Annual report 2008-09

The global financial crisis has reaffirmed the importance of open and liberal international trading arrangements and an ongoing commitment to economic reform, according to the Productivity Commission in its Annual Report released today.

The financial crisis and resulting economic downturn have seen world trade decline to an unprecedented extent in a short period. Although there has not been widespread resort to trade barriers, some countries have imposed non-tariff, or 'behind the border' measures. Modelling by the Commission suggests that resort to further protection internationally could come at a high cost to Australia and the global economy.

The financial sector received substantial support in most developed countries during the crisis, which played a key role in stabilising financial markets. Reforms to financial regulation are currently under consideration. The challenge here will be for governments to target the causes of any undue risk taking within financial institutions, without detracting from desirable innovation and cost reductions over time which would benefit consumers and industry alike. Commission modelling again shows that the potential costs of getting the regulatory balance wrong could be high.

More generally, the Commission observed that when budgetary pressures are paramount, 'off-budget' regulation can have attractions over 'on-budget' program expenditure. Rigorous evaluation and review processes for regulation are particularly important at such times.

The Commission argues that Australia's recovery from the crisis will be determined in part by the nature and timing of economic reform. Reforms that can most readily promote flexibility in labour and capital markets, ease fiscal pressures and promote productivity deserve particular priority. In the longer term, continuing to make progress on Australia's wider reform agenda remains important for the future living standards of Australians, notwithstanding the immediate impacts of the financial crisis.