Economic Reform and Productivity Regulatory Policy

Regulation is pervasive in modern societies. However, well targeted and designed regulation can generate significant benefits – delivering economic, social and environmental outcomes that may not have been achieved through a laissez-faire system. However, unnecessary or poorly formulated and implemented regulation can expose business to excessive compliance costs, stifle market competition and distort resource allocation in the economy. To ensure that regulation delivers the greatest net benefit to the economy, it needs to be properly justified and well designed, to avoid imposing unnecessary compliance costs. Significant productivity gains have been made since the 1980s from regulatory reforms, directed at: sharpening incentives to be more productive through increasing competition from domestic and overseas sources; opening the domestic economy to trade, investment and technologies from overseas; and providing greater flexibility e.g. more flexible labour markets to adjust production processes and business operations to improve productive capabilities. • • • These reforms included deregulation of access to finance, floating the currency, establishing the independence of the Reserve Bank of Australia, marked reductions in trade barriers and restrictions on foreign direct investment, commercialisation and privatisation of government business enterprises, and increasing labour market flexibility (Parham, 2003). Independent research (Salgado, 2000) found a positive link between Australia's structural reforms and productivity growth. Relative to the rates in the 1980s, these estimates suggested that reforms, which have included deregulation initiatives, have lifted Australia's trend total factor productivity by between 0.5 and 0.9 percentage points in the aggregate level during the 1990s productivity boom cycle. In order to explore more opportunities for productivity improvements there also needs to be a focus on the stock of existing regulation, the growth of new regulation and the associated compliance costs. According to the Productivity Commission (PC 2006), the compliance costs of regulation are significant and could be as high as 4 per cent of GDP per annum – up to $35 billion in 2005-06. Regulation is also rarely reviewed.Instead in many circumstances ineffective regulation continues to be applied, reducing business flexibility, decision-making ability, investment, innovation, competitiveness, and productivity. While ineffective and overly intrusive regulation is an obvious problem, initially good regulation, in a dynamic market economy, can also evolve into stifling regulation. Clearly all regulation must be reviewed on a regular basis. Developing effective processes prior to introducing regulation will significantly reduce the overall cost of regulation to the Australian economy. Implementing an agreed and transparent regulatory framework will ensure …