Monday, May 12, 2008

Is there evidence that institutionalised transparency reduces the political power of narrow interest groups?

Recent posts by Richard Posner and Gary Becker on their blog (May 4 ) discuss US farm subsidies that apparently amount, on average, to of the order of $50,000 per farmer. Posner suggests that these subsidies are outlandish and that “their firm entrenchment in American public policy illustrates the limitations of the American democratic system”. Becker points out that the subsidies are a consequence of interest group competition that tends to favour small groups of producers (who gain substantial benefits per person) at the expense of large groups of taxpayers and consumers (whose losses are relatively small in per capita terms).

I left a couple of comments on Becker’s post, the second of which was as follows:

“... it seems to me that some political outcomes are outlandish even though they can be explained in terms of democratic politics e.g. in terms of the relative power of different pressure groups associated with differential rational ignorance and free-rider problems.
The interesting question is whether better outcomes could be achieved through institutional changes e.g. through procedures to promote greater transparency and thus reduce rational ignorance problems.”

I must confess that the question of whether transparency institutions have the capacity to reduce rational ignorance problems is something that I have thought about quite frequently over the last 35 years, having worked in such a transparency organisation for a considerable part of that time.

The latest WTO Trade Policy Review of Australia makes the following observation:

The high degree of transparency in the formulation and evaluation of Australia’s economic policies in relation to their rationale, nature, and economic effects, enhances government accountability and public debate over the merits of these policies. Hence, transparency has contributed greatly to the continued process of reform, which began in the 1980s, and in which trade liberalization, much of it unilateral, has played an important part. (WTO 2007, p. vii)

The TPRM report emphasised that the transparency function had become
institutionalised in Australia, notably through the role of the Productivity
Commission (and its predecessor organisations) as an independent review and
advisory body on microeconomic policy and regulation.

The role of the Productivity Commission and its predecessor organisations has been discussed in a recent paper by Gary Banks and Bill Carmichael, available here.

In discussing the possible relevance of the Productivity Commission as a model for other countries, Banks and Carmichael suggest that Australia’s experience demonstrates that institutionalised transparency can help promote reforms. They do not suggest, however, that institutionalised transparency is a magic wand.

“Expectations need to be tempered: transparency is unlikely to transform the policy environment overnight. Building a pro-reform constituency in government and the wider community is a gradual process. It took Australia four decades to get tariffs down and more than a decade tackling sources of underperformance in economic infrastructure services. And neither reform program is yet complete.

That said, reforms once made in Australia have tended to stick, having stronger foundations of support or acceptance within the community precisely because the basis for reform was transparent. The programs of tariff liberalisation and regulatory reform initiated under one government have generally been maintained by new governments of different political complexions”.

Banks and Carmichael conclude as follows:

“We recognise that Australia’s transparency arrangements may not suit other countries. There can be no ‘one size fits all’ approach. Arrangements in other countries must necessarily reflect their cultural and political systems, and ensure domestic ownership of national trade policy. However, finding ways of achieving the broad principles of domestic transparency in other countries’ institutional settings is an objective to which Australia’s experience lends considerable support”.


Jim Belshaw said...

Interesting post, Winton. A question for you. Has the PC retained its influence since it's role became so generalised? My impression is that it has lost a degree focus.

Winton Bates said...

Thanks for your comment, Jim.

I find the question difficult to answer objectively. I suspect that it would be very rare for anyone to say that they think an organisation has become more influential and focused after they have left it. But I will try to be as objective as possible.

First, I think the the extension of the role to non-border interventions was a good thing. The issues involved are often very similar - narrow groups benefit at the expense of the wider community.

Second, the organisation seems to me to have lost some of its zeal. Although the methodology of the IAC was to present the facts as objectively as possible, the people who claimed that the organisation was staffed by crusading free-traders were not entirely wrong. (Arguably, crusading zeal is less appropriate when dealing with social issues. Thank God Australia still has the CIS and IPA.)

Third, the organisation seems to have lost influence in tariff policy. It seems to me that it would have been unthinkable even for the protectionist Fraser government to by-pass the IAC by sending a review of car industry assistance to a non-IAC inquiry -as is happening at present.

Jim Belshaw said...

Again interesting, Winton. I agree with you re the extension beyond border issues.

The problem that I see it with the broader role is that it leaves the PC in a bit of a lobo land, without the old power to force consideration. Your comment re cars is germane here.

Some time if you ever get bored,and this is a bit of a challenge, try a post on what the mission of the PC might be in this new environment, taking transparency as a starting point.

My personal view for what it's worth is that the need for objective scrutiny has never been greater.

Winton Bates said...

I will certainly be giving that some thought, Jim.

I think the transparency issue is very important to the question of how limited government can be possible.