Henry Thornton - Politics: A discussion of economic, social and political issues A Keating kick-along required as timidity stalls reform Date 01/07/2009
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The Rudd Government is moving slowly on enacting reforms to Australia's financial system. This hesitancy is likely to impede future growth in the Australian economy.

“That's not a knife – this is a knife” - Crocodile Dundee, 1986.

THE Rudd Government's inability to make decisions on three sharemarket operator licence applications is but one of many examples of its timidity on microeconomic reform.

Its stock excuse – “market volatility” – doesn't cut it. Labor's last great reformers – Bob Hawke and Paul Keating – didn't let even greater volatility derail their microeconomic reform agenda.

In 1987, despite the sharemarket plunging 25 percent in a single day and 50.1 percent in 37 days, Keating declared that the government would not “run around like a chook with its head cut off trying to recast policy” just because of that.

Our 2007-09 slide was much less frantic. The market fell a similar amount (54.1 percent) but far more slowly (over 340 trading days). Its biggest one-day drop was only 8.2 percent.

Nevertheless, it turned the government schizophrenic: a macroeconomic chook (spending wildly), but a microeconomic ostrich.

Hawke and Keating didn't bury their heads in the sand. They argued that the crash raised the importance of structural adjustment and vowed to maintain its pace.

Just days after the 25 percent plunge, tariffs were cut and oil prices were de-regulated – both to promote competitiveness. Within three months, Industry Minister John Button announced an immediate 12.5 percent auto tariff cut and abolished import quotas – again, to promote competitiveness.

Within six months, Keating delivered a mini-Budget to “increase the competitiveness of every sector,” accelerate structural adjustment and free “dynamic forces in the economy.”

He slashed tariffs an average 20 percent, cut industry subsidies and reduced real government spending by 1.5 percent to produce the first Budget surplus since Gough Whitlam in 1974-75.

Keating did this despite unemployment of 7.8 percent when the crash hit. It was only 4.4 percent when our recent slide began and remains under 6 percent.

In 19 months, Kevin Rudd has ended only one monopoly (export wheat).

Liquidnet and AXE applied for sharemarket operator licences 27 months ago, and Chi-X 17 months ago.

In fairness, the Australian Securities and Investments Commission (ASIC) took 18 months – far too long – to appraise the applications. The 1997 Wallis Review of our entire financial system took only nine months.

Nevertheless, ASIC recommended that then Financial Services Minister Nick Sherry approve all three applications 15 months ago. Former Treasurer Peter Costello responded to Wallis' recommendations within five months.

Sherry sat on ASIC's recommendations, but nothing had hatched when Rudd replaced him with Chris Bowen earlier this month.

Fifteen months ago, Sherry said a decision would be made “in the next month or two.” Thirteen months ago, he said: “I've got a duty to make a decision about those licences.”

Ten months ago, he said he was convinced that the applicants could operate without increasing market volatility and that a decision would be made “within weeks.” In March, he said the Rudd Government had “reprioritised” due to the “GFC – Global Financial Crisis” and “volatility.”

AXE's part-owner New Zealand Stock Exchange (NZX), said in February that “in 22 months, AXE has received neither a response from the government, nor a timeline for consideration” of its application.

Liquidnet told me yesterday that it was a “terrible indictment on the government and regulatory process” that companies offering impressive innovations “have been made to wait so long.” One applicant told me yesterday that, despite repeated requests, it had not heard anything from a minister since March last year.

Wallis – like the Campbell and Martin Reviews (conducted 28 and 25 years ago respectively) supported sharemarket competition; Wallis also recommended that licence decisions be made by an independent regulator, not a minister.

While Costello accepted competition in principle, he didn't delegate licence decisions to ASIC. If he had, we would have had a competitive stock-market 15 months ago.

The Rudd Government's hand-sitting stands in marked contrast with the Hawke/Keating Government's first-term reforms.

Within nine months, it floated the dollar. Within a year, it had decided to open the banking sector to foreign competition; within two years, it had granted 16 licences.

While ASIC's positive recommendations made it easy for Sherry, Keating made these decisions against the advice of Treasury Secretary John Stone. Keating didn't let volatility claims bother him.

He claims Stone warned that the dollar “would be thrown around like a cork in a bath.” But what mattered was volatility of the real economy, not a financial price. The float decision has repeatedly insulated our economy from overseas disturbances.

Keating acknowledged Stone's view that insufficient information existed to justify the float, but argued that “ministers take the risk. They can't be certain. That's how countries get their kick-along – by decisions.”

When the dollar was floated, unemployment was 9.5 percent – far higher than even the pessimists predict our unemployment will reach.

Anyway, “volatility” can't be used as an excuse now. A standard volatility measure (used by the Australian Stock Exchange (ASX) and Reserve Bank of Australia (RBA)) is the frequency with which absolute one-day market moves exceed 3 percent.

This measure peaked at 12 per 20 trading days eight months ago (only seven of those were negative). In 1987, it reached 15 (10 negative). In the past six months, it hasn't exceeded three (often positive); it now stands at one.

The costs of delay are substantial. The evidence is compelling: competition reduces volatility and trading costs (see my “Do not pass go: time to tackle a monopoly that delivers outrageous profits”, published March 11 last year).

Of course, the ASX claims the opposite. The Rudd Government's naivety and/or pandering to vested interests has stymied multiple microeconomic reforms. Keating didn't let vested interests stymie him.

We've already lost 15 months worth of benefits – just when they were badly needed. That's bad enough, but delays also dampen future competition – ASX is already proposing or implementing many innovations that the applicants had proposed.

The Rudd Government claims it is pro-competition, innovation and employment and wants to cut super fund fees and build Australia into a major financial hub.

Yet its inaction has prevented competition and innovative business models. After waiting so long, AXE retrenched staff months ago.

Preventing trading cost reductions doesn't help cut super fees or the financial hub aspiration – nor does the appalling treatment of three potential entrants that serve and/or are owned by the world's largest financial institutions.

Rudd faces just as many microeconomic reform challenges as Keating. They're just different – like introducing emissions trading, removing water trading barriers and introducing sharemarket competition. On all these and more, they've let vested interests stymie reform.

Paul Kerin is Professorial Fellow, Strategy, at Melbourne Business School.


As published in The Australian on July 1, 2009.