OECD's
Australian Economy
Review Says
Infrastructure
Development
Must Continue
Where
Performance
Blends With
Resilience
Australia
has a strong
track-record
in pushing ahead
with sensible
reforms. Major
progress has
been achieved
by the country
in providing
a coherent framework
for delivering
infrastructure
services, but
unfinished business
remains. Further
reform is needed
to underpin
vigorous growth
and sustainable
prosperity in
the face of
population ageing,
according to
a survey by
the Organization
for Economic
Cooperation
and Development
(OECD).
This
2006 edition
of OECD's periodic
survey of the
Australian economy
finds that reforms
have raised
both economic
performance
and resilience,
but that some
challenges still
remain, including
closing the
productivity
gap and raising
labour utilization.
Individual chapters
look at fiscal
relations across
levels of government,
further reforming
infrastructure
services, providing
greater flexibility
in workplace
conditions,
and improving
incentives to
work, especially
for older workers
and women with
families. The
survey published
recently, said
further reforms
would raise
productivity
and reduce bottlenecks,
including those
most visible
recently when
many ships were
forced to queue,
some up to a
month, to load
commodity exports,
which were key
to the Australian
economy.
The new National
Reform Agenda
builds on and
continues the
National Competition
Policy reform
programme, focusing
on reform in
the areas of
energy, transport
and infrastructure
regulation.
However, important
implementation
details are
still to be
determined,
particularly
in relation
to electricity
market reform
and road and
rail freight
infrastructure
pricing. So
reform outcomes
remain uncertain.
Cooperation
between the
federal and
state governments
will be crucial
for establishing
a final programme
that delivers
the necessary
reforms.
In the light
of regulatory
delays relating
to infrastructure
development,
the time taken
for regulatory
decisions should
be closely monitored,
especially where
it is likely
to impinge on
export performance.
The Council
of Australian
Governments
has agreed that
an appropriate
time for such
decisions should
be at most six
months, rather
than as in some
recent cases
a number of
years. This
decision was
part of a broader
COAG agreement
on arrangements
for a simpler
and consistent
national approach
to the economic
regulation of
significant
infrastructure.
It is important
that these arrangements
be implemented
expeditiously,
but if delays
continue to
be excessive
then further
intervention
by the Commonwealth
would be appropriate.
Need
for Transport
Reform
The central
and state governments
should establish
an integrated
transport reform
agenda within
a co-operative
framework covering
all elements
of transport.
Competitive
neutrality across
all transport
modes should
be achieved;
barriers to
competition
in individual
modes be removed;
and interfaces
between modes
enhanced. State
governments
should also
complete all
outstanding
National Competition
Policy electricity
reforms, lifting
price regulations
for households
and instilling
stronger competition
in the electricity
generation sector.
The level of
government and
private sector
expenditure
on infrastructure
has lifted markedly,
partly in response
to the commodities
boom. It is
important that
this expenditure
is not pushed
to a level beyond
the infrastructure
supply capacity
of the economy
as this will
add to cost
pressures. Furthermore,
in the Australian
context, the
major challenge
is to improve
pricing and
regulatory arrangements,
rather than
increasing the
total volume
of infrastructure
Trends in infrastructure
investment.
Engineering
construction
activities,
current prices,
in percent of
GDP
Source: Australian
Treasury; ABS
(2006); Australian
National Accounts:
National Income,
Expenditure
and Product
(cat. No. 5206.0)
and Engineering
Construction
Activity, Australia
(cat. No. 8762.0).
Legal barriers
to entry in
infrastructure
services are
relatively high(1)
2003
1. Indicator,
higher values
denote greater
legal barriers
to entry. Source:
Conway, P.,
V. Janod and
G. Nicoletti
(2005), “Product
Market Regulation
in OECD Countries:
1998 to 2003”,
Economics Department
Working Papers,
No. 419, OECD,
Paris.
The scarcity
of water remains
a major issue
and progress
in this area
has been disappointingly
slow. The National
Water Initiative
is a framework
agreement between
the federal
and state governments
which provides
for further
reforms and
it is vital
that these are
pushed ahead
rapidly. It
aims at establishing
a water market
with tradable
water entitlements.
This is a prerequisite
to better integrate
the rural and
urban water
reform agendas
and to ensure
that water prices
reflect the
scarcity of
water and of
environmental
amenities. To
this end, cross-subsidisation
of water usage
between urban
and rural users,
and also between
different types
of agricultural
users, should
be phased out.
Index
of the ability
of infrastructure
to support economic
activity(1)
1. Global competitiveness
index where
the scale varies
from 1: infrastructure
is poorly developed,
to 7: infrastructure
is among the
best in the
world. The index
combines publicly
available data
and the results
of country surveys
of business
executives.
The OECD aggregate
is an unweighted
average. Source:
World Economic
Forum (2005),
The Global Competitiveness
Report 2005-2006,
Global
Commodities
Boom
Sometimes referred
to as the “lucky”
country, Australia
has been riding
the global boom
in commodities,
benefiting increasingly
from its proximity
to Asia. But
Australia “has
also made its
own luck”
through a series
of structural
reforms and
the introduction
of a robust
macroeconomic
framework, which
have bolstered
resilience.
This is illustrated
by its macroeconomic
stability in
the face of
a string of
recent shocks,
in stark contrast
to the macroeconomic
chaos, which
followed the
commodities
boom of the
early 1970s.
A further test
of this new
resilience will
occur at some
point when the
terms of trade
decline this
underlines the
need to continue
prudent macroeconomic
policies.
Reforms have
also boosted
productivity,
with living
standards steadily
catching up
with the best
performing countries
since the early
1990s. The long-term
challenge is
to sustain this
performance,
particularly
in the face
of population
ageing, which
will require
progress on
a number of
fronts:
Improving fiscal
relations across
levels of government.
Many public
services are
funded jointly
by the central
government and
the states.
Clarifying roles
and responsibilities
would raise
public sector
efficiency.
Particularly
in the areas
of hospital
services and
old-age care,
fragmentation
in decision-making
leads to cost
and blame-shifting.
Addressing these
problems has
been placed
on the agenda.
Boosting productivity
growth. Following
a surge in the
second half
of the 1990s,
productivity
growth has reverted
to its long-run
average. Infrastructure
bottlenecks
have held back
export growth
in some cases.
More importantly,
there is still
further business
in the reform
of network industries
and inefficient
use of water
remains a major
concern. The
slow pace in
overcoming market
segmentation
and instilling
greater competition
in these sectors
is partly due
to the joint
responsibilities
of the federal
government and
the states,
although, the
Council of Australian
Governments
has recently
agreed to a
National Reform
Agenda that
aims to re-invigorate
and broaden
the reform process.
In this context,
improving workforce
skills will
also be important.
Raising labour
market flexibility
and supply.
The recent industrial
relations reform
is a further
move away from
a system that
had been highly
prescriptive.
Room for further
simplification
remains, which
would allow
greater scope
for bargaining
over workplace
conditions.
In addition,
labour supply
can be raised
further, particularly
from lone parents,
second earners,
disability beneficiaries
and those aged
over 55. The
recent tightening
in eligibility
requirements
for welfare
benefits goes
in the right
direction, but
should also
be applied to
the stock of
all beneficiaries.
A priority for
future tax cuts
should be to
reduce “low
wage traps”.
