Institutional Innovation and the Calculus of World Competitiveness

Microeconomic reforms to raise Australia’s export competitiveness and to attract investment have lost momentum and political commitment. Australia’s international competitiveness ranks far below the big industrial economies and the more dynamic of the new industrial countries of the Asia-Pacific region. One important ingredient in Australia’s poor international competitiveness is high transaction cost. These costs were allowed to grow throughout a long era of protection, which was protection from the discipline of world-market competition. The costs of transacting business in Australia will only be lowered if the importance of institutions in determining these costs is explicitly acknowledged – along the lines of what is now taught by the “new institutional economies” – and if policy makers and the public engage in comprehensive institutional innovation. After many of the obvious microeconomic reforms were implemented in the 1980s, a second round of reform is needed. This second round must to aim at those sectors and institutions that are not at the frontline of international competition, but that have great influence over business cost levels and hence the competitiveness of Australian exporters. Future economic growth and job creation in Australia will depend on it.