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SA needs less govt vision, more business evolution

Analysis

The key underlying factor required to strengthen South Australia’s economy is for the state to become much more citizen and business-driven and much less State Government-driven, writes economics commentator Richard Blandy.

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In the latest year for which we have ABS data (2014/15), Final Demand in South Australia increased by just over 1%, while Australian Final Demand increased by 2.5%.

The main reason for this difference was that South Australian Private Capital Formation was only 18 % of Final Demand whereas nationally it was nearly 22%.

Over the last five years, every sub-category of private investment in South Australia (even investment in dwellings) has shrunk, with total private capital investment in South Australia shrinking at 10 times the national rate.

The employment consequences of the private sector malaise in South Australia have been disastrous. Over the last five years (from August 2011 to August 2016), employment has increased by only 2,300 people in total, at the average rate of 0.1% p.a. For comparison, over the last five years, employment has increased in Australia as a whole at the average rate of 1.3% p.a.

Moreover, there has been a big shift to part-time employment within the ranks of the employed. There are now 16,200 fewer people employed full time in South Australia than there were five years ago. For comparison, the number of full-time jobs in Australia as a whole increased by 0.7% p.a. over the past five years.

The “strong government” economic strategy being pursued by the South Australian Government over the last five years has failed to deliver acceptable economic and employment outcomes for the people of the state.

Keynesian pump priming by running Government deficits does not work in small open economies like South Australia’s. The leakages interstate and overseas are too large. The Keynesian multiplier could even be negative if expectations of future tax rises in South Australia become stronger as a result of the Government’s deficits.

The only thing that works in a small, open economy like South Australia’s is stimulating investment in the private sector, by cutting its costs and deregulating its working environment, not by offering subsidies of one sort or another to particular businesses (which have to be paid for by present and future taxpayers – including businesses).

The Jobs Accelerator Grant scheme introduced in this year’s South Australian Budget offers a subsidy of $10,000 for each additional full-time person hired by medium-sized businesses. Such a wage subsidy scheme shows that the Government itself recognises that wage rates matter in terms of job creation, and that wage rates are too high in South Australia to allow enough jobs to be created to stop unemployment rising.

South Australian businesses must make greater profits so that they will invest in expanding their businesses and employ more people in consequence. Competition will ensure that the rates of profit that they make are fair and moderate.

In order to enable this, the South Australian Government should reduce state taxes and state regulations adversely affecting expected profits on investments in South Australia.

The large evolutionary advantage of competition and free markets over “strong government” is that competition and free markets maintain flexibility. As the world changes, it deals out an ever-changing set of winning and losing economic activities. Competitive free market systems expand into the expanding niches and contract out of the shrinking ones. Where is Bond Corporation or Quintex today? Where did CSL and Transurban come from?

Despite unpredictable ups and downs of particular activities, our economy has evolved, survived and sometimes flourished because of our free market system, not because of “strong government”. The longer-term future of economies cannot be planned.

The South Australian economy needs to become more flexible, adaptable and creative if its economic growth and employment outcomes are to improve. This means more reliance on private sector evolution and less reliance on government visions.

As Noel Pearson has eloquently argued in support of empowering local indigenous communities to run their own affairs (Weekend Australian, 30-31 January, 2016, p.20):

… Allowing individuals and corporations to choose according to their own lights, in pursuit of their own interests, is much more productive than governments picking winners.

This applies just as powerfully to the work of governments in supporting citizens and communities. Governments can best develop enabling policies and establish systems that allow players in the market place to best determine what needs to be done, and how to do it.

The proper role of ministers and departments in their executive functions is a subtle one: to enable maximum choice in the marketplace…

About 30 years ago, an article appeared in the Journal of the Chinese Academy of the Social Sciences discussing the reason for the failure of strong central planning to deliver fast economic growth in China. The reason, the Chinese author argued, was that, under those conditions “the people lose enthusiasm”. Or, as the saying used to be in other places under strong central planning: “We pretend to work and they pretend to pay us.”

Lao Tsu, the famous Chinese General and philosopher said many centuries ago: “When the best leader’s work is done, the people say, we did it ourselves”; and “To lead the people, walk behind them”.

The State Government must do whatever is necessary to create incentive and opportunity for the citizens and their businesses to do it themselves, with enthusiasm, with the government walking behind them, not in front, “leading”.

The model of government that many people have in their heads as a super-rational decision-making place is wrong. These powerful people are not subject to sufficient openness and constraint to produce the sort of government that people think they are getting. Competition in the market-place between enterprises is a much better – and much more power-constraining – process for producing good results for the whole community.

Government lends itself to groupthink, because it is all about the wielding of power. People who offer minority opinions lose influence, however rational their opinions may be. Groupthink results in dysfunctional decision-making and increases the chances of bad outcomes. Extra effort is then needed on covering-up and transferring blame for failures in government actions. As Thomas Jefferson famously said: “That government is best which governs least” and “Dissent is the highest form of patriotism”.

Only our business sector can resurrect our economic fortunes by becoming serious competitors on the world stage, and that does mean without government subsidies.

We have many small and medium-sized firms that are already serious competitors on the word stage, despite the odds. We must make it more compelling for many more to follow their example.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia and a weekly contributor to InDaily.

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