Monday, February 7, 2011

Comparing Tariff Reform with Climate Change Reform

In today's Crikey! Bernard Keane ("What Real reform Looks Like") has a very interesting piece on comparisons between tariff reform in 1991 and the reform needed to get a carbon price in the Australian economy. While I have some sympathy for Keane's views I think he underestimates the fundamentally different political situations prevailing in 1991 and 2011.
The Prime Minister’s comment yesterday extolling the “various elements of the Carbon Pollution Reduction Scheme” when asked about handouts to industries under a carbon price demonstrates that Labor remains committed to a political solution to climate change, not an economic one.
Only a few seconds earlier in that interview (on what is consistently the most substantial political interview program, Meet The Press), Gillard had referred, as she frequently does, to the reform courage of the Hawke and Keating Governments on floating the dollar and tariff cuts.
So let’s call the PM on that and do a comparison.
The Hawke government’s Building a Competitive Australia package, which slashed tariffs across manufacturing, would have to be one of the gutsiest reform decisions ever made by a federal government (even braver, for example, than John Howard’s finest moment, the gun laws). While union opposition mainly came from the Left in Labor (Andrew Leigh wrote a good account a while back) and the corporate sector was divided on protectionism, it was while a savage recession as still unfolding. When Hawke rose to deliver the package in Parliament in March 1991, unemployment was nearly 9% and rising.
Like carbon pricing, much of the debate over how far Australia should go in reducing tariffs was couched in terms of how our trade-exposed industries would fare when we started reducing protection and other countries did not. But the Hawke Government, recognizing the need to complete the opening of the Australian economy they had commenced in the 1980s, decided, on the advice of figures like Ross Garnaut, to adopt a unilateral approach to reform.
What “industry adjustment” assistance did our trade-exposed industries receive as part of the Building a Competitive Australia package? They got nothing. Hawke, Button and Keating put $90 million into a package for displaced workers to help retrain them and move them to other industries. There was also a rural adjustment package and increased services and loans for exporters. Otherwise, the big manufacturers got nothing.
And of course they got nothing. That was the very point of the reform.
The CPRS, in which the Prime Minister says “a lot of good work was done, contained so much industry assistance - — $20 billion over a decade — that it initially cost the Budget money. Far from being any sort of “great big new tax”, for the first five years of operation the CPRS would have cost the Budget a total of $4 billion. The CPRS wouldn’t have provided a net return to the Budget — ie: been any sort of tax, great, bit, new or otherwise, until the 2020s.
Most of the recipients of the industry assistance would have been foreign multinationals. Rio Tinto was largest, followed by Alcoa. BP, Shell, Norsk Hydro, Chevron, Mobil were all big recipients of free permits. Only local steel makers Bluescope and OneSteel and CSR figured among the top ten beneficiaries. None are major employers.
As the Grattan Institute subsequently showed, the exorbitant levels of assistance were far in excess of the actual level of actual impact of the CPRS on the most trade-exposed companies.
It’s appalling that the CPRS provided massive handouts to a number of the world’s biggest companies. It was indeed “good work” if you were a shareholder in Alcoa or Shell. But that’s a moral issue, not a policy issue. If the exorbitant handouts had no impact on the goals of the CPRS, or even facilitated them, there would have been a case for the CPRS.
Instead, by muting nearly the entire carbon price signal for our biggest polluters, the CPRS would have created an incentive for them to maintain business-as-usual at least until the 2020s, when the handouts were scheduled to start winding down — assuming the then-government was prepared to let them do so. It would have transferred the task of reducing emissions to the domestic economy and the power sector, which had its own set of less generous handouts.
Labor figures acknowledge the CPRS turned into a rentseekers’ frolic, with each government backdown encouraging more executives to book a flight to Canberra to wave rubbish modeling and warn of massive job losses, production cuts and the four horsemen of the Apocalypse. Australian innovation at its finest.
Nonetheless, despite the campaign waged by it all sides, Labor’s CPRS remained popular with voters right up until its axing last May. As far as voters were concerned, they wanted action on climate change, and the CPRS, which they didn’t have the faintest understanding of, ticked the box. After all, if Malcolm Turnbull was prepared to sacrifice his leadership for it, it must be OK.
Labor’s primary goal remains to convince voters it is taking action on climate change. Whether that action is effective is less important. That’s why they want to keep the handouts, and why there is going to be a fight with the Greens over them.
Thank goodness Hawke, Keating and Button were smarter than this lot.

Here is my response:


Thank you for your article. I've been thinking about this issue for a number of years and now that I have some study leave have been thinking about writing an academic article on the comparison between these two key reforms. I'm glad that someone in the media has finally seriously tackled the comparison, which is extremely pertinent for Australia's economic future.

There is no doubt that the 1991 package was a gutsy reform (I wrote about it as part of an article called "The Domestic Politics of Globalisation" in the Australian J of Political Sci) and I think the package was a major nail in coffin of the entire protectionist policy edifice in Australia. But the 1991 package was an important step in a long period of reform. The 1988 tariff cuts prepared the way, even though as you say the economic situation as remarkably different. By 1991, the Labor government had also built a coalition in support of tariff reform and had spent the previous eight years persuading and coercing Australians that such changes were inevitable.

There were still some sceptics in the business sector, but the battle of ideas had been won. Even the Metal Trades Industry Association accepted the inevitability of tariff reform. This is not the case with a carbon price. The government doesn’t have the same level of ‘business’ support.

Even the union leadership didn't argue too hard against the 1991 package with Martin Ferguson describing it as "sweet and sour". Labor also had an opposition arguing for harder and faster on the liberalisation front and key business sectors were effusive in their praise.

Importantly, much of the serious media were supportive. Leftist traditional Labor voters had nowhere to go but to vote Democrat or some other minor party, before they effectively preferenced Labor anyway.

Making a comparison, therefore, between this reform and the carbon price reform needs to acknowledge clearly the fundamentally different political situation facing the Rudd and Gillard governments: an opposition clearly opposed, a new government extremely uncertain about reform, a voting base with somewhere else to go, a media mainly opposed to acting before the rest of the world, key business sectors willing to fight the government in the media.

In both cases Labor has had to deal with a sceptical voting public. Especially important for Labor are the blue-collar (self-employed) voters many of whom were never convinced of tariff reform, perhaps still aren't. These can be opposed to another key section of Labor's constituency, the 'flat white' drinking, university educated voters who rightly saw an inevitability about the need for adaptation of the Australian economy and who no longer saw tariff protection as a panacea for dealing with Australian economic vulnerabilities. I imagine broadly that these two groups continue to divide over the issue of a carbon price and the broader issue of climate change and environmental protection. It’s important to remember the eventual political outcome for Labor was John Howard’s ascendancy, which was built upon garnering a large number of conservative former Labor-aligned voters.

It's also incorrect to argue that there was no adjustment assistance in the transition to lower tariffs. Labor's industry policies under Button were fundamentally about adjustment and we are still paying adjustment cash to two key industries, whose decline was managed by Labor in the 1980s and 1990s - cars and textiles, clothing and footwear. Big manufacturing in the form of the car majors and some minors got a lot and are still getting a lot!

I don't disagree, however, that the whole carbon price exercise has been one big exercise in rent-seeking and the level of compensation probably meant that not getting the CPRS was probably a good thing. This process is also why I prefer a simple carbon tax, the proceeds of which could be hypothecated into renewable energy research. And I mean research and not subsidisation of existing inefficient renewable technologies such as the ridiculous schemes to pay people to put up solar panels.


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