true for both developed and developing economies.

Thank you for your time today.

Footnotes

[1] These three paragraphs are extracted from the work of Dean Parham, “Microeconomic reforms and the revival in Australia’s growth in productivity and living standards”, Conference of Economists, Adelaide, 2002, page 3

[2] See Paul Gretton, “National economic reform in a federal system – the case of Australian national competition policy and related reforms”, paper to the conference on federation and reform in Asia, New Delhi, December, 2010, page 6.

[3] See National Competition Policy, Report by Independent Committee of Inquiry, August 1993, pages XVII-XVIII

[4] Pages XVI-XVII

[5] Productivity Commission, Review of National Competition Policy Reforms, Inquiry Report No33, February 2005.

[6] See Gretton, 2010, footnote 6; and Parham 2002, footnote 5.

[7] Source: OECD Data, referred to in  Giuseppe Nicoletti and Stefano Scarpetta, “Regulation, Productivity and Growth: OECD