Photographer: Krisztian Bocsi/Bloomberg

The Drugs Aren’t Working Down Under as Economic Reform Lags

  • Pharmacies’ political clout insulates industry from reform
  • Central bank has called for more competition in economy

In downtown Sydney, adults can buy a pack of 30 painkiller tablets for less than A$10 ($7.37) that are banned over-the-counter in most developed nations, because they partially convert into morphine after taken.

Futile attempts to regulate the sale of codeine despite addiction risks, and the lack of debate on the issue in the run-up to next month’s election, illustrates the strength of the pharmacy lobby. It’s also an example of a wider impasse on structural reforms that’s put a brake on Australia’s productivity.

Changing the rules on codeine sales would be a small step compared with the broader overhaul of the industry that economists say would boost competition and spur the kind of efficiency gains that Australia’s economy needs. Pharmacy-ownership restrictions, along with protection within the taxi, shipping, medical and legal industries, have been cited as priorities for reform by an independent government-chartered group.

In an increasingly tight July 2 election contest, neither side in politics is carving out regulatory change as an issue. While voters haven’t experienced a recession for 25 years, economists are increasingly worried that the drivers for growth are diminishing. With commodity prices in retreat and national income sliding, one way to reverse the trend is by bolstering competition in industries like pharmacies. 

‘Totemic’ Issue

“Pharmacies are totemic -- if you could do them then you could do almost anything else and that would help revive productivity that’s crucial to increasing national wealth,” said Saul Eslake, an independent economist who has studied Australia’s economy for more than three decades. “It’s the archetypal example of an industry that has been able to use its extraordinary political clout to insulate itself from reform.”

To read more about what the central bank chief says on reform click here.

Reserve Bank of Australia officials have stressed that, as the nation’s trading strength fades, further wealth increases will now require a boost to productivity growth, which has slowed this century compared with gains in the 1990s widely attributed to reforms started in the previous decade. Outgoing central bank Governor Glenn Stevens highlighted the issue in August, saying the to-do list for restructuring remained substantial. 

Election Pledges

Yet reform has barely rated a mention in an election campaign so far dominated by the government’s pledge to cut company taxes, and the main opposition Labor party’s health and education spending promises. Prime Minister Malcolm Turnbull’s government, which is tied with Labor in the most recent Newspoll, has steered clear of flagging any significant structural economic changes.

The underwhelming progress on reform could be explained by the prosperity of the nation’s mining boom sapping the need for change over the last decade, according to the Grattan Institute, a Melbourne-based economic think tank.

“The politics of reform is never easy,” the Institute said in a report this week. “Vested interest groups, emboldened by success, are more vocal in protecting their interests. Meanwhile, the public interest has few friends.”

The Pharmacy Guild of Australia has demonstrated its political force before. During the last election almost three years ago, it ran a “Pharmacy Under Threat” campaign against the then-Labor government’s plans to accelerate reductions in generic drug prices, garnering 1.2 million signatures backing its view.

Dear Pharmacist...

This time around, there’s no sign of leaders challenging the status quo. Indeed, Turnbull this month wrote a pre-election letter to all of the nation’s pharmacists to reassure them: “The established consumer pharmacy model continues to serve Australians well,” he said.

A government-commissioned review of Australia’s competition policies wasn’t as agreeable when it released the final findings last year. Among recommendations it called for were:

  • removing bans on non-pharmacist ownership, which prevent supermarkets and large international chains like the U.K.’s Boots from owning them in Australia; and
  • curbing location rules preventing new pharmacies opening within 1.5 kilometers (about 1 mile) of an existing drug store

The pharmacy industry is “a very robust market, in which there are varieties of models,” said Pharmacy Guild spokesman Greg Turnbull, who’s unrelated to the prime minister. He said there is already “ferocious competition” among pharmacies. “Some are discount models, some are what we call service models that become health-care hubs and offer a whole range of services, which no supermarket is ever going to offer.”

Rising Revenue

Pharmacies enjoy the right to distribute taxpayer-funded prescription drugs. The Australian National Audit Office calculated that payments received from the government had more than tripled to A$2 billion in 2013 from 20 years earlier, even after adjusting for inflation. Over the same period, curbs on competition contributed to there being fewer pharmacy businesses in Australia than in the early 1990s.

The guild last year successfully lobbied to delay plans to stop over-the-counter sales of codeine-based painkillers, arguing that it would penalize millions of Australians who use the medication responsibly. The guild has said making codeine-based products prescription-only would increase costs to the health system, citing a report that warned of an extra 8.7 million visits to doctors a year.

Yet in Europe and the U.S., codeine products can only be issued with a prescription; in Greece, possession is the equivalent of carrying narcotics.

‘Strong’ Opposition

“There’s good precedent for societies functioning well without over-the-counter codeine,” said Matthew Frei, an addiction medicine specialist and clinical director at Turning Point Alcohol & Drug Centre in Melbourne. “But regulators are up against some strong groups in the community and in industry,” such as the guild, he said. In the past 10 years, Frei said people addicted to codeine-based painkillers have gone from being “not much of an issue” to a “significant proportion” of his center’s addicts.

Eslake, the economist, isn’t holding his breath for change. “The chances of either side of politics tackling the industry is equivalent to Kim Jong Un unilaterally renouncing North Korea’s nuclear weapons,” he says.

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