Seeing economic forest for the trees

Growing the economy is a bit like growing a forest. It takes time and is subject to climatic conditions. Trees are eventually harvested but work done today matters in the future. Our political debates focus on the macroeconomic level of the economy. That’s big picture stuff, things like interest rates, inflation and the budget deficit. The strange phrase “NZ Inc” gets thrown around. We look at the whole forest – not the trees.

To get our economy performing better, government should examine the individual sectors that make up our economy. This is known as “microeconomic reform”, working on the sectors that are inefficient to make our economy run more smoothly as a whole.

In recent years, the favoured solution to problems has been to allocate more taxpayer money and create a central bureaucracy. People often want more rules and bans – and some think a monopoly will be efficient due to scale. However, this approach hasn’t worked, and more government rules can often make things worse.

Those rules and regulations have a big impact on how businesses operate. Some of our biggest private businesses rely on the way the laws work. Monopolistic or anti-competitive situations are often created by incumbency, government legislation, standards or regulations – which create barriers to new entrants in our small economy.

Monopolies can be government-owned. These monopolistic firms get to pass on their costs rather than striving to be more efficient. While it’s unfashionable to admit it, business in a competitive market is incentivised to reduce costs and provide services efficiently.

We have the Commerce Commission to act as the competition police or hope that the market forces will break up monopolies. Politicians commission another study or report. Decisive action is rare.

Microeconomic reform means government taking action to enhance economic productivity, taking away the barriers that prevent the market working more freely and efficiently.

Ensuring the rules and standards are the minimum, focused and up-to-date. Levelling the playing field in different sectors of the economy and forcing business to compete.

This can go as far as forcing the breakup of monopolies through legislated changes in ownership to prevent a business controlling a market.

Competition tends to be very useful for consumers, keeping a lid on price rises. The pressure forces business to keep an eye on costs. Innovation and more efficient service provision by business is rewarded. Consumers choose the best option rather than the only option.

More competition is almost always a good thing. We always see this starkly when airlines start competing on a particular route.

Innovators can bring new solutions to consumers, leverage new technologies and provide a better service to win the work. So why don’t governments do this more often?

The Eighties reform era was rapid and brutal. This has left politicians reluctant to intervene to reset markets. The right says it will interfere with property rights. The left says it’s part of the “neoliberal agenda” – whatever that is. This has created a fear of action and created inefficiency.

Our Commerce Commission said in 2001 that going from three to two supermarket chains would substantially lessen competition. The commission also found that the barriers to entry into these markets are high, so two incumbents would not face competition from potential new entrants.

But this was overridden by a protracted legal battle. The Government of the day didn’t act, and we deal with the consequences today.

Where our government has tidied up the market structure in recent decades – it has been pretty successful. The operational separation of Telecom – which split the phone network from the retail business, opened the telecommunication market and gave us cheaper and better communication. And the shareholders benefited from the more dynamic successor companies.

This followed the breakup of the Post Office in the 1980s, which also improved the quality of service and provided a spur to the delivery of new technology and solutions. Prices fell and productivity rose.

Prior to the electricity reforms of 2010, there were considerable problems each winter with estimates the hydro dams would “run out of water”. We were subjected to lectures about switching off lights and fear of blackouts.

The Key government rebalanced the electricity market, shuffling power station ownership so that the true value of the water in the big dams was recognised. Market forces better managed the resources and we all benefit today. Prices didn’t explode – because competition was more effective.

Our new Government wants to grow our economy. Reducing government distortions caused by regulations or government presence is vital to growing our economy. They could start looking at sectors like building supplies and supermarket distribution, where competition is limited.

The Government toolbox should include aggressively encouraging stronger competition and breaking down barriers to disruption. Microeconomic reform should be a priority. Time to trim and prune that forest.

Tim Hurdle is a former National Party senior adviser and is a director of several companies, including Museum Street Strategies, a public affairs firm.