Reforming Economic Reform

By Hyde, John | Review - Institute of Public Affairs, March 1999 | Go to article overview

Reforming Economic Reform


Hyde, John, Review - Institute of Public Affairs


It is about fairness and morality-so reformers should say so.

MY host had barely accomplished the usual pleasantries when he opened what might have been a vigorous conversation with `What price economic rationalism now?' I had only started to protest that Australia was escaping the Asian meltdown for some reason, when his wife said firmly, `I am seating you two at opposite ends of the table'. I'm not very brave in such situations and have let him go on believing that Hawke's financial deregulation and tariff reduction, Howard's fiscal rectitude and labour market reform (such as it was) and the privatizations and deregulations of both political sides, State and Federal, were in vain.

In spite of 3 to 5 per cent economic growth, less than 2 per cent inflation and a relatively stable dollar while neighbouring currencies bum, people will keep telling me that economic rationalism has failed. It is true that we still suffer around 8 per cent unemployment, inadequate savings and high welfare dependency. These are, however, long-standing problems for which the economic rationalists' solutions have not been attempted. Neither will they be tried until voters accept the need to do so. Meanwhile, the 8.5 per cent of the vote captured by One Nation is more than a straw in the wind.

Reform must be made acceptable, if not popular, and how to make it so is itself an issue. The democratic economic reformer faces three formidable hurdles: one is that economic logic is counter-intuitive to most people; another is that reform always imposes costs on some people and the costs come before the benefits; and a third that people who benefit from the status quo are identifiable, concentrated and organized, while those who will benefit from change are not. He no longer, however, has to convince economists and administrators and more thoughtful political leaders, such as Tony Blair, who are already experimenting with terminology and argument to give reform an acceptable face.

Reports of economic rationalism's death are greatly exaggerated. It is true, for instance, that several leading economists now advocate a measure of government control over capital movements. It is not the case, however, that they have abandoned their belief in foreign investment or learned that investors don't care whether they can recover their funds; it is just that, rapid withdrawal being disruptive, they believe that a modest brake on capital flows from vulnerable economies will, in current circumstances, produce net gains. Current warnings about deflation reverse nothing. Reserve bankers have always feared deflation but until recently their problem has been inflation. Similarly, although many economists doubted that Hong Kong could burn off of the speculators (actually manipulators), they had always recognized the risks inherent in fixed exchange rates, never doubted that monopoly power could be employed to counter monopoly power, cheered when it succeeded, and are right about the price that has been paid for the success.

Public, not informed, opinion is the principal barrier to change and it must be addressed. …

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