D. N. Harris & Associates
Institutional involvement in reform & adjustment issues
Institutional involvement in industry reform and adjustment:
The Australian experience
Paper prepared for the APEC Study Centre training course –
Managing industry adjustment to trade reform
Government policy development
Government decision making on issues such as trade reform and adjustment assistance is
based on advice and analytical inputs from a variety of institutional sources in the
Government sector. Policy advisers need to be aware of the role of different organisations
in the decision making process. Proposals for industry adjustment assistance must
consider the views and policy positions in other areas of Government.
Policy advisers in the relevant Government Department have the expertise to assess
industry developments and the impact of trade reform. They usually have the executive
authority to make judgements about the need for adjustment assistance. If the analysis of
the issue is well prepared the policy advice will stand-up to political scrutiny.
The final policy position is generally based on the interaction of these views with
political considerations. Elected representatives make the decision and their views will
reflect political reactions to the reform and adjustment issues. The executive arm of
Government considers the perspectives of all Government Departments and organisations
that have an interest in the policy response.
Other institutions become involved because their portfolio of responsibilities requires
them to consider the implications of the policy proposals. Some may have been involved
in the initial decision to introduce the policy reform. Other areas of Government may
have responsibilities that cover different aspects of the industry adjustment issue:
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the performance of the economy;
international trade obligations;
budget issues; and
welfare issues.
Inputs and decision making in Government policy
The policy response to an adjustment issue cannot be developed in isolation of previous
decision making and the implications for other areas of Government. Policy advisers
have to consider other institutional inputs when framing their advice:
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industry adjustment assistance has to be consistent with the country’s
international trade obligations;
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Institutional involvement in reform & adjustment issues
creating precedents in the justification for assistance can have implications for
other industry adjustment issues and other areas of decision making;
adjustment programs may introduce new distortions, negate the benefits of the
trade reform or conflict with other Government policy objectives;
the design of adjustment programs can affect funding requirements and the cost
of implementation and compliance; and
open-ended, uncapped assistance funded by tax-payers may have implications
for future budget outcomes.
Representatives of other areas of Government may have a different perspective on the
need for adjustment assistance. This is partly because the issue is tied to notions of equity
and ‘fairness’. It requires judgements about the need for assistance, the form of assistance
and the amount of assistance.
Proposals for adjustment assistance are initially developed by policy advisers in the
Government Department that has responsibility for the affected industry. The advice is
passed to the executive arm of Government through the relevant Minister. It is reviewed
and refined by the Minister and then submitted to the Cabinet for final approval:
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the Cabinet is typically a group of senior Ministers who make the final decision
on Government policy.
The Cabinet review process subjects the policy proposals to political considerations and
advice put forward by other areas of Government. It often involves presentations by the
various Ministers who have an interest in the issue. This process imposes ‘checks and
balances’ on policy proposals to manage the effects of industry adjustment pressures.
Policy advice should be presented in the context of the institutional inputs from other
areas of Government. Policy advisers need to invest time in understanding the reasoning
and policy positions of other Government Departments who have an interest in the issue.
There may be particular organisations that play a major role in the Government’s
approach to adjustment issues:
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the research activities, position papers and operational guidelines of these
organisations should be investigated;
it is important to consult with other Government organisations that have a stake
in the issue.
Australian institutional involvement in policy reform
The structure of Government and the institutional roles are different for each country.
The Australian situation is worth examining to illustrate how a range of institutions
contribute to policy reform and the approach to adjustment issues. Australia has initiated
numerous industry specific reforms. Governments have had to consider how to manage
the adjustment issues that flowed from these reforms.
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Institutional involvement in reform & adjustment issues
Many of Australia’s policy reforms were unilateral initiatives that involved reduced
import protection. They did not come from obligations under international trade
agreements. The reforms were often initiated in response to concerns about industry
performance and the costs of protection for the wider community.
In some cases the impetus for reform came from adjustment pressures created by changes
in market conditions and a loss of industry competitiveness. This would lead to political
pressures for Government assistance. The requests for adjustment assistance or increased
protection would lead to an independent investigation of the circumstances to determine
if industry specific assistance was warranted.
Recent examples of significant policy reforms in Australia have involved a range of
agricultural and manufacturing industries. In agriculture the dairy, sugar, citrus and pig
meat industries are some notable examples of reforms that involved changes in trade
protection. The TCF, motor vehicle and steel industries are some notable examples in the
manufacturing sector.
Each of these industries experienced adjustment pressures driven by changing market
conditions before the reforms were implemented. In each case the Government response
has varied. But in general there was a common approach in how the final policy position
was developed:
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it was based on recommendations from an independent inquiry in conjunction
with proposals from the Department who was responsible for the industry.
The Commonwealth Government has the primary responsibility for industry policy in
Australia. It has the constitutional powers to impose taxes and is the main source of
industry adjustment assistance. State Governments may become involved in adjustment
assistance programs if the industry is concentrated in particular communities.
In the Australian political system the cabinet of the ruling political party makes the final
decision on policy. The cabinet takes advice from the Department who has responsibility
for the industry. It also takes advice from other Government Departments who have an
operation interest in different aspects of the policy issue:
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the Treasury and Finance Departments promote micro-economic reforms and
are concerned about the overall performance of the economy and the direct cost
of adjustment assistance programs on the budgetary situation;
the Department of Foreign Affairs and Trade (DFAT) is responsible for
international trade negotiations and assessing the compliance of adjustment
programs with these trade agreements;
the Departments with primary responsibility for developing industry adjustment
policies are Agriculture, Forestry and Fisheries Australia (AFFA) and the
Department of Industry, Tourism and Resources (DITR); and
the Department of Prime Minister and Cabinet (PM&C) provides an alternative,
independent source of advice for Government.
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Institutional involvement in reform & adjustment issues
Government advisory bodies
The Commonwealth Government provides funding for a number of research and advisory
bodies that contribute to policy development. They are usually attached to a particular
Department which has responsibility for policy development for a particular sector of the
economy.
These semi-autonomous bodies generally operate at arms length to the mainstream
functions of the Department. Work programs are independently determined but typically
reflect the interests of the relevant Department. The output and work activities of these
bodies have to be relevant to the policy issues of interest to the Department.
On occasions the Minister responsible for the Department will refer specific issues to
these advisory bodies for a formal investigation. The Minister establishes the terms of
reference and a date for completion of the task. The Minister uses the results of the
investigation as an input in the final policy position of the Government.
In Australia there are several organisations that contribute to the development of industry
policy reform and assessments of the need for adjustment assistance:
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the Productivity Commission (PC) holds public inquiries on industry issues
including policy reforms and industry requests for assistance;
the National Competition Council (NCC) monitors the performance of
Governments in implementing industry reforms under the National Competition
Policy (NCP) agreement;
the Australian Bureau of Agriculture and Resource Economics (ABARE) is a
research body attached to AFFA that investigates agricultural policy issues; and
the Australian Competition and Consumer Commission (ACCC) monitors
industry compliance with competition regulations and provides advice on
regulatory reforms.
The Productivity Commission and the National Competition Council have had a
significant impact of the Government approach to industry adjustment issues. Both
organisations occupy special roles in the Government structure. The executive arm of
Government is not bound to follow their advice. But publication of the findings of their
inquiries plays a role in shaping community views on policy reform and adjustment:
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it has improved public understanding of the economic benefits of reform.
The Productivity Commission
The Productivity Commission is an independent statutory body that was established to
provide advice to the Commonwealth Government on industry policy issues. The
Commission has a considerable degree of autonomy. It is funded by the Government and
attached to Treasury Department for administration purposes. But the Commission
operates under its own Act of Parliament and is independently managed.
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Institutional involvement in reform & adjustment issues
The Productivity Commission reports to the Treasurer. It evolved from two earlier
organisations. The Industries Assistance Commission operated from 1974 to 1989 and the
Industry Commission operated from 1990 to 1998. All three organisations were
established with the overall objective of improving the efficiency of resource use in the
Australian economy.
The primary role of the Commission is to hold public inquiries on a range of microeconomic issues that affect the performance of the economy. The PC also initiates
research into various issues and promotes public understanding of how these issues affect
the wider community. The inquiries cover industries in all sectors of the economy –
manufacturing, agriculture, mining and services. They also cover general issues that are
not sector specific.
The PC is currently managed by a Government appointed Chairman. He is assisted by a
group of Commissioners who are required to take responsibility for particular inquiries.
The Commissioners are supported by a group of research staff who are dedicated to
individual inquiries. The PC has a staff of around 200 and most are trained in economics.
The PC inquiry program is set by the Commonwealth Government. The Treasurer
determines the inquiry terms of reference after consulting with Ministers who have
responsibility for the area of investigation. For some inquiries the Treasurer may consult
with State and Territory Governments before deciding on the terms of reference.
The Commission is often asked to investigate the circumstances surrounding industry
requests for assistance. Typically a PC inquiry will evaluate industry claims about a
decline in financial performance. This will involve an economic analysis of the reasons
for the decline in performance and the magnitude of the effects on producer returns,
industry profitability and employment.
PC inquiries are often the result of political reactions to specific policy issues. The public
inquiry process is an opportunity for all interest groups, firms and individuals to present
their views on the issue being investigated. Inquiries involve public hearings and
workshops in different locations to provide this opportunity:
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the Commission is required to conduct it’s inquiries in an open and transparent
manner.
The Commission accepts written submissions from interested parties. The public hearings
allow the Commission to raise questions about the content of submissions and to verify
the information it has collected for the inquiry. The Commission draws on research and
expertise from a variety of sources during the course of their investigations.
For particular inquiries the Commission may engage external experts to prepare specific
research inputs for the inquiry. This often involves the preparation of quantitative studies
of particular issues. For inquiries into particularly sensitive issues (eg assistance for the
TCF industries) the Commission may fund more than one quantitative analysis.
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Institutional involvement in reform & adjustment issues
The quantitative analysis is sometimes prepared in-house. The Commission was a pioneer
in the use of economy-wide, general equilibrium models to evaluate the costs and
benefits of industry assistance and policy reforms. External organisations that specialise
in quantitative analysis are also contracted to support particular inquires:
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for example, the Centre of Policy Studies (COPS) located at Monash University
is a research group that specialises in economy-wide modelling work.
The Commission prepares a draft report on each inquiry which is released for public
comment. A final report is prepared and recommendations are made on the policy
response. The report is tabled in the parliament and published. The Government can
choose to accept or reject the final recommendations. Examples of some recent inquiries
include:
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Review of TCF Assistance
Review of Automotive Assistance
The Impact of Competition Policy Reforms on Rural and Regional Australia
Review of Australia’s General Tariff Arrangements
Citrus Growing and Processing
The Commission is required to follow operational guidelines that are specified in the Act
of Parliament. Inquiry recommendations have to meet the overall objective of improving
economic prosperity in a socially and environmentally responsible way. The guidelines
require the PC to:
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encourage the development of efficient, internationally competitive industries;
facilitate adjustment to structural change;
promote regional development and employment; and
reduce unnecessary regulations.
A PC inquiry will focus on the interests of those who are directly involved in the area of
investigation. But the Commission has to consider the interests of the whole community
when it develops a set of recommendations. There is also a specific requirement to
consider the economic and social costs of proposed changes in Government policy:
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it requires the PC to comment on the adequacy of existing adjustment programs
and the need for additional transition measures.
PC inquiries are an independent, public assessment of industry requests for assistance.
The case for assistance is examined in the context of the market conditions that normally
affect industry returns. For example, fluctuations in world prices or increased import
competition may be part of the typical market environment and do not justify adjustment
assistance:
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Commission reports will often include recommendations for policy responses
that address adjustment issues created by industry reforms.
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Institutional involvement in reform & adjustment issues
The National Competition Council
The National Competition Council (NCC) is an advisory body for the Commonwealth,
State and Territory Governments on the implementation of the National Competition
Policy (NCP). It was established in 1995 in conjunction with the agreement to implement
the NCP program of reforms. The Council is an independent Government organisation
that reports to the Treasurer.
The primary role of the NCC is to monitor and advise the Commonwealth Government
on progress in implementing the NCP reforms. Work activities are focused on the area of
competition policy but it has no compliance role. The Council has three key functions:
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assess the progress of State and Territory Governments in implementing NCP
reforms in their jurisdictions;
analysis and reviews of specific NCP reforms; and
improve community understanding of the NCP.
The NCC has a professional staff of around 15 people and the work program is set by a
majority of the Government members. It is concerned with Government commitments to
the NCP reform agenda. The objective of the NCP reforms is to improve national
economic performance and the welfare of individuals.
Many of the NCP reforms involved politically sensitive areas of economic and social
regulation. For this reason NCP reforms involve a ‘public interest’ test to determine if a
regulatory reform is in the interests of the whole community. Regulations that restricted
competition have to be reformed if the community benefits of the reform exceed the costs
on the affected interest groups:
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the ‘public interest’ test explicitly takes into account the interests of the groups
and individuals that are affected by the reform.
The objective of the NCP reform process was to introduce greater competition into areas
of the economy that was previously protected. By promoting economic efficiency
through greater competition the reforms will generate benefits for the wider community.
This could come in the form of lower prices, improved services, better products, etc.
The Commonwealth Government will gain higher tax revenues from the effects of the
reforms on economic activity. As an incentive for State and Territory Governments to
implement reforms the NCP included a schedule of progressive payments by the
Commonwealth Government. The NCC assesses the adequacy of the Government
regulatory reviews and progress in implementing reforms:
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the Commonwealth can withhold payments to the States and Territories if the
NCC assessments indicate progress has been inadequate.
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Institutional involvement in reform & adjustment issues
NCC advice on the implementation of policy reform is that adjustment assistance may be
appropriate in certain circumstances. It does not provide advice on the design and funding
of adjustment policies. However, the NCC has advocated the use of a portion of the NCP
payments to fund adjustment programs in situations where it judged to be necessary.
Institutional perspectives on adjustment assistance
The Productivity Commission and the NCC are closely involved with policy reform
developments that can lead to industry adjustment issues. Both organisations recognise
that changes in protection and industry support measures will deliver important benefits
to the community. But they also acknowledge the changes can impose costs on particular
regions, communities, industries and individuals who are directly exposed.
Both organisations prepare independent reports and provide advice to Governments on
policy reform issues. They both argue that the costs of adjustment to policy reforms
should be address by Governments. They acknowledge that various safety net measures
are in place to assist people who lose their jobs. But they recommend that consideration
should be given to extra adjustment assistance in certain circumstances:
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both organisations acknowledge that extra assistance measures may be
especially important in situations where the industry is concentrated in
particular regions or communities.
One form of adjustment assistance they continually recommend is to phase-in the policy
reform. It gives firms and individuals an opportunity to adapt to the change in market
conditions. Other forms of adjustment assistance they advocate are programs to improve
the labor skills of those who lose their jobs. This could involve:
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retraining programs and education allowances; and
complimentary programs to identify new employment opportunities.
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Institutional involvement in reform & adjustment issues
References and further reading
NCC (National Competition Council) 1999a, National Competition Policy: Some Impacts
on Society and the Economy, Canberra.
––– 1999b, Annual Report 1998-99, Canberra.
PC (Productivity Commission), 1999. Impact of Competition Policy reforms on Rural
and Regional Australia, Inquiry Report No. 8, Canberra.
––– 2002, Annual Report 2001-02, Canberra.
––– 2003, Review of TCF Assistance, Inquiry Report No. 26, Canberra.
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