December 16, 2017
Monday, January 18, 2016

Lessons from Down Under

Dr Alexis Esposto shares his thoughts at an event hosted by the Argentine Chamber of Commerce.
Dr Alexis Esposto shares his thoughts at an event hosted by the Argentine Chamber of Commerce.
Dr Alexis Esposto shares his thoughts at an event hosted by the Argentine Chamber of Commerce.
By Michael Soltys / Senior Editor

Protectionism, incentives and micro-economic reform

The urgent has a habit of crowding out the important in Argentine journalism — just before those hectic weeks since President Mauricio Macri’s runoff victory in November, Melbourne-based, Argentine-born economist Alexis Esposto offered various lessons from Australia toward Argentine development at a Chamber of Commerce seminar and only now has the dust settled sufficiently to pass on his ideas. Comparisons between Argentina and Australia (and also Canada) as to their economic evolution in the last century or so are frequent enough but Esposto’s analysis is more intensive than most.

If G20 member Australia has been a globally respected economic success story in the past three decades, deregulation and micro-economic reforms have contributed significantly to efficient management in Esposto’s opinion — with the interesting detail for Argentina that the turnaround began under a Labor government (i..e. the major party closer to Latin American populism and showing that orthodoxy is not the only possible basis for economic dynamism). Productivity is the key to economic performance, he reasons, since it raises real incomes — this should never be taken for granted, facing certain challenges in Australia today. The central role of institutions (defined as both formal and informal constraints) in economic performance is another lesson which Argentina could usefully absorb.

Esposto does not believe that people are genetically conditioned by any inbred national character — it is the rules in place which provide the incentives to their behaviour. It is not that Australians (or Argentines) are “inherently more lazy, accident-prone, sick on Mondays, militant in industrial relations, spendthrift, prone to welfare dependency or tax evasion” than anybody else but rather about a set of incentives to which they respond. Micro-economic reform is all about changing those incentives by encouraging business to be more productive, minimize costs and price rationally, providing the goods and services consumers want. In other words, to create markets with a more effective flow between consumers and producers with efficient production.

Esposto proceeded to give a potted economic history of Australia since Federation in 1901. As Australia had the world’s first Labor Party governments a decade before Britain (women were already voting in 1890), a tradition of heavy regulation developed which had the Australian economy in distress by the 1970s. Protecting industry from foreign competition throughout most of the 20th century had to come to grips with the rise of Asia with low labour costs in manufacturing. The Herald asked if Britain’s entry into the European Common Market in 1973 and the abrupt end of Commonwealth trade preferences was a decisive catalyst but Esposto thought not — with Britain entering into economic difficulties and calling in the International Monetary Fund later in the decade, the old colonial connection would probably only have dragged on for a few more years.

Before describing what he considered the four key reform areas (tariff, financial and labour market reforms and competition policy), Esposto began by saying that micro-economic reform should not be misunderstood as the withdrawal of government intervention and regulation and nor was it a pure win-win situation — it involved the “creative destruction” of some industries with the need to compensate the affected and disadvantaged. One classic example was the car industry, which lost state support two decades ago when it was estimated that this would be costing the country US$100 billion by the year 2005.

Tariff reform began around half a century ago when protection started to be questioned. Key milestones were the Jackson Report (1976) rejecting import substitution and the Crawford Report (1979) recommending that tariff protection be replaced by export incentives. In 1988 Bob Hawke’s Labor government started the process by announcing the progressive reduction of most tariffs above 15 percent with most falling to five percent by 1996. Manufacturing industry’s share of employment fell from 23.9 to 12 percent in that period. At the same time Australia increasingly turned to multilateral trade agreements, forming the Cairns Group of anti-subsidy agricultural exporting countries.

As for financial reform, Australia’s highly regulated banking sector during most of the 20th century started succumbing to the pressures as international financial markets became more open with less restrictions on capital flows and with Internet also on the rise. The Australian dollar was floated in late 1983 when controls on interest rates had already started being phased out some years previously. In 1985 16 foreign banks were invited to establish operations in Australia. By the early 1990s these reforms had led to a new model of macro-economic management with inflation-targetting. Debt is only 30 percent of Gross Domestic Product but tax reform is needed, concludes Esposto.

The Australian labour market was traditionally dedicated to full employment within a closed economy, even with immigration. Australia had a minimum wage as early as 1907 (two guineas a week at that time, considered a living wage). Pioneers in many micro-economic reforms, Labor governments tended to drag their feet when it came to their core constituency — the main reforms (including wage bargaining at company and even individual level) mostly came as from 1996 under Liberal governments. Unemployment is still low at six percent yet Australia’s labour reforms remain a continuing story because the country faces the challenge of upgrading its skills — immigration policies now focus on encouraging skilled people to enter the country.

The Swinburne University economist sees the contrast between the Tariff Board of 1921 and the Productivity Commission (PC) of 1998 as illustrative of the evolution of Australian policy development over the last nine decades. The Tariff Board reflected a protectionist orthodoxy and a British connection which only began to be challenged in the 1960s. But together with a growing realization that Asia was Australia’s biggest market, the 1973 oil crisis led to the Industries Assistance Commission (renamed Industry Commission in 1990), which was premised on the new challenges being met by improving efficiencies rather than changing structures. John Howard’s initiative of the PC not only changed the focus to national productivity (especially industrial), as the name suggests, but also switched to a medium-term perspective with “evidence-based policy-making.”

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