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INTERVIEWS
WITH ECONOMISTS
PROFESSOR
GLENN WITHERS
Glenn Withers
is
Professor of Public Policy and Head of Program in the Asia–Pacific
School of Economics and Management at the Australian National
University (ANU). Prior to taking up his ANU position, he was
Commissioner of the former Economic Planning Advisory Commission
(EPAC), reporting to the Prime Minister.
What do
you think is the optimal size of government in Australia?
The optimal
size of government is that level of public activity that maximises
equitable and ecologically sustainable economic growth. Pinning
that down to a number is hard, particularly as it will vary with
changing circumstances, such as technology, population ageing,
etc.
The fate of
the Communist economies clearly shows that too much government
can be disastrous economically and in many other ways. But Australia
is at the lower end of OECD economies in terms of government share
of GDP. Given our own culture, government expenditure somewhere
in the range of 35–40 per cent of GDP is fine for the foreseeable
future, with the key question really being how well we direct
such outlays. If government’s expenditure falls below 30
per cent, Galbaith’s depiction of a world of ‘private
affluence, public squalor’ may be appropriate; if it rises
beyond 40 per cent, I fear adverse incentives for wealth creation
will seriously bite.
Is there
any Australian empirical evidence supporting the view that increased
government expenditure crowds out private investment and, in the
long run, slows down economic growth?
There is a
range of Australian studies, and international studies that include
Australia, which seeks to determine whether levels of taxation
and government expenditure (or broader notions such as ‘economic
freedom’) are linked to economic performance. What is clear
on past evidence is that at the extremes, high tax or public outlays
have been bad for the economy and at the very small government
end increases in tax and public outlays have been good for the
economy. In the middle, beauty is often in the eye of the beholder:
welfare state nations like Austria, Norway and the Netherlands
do about as well as smaller government countries such as the United
States, the United Kingdom or New Zealand. Which of them does
better depends substantially on the selection of dates and measures
or the precise criterion of performance used. Hence, there is
not a lot of empirical evidence except at the extremes.
If you
were to scale down the role of government in the Australian economy
where would you start and where would you end?
I would certainly
complete the process of microeconomic reform and the continued
opening up of the Australian economy to greater global integration
and international competition. The protection against this (e.g.
tariffs, government business ownership, controls on competition,
low migration) inhibit Australia’s potential. But creating
a competitive environment carries with it a complementary obligation
to create competitive capability and, in that, government retains
a major role. In a competitive world, we must not wind back on
investments in our people and in the infrastructure that will
enable Australia to compete effectively.
If you like,
think of the Australian Institute of Sport. We do not protect
our athletes from competition but we do believe in preparing them
properly for competition, with public support. The analogy can
apply to the economy but with an important difference that we
also must not wind back on support for those who do not fare well
in this process of change, although we can emphasise improving
their capacities as well as providing welfare.
Adam Smith
and J. M. Keynes had different views on the role of government.
With whom do you agree?
With both.
Smith articulated the virtues of the market with his metaphor
of the ‘invisible hand’, but he was not blind to the
many problems of markets. Keynes articulated these market problems
further, particularly in the light of the enormous social cost
and misery of the Great Depression, but he was not blind to the
limits of government. It is zealous disciples, who take only the
main message of their masters and forget the caveats, who cause
so much trouble. One must beware of the terrible simplifiers and
absorb the insights of both Smith and Keynes. The virtue of extremism
is that it makes moderate reform seem feasible, but in the end
the correct philosophy is a balanced one — what Aristotle
called the ‘golden mean’.
The Economist
magazine once suggested that ‘it is not the size of your
state that counts but what you can do with it’. Do you agree?
I don’t
agree with the Economist’s sometimes public schoolboy sense
of humour, but the observation that it is better government that
counts more than the extent of government is of fundamental importance.
In Australia that points to the need for economic reform to be
complemented by reform of governance — a topic we hear less
about from our political masters. Yet many of the problems in
delivering on the economic reform process come from the lack of
reform and improvement in the process of government itself. Perhaps
the new millennium will offer a focus that allows this issue to
be better considered. An increasingly educated citizenry will
be requiring considerable improvement in government.
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