Friday, September 20, 2013

What is "Economic Reform"?

“Reform” is very sexy word. It is often deployed to cloak policy in feel good vibes and to create an aura of leadership and vision.  So everyone in the policy-sphere wants to think of themselves as reformers and many a complete bastard has appropriated this lovely, but overused, title.  But who are the real reformers and who are the pretenders?  Remember everyone from Lenin, Stalin to the odd Italian Fascist claimed the heroic title of "reformer".  So you should often be very cautious when you encounter people and policies claiming the mantle of "economic reform". 

Economics is a very broad field. There are professional economists working on topics ranging from the economics of wine, food, love, technology, prostitution, video gamescrime as well as the more 'conventional' topics such as public policy or financial markets. As such it's perhaps unsurprising that 'economic reform' is used to describe pretty much any policy that the government wants to sell as a being important for the nation.

But does it really make sense to label policies such as the Gonski reforms (aka Better Schools) or the NBN as 'economic reforms'? Certainly a better education system and a faster broadband network could have an impact on the Australian economy, but that is true of most government policy. If the phrase is to have any meaning at all, it needs to saved for policies that are truly economy-wide, as opposed to policies for individual areas or sectors (in this case the education and telecommunication sectors).

So what would be a sensible definition for economic reform? To answer this question you need to think about two criteria: who does the policy affect, and what does the policy involved changing. More specifically, does the policy affect all sectors and industries, or just one in particular? And secondly, does the policy substantially change the rules of the game, or does it just funnel money around the budget?

I have graphed both of those questions below, and (roughly) plotted a few policies on where they might sit on the spectrum. Up in the top left quadrant you have the economy-wide game-changing economic policies, it's where most of the lionised Hawke-Keating reforms would probably sit. This is what I would define as the archetypal, pure 'economic reform': something that fundamentally changes the way we work as a nation both in the public and private sector for most, if not all, Australians. To the right you have policies that predominantly affect individual sectors, and while they may impact the economy, I think their narrow focus should preclude them from the title. Finally, down the bottom you have policies that either spend or raise money, as opposed to ones that actually change the rules (both legal and cultural) by which our society operates. A classic example of the former is an income tax cut. I don't think these sort of policies should really be described as reforms, they are polices that affect the economy on the margin, but aren't likely to produce fundamental changes in the way it works.

Looking at our list of economic reforms through this lens it becomes apparent that the implementation of 'pure' economic reforms has slowed down over the past decade or so. The most recent reforms have been the GST (which replaced an inefficient and complex wholesale tax system - but doesn't really rise to the level of reforms such as floating the dollar) and the carbon tax (which had a big impact on the mining, manufacturing and energy sectors, but only a limited impact on the services and agriculture industries).

Why might this be the case? Undoubtedly the reforms of the 1980's constituted a lot of low hanging fruit - policies that had large and obvious benefits, and had already been implemented in other countries. But there are still plenty of big ideas out there, many spelt out in the Henry Review. Have our politicians lost their nerve? Or have our economists and public servants lost the imagination necessary to initiate these big reforms? I'm not sure of the answer, but I plan on blogging about potential candidates for the 'Next Big Economic Reform' soon!

PS There is obviously quite a bit of discretion in how I have classified several of the reforms. The reason why I have placed the carbon tax towards the sector specific side, is that for most firms the impact will be quite small (at most a small rise in energy prices). The composition of our electricity production will change, but for most firms and households solar electricity is much the same as the voltage from a fossil fuel based source. This contrasts with, for example, tariff reform which would of affected almost every household and the vast majority of firms.

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