Glenn Stevens: "Reform" and economic growth
Remarks by Mr Glenn Stevens, Governor of the Reserve Bank of Australia, to the National
Reform Summit, hosted by The Australian and The Australian Financial Review, Sydney, 26
August 2015.
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Thank you for the invitation to take part in this very important discussion. It is pleasing to see
so many influential people coming together for a discussion about the country's economic
future.
In a sense, I am really an observer here, because the things you need to grapple with today
are mostly outside my remit. Australia's monetary system is still - I trust - well supported by
all the key stakeholders here. It has helped to deliver good outcomes. Our financial sector is
robust and stable. But a stable monetary standard and a strong financial system, while
necessary conditions for prosperity, are not sufficient ones. More is needed - and that's why
you are here.
Your topic is "reform" in the broad. It's a term that will be used frequently over the next few
hours.
What does it mean?
Often it is presented through the lens of allocative efficiency, otherwise known as
productivity. And this is very important. Ideally, production and demand each face and
respond to, without distortion or impediment, underlying relative costs. Those relative costs
are given by the state of human and physical capital, technology, natural resource
endowments and so on.
Generally, economists think optimal allocative efficiency is achieved by removing barriers to
competition in markets - be they tariffs, subsidies, protectionist devices, unnecessary
regulation - and allowing relative prices to allocate productive resources. For most products,
competitive markets will deliver the greatest choice at the lowest price to informed
consumers.
Granted, there are various exceptions to the generalisation above. Where markets are
"natural monopolies" or externalities exist, for example, regulation is called for. Good
outcomes won't occur if consumers are not well informed. And so on.
Nonetheless, I would venture that the biggest gains to prosperity over the past 25 years have
come from more competition. (Aside, that is, from gains from the terms of trade, about which
we can do nothing and which usually don't keep coming). Competition lowers prices and
costs. It promotes the drive to do better, which spurs innovation.
Minimising distortions due to the tax system also has a role in enhancing allocative
efficiency.
These things remain important. You should talk about them today. The "to do list" remains
substantial.
In arguing the case for reform, though, the way the discussion is framed matters.
I would like to suggest that "reform" is a term which excites the intellectual elites and the
various interest groups (including those who feel they have something to lose from reform)
but doesn't do much to excite the general public. And getting buy-in from them is ultimately
critical. To be sure, they have to be led. But they have to be convinced too.
I submit that the general public is much more likely to grasp, intuitively, a conversation about
growth. Growth in jobs, in incomes, in their standard of living, wealth and prosperity. Better
allocative efficiency, if we could secure it, would doubtless add to growth. That growth is
worth having.
But the story is also about how to secure more dynamic effects: increasing the resources
available to be deployed in economic activities of various kinds; fostering conditions under
which innovation and genuine risk-taking flourish. In that regard, how to minimise adverse
effects on work effort, enterprise, capital accumulation and innovation, due to tax or other
factors, would be a worthwhile question - accepting, as a condition, that there is an amount
of revenue the government must raise to fund the provision of services only the government
can supply. Minimising those adverse effects means a larger economy; more income; more
revenue and so on.
In parallel, there is no avoiding the need to have the right labour market arrangements. The
question is how to have suitable rules that offer basic fairness, but with minimum adverse
effects on enterprise, employment, and the scope for free agents to come together in ways
that mutually suit them - and that grow the economy. Whether we have that balance right is
a question you might address.
Growth is important. And for a while now, there has not been quite enough growth. There
has been growth, and more than in many countries. But, recent labour market outcomes
notwithstanding, not as much as we ought to be capable of. Growth rates have mostly
started with a "2" for a while now - despite the lowest interest rates in our lifetimes, banks
able and willing to lend and measures of consumer and business confidence generally about
average (notwithstanding what we keep reading in the media). This may be simply a feature
of the post-financial crisis world - the need for balance sheet repair. It may be about
changing demographics. It may be that potential growth is a bit lower than we used to think -
though I don't think we can know whether that is so at present.
But whatever the factors at work, we are unavoidably and inexorably being led to the
question: how do we get more growth? The fiscal policy debate, usually framed as "when will
we get back to surplus?" is actually about: how do we get more growth? Other discussions,
so often framed as about "fairness" - that is income distribution - might be better framed as:
how do we grow the pie? That isn't because distribution doesn't matter. It's because
distributional issues surely get easier with growth but much, much harder in its absence.
Reasonable people get this. They also know, intuitively, that the kind of growth we want
won't be delivered just by central bank adjustments to interest rates or short-term fiscal
initiatives that bring forward demand from next year, only to have to give it back then. They
are looking for more sustainable sources of growth. They want to see more genuine
dynamism in the economy and to feel more confidence about their own future income.
So in your deliberations today, a key question worth asking is: how do we generate more
growth? Not temporary, flash-in-the-pan growth, but sustainable growth. How do we craft a
credible, confidence-enhancing, narrative about growth?
That's actually what "reform" is about: making things work better for higher income and
wellbeing. If there are some things of substance that you could agree on, it would be a step
forward.
Present here in the room you have the intellectual resources, the stakeholders, the
leadership and the communication capabilities. In short, you have the ingredients.
Over to you.