Andy Stoeckel asks why in The Australian....
IN its annual review of member states, Going for Growth, released yesterday, the Organisation for Economic Co-operation and Development highlighted that the main reason Australia's per capita income is below that of the US is lower productivity.
The Rudd Government made much of productivity in the run-up to last year's election, and for good reason. Productivity is the key to a more prosperous, cleaner, greener Australia, with lower inflation to boot. Productivity means you can have more for less. It means we can have more income using fewer workers (there is a skills crisis), less water (water restrictions are in force) less energy (there are worries about climate change) and less capital (there is a credit crunch). But there is a creeping sense that the Rudd Government is already losing its way on the productivity front.
The biggest driver of productivity is the way people behave economically: what they do and how they do it. Economic behaviour is dictated by the incentives people face. And incentives are shaped in a significant way by policies. If the price of water goes up, people have an incentive to conserve it. Engineers have an incentive to design more water-efficient appliances and irrigation technology. Scientists have an incentive to breed more water-efficient plants. Planners have an incentive to build more water storages or design systems for water recycling. The result is we produce more goods and services with less water: that's productivity. But as Treasury secretary Ken Henry reminded us yesterday in the Ian Little Memorial Lecture, our policies do not let the price of water go up. Instead, we have costly regulation and rationing. We are not using water in its highest value use. We do not yet have best policies in the water market.
So how do we get good policies that allow for productivity? The answer is through the ongoing public scrutiny of the national benefits and costs of the policy choices we face. For best results this scrutiny has to be done with some particular features in mind. One is the results have to be credible in the eyes of the public. Good reviews can be done by ad hoc committees, but perceptions matter. Credibility is best achieved by an independent body professionally scrutinising policies in a fully open and transparent way. For when the electorate comes to accept and understand good policies it will vote for them. That is, good public governance processes educate the electorate about better policies and eventually they get adopted. Good transparent policy reviews change the politics of reform.
We know what to do to have an efficient water market; Henry spelled it out (again). It's the politics that holds us back.
In Australia we have the world's best transparent process of scrutiny of policy, provided it is used.
That process is run by the Productivity Commission. It was first set up as the Industries Assistance Commission under Gough Whitlam and later given a new lease of life by the Hawke-Keating government. The commission has done us proud and Australia's performance improved markedly once it got in on the act. International institutions attest to this.
Yet, as Melbourne Business School's Paul Kerin noted in The Australian last month, the Rudd Government has announced a series of reviews that do not use the commission's transparency processes. Reviews have been announced into car tariffs, trade policy and quarantine arrangements, to name a few. But these bypass the commission's transparency processes. To forsake the world's best transparent process of review policy, where independence is defined by statute, unnecessarily invites the question of whether there is a hidden agenda. The electorate may not believe the findings. The educative role of policy scrutiny will be lost and the politics of reform set backwards. The chance to lift productivity may be lost.
Good transparent policy reviews by an independent agency work through several subtle interrelated ways. They identify what is in the national interest, whether that is more income or clear air. Such reviews expose vested interests and weaken their influence. Transparent reviews, conducted under basic principles of good governance, where discussion papers are circulated, draft reports issued and open submissions taken from the public, themselves subject to scrutiny, all serve to involve stakeholders and lower the cost of educating the electorate about good policy choices.
Transparency helps build countervailing forces for reform and thereby helps shift the politics of reform.
We have a Productivity Commission set up by previous Labor governments for good reason and effect. We should use it if we want to lift productivity and prosper as a nation with less waste of our scarce resources.
Andy Stoeckel is executive director of the Centre for International Economics in Canberra.
