Speech to the Annual Business Symposium, Economics Society of Australia, Canberra, 2 October 2003

 

In an open dynamic economy, reform is not an optional extra. It is a necessity. In a world of economic change, reform should be the natural order of things.

Unfortunately, this is no longer the case in Australia. Our national debate has developed a reform blind-spot. The Howard Government is no longer interested in economic reform. It sees national security as a political winner and has lost interest in other issues and ideas.

The Australian economy faces a number of important challenges: the housing bubble, falling housing affordability, low national savings, a record Current Account Deficit, declining productivity and high marginal tax rates. Yet the Government is in a state of denial and inaction.

Can anyone remember the last time Peter Costello gave a serious speech on economic reform? It is only a matter of time before this policy complacency catches up with the Government and the Australian economy.

The reform blind-spot, however, goes beyond the Howard Government. It is a regular part of political commentary in this country. One of the good things about being in the Labor Party is that we get attacked from both ends of the political spectrum – the far Right and the far Left. This usually confirms that we are on the right track.

In practice, the far Right and the far Left are on a unity ticket. They are both very good at saying why something should not happen, why things should stay the same. They are on a unity ticket against reform.

For Right-wing conservatives, of course, this is hardly surprising. Arguing against change is their stock-in-trade. Tory elites like Tony Abbott and David Flint are more interested in the past – winning the history wars and preserving the English monarchy – than the future of the Australian economy.

But what I find really puzzling is Left conservatism: knee-jerk opposition to new proposals and new ideas. These commentators are good at outlining the things they oppose but never the things they favour. I can never understand how they expect to create a better and fairer society by supporting the status quo.

I can assure you this is not the Labor way. We believe in economic reform. We built the modern Australian economy during the Hawke and Keating years and we want it to adapt to changed circumstances. We want to implement a new reform agenda, to give the Australian economy a second round of productivity gains and competitive advantages.

This is unashamedly an interventionist strategy. When markets fail, governments must intervene with policy reforms. This is why we need industry policy, to correct the market’s failure to invest adequately in research and development. This is why we need labour market programs, to correct the market’s failure to invest in the skills of low-paid workers and the unemployed. This is why we need competition policy, to overcome the market’s tendency towards collusion and industry concentration.

Competition Policy

Private sector competition has always been central to Labor’s economic agenda. Trade practices law, lower tariffs, financial reform, new markets in energy and telecommunications – these are all Labor legacies. The Tories talk about markets but they never reform them. They talk about competition but they never implement it.

This is the big difference in Australian economic policy. Labor believes in competition and productivity. Our political opponents believe in business deals and preferment – a system of crony capitalism, in which selected companies receive government subsidies and favouritism.

This has always been the Coalition way. It was the basis of McEwenism in the 1960s. It was the way in which Malcolm Fraser and John Howard ran the Australian economy in the 1970s and early 80s. It is now a feature of the Howard Government’s industry policy – its shameful record of preferment in the alternative fuels sector.

When markets are distorted in this fashion, investment flows into inefficient uses, damaging economic growth and employment. We all suffer because of rorted public policy and government favouritism. The growing damage to the Australian ethanol industry confirms the folly of this approach.

When they work properly, the good thing about markets is that they aggregate all our interests. You don’t have to be someone’s mate to market a product or sell a service. Of course, inequality – inequality of income and especially of wealth – determines the level of participation in the market. The rich can buy and sell more than the poor.

But when I look at the economy and compare it to society, the inequality of income and wealth is dwarfed by the inequality of power and political influence. Many can get access to the market, but very few people can get access to a Liberal Prime Minister.

This is why the public sector needs to be above preferment and dealism. If governments, elected by the will of the people, do not treat people fairly in the market then nobody else will. This is the real tragedy of crony capitalism: it takes the inequality of the market system and magnifies it many times over through the corruption of the state.

Governments do not need to mould the market economy. They need to open it up to competition. This involves the dispersal of economic power and privilege – one of the basic principles of the ALP. We believe that those with limited resources should not have to pay higher prices in concentrated markets. We believe that the nation’s consumers should not be limited in their choices. We believe that economic investment should be allocated in a way that maximises the national economic interest.

And we believe that the executives at the top-end-of-town who insist on change for others, should not be immune from it themselves. Through competition policy, we want opportunity for all and special privileges for none. This is where the efficiency and equity arguments come together.

The obscene growth of executive salaries and payout packages in recent years has had a negative impact on staff morale and incentive. It is one of the factors holding back productivity in the Australian workplace. Why should workers put in long hours and extra effort when the financial benefits of their labour are captured by just a handful of senior executives? Greater economic equality, with a genuine system of gain-sharing and reward for effort, can help boost labour productivity.

Take the example of the Commonwealth Bank’s CEO, David Murray, who last week received a $200,000 pay rise, taking his annual salary to $2.5 million. This coincided with his announcement of the abolition of 3,700 jobs. This double standard sends a jaundiced message to the bank’s staff: an obscene amount of money for the CEO; job insecurity and inadequate pay for the people who do most of the work.

Indulgences of this kind are a product of greed and anti-competitive markets. Anyone who has met Mr Murray would know that, while a dogged and strong person, he is not worth $2.5 million. Anyone who understands the Australian banking system would know it is not that hard to turn a profit. The level of competition is so low that Australia’s banks have the highest margins in the Western world. With compliant boards and disempowered shareholders, the top executives have been given a blank salary cheque.

Competition policy is the best way of cleaning out the rorts and featherbedding of concentrated markets. Economic efficiency and fairness can co-exist. Competitive pressures help companies to upgrade their technology, expand their markets and lower their prices. They also help to level the playing field, exposing the indulgences of big business and giving smaller players the chance of market entry. This is why I am unequivocally pro-competition.

Private Sector Competition

Since 1995 the competition debate in Australia has concentrated on the public sector. This was an important reform process, with a major boost to growth and living standards. According to the Productivity Commission, the Hilmer reforms have increased GDP by 2.5 percent and household incomes by an average of $7000.

Post-Hilmer, Australia needs a new competition agenda. Over the past eight years, the focus has gone off the private sector, with a loss of competition in many parts of the economy. Under the Howard Government, market competition is in decline, with the private sector trending towards duopoly and oligopoly. This can be seen in the retail, banking, airline, media and telecommunications industries and, of course, ethanol. The purpose of Labor’s competition policy is to put the spotlight back on the private sector and the need for trade practices reform.

In terms of market concentration, the evidence is damning. In the grocery sector, Australia has a near-duopoly, with Coles Myer and Woolworths enjoying 76 percent of the market. By comparison, in the United States, the top five grocery retailers have one-third of the market. Wal Mart, a huge company by international standards, has a market share of just 15 percent. In the United Kingdom, the top three retailers occupy no more than 55 percent of the market.

The trend to duopoly is widespread. Beer manufacturing in Australia is restricted to two brewers, with 90 percent of the market between them. In domestic aviation, the situation is now worse than the bad old days of the two-airline policy, with Qantas taking a dominant 70 percent market share. In the expanding area of health care, the top two pathology services have 80 percent of the market. Even in the relatively dispersed pharmaceutical sector, the top three retailers have a market share of 45 percent.

To make things worse, the Howard Government wants to abolish Australia’s cross-media ownership laws and entrench Telstra as a near-monopoly in the telecommunications market. Bit by bit, the market reforms and competition of the 1980s and 90s are being unravelled. The Coalition is pro-business and pro-preferment. Only Labor is pro-market and pro-competition.

This is the essence of our economic record. Labor’s first wave of change was to open up the economy to international competition. In the second wave, Labor introduced Hilmer and national competition policy. The next Labor Government will embark on a third wave of change, equally robust, increasing competition in the private sector, increasing Australia’s productivity and living standards.

We will strengthen the Trade Practices Act and increase the powers of the ACCC. Our approach is competition where possible, regulation where necessary. Our goal is to shift the balance of economic power away from big business and towards small- to medium-sized enterprises. In practice, I want the Trade Practices Act to be a Small Business and Consumer Protection Act.

Labor’s first task is to repair Section 46 (abuse of market power), especially given the High Court’s decision in the Boral case earlier this year. Even though the ACCC showed that Boral was pricing below avoidable cost in order to eliminate a competitor (that is, predatory pricing), it was unable to demonstrate that Boral had substantial market power (under the terms of Section 46). The court indicated that financial strength did not equate to market power.

Post-Boral, small business in Australia has next to no protection against anti-competitive conduct. Section 46 is an empty shell. The ACCC has won just two cases on abuse of market power in 13 years. As Allan Fels has said:

It defies belief that there have been only [two instances] since 1990 where big business has used its market power to harm competition If Section 46 does not work then one of the most important protections of competition is missing from the Australian economy.

Labor’s policy is to outlaw predatory pricing, irrespective of the market power of the companies involved. We will amend Section 46 to prohibit anti-competitive predatory behaviour. We will also strengthen the current ‘purpose test’ to allow the ACCC to infer an anti-competitive purpose from the conduct of the corporation or the circumstances of the case.

Another important reform is to crackdown on hard-core cartels. This is a growing problem in the global economy. Collusion is not just a matter of bad corporate behaviour. It is a characteristic of industries where concentrated ownership encourages collusion to take place. This is why Labor will introduce criminal sanctions for cartels that engage in bid rigging, market sharing, output restrictions and price fixing. Amid the public demand for governments to get tough on law and order, it is time to apply the full weight of the law to the corporate sector.

Labor also supports the collective bargaining recommendations of the Dawson Review, the only provision from the review process to assist small business. We believe in rebalancing the Trade Practices Act – giving small business a level playing field on which to bargain with big business.

This is our first instalment of trade practices reform. A number of other issues are also being considered as part of Labor’s policy review. These include:

* The introduction of cease-and-desist orders to give immediate relief to small business and consumers from the abuse of market power. This is an international standard among competition regimes.

* Stronger provisions to deal with the underlying causes of collusion and anti-competitive behaviour – that is, markets with a high degree of concentration and control. In 1991, for instance, the Senate minority report on Monopolies and Acquisitions recommended that: “in cases of serious and persistent misuse of market power, the courts should have the power to order divestiture of the assets or component parts of the offending corporation”.

* New powers to deal with the problem of creeping concentration: allowing the ACCC to treat a series of acquisitions as one event. This is a big issue in the retail sector, where Coles Myer and Woolworths have acquired up to 90 independent grocers since 1995.

* Reviewing the provisions of Section 51AC, which deals with unconscionable conduct in relation to small business. The High Court’s Berbatis decision in April has raised doubts about the scope and effectiveness of this provision.

* Improving the coverage and success of the ACCC’s prices surveillance role, which has fallen away in recent years.

* Providing better protection for franchisees in disputes with the parent franchise company. Too many franchisors are able to abuse their market power and contractual obligations without any effective sanction under the current law.

* Improving the transparency and accountability of the ACCC, especially with regard to undertakings and authorisations. Markets rely on quality information and disclosure from government regulators.

This is a long list of issues for trade practices reform. It demonstrates the difference between Labor and Liberal. While the Government is yet to enact any of the recommendations of the Dawson Review (as limited as they were), the Opposition is working on its second instalment of competition policy. An economic reformer’s work is never done.

Conclusion

If Labor wins the next Federal election, we will not be ‘returning’ to office. We will come to power as a renewed Party to form a new Government. We will not be turning the clock back to 1996. Our agenda is about the future: giving Australia its next wave of productivity gains and competitiveness.

Competition policy is crucial to Australia’s future. Domestic rivalry helps to create a more efficient and dynamic economy. If we are to keep pace with other nations we must continually upgrade our skills and inventiveness. Competition policy is also about justice. It gives people the freedom of market entry and the opportunity to grow their business without the threat of anti-competitive behaviour.

The Howard Government talks a lot about the rights of small business but it has done nothing to improve these rights under the Trade Practices Act. Given a choice between the demands of big business and the needs of small business, the Liberals always go for the big-end-of-town. Even its Coalition partner is blowing the whistle. As the Federal Director of the National Party said recently:

The Liberal Party is seen as very good at representing the large end of town but it struggles to relate to the challenges of the average family and the average small business.

Labor has always put the interests of consumers and small business first. That’s why the Whitlam Government established the Trade Practices Act in 1974. That’s why the Keating Government strengthened the Act in 1995. That’s why the next Labor Government will implement a third wave of private sector competition policy. From where we sit, too much competition is never enough.