Commentary 1st Aug 2014

Microeconomic reform is critical for WA’s future

The Economic Regulation Authority of WA (ERAWA) has just released its final report on microeconomic reform. The report is the beginning of a policy reform journey that will help underpin WA's future prosperity.

Microeconomic reform is all about providing incentives to encourage innovation and change.

Government, directly and indirectly, affects the incentives that face individuals, businesses, community groups, schools, and, indeed, every part of society. Incentives work if people are required to face the costs and benefits of their actions while not being constrained by unnecessary rules and regulations.

Through microeconomic reform, government encourages the right incentives while removing rules that may help a few but hurt many.

What microeconomic reform does for the wider community, it also does for government through the right mix of incentives. It is about making sure that government is careful with our taxpayer dollars and focusses on initiatives that will leave Western Australians better off. 

Microeconomic reform is not new. Australia's first wave of reforms followed the Hilmer committee inquiry in 1993. Those reforms have underpinned more than two decades of continuous economic growth in Australia. 

This continuous growth is unprecedented in Australia and globally among our competitors.

The benefits from this first wave of microeconomic reform were huge. In 1995, the Industry Commission predicted that the benefits from the Hilmer reforms could be 5.5% of GDP. In today's terms, that is about $82.5 billion.

The impacts of the first wave of microeconomic reform are still benefiting Australia, particularly in the eastern states.

In part these impacts are found in infrastructure, such as the interconnected electricity and gas networks and the improvements to road transport. In part they are embodied in reduced bureaucracy and by eliminating regulation that harmed rather than helped Australians.

But probably the biggest impact was on mindset. When Australians are given the right incentives to innovate and contribute, then we do amazing things.

Professor Stephen King

Professor Stephen King

Victoria provides a simple example. There was no mining boom for Victoria in the 1990s. That state was faced with declining rust belt manufacturing industries and major financial problems.

Through microeconomic reform, Victoria turned its fortunes around. , It built, for example, a $4.5 billion export industry in education, and a $1 billion export industry in dairy products. Indeed, dairy provides a great example of the potential benefits from reform.

Pre-Hilmer, the dairy industry was highly regulated. Farmers had quotas on the amount of milk they could produce. Milk was 'pooled' so no farmer had an incentive to improve quality. Removing regulatory barriers, helped innovative farmers to prosper. And, the benefits extend beyond the farm gate and right down the value chain. Getting the incentives right has created a vibrant industry.

Since it took the microeconomic reform journey, Victoria's economy has been consistently strong by world standards and with growth over the past 20 years only surpassed within Australia by the resources rich states of Western Australia and Queensland.

But if Western Australia has been leading the nation in growth, why bother with microeconomic reform; after all, "if it isn't broken why fix it"?

An example close to home would be in the State's agricultural sector, where some WA farmers are being held back by unnecessary regulations.

With its location close to the heart of Asia, WA should be booming in multiple sectors. I can't tell you exactly where the innovations will occur (if I could do that I would be very rich!). But the experience from Victoria shows that when unnecessary barriers are removed and incentives are set, innovation and economic growth will occur.

Does WA need microeconomic reform? Yes!

The Hilmer reforms were underpinned by Australia's falling economic performance. Growth was poor and, as a nation, our competitors were leapfrogging us. In the words of the Treasurer Paul Keating, in 1986, Australia risked ending up as a "third rate economy; a banana republic".

The West is not in banana republic territory. But we do have to adjust to changing demand for our resources and at the same time, provide incentives for other parts of the State's economy to grow and match the resources sector. The government needs to plan for the future.

The reforms recommended in the ERA report are a map of the road forward for WA. This report will help ensure that Western Australia's economy remains resilient in the face of national and global economic change.

Importantly, the State Government has recognised that a report on microeconomic reform should not fly solo. They have asked the ERA to do fresh rounds of microeconomic reform inquiries nine months prior to each coming State election in an attempt to maximise growth and give the State the opportunity to deliver better outcomes for everyone.

A version of this article has appeared in The West Australian.

Professor Stephen King works in the Department of Economics at Monash University. He is a member of the governing body of the Economic Regulation Authority.

By Stephen King

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    Professor Stephen King

    Professor of Economics Monash Business School

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