Reforms of 1990s helped lift productivity and we can do it again
19 November 2024 | Danielle Wood and Alex Robson
Vincent van Gogh once said that “great things are done by a series of small things brought together”.
Van Gogh could easily have been referring to the compounding effect of productivity improvements: over time, a series of small differences in annual growth rates can add up to large differences in overall living standards.
Take the difference between the annual per capita growth rates of Argentina and Australia over the past 120 years.
In the early 1900s, the two countries were in relatively similar positions in terms of average living standards. Since then, a seemingly minor average annual growth gap of 0.6 percentage points has contributed to a huge difference in average income levels, amounting to almost $82,000 today.
Comparisons such as this underscore the need for policymakers to pursue sensible productivity-enhancing reforms where possible, even where the impacts of individual policies may seem small.
Reforms that help build a more dynamic and competitive economy are a perfect case in point.
Competition is about market rivalry: businesses striving to attract customers, increase their profits, avoid losses or gain market share.
Strong competition makes it difficult for individual firms to become too dominant, which in turn encourages fair and efficient market dynamics and keeps prices in check.
It motivates businesses to respond to the needs of consumers by offering better products and services, and that lifts living standards for all Australians.
Sometimes the benefits of competition are difficult to see and even harder to measure. But past reforms in Australia shine a light on the gains that change can bring.
For example, the reforms of Professor Fred Hilmer in the 1990s are estimated to have led to a permanent uplift in Australia’s GDP of about $23 billion in 1993-94 dollars – or about $52 billion today.
The Hilmer reforms, however, appear far less impressive when you look at the estimated economic impacts of individual policy changes, such as including third-party infrastructure access arrangements, abolishing anticompetitive regulations, introducing competitive neutrality principles, and implementing structural reform of public monopolies.
But that does not mean this “series of small things” were not worth doing.
On the contrary, it is widely accepted that the Hilmer reforms contributed to a sustained productivity boom in Australia over the subsequent decade, underpinning significant increases in real wages.
Unfortunately, further microeconomic reform efforts have stalled in recent years. Proposed reforms have not seemed as meaningful as Hilmer’s in terms of their benefits, and are often thrown in the too-hard basket.
As a result, our productivity growth performance has suffered.
Over the decade to 2020, our average annual labour productivity growth rate fell to just 1.1 per cent – the slowest in 60 years.
Labour productivity has increased an uninspiring 0.5 per cent over the past 12 months.
All of this begs the question: could a new wave of national competition policy (NCP) reforms result in a boost to productivity and achieve similar results to the reforms of yesteryear?
Other impacts include improvements in the access to and quality of care, and helping Australia meet its net zero emissions targets.
Modelling undertaken for our final NCP report handed to the government earlier this month says yes, there is strong chance that they could.
Our modelled reforms span five themes: dynamic business environment; net zero; labour mobility; human services; and data and digital.
Australia’s economy has changed considerably since the time of the Hilmer reforms – in part due to the reforms themselves.
A larger and more complex economy means that reforms of any size will, mathematically, register as a smaller share of GDP today than three decades ago.
Despite this, our modelling found that a revitalised NCP could permanently boost Australia’s GDP by up to $45 billion a year – equivalent to about $5000 per household per year.
Proposed changes such as the adoption of trusted international product safety standards, developing a general right to repair, streamlining commercial planning and zoning, and removing barriers to the uptake of modern construction methods are all likely to boost living standards.
Higher GDP means the proposed reforms are also likely to have a positive fiscal dividend. Other impacts are likely to be even more far-reaching and include improvements in the access to and quality of care, and helping Australia meet its net zero emissions targets.
In other words, the overall benefits of a revitalised NCP are very likely to be in the same ballpark as those of Hilmer.
Economic reform is never easy. Securing all these modelled gains will depend on close co-operation between the Commonwealth and the states and territories, and whether we get the scope, sequencing and implementation of NCP reforms right.
But it is by doing this important work, dismantling policy barriers to productivity brushstroke by brushstroke, that we generate long-term improvements in our living standards.
This article was written by Chair Danielle Wood and Deputy Chair Alex Robson. It was first published in Australian Financial Review on 19 November 2024.