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In January 2010 there seemed to be a significant difference of opinion between the Federal Government and the Productivity Commission in relation to the widely-supported goal of raising Australia's economic productivity.
This document will suggest that:
In March 2010, it was suggested that, as Australia was likely to experience a resources boom that was 'bigger, longer and better than most people imagine', so focusing attention of productivity was not really necessary. An outline of, and comments on, that viewpoint are included as an addendum to this document.
|Beyond Market Liberalization||
Beyond Market Liberalization
While the Productivity Commission seems correct in highlighting the impediments to productivity growth through politically driven initiatives such as those Mr Rudd apparently advocates, the Commission's reported view that productivity depends on the activities of individual firms (and the incentive / obstacles that government provides) is too narrow.
Liberalization of other other institutions which impact on Australia's economy is also needed (eg empowering civil institutions to accelerate development of market economic systems, and breaking down dysfunctional centralization that affects the public institutions involved in developing infrastructure and encouraging economic development).
Accelerating Market-oriented Development of Economic Systems
Productivity does not only depend on incentives for competition and the absence of unnecessary government constraints or of interventions to benefit interest groups. The effectiveness (ie level of development) of the entire economic system is important (as illustrated by the literature on industry clusters). The problem with economic reform in Australia over the last two decades (and a likely significant factor in the productivity slowdown over the past decade) is that emphasis has been placed on creating a competitive environment, but not on the systemic requirements for individuals / enterprises to compete successfully in high value-added activities in such an environment (see The Inadequacy of Market Liberalization).
For example, innovation is an important method for improving productivity (see Economic Role of Technology), and support for this has been a key aspiration of all governments since the 1980s (eg consider the federal government's 'Backing Australia's Ability' program and similar state efforts). There has for years been widespread recognition by policy analysts of the importance of effective innovation systems (ie complementary support for innovating firms from other entities that contribute research, intellectual property law, appropriate financing, management, marketing, logistics etc). However despite this, innovation systems are not well developed, and in fact have been getting worse - perhaps because of the misguided way governments tried to support them (eg see Political 'Push' on Economic Inputs can Achieve Little).
The problem is that boosting 'smart' inputs (eg research, education, training) into economic systems that are not well enough developed to use them productively is not helpful. Rather it is necessary to start by boosting the effectiveness of innovation systems as a whole (which is possible through a market-oriented process to accelerate 'learning' within the real-world embryonic innovation system) so as to increase the economy's ability to productively use, and its demand for, those 'smart' inputs.
How this might be achieved in practice, through apolitical institutions, is speculated in A Case for Innovative Economic Leadership. The latter described the need for, and methods to achieve, a sustained community / business based leadership process - rather than a quick fix through government fiscal or regulatory actions, though democratic endorsement of the protocols through which diverse civil institutions could take such a leadership role would seem highly desirable. Leadership can not be undertaken politically, because:
In the absence of such a process to stimulate changes within economic systems as a whole, such development faces a 'chicken and egg' constraint (ie such systemic capabilities are only viable when a large number of firms want to use them, and no individual firm can succeed and start to create that demand until the system as a whole already exists). While this constraint is most severe in regions that are plainly 'under-developed', the fact is that changing market and technological requirements ensure that all regions are likely to benefit from faster adjustment.
Opportunities should be able to be found for regional economies / industry clusters as a whole that are not available to individual enterprises in the absence of complementary economic functions.
Rigidity in Institutions Developing Infrastructure
The timely and efficient provision of infrastructure (eg transport, urban utilities) is important to the effectiveness of the economy, and yet major limitation in Australia's institutional capacity to deal with this have developed.
This issue is considered separately in Infrastructure Constraints on Australia's Economy, which referred to diverse defects such as; fiscal imbalances in Australia's federal system; fragmentation of responsibility; politicisation of public administration; attempts at centralised planning; and increased complexity due to private controls over functions subject to market failures.
Motivating State Governments
Governments also have an impact on whether a productive modern economy develops - noting the 'development' programs of various sorts that are undertaken). Unfortunately because the Grants Commission equalizes funding on the basis of 'needs' and only a narrow tax base is available to state administrations (which have the leading governmental role in affecting the character of economic development in Australia), the latter do not have an incentive to take this responsibility seriously, and the financial interests of state governments diverge from the economic interests of the community generally. (see Providing Incentives for Effective Economic Development).
A broader own-tax base for state governments (ie one linked more to value-added than to economic turnover) seems vital if more productive economic activities are to be officially encouraged (eg see comments on one state's history of adopting ineffective economic development tactics in Queensland's Economic Strategy).
|Beyond Population Ageing||
More is at Stake than Meeting the Costs of an Ageing Population
The Prime Minister reportedly explained the need for faster productivity improvement in terms of meeting the increased budgetary costs of an ageing population. This point has undoubted validity. However there are other issues at stake.
Firstly, Australia is highly dependent on foreign capital inflow, and there was some risk as a result of the global financial crisis that this might have been disrupted. Thus government guarantees of bank deposits were arguably vital at one stage to prevent the spread of a global 'credit crunch' to Australia with disastrous consequences, There is thus a need to increase Australia's savings to reduce dependence on capital inflow, according to Westpac CEO, Gail Kelly (see Cut Government taxes on savings, says Westpac boss Gail Kelly', 4/11/09). Increasing incomes (through lifting productivity) whilst constraining the availability of consumer credit would be likely to increase Australia's savings rate and reduce dependence in future on uncertain capital inflows.
Secondly, the global financial crisis may not yet be 'history' (eg see Unresolved Problems and Coming Crises?). Thus it is not realistic to assume that the economic challenge is simply to deal with a new (say China-driven) boom. Rather it is vital to maintain the sort of flexibility and vigour in the economy that will contribute to rising productivity, in order to also best be able to cope (if necessary) with an unstable / unpredictable international economic environment.
Thirdly, boosting the productive capabilities of regional economies through a systemic development process is vital to ensure that none are left behind - as socially and politically disruptive outcomes (such as the One Nation phenomenon in the 1990s) may otherwise emerge (see Assessing the Implications of Pauline Hanson's One Nation)
There are probably important philosophical principle at stake. The Prime Minister seems to be implying that major initiatives that will boost productivity can best be determined by 'social democrats', rather than through the market. This is implicit in his reported references to (say) infrastructure; education spending and direct government support for particular innovations as the foundation for lifting productivity.
Mr Rudd's perspective on this are presumably based on his suggestions that "neo-liberalism" was to blame for the global financial crisis, so that 'social democrats' now need to save capitalism from itself (see A Social Democratic Alternative to 'Neo-Liberalism'?). Unfortunately, as the latter suggested, Mr Rudd's assessment of the issues involved seemed somewhat simplistic. It would thus be an unwise starting point for defining Australia's future economic strategies.
The alternative suggested above is based on what the present writer suspects is a philosophically and practically significant breakthrough in understanding economic development (and the way in which information contributes to economic growth).
The Advantages and Limitations of Financial Criteria
Conventional economic treats financial criteria (eg a balanced budget, enterprise profitability, economic value added, etc) as the primary element in economic analysis. However though financial criteria are valuable, they are also limited - and those limitations need to be considered.
Finance / money has a useful role as a means of exchange and a store of value. Money also provides a powerful way of coordinating and directing economic activities. For example:
The use of money also has more fundamental advantages that economics does not conventionally recognise. Those advantages arise from the fact that human rationality (ie the use of abstract concepts as a way of modelling / understanding reality) is limited. Rationality only works well for relatively simple problems (ie those where the relationships involved are comprehensible because they don't involve complex feedbacks and unknowable relationships). The failure of rationality in dealing with complex problems is recognised in many disciplines (eg by those who study economics, management theory and public administration).
One of the strengths of Western societies has been the emphasis placed on rationality (see Cultural Foundations of Western Strength). However this only works well in simple / comprehensible environments. The use of money as a means of exchange and a store of value (as well as a rule of law) creates such a relatively simplified economic environment in which individual / enterprise rationality can produce reasonably predictable and constructive outcomes
However there are limits to conventional economic (ie financial ) criteria in guiding decision making by individuals, enterprises and public policy analysts. For example:
|The 'Bigger, Longer and Better' Resource Boom Hypothesis||
The 'Bigger, Longer and Better' Resource Boom Hypothesis
In early 2010 many observers noted the potential for a resources boom as a consequence of the rapid growth arising in China and other emerging economies in the wake of (at least the first phase of) the global financial crisis.
However there has been a well-established view since the 1980s that Australia needs to diversify it economy away from reliance on commodity exports because of their boom-bust character, their low productivity except duing boom periods (because it is impossible with undifferentiated commodities to create the competitive advantages needed to maintain high margins) and because resources booms tend to hollow-out other industries (eg by raising exchange rates and thus undermining other sectors' competitiveness) - a phenomenon which has been labelled the Dutch Disease.
In relation to such concerns it was argued that the emerging resources boom (from which Australia's economy could benefit enormously) would be strong and durable, and that productivity down-turns associated with periods of high investment do not last.
This view does not, unfortunately, take account of structural features that could easily lead to financial crises in emerging economies (especially China) on whose growth the resources boom depends.
Thus, for reasons outlined below, it seems that corporate and economic strategies in Australia should be based on the development of the economy and governing institutions generally - rather than giving special emphasis to resource exports.
|Seeking a Strategy for Economic Prosperity||
Seeking a Strategy for Economic Prosperity - email sent 25/8/10
Re: Prosperity betrayed by reform retreat, The Australian, 21/8/10
Congratulations on this challenging article (outlined below), in which you strongly argued the need to think seriously about how Australia's future economic prosperity might best be ensured.
Some additional options that might be of interest are suggested below. They relate to:
There is no doubt that the subject matter your article is of critical importance.
However, the issue seems more complex than the above article indicated because:
There is a need for a solid assessment of Australia's circumstances before adequate proposals can be developed to promote Australia's future economic prosperity. The complexity of those issues and the community's failure to support institutions that might develop such policies or relieve governments of the need for super-human wisdom are the reasons that Australia's political leaders now can have nothing relevant to say on this subject.
Some suggestions about boosting Australia's economic performance are in A Case for Innovative Economic Leadership (2009); Lifting Productivity: Considering the Bigger Picture (2010); and Developing Australia's Economy: The Role of Migration (2010), while speculations about what seems to be needed to re-create a competent system of government are in Australia's Governance Crisis (from 2003).
The major constraint on the development of a productive modern economy has been and remains Australia's natural resource wealth, which offers apparent 'easy' wealth and encourages dominance in the world of business and public affairs by those who hope to benefit personally from that natural wealth but provide the community with poor economic leadership (see About the Curse of Natural Resources, 2004). As the latter noted, an inability to get onto a sustainable path to the development of a productive modern economy characterises many resource rich societies, and Australians must perpetually struggle to avoid this fate.
Their struggle has been made harder since the 1990s because the politicisation of public services led to their dominance by 'yes men' (rather than by independent professionals) and thus reduced access to practical reform options that are in the interests of the community as a whole. Proposals from those whose seek to exploit natural wealth for their own benefit, or to simply redistribute wealth, have become harder to contest.
|Do Blind Spots Cloud the RBA's 'Lucky Country' Vision ?||
Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?
Mr Glenn Stephens,
Re: Economic Conditions and Prospects, RBA, 15/6/11
I should like to suggest alternatives to reliance on the ‘stronger for longer’ resource boom that your recent address in Brisbane to the Economic Society of Australia suggested would be a sound basis for Australia’s future economic growth.
As I interpreted it, your address (which is outlined on my web-site) seemed to suggest that:
The latter point implies that the perceptions of a ‘two-speed economy’ (ie weakened competitiveness of other industries due to the high exchange rate associated with a resources boom) will simply be a transitory phenomenon, as the economy adjusts to its new environment in which resources demand will permanently tend to exceed available supplies.
While your hypothesis deserves serious consideration, it seems overly simplistic, because:
The above suggestions are presented in more detail on my web-site, and I would value any comments on them.
Summary of 'Economic Conditions and Prospects' and Detailed Comments [Working Draft]
The above address suggests (amongst other things) that:
The latter implied that the perceptions of a 'two-speed economy' (ie weakened competitiveness of other industries due to the high exchange rate associated with a resources boom - a phenomenon sometimes called the ‘Dutch disease’) will simply be a transitory phenomenon as the economy adjusts to a new environment in which resource demand permanently tends to exceeds available supplies.
These suggestions deserve serious consideration. However, for reasons outlined below, the context seems to require much deeper consideration than the above address suggests, both in relation to resource industries and to the economic environment generally.
Resource Industry Complexities
Australia’s economic reform agenda since the 1980s primarily featured market liberalization to create a more competitive environment in which Australians would be forced and enabled to increase their productivity. This was supported because of the relative decline in Australia’s income levels for most of the 20th century associated with heavy reliance on exports of basic commodities, and reliance on various forms of protection to develop other economic functions.
The above address suggested that the declining relative prices of basic commodities and possible 'Dutch disease' effects were no longer a problem. However the latter were only ever part of the story. There are other disadvantages traditionally associated with heavy reliance on commodity-based industries (eg their susceptibility to boom and bust cycles; and adverse effects on political and economic leadership - which is sometimes called the 'resource curse').
There are moreover no guarantees that Australia will remain competitive in the resource industries that are currently attracting huge investments because of the potential emergence of new competitors and an apparent inadequacy in the institutional support required for competitiveness.
Another complicating factor that needs serious consideration is that commodity-based industries related to both mining and agriculture tend to be heavily dependent on liquid fuels for efficient production. Such industries will thus presumably be impacted by the apparently-imminent global peak oil event, as this is likely to significantly increase the cost of liquid fuels and affect the viability of all industries and activities in which they are important (see General Notes on Peak Oil).
The global economic environment unfortunately appears anything but stable and sustainable, though many risks arise from problems in financial systems that are not revealed by conventional analyses of the ‘real’ economy, and thus tend to be 'invisible' to some analysts.
Moreover some changes in the global economy that the above address mentioned (eg the GFC and resource demand driven by extraordinarily high rates of capital investment in China) are arguably manifestations of a neo-Confucian challenge to the Western-style democratic capitalist basis of the international order, whose outcome, while anything but certain, has very significant implications. For example, the end point of that challenge might be either failure by the neo-Confucian systems of socio-political economy that characterise Australia's major commodity export markets (eg Japan and China) or the emergence of an international political and economic order around such countries that is incompatible with Australia's democratic and capitalistic institutions.
Overall it seems highly unlikely that a major transition has occurred that will see strongest future economic growth in Asia (mainly China). It can be noted that China faces many difficult short term challenges (eg growth that is extra-ordinarily dependent on investment (ie >50% of GDP); an apparent property bubble and huge losses by provincial authorities; weak household income even though future export markets are unlikely to be able to sustain growth because of past international financial imbalances; and political instability) - see Heading for a Crash? Even if these can be overcome, the poor linkages between domestic supply and demand under non-capitalistic neo-Confucian systems seem likely to be a fatal constraint in the medium-long term (see Balancing Supply and Demand).
Likewise the suggestion in the above address that strong growth will be driven by demand from emerging economies more broadly is equally uncertain, because their ability to do so within current international political and financial frameworks is also often constrained by under-developed financial systems.
Institutional weaknesses that limit Australia's potential competitiveness in resource industries (ie those related to innovation and infrastructure) was noted above. However there are many other institutional constraints that need to be considered. For example:
There is unfortunately even a risk that the world could plunge into economic and political chaos because of the inability of international institutions to cope with current challenges.
It can also be noted in passing that severe limitations are likely in future on the methods that have been used by reserve banks in recent years for macroeconomic management (ie to counter the risks associated with booms and busts) - see New Methods for Macroeconomic Management?. The latter referred to: the timing problems that (in the 1970s) eroded confidence in the post-war emphasis on macroeconomic management by counter-cyclical public spending; the asset bubbles potentially generated by the use of easy monetary policy to boost growth; and the risks of inflation associated with easy monetary policy in future in the event that cheap imports cease to be available to deprive domestic producers of the ability to raise prices (ie if emerging economies try to increase incomes so as to make a much greater domestic contribution to demand).
Considering Economic Options
Because of the complexities outlined above, there is a need (even in regions with the richest natural resource bases such as Western Australia and Queensland) for communities to carefully consider which economic direction is likely to produce the best outcomes. Such communities need to be aware of their real economic options (and perhaps decide to ‘hedge their bets’)
There are alternatives to heavy reliance on basic commodity exports through processes to accelerate the development of industries based on the knowledge and skills of a community (eg see Lifting Productivity: Considering the Bigger Picture, 2010). In brief the latter suggests that, while the market-liberalisation approach to economic reform in the 1980s and 1990s achieved some gains, it also had undesirable side effects especially on the administrative competence of governments. Moreover merely requiring competition can not ensure that the capacity to compete successfully in high value-added activities exists. The adoption of more effective techniques for economic development should enable regions without strong resource-export prospects to cope with a strong currency without merely relying on spin-offs from resource exports.
Reliance on ‘comparative advantage’ (ie the pre-existing economic strengths of a region such as natural resources) is not necessarily the best economic option. For example, Japan was expected after WWII to rely on the 'comparative advantage' it then had in labour intensive industries. But following the economic wisdom of that day would have left Japan permanently backward, so an alternative path was chosen.
Since the 1990s pursuing ‘competitive advantages’ (ie those created by strategy related to the knowledge and skills of a community and effective economy-wide organisation) has been recognised as an alternative to reliance on a region’s ‘comparative advantages’. Doing so in Australia’s more resource rich regions would require communities to think and work harder, but would give them more mastery over their own fate and be more economically favourable. If emphasis is placed on developing competitive advantages (ie by enhancing the communities' economic competencies), such regions would retain the benefit of resource strengths, but the reverse (ie giving primary emphasis to developing resource exports) would not ensure competitive advantages.
In simple terms an emphasis on 'comparative advantage' would involve those seeking to promote economic development in providing information to external investors about natural resources, while an emphasis on 'competitive advantages' would involve seeking to ensure that communities have the capacity to acquire information about available technologies and markets. And it would involve governments re-emphasising their core role of 'governing' (ie creating frameworks in which the community generally can 'do things'), rather than focusing on 'doing things' to facilitate individual projects while the community watches to see what happens. How a renewed emphasis on 'governing' (and a reduced emphasis on centralised micromanagement of 'things') might be achieved is suggested in A Nation Building Agenda.
There is undoubtedly a need, as the above address suggested, to boost community understanding of current economic challenges and opportunities. However doing so can't just be the role of economists.
One possible broader approach to boosting a particular communities' understanding is suggested in Curing Queensland's Myopia.
|More on the Limitations of Conventional Economics||
More on the Limitations of Conventional Economics
Efforts in mid 2011 to develop proposals to strengthen Australia's economic performance again illustrate the limitations of conventional economics in identifying ways to significantly boost Australia's economic productivity.
In particular, in June 2011 the governor of the Reserve Bank of Australia presented a vision of Australia’s economic future based on the ‘stronger for longer’ resource boom hypothesis (see outline of ‘Economic Conditions and Prospects’ above). And in July 2011, a policy conference was hosted by The Australian and the Melbourne Institute of Applied Economic and Social Research, on the theme: Growth Challenge: Riding the Resources Boom to Lasting Prosperity.
The general view at the Growth Challenge conference about what was needed seemed be summed up in an address by the Secretary of the Commonwealth Treasury (Martin Parkinson). He noted that though the resource boom was useful, it had limitations, and that a new emphasis on boosting productivity was needed in Australia to avoid economic backsliding.
Moreover widespread frustration was apparently expressed at the Growth Challenge conference about Australia's failure to take the steps needed to boost productivity, and this was seen to reflect either problems in the political system or a lack of political leadership.
The problem with blaming the political system or political leaders is that the issues involved are much more complex than participants in the Growth Challenge conference seemed to realize, and the political system on its own can't realistically be expected to resolve this. For example:
There are moreover limits to the ability of conventional economics to provide a way to significantly boost Australia's productivity. For example:
Conventional economics and politics needs to be part of the solution, but are likely to be insufficient in themselves.
|Addendum E: Progressive Economic Policy Options||
Re: Economic policy: The decline of the West?, Online Opinion, 22/8/11
I should like to try to add value to your constructive case for a progressive (rather than, say, a protectionist) approach to current economic challenges.
In no particularly logical order I should like to submit the following comments for your consideration:
I would be interested in your response to the above speculations.
|Addendum F: Keep Politics out of Economic Strategy||
Keep Politics out of Economic Strategy - email sent 5/9/11
Re: Mine wealth may end up being curse, The Australian, 3/9/11
I should like to try to add value to your constructive suggestions about basing economic strategy on creating ‘competitive’ advantages, rather than simply relying on pre-existing ‘comparative’ advantages. The basic idea outlined in your article is excellent, but politicians can’t succeed as the ‘catalysts and challengers’.
The alternative notion that Australia should simply adapt its economy to rely on its comparative advantage in export of mineral and energy commodities was the basis of the Reserve Banks’ argument about relying on a ‘stronger for longer’ resource boom associated with industrialization and urbanisation in Asia. However as your article noted, resource wealth can sometimes be a curse. Some reasons for this are suggested in Do Blind Spots Cloud the RBA's 'Lucky Country' Vision? . The risk is not only that high exchange rates squeeze out other industries and that commodity-based industries are typically subjected to boom and bust cycles, but that communities gain very poor economic leadership where rich natural wealth is available because political and business elites exploit their positions to gain a share of that wealth while the community as a whole does not prosper. This was the basis of the problems that long faced the (so called) ‘banana republics’ in Latin America and oil rich nations in the Middle East.
However democratic governments are intrinsically unable to act as ‘catalyst and challenger’ in relation to the development of industries based on competitive advantages. Reasons for this are suggested in Economic solutions are beyond politics (1995). Those reasons relate to: (a) the need to stimulate action on opportunities that are not yet widely (and thus politically) understood; and (b) the way democratic politics attracts rent-seeking interest groups.
Most Australian governments have been trying to catalyse the development of industries based on competitive advantage since the 1980s but success has been elusive because of the attempt to drive change politically (eg see The Economic Futility of 'Backing Australia's Ability 2'). Governments have been lobbied to provide ‘smart’ inputs (eg advanced education and R&D) into economic systems that are insufficiently developed to use them productively, and have tried to provide ‘assistance’ to potential innovators through politically-accountable agencies which lack the necessary commercial competencies and aspirations.
The need to now cease playing political games and get serious about developing the real economy is increasing because: (a) there is a risk that the RBA’s wish for a ‘stronger for longer’ resources boom will not be granted (see International Complexities in Do Blind Spots Cloud the RBA’s Lucky Country Vision?); and (b) the federal government seems to face a structural budget deficit when / if the resources boom busts (see The Long Term Impact of the Global Financial Crisis).
Fortunately there are other ways of achieving the goal your article suggested.
Stimulating the development of high productivity industries based on ‘competitive advantage’ should be possible using methods suggested in A Case for Innovative Economic Leadership. The latter suggests an arrangement (based on ideas developed, and experiments conducted, in the 1980s) whereby governments approve the protocols under which those with relevant market-oriented capabilities might ‘catalyse and challenge’ clusters of existing enterprises to develop new capabilities. Michael Porter’s ideas about competitive advantage it may be noted apply to complementary capabilities within many different enterprises and in the overall economic environment, rather than capabilities within individual enterprises.
Australia’s system of government is not working well in many respects largely because of the expectation that all problems can be solved politically and should be micromanaged by the federal government (see Australia's Governance Crisis and the Need for Nation Building). The latter suggests the need to boost the support available to the political system in many respects (including enabling leadership in economic and community development by apolitical institutions). There are well recognised reasons for keeping politics out of business and governments usually simply determine the rules under which businesses operate through legislation and regulation. The same needs to apply to new institutions that would be enabled to catalyse the development of competitive advantages in clusters of enterprises.
I would be interested in your response to the above speculations.
|Addendum G: Politicians Can't Take the Economic Lead||
Politicians Can't Take the Economic Lead - email sent 17/12/11
RE: Business to politicians: time to lead as boom 'won't last forever', The Australian, 17/12/11
Your article recorded concerns by numerous business leaders about the present economic environment, and their view that politicians need to take the economic lead because the international environment is unlikely to permanently support the boom that has been so favourable to parts of Australia’s economy.
There is no doubt about the need to do more than rely on a commodity boom (eg see Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?, 2011)
However those business leaders are merely passing the buck, because: (a) there would be productivity and competitiveness advantages in leadership of change in systems in the real economy in response to likely changes in economic circumstances, and such leadership is intrinsically impossible for democratic governments; and (b) ideas about complementary policy responses have to be developed and publicised by others, before there is any prospect of appropriate action being understood by opinion leaders and then politically understood and accepted. My reasons for suggesting this are outlined in A Case for Innovative Economic Leadership (2009).
There is a vital need for economic leadership – but politicians can’t be expected to provide it.
|Addendum H: A Smarter Country?||
A Smarter Country? - email sent 21/1/12 (with minor modifications)
Re: Road to a Smarter Country, The Australian, 21-22/1/12
Your article has made a useful contribution by highlighting some of the issues related to whether, and if so how, Australia might maintain a relatively diversified economy.
I should like to draw your attention to some thoughts which parallel yours, Do Blind Spots Cloud the RBA's 'Lucky Country' Vision? This suggested:
In relation to the positive points raised in your article, it is submitted for your consideration that:
Good luck with your efforts to promote debate about Australia’s strategic economic options. ..
|Addendum I: Global Problems Need a Big Picture Perspective||
Global Problems Need a Big Picture Perspective - email sent 23/1/12
Dr John Tomlinson
RE: It's the same the whole world over, Online Opinion, 23/1/12
Your article realistically highlighted various social problems (eg unemployment and inequality) affecting Australia and Western societies generally, and also pointed to debates about issues such as: aborigines; gays; asylum seekers arriving by boat; terrorism; drugs; “culture wars”; and social welfare systems.
I should like to suggest for your consideration that such issues cannot be realistically dealt with as purely internal matters, or as simply the outcome of ideological biases.
In particular increasing unemployment and inequality in many Western countries (which motivates the Occupy movement to blame Western-style capitalism) is largely a consequence of effective competition from low wage emerging economies, and a failure of economic adjustment in higher wage economies. The phenomenon of de-industrialisation in Europe and North America was well recognised in the 1960s and 1970s – and arose because Japan and the Asian ‘tigers’ developed capital intensive mass production industries with relatively low wage rates and thus transformed industries which had supported high productivity / wage rates in developed economies into low productivity sectors that were incapable of providing the incomes expected in Europe and North America. Market liberalization policies were widely adopted as a response in order to speed economic adjustment, and for a time changes in economic organisation (ie a shift from hierarchical to network organisation) reduced this problem – see New American Economy (1997). Arguably there is now a need for other tactics to generate the productivity needed to sustain high middle-class income levels – see suggestions about what this might require in Lifting Productivity: Considering the Bigger Picture. A change in attitude by governments towards the disadvantaged will not solve the problem.
Another source of current constraints on dealing with unemployment and inequality problems lies in the international financial imbalances that have resulted from suppressing demand in order to protect poorly developed financial systems in East Asia and emerging economies (eg see Structural Incompatibility Puts Global Growth at Risk, 2003; Understanding East Asia's Neo-Confucian Systems of Socio-political Economy, 2009; and Impacting the Global Economy, 2009). Those structural imbalances involve demand deficits in countries with poorly-developed financial systems and require their trading partners to be willing and able to perpetually increase their debt levels if global growth is to be maintained – a requirement that they are unlikely to achieve much longer. The problem is not just a ‘crisis of capitalism’ but also a ‘crisis of non-capitalism’ (see World facing 'Crisis of non-Capitalism': Non-economist, 2011). As the latter suggested the failure of humanities and social sciences faculties in Western universities to consider the practical consequences of cultural differences is arguably the reason that what is happening is not generally understood (eg see also Misunderstanding the 'Asia' Factor in GFC and Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems).
Similarly I suggest that there are complexities in various other issues that your article mentioned that make it unrealistic to view them as simply a product of elite conspiracies. For example:
I would be interested in your response to the above speculations.
|Addendum J: The Parallel Between Bob Katter's Australian Party and Pauline Hanson's One Nation||
The Parallel Between Bob Katter's Australian Party and Pauline Hanson's One Nation - email sent 14/3/12
Re: Marriage debate must be allowed to speak its name, The Australian, editorial 14/3/12
Your editorial was useful in drawing a parallel between Bob Katter’s Australian Party and Pauline Hanson’s One Nation, and in suggesting that views such as Mr Katter’s opposition to same-sex marriage must be able to be expressed without personal attacks against those involved in doing so.
One Nation appeared to primarily represent those in marginal regions who were disadvantaged by economic change which was necessary for reasons they did not really understand and which they were often poorly equipped to deal with. When they expressed disaffection with the ‘elite’ policies they believed responsible for their predicament, they attracted abusive responses, eg ‘racist’ labels (see Assessing the Implications of Pauline Hanson's One Nation, 1998). It is further noted that:
The parallel between One Nation and Bob Katter’s Australian Party is strong not only in the fact that both criticised ‘politically correct’ views, but that the Australian Party also seems to represent those in marginal regions who are exposed to economic changes that are hard to deal with because of inept efforts to develop economic capabilities. Lifting Productivity: Considering the Bigger Picture (2010) suggests why established economic policies have been inadequate, and that social disadvantage and political instability in marginal regions are predictable and avoidable consequences.
Thus (as your editorial implied) suppressing politically-incorrect views with personal attacks is anything but constructive. And, in relation to the anti-same-sex-marriage advertisement, I suggest that:
|Addendum L: Piggy-backing off China: A Very Risky Strategy||
Piggy-backing off China: A Very Risky Strategy - email sent 1/6/12
Re: How long can Australia piggy-back off China?, Business Day, 1/6/12
Might I respectfully suggest that the answer to this question can’t be realistically answered on the basis of econometric analysis (eg see Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics)? This is because of the importance of cultural factors both to the methods that have been used to accelerate development and to the consequent structural constraints that China now faces.
The cultural issues that I am referring to are very difficult to get to grips with (for reasons suggested in Understanding 'Asia').
However an attempt to outline what this seems to lead to in practice is in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, while the resulting economic and political challenges that China faces (if my theories are valid) are suggested in Heading for a Crash? (in China’s Development: Assessing the Implications).
|Addendum M: Autocratic Asian States and Australia's Economic Options +||
Autocratic Asian States and Australia's Economic Options (email sent 6/5/12)
Re: China and mining boom crucial for future success, editorial, The Australian, 2/6/12
I must submit that your editorial presented an overly-simplistic view of Australia’s economic options in a world in which autocratic East Asian states could become dominant.
In brief I interpreted your editorial as suggesting that;
While it is useful to confront directly the question of the impact on Australia of China and the mining boom, I submit that a more Asia-literate approach is needed to take account of the challenges posed by autocratic neo-Confucian states whose influence is potentially incompatible with Australia's institutions and current capabilities.
This needs to be the subject of informed debate rather than being dismissed as unnecessary on the basis that raising such questions simply reflects ‘xenophobia’. In brief my reasons for suggesting this are that:
Similarly Australia’s economic options appear to be nowhere near as clear cut as the editorial suggested. For example:
It is counterproductive to (as the editorial seemed to do):
The above concerns are outlined more fully on my web-site.
Outline of 'China and mining boom crucial for future success' (editorial, The Australian, 2/6/12):
Detailed Comments (Working Draft)
The issues are nowhere near as simple as the above editorial suggests.
Autocratic Asian States
While it was useful to directly raise the question of the impact on Australia of China and the mining boom, a more Asia-literate approach is needed to take account of the challenges posed by autocratic neo-Confucian states whose influence, if dominant, is potentially incompatible with Australia's institutions and beyond current capabilities. In particular:
Arguably Australia requires a process of nation-building to overcome current failures in its system of governance, and this is would be particularly important if an 'Asian' century emerges (eg see Comments on Australia's Strategic Edge in 2030, 2011).
It is counterproductive to suggest that all that would be required would be openness to investment and migration, and try to inhibit mention of the more complex and sensitive issues that need to be debated if real progress is to be achieved.
Australia's Economic Options
There seem to be similar over-simplifications implicit in the editorial's comments on Australia's economic strategies and options. For example:
Australia's Federal Budget Surplus?
Finally it is noted that very few observers seemed to believe official claims about the federal government's 2012 budget achieving a surplus, as that surplus relied on projections of rapid global and domestic economic recovery that bore little relationship to what actually seemed to be happening in the apparently unstable and uncertain international economic environment characterised by risks such as:
While this primarily raises the risk of financial crises and monetary policy methods have been used since the late 1980s to insulate the real economy from the effects of financial problems, these methods are approaching their 'use by' date (a situation that the US Federal Reserve seems to accept). The problem is arguably that those methods:
There are thus probably no counter-cyclical policy tools available (eg see Asia-illiteracy as a Factor in the IMF's Counter-cyclical Response to Structural Problems and Ending Policy Paralysis). And at the same time, as noted above, there has been essentially no attention to the structural causes of the international financial imbalances that render counter-cyclical policies ineffectual.
Thus a more realistic interpretation of Australia's 2012 federal budget in the light of the global economic crisis that is almost certainly emerging is that it is likely to constitute yet another unfunded stimulus package.
|Addendum N: Developing Economic Game Changers +||
Developing Economic Game Changers - email sent 15/6/12
RE: Economic game-changers ignored, Australian Financial Review, 13/6 12
Your article suggested that the Prime Minister’s Economic Forum should be judged by whether it identifies concrete government actions that will make a big economic difference, and that the Forum did not seem to have achieved this. In particular you drew attention to three overlooked initiatives identified in your Institute’s Game Changers report that might each add about $25bn to GDP (ie increased workforce participation by women and older persons, and a shift towards consumption taxes).
I should like to submit for your consideration that: (a) at least two (and perhaps many more) other potential economic game changers are being ignored; and (b) there might be value in developing Australia’s capacity to formulate such options independent of political considerations.
The ideas submitted to, and the priorities emerging from, the Economic Forum were outlined by the Prime Minister’s closing remarks.
While there is value in the initiatives suggested by your Institute and through the Prime Minister’s Economic Forum, two other potential economic ‘game changers’ are suggested on my web-site, namely:
More generally I submit that there are limits to which democratic governments can deal with ‘game changers’ of any sort, because they are bound to stay close to what is already widely known and well accepted in the community (see Economic solutions are beyond politics, 1995).
Thus, just as major companies may need ‘skunk works’ to develop new innovations, there is arguably a need to improve Australia’s institutional capacity to develop and build understanding of ‘game changing’ policy options without such efforts being easily suppressed by established interests. Some suggestions about ways to improve the availability and acceptability of potentially ‘game changing’ inputs to business, the community and ultimately the political process are in Australia's Governance Crisis and the Need for Nation Building (2003+).
Other Possible Game Changers
A Broader Approach to Economic Development
Government actions (eg through the legal and taxation systems and by the provision of goods and services) can make a positive economic difference if they support the market economy, or a negative difference if they (say) discourage initiative or economic change. However the support (or otherwise) that individuals and enterprises receive from within the market economy itself (eg from other enterprises) is at least as important (maybe twice as significant as) the support (or otherwise) that governments provides (as governments only account for about 30% of GDP).
The possibility of going beyond conventional approaches to microeconomic reform, ie by establishing mechanisms to accelerate the development of the capacity of industry clusters to support enterprises in pursuing market and technology driven opportunities is suggested in Lifting Productivity: Considering the Bigger Picture (2010). The latter refers to:
Over the past 2-3 decades emphasis has been placed on developing innovation systems as the best path to strengthening Australia’s economic capabilities. However, in reality, despite huge public spending Australia’s capability to benefit economically from innovation has not significantly improved because emphasis has been placed on what government could do (eg fund education / skills / research or provide ‘assistance’) rather than on developing the capability of the market economy to profit from innovation and thus provide viable and sustainable support to potential innovators and well-direct demand for education / skills and research). This point is further developed in: The Economic Futility of Backing Australia's Ability 2 (2004+) and Investing in science / innovation (2012).
Economic ‘miracles’ (ie rapid economic development and growth) in East Asia have been associated with methods to accelerate market-oriented economic learning by non-democratic elite-dominated states. An effective process to accelerate market-oriented economic development that can work in an egalitarian democratic context should be capable of adding at least 2% pa (ie about $25bn pa) to Australia’s GDP.
An Asia-literate Approach to ‘Asia’
A well-intended effort to explore Australia’s opportunities from engagement with what is seen as the ‘Asian Century’ is the subject of an ongoing white paper process (see website). However despite those good intentions the process seems to suffer from a lack of real Asia-literacy, and is thus unlikely to be particularly effective or beneficial.
For example, a summary of submissions on improving Asia-literacy (Improving Australians' Asia-relevant Capabilities) referred to: enhancing Australians ability to engage with people in Asia; language training; cultural literacy; the particular importance of China; and potential jurisdictional barriers. It also highlighted the fact that ‘Asia literacy is more than language fluency’.
However there was absolutely no indication of any real understanding of what ‘cultural literacy’ actually meant in the potentially-dominant societies in Asia (ie of the intellectual basis of East Asian societies with an ancient Chinese cultural heritage, rather than the West’s classical Greek, Roman and Christian heritage – and of the practical consequences of those differences).
An undoubtedly inadequate attempt to suggest what this means is in Babes in the Asian Woods (2009+). The latter suggests that, in relation to the East Asian states that have been most economically successful and are seen as potentially dominant, an 'Asian century' implies that intuitive, hierarchical and autocratic ethnic groups would prove better able to deal with ongoing economic and political challenges than rational / responsible individuals operating within the framework of individual liberty, a rule of law, democratic governance, freedom of speech and profit seeking enterprises that Western societies have adopted. Such societies take a quite different approach to epistemology (ie to the way knowledge is used - see East Asia in Competing Civilizations). They thus do not rely on rational / responsible individuals and or on institutional frameworks to reduce the limits to rationality that Western societies have adopted (eg a rule of law that allows individuals to make decisions without needing to second-guess the reactions of political and social elites / authorities). Thus effective participation in an ‘Asian century’ on the basis of East Asian traditions would be incompatible with Australia’s current social, economic and political systems (see also Autocratic Asian States and Australia's Economic Options).
Also it was recently reported that a member of the Asian Century white paper group (John Denton of Corrs Chambers Westgarth) recommended that Australia have closer law-regime ties with Asia (eg in terms of financial rules and corporate governance) – see Dodson L. Daley G., Greber J., and Massola J. ‘Dovetail laws with Asia, leaders told’, Australian Financial Review, 13/6 12.
One problem is that, while there are various legal systems in ‘Asia’, those in the region’s dominant economy do not provide rules that all citizens and the state are bound by (because, as noted above, there is no Western-style endorsement of universal values or rules). Rather selectively applied 'law' tends to provide one of the means whereby social elites ensure compliance by their subordinates. Australia’s legal system is derived from that in Britain and places both individuals and the state under the law. This is in marked contrast to the system of Roman Law which prevails in much of Europe – under which the state is legally prior to individuals and is expected to be concerned with the culture and functioning of the society as a whole. The not-inconsiderable difficulties of harmonising laws between British and Roman law systems would be trivial compared with those involved in dovetailing with those in neo-Confucian systems of socio-political-economy. There is a need for real understanding of the foundations of Asian ‘legal’ systems before dovetailing Australia's system into them can be sensibly discussed.
Moreover, while there is a need to harmonize Western and East Asia approaches to financial rules and corporate governance, it needs to be recognised that the systems adopted in East Asia seem to require suppressing demand and thereby played a major role in generating the international financial imbalances that contributed to the global financial crisis (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, Impacting the Global Economy and Creating an Effective International Financial System?). It seems highly unlikely that there would be value in ‘dovetailing’ Australia legal system (in terms of financial rules and corporate governance) into those in the currently-dominant economies in Asia – quite the reverse in fact (see Should Fixing the International Financial System Start in Asia?, 2011).
Significant economic pay-offs from a more realistic approach to Asia-literacy would include:
A Strategic Approach to Asia-Literacy provides some suggestions about what might be required to achieve this.
Addendum O: Rethinking Economics in the Light of the Global Financial
Rethinking Economics in the Light of the Global Financial Crisis - email sent 21/6/12
Re: Rethinking macroeconomics in light of the U.S. financial crisis, Real World Economics Review, No 60, 20/6/12
I was interested in your paper because of my own speculations about the need to rethink macroeconomic management (see Booms and Busts: Unsatisfactory Tools for Macroeconomic Management). The latter pointed to the fact that Keynesian countercyclical fiscal policy action had lost credibility some decades ago (because of the difficulty of actually achieving counter-cyclical, rather than pro-cyclical, outcomes) and that its successor, countercyclical monetary policy, had been associated with the emergence of the asset bubbles that led to the global financial crisis (GFC).
In seeking explanations of the GFC I submit that it is more important to consider the character of financial systems which have led to international financial imbalances, than simply to look for defects in traditional macroeconomic theories about the stability of market economies. My reasons for suggesting this are outlined in Structural Incompatibility Puts Global Growth at Risk (2003), Financial Market Instability: A Many Sided Story (2007), Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009) and Impacting the Global Economy (2009). Unless and until the problem of financial imbalances related to poorly developed financial systems is overcome, macroeconomic management based on either fiscal or monetary stimuli must just make the situation worse (eg see China and Japan Need to Do More Than Contribute to Europe's 'Begging Bowel').
In relation to the broader issues raised in your paper about economics, I should like to suggest that:
I would be interested in your response to my speculations.
|Addendum P: Fixing Economics||
Fixing Economics - email sent 22/6/12
Dr Geoff Davies
Re: Eight ways economists are getting it wrong, Business Spectator, 22/6/12
I noted with interest your suggestions about what is wrong with economics (ie inadequacy of GDP; poor performance in neo-liberal era; failure to consider debt; false ideas about equilibrium; collective inability to guess the future; limited rationality; ignoring market dominance and spill-over benefits to land-owners).
Some alternative suggestions are in Rethinking Economics in the Light of the Global Financial Crisis. The latter suggested, for example, that economics has been inadequate, not just in relation to assumptions about equilibrium, but more fundamentally in assuming that it should seek to be a ‘science’ concerned with discovering ‘laws’, rather than recognising that it is dealing with systems subject to varying relationships.
And in relation to the other points suggested in your article it is submitted that:
I would be interested in your response to my speculations.
|Addendum Q: New Economics: Some Pragmatic Suggestions||
New Economics: Some Pragmatic Suggestions - email sent 30/6/12
Professor John Wiseman,
RE: Building the new economy: alternative strategies for the 99%, The Conversation, 29/6/12
I should like to provide some feedback on your account of the recent Strategies for a New Economy conference.
While I am anything but an expert on how the desirable social and environmental aspirations reflected in the search for a ‘new economics’ will be achieved, I should like to put forward some suggestions in relation to the concluding comments by Bob Massie that your article referred to (ie about the need for pragmatic realism in giving practical effect to environmental aspirations and those of the Occupy movement).
Massie’s suggestion about this is particularly important.
In the past social progress could be achieved simply by engaging public support, because of the global economic dominance of democratic societies that would respond to such pressures. However this is not sufficient in an environment in which the economic foundations of democratic political systems (and thus their capacity to do what public opinion concludes is the ‘right thing’) are at risk. There is also a need to rebuild those economic foundations, ie to strengthen economic productivity and competitiveness and to end the escalation of private and public debts that arise where national aspirations (to consume and provide public goods and services) are greater than national income. This constraint is increasingly apparent in Europe – though it is not the only cause of concern (see Sovereign Defaults: Stage 2 of the GFC?) and will again become apparent late in 2012 when the US faces its ‘fiscal cliff’ (ie the need to either significantly impede economic activity by increased taxes / reduced spending, or to suffer a likely downgrade in the US’s credit rating in a decade of so). Moreover it is not only fiscal capacity that is being eroded, as it seems that:
The other side of the eroding fiscal capacity of democratic societies is the increased financial status of non-democratic systems (eg China) that do not respond to what the 99% believes is the ‘right thing’ to do. In East Asia it is considered normal to ‘do things’ before / without getting agreement or announcing what is being done (as illustrated by China’s President in a 2003 speech to Australia’s federal parliament in which he referred enigmatically to building on points of agreement and not debating differences – see China as the Future of the World). Whereas western societies identify ideas before putting them into practice (eg by democratic debate), the reverse applies in East Asia, and the latter societies are given direction behind the scenes by social elites with the aid of their social subordinates rather than by public debate or the search by independent enterprises for profitable opportunities (see also What Does an Asian Century Imply?).
The concerns expressed by the Occupy movement (ie about poor economic opportunities for many and the consequences of financial crises - including the transference of banking losses to the public sector) are neither solely, nor even primarily, a consequence of the characteristics of democratic capitalism. There are many other factors involved (eg see Global Problems Need a Big Picture Perspective and World facing 'Crisis of non-Capitalism': Non-economist). The former referred to:
As noted above, I am in no position to suggest how to achieve the desirable social and environmental goals reflected in the search for a ‘new economics’, however some partial suggestions which are limited to how economics may need to evolve in order to ensure that democratic governments retain the capacity to respond to pressures to ‘do the right thing’ in social and environmental domains are in:
I would be interested in your response to my speculations.
|Addendum R: Economics Beyond the Limitations of Science?||
Economics Beyond the Limitations of Science? - email sent 6/1/13
Re: The End of Economist’s Imperialism, Harvard Business Review, Jan 4, 2013
My attention was drawn to your article about the confusion amongst economists about their discipline, and would like to suggest a possible way to move forward.
While the issues involved are complex, one option to revise the way economics is regarded is to recognise that there are limits to science (and thus to economics if it tries to be a ‘true science’).
The laws of physics (for example) seek to explain the future of a system based on knowledge of its initial state and time-reversible deterministic laws. Such laws (which do not allow any loss or gain of information) do not explain the qualitative changes that we can observe to occur in nature and society – and this strongly suggests that information / free energy / neg-entropy from a system’s environment is required to explain change (eg see Problems in an Internally Deterministic Scientific Worldview, 2004).
A possible implication for economics is that information /knowledge (which is validly seen as the key factor in economic growth) should not be treated as simply an input to a fixed production function (as growth theory traditionally does) but rather should be viewed primarily as a means for changing the production function (eg see Probable Breakthrough in Understanding Economic Development, 2004). The practical relevance of this in terms of economic competitiveness can be recognised because economic ‘miracles’ in East Asia have been based on a radically different way of thinking (one that does not recognise ‘laws’, and where the methods used to accelerate economic adjustment have involved stimulation of change in whole economic systems by the introduction of new information) – see East Asia in Competing Civilizations (2001+). And in China now, in response to nostalgia for the social equality of the Maoist era, it is pointed out that Mao was unable to ‘break any rules’ (eg ‘laws’ of economics) – see Communism Versus Confucianism: The Continuing Contest in China (2011).
In practice looking beyond the limitations of science would require an active (rather than a simply analytical) approach to economics (eg like the experiments with the development of industry clusters in the 1990s). Possible protocols to neutralize the limitations that democratic government imposes on achieving market-oriented economic ‘miracles’ are speculated (in an Australian context) in A Case for Innovative Economic Leadership (2009).
Some broader implications for economics are suggested in Rethinking Economics in the Light of the Global Financial Crisis (2012) and Fixing Economics (2012). These refer (for example) to: (a) the inadequacy of traditional economic management tools; (b) the need to pay attention to the character of financial systems (especially under neo-Confucian systems of socio-political-economy in East Asia) that have depended on the financial imbalances that were a factor in giving rise to the financial crisis and subsequent global stagnation; (c) the obstacles to success in Western-style economies that are created by complex financial systems; and (d) the inadequacy of market liberalization as a means for ensuring economic competitiveness.
In another article (What Will Make These Fiscal Showdowns Stop?, Harvard Business Review, Jan 2, 2013), you implied that dealing with the US’s fiscal challenges is simply a political problem. However developing a new approach to economics (and to other matters) is arguably required for a solution (see Progress Towards Ending the Global Financial Crisis?, 2012). The latter suggests (for example) that: (a) international financial imbalances need to be considered in relation to the fiscal crisis and subsequent economic stagnation; (b) these imbalances make changes to US fiscal policy almost irrelevant from a macroeconomic viewpoint; and (c) there are options that go beyond traditional monetary and fiscal policies to both reduce fiscal constraints and to promote sustainable global economic growth.
I would be interested in your response to my speculations.
|Addendum S: Comments on Dow's Advanced Manufacturing Plan for Australia||
Comments on Dow's Advanced Manufacturing Plan for Australia (March 2013)
In an address to Australia's National Press Club in October 2012 the Chairman and CEO of Dow Chemicals (Andrew Liveris) made a case for Australia getting its economic act together through advanced / innovation-linked manufacturing.
This presentation related to an Advanced Manufacturing Plan for Australia the Dow has produced (in addition to parallel plans for the US, Europe and Kenya). Key point in a synopsis of that plan are outlined below.
There is no doubt about the need for a significant transformation of Australia's economic capabilities as Dow suggested (for reasons suggested in Lifting Productivity: Considering the Bigger Picture, 2010+). However more consideration is needed of the methods by which this can be achieved because:
The methods for accelerating economic development in Australia that are mentioned above were being developed within Australia’s bureaucracies in the 1980s – but this prospect was demolished when ‘reforms’ were introduced to make public services more politically responsive (ie to ensure the dominance of ‘yes men’ and thereby inadvertently eliminate governments’ access to any reality-check on foolish policies) and ‘efficient’ in the provision of public goods and services. That ‘reform’ process not only eliminated the prospect of significantly improving Australia’s economy but also contributed to a couple of decades of very bad / wasteful government (eg see Decay of Australian Public Administration, 2002 and Reforming State Governments: Does Queensland's Commission of Audit Have the Answer?. 2013).
Australia not only needs to develop a balanced sustainable economy, but also to create a competent system of government. What the latter might require is suggested in Australia's Governance Crisis and the Need for Nation Building (2003+).
|T: 'Australia's Competitiveness': Some Suggestions +||
Professor Michael Enright
Professor Richard Petty
I should like to offer suggestions in relation to the worthy aspirations of the book that you recently wrote in collaboration with CPA Australia (ie Australia’s Competitiveness: From Lucky Country to Competitive Country). A brief scan of the synopsis suggests that it is likely to contain useful information and ideas.
However similar information and ideas that were up-to-date at the time were advanced in the 1980s, and while Australia’s economic competitiveness and resilience has since improved as a consequence of market liberalization, there has been no fundamental or adequate breakthrough.
This implies the need to do things differently and better this time.
Progress has arguably been frustrated by weaknesses in Australia’s institutions that arise partly from its ‘Lucky Country’ heritage. Thus I would suggest that success in achieving the goals you advocate requires:
These suggestions are elaborated on my web-site, and I would be interested in your response.
The alternative I suspect is to continue down the self-destructive path towards the 'banana republic' that Paul Keating foresaw as Australia's future.
By way of background I note that I authored one of the early proposals for diversification of Australia’s economy from reliance on existing comparative advantages (which had long been based on natural resources) by the development of knowledge-based competitive advantages (Towards a Strategy for Technological Development in Queensland, 1983). I also had the opportunity over several years to study international debates about economic strategy and experiment with several initiatives that suggested ways to make practical progress - and have followed subsequent progress and debates.
Economic Systems and Industry Clusters
In the late 1970s and into the 1980s a strong case was made for boosting Australia's competitiveness so as to reduce its 'Lucky Country' reliance on natural resource wealth. The latter had been associated with a steady decline in Australia's relative per capital income levels since the start of the 20th century, because they were subjected to boom-bust cycles and had suffered falling product values relative to other sectors.
A serious commitment to economic reform thus emerged in the late 1980s and early 1990s involving particularly market liberalization (eg via financial deregulation, reduced tariffs and other micro-economic reforms).
Australia's competitiveness and economic resilience improved as a result. But productivity gains stalled and the Lucky Country's dependence on commodity exports resurfaced.
One problem seems to be that market liberalization created an environment in which individuals / enterprises were required to compete, but this did not ensure that they were able to compete successfully in high productivity activities as such competitiveness requires support from other parts of the economy (eg through the existence of integrated industry clusters and the effectiveness as a whole of financial, transport, distribution, education, training, marketing, legal, regulatory ... etc ... systems).
In the absence of effective integrated economic systems, market liberalization was a very limited tool for boosting competitiveness (see The Inadequacy of Market Liberalization, 2004).
Moreover where attempts were made to develop economic systems (eg for innovation) these were frustrated by the intrinsic limitations that democratically accountable governments face in trying to play a lead role in addressing competitiveness challenges.
Some of the causes of this constraint and methods to get around it while retaining democratic oversight of the methods that are used were suggested in Comments on Dow's Advanced Manufacturing Plan for Australia.
One implication is that to effectively address competitiveness issues there seems to be a need for apolitical arrangements through which practical market-oriented initiatives can be stimulated while policy questions potentially requiring political decisions are treated as a necessary but secondary product (eg as suggested in A Case for Innovative Economic Leadership, 2009). Though experiments have suggested how this might be achieved in practice, better arrangements would undoubtedly emerge after experimentation over several years (and, as for companies and associations, those arrangements would preferably operate under democratically-endorsed protocols while not being directly politically accountable).
A consequent implication is that, instead of lobbying governments to 'do something' about Australia's competitiveness, Australia's civil society (eg business, universities, professional bodies and others) need to take the primary responsibility themselves for doing what needs to be done. Modern democratic governments originated (initially in the UK in the 18th century) mainly as a means for: (a) creating a (say legislative) environment in which others could do things; (b) stabilizing society by redistributing the wealth created by mechanised and mass production in industrial economies; and (c) providing goods and services that can't be effectively provided in a competitive market context. Democratic government still has overwhelming advantages, but is much more effective in redistributing wealth than creating it - especially in an environment where generating wealth now primarily depends on market-relevant knowledge and is likely in future to depend increasingly on using such knowledge to accelerate the development of economic systems as a whole.
It can also be noted in passing that the methods of counter-cyclical macroeconomic management that are being used globally (ie those involving competitive (?) quantitative easing) are likely to merely generate asset bubbles and more financial crises (see Debt Denial: Stage 3 of the GFC?) unless methods such as those suggested above are put in place to stimulate 'real economy' recovery as compared with a 'paper economy' bubble (see New Methods for Macroeconomic Management).
Strengthening the Foundations of Australia's Economy
However it is not sufficient to merely enhance 'economic' systems to boost Australia's competitiveness.
The economic institutions that have been successful in countries such as Australia require solid foundations such as (for example) a rule of law and responsible citizens (see The Cultural Foundations of Western Strength).
And problems have been growing in these areas. Thus Australia's competitiveness now requires attention not only to 'economic' systems but also to the 'foundations' that are needed to underpin them including, for example effective and efficient government, a capable / responsible community and high quality strategic intelligence.
Effective and Efficient Government
The intrinsic limitations on what democratic governments can do to boost economic competitiveness have been compounded over the past 2-3 decades by attempts to make public services both business-like and unquestioningly politically compliant. Those efforts: (a) led to problems in undertaking government's primarily-non-business-like functions; and (b) undermined effective governance (see Decay of Australian Public Administration, 2002+).
Moreover attempts to be 'business-like' and politicisation of public services were not the only obstacles to effective government (see Australia's Governance Crisis and the Need for Nation Building, 2003+). For example, other problems included:
The net effect is that governments have tended to be both ineffectual and inefficient - resulting in a widespread inability to generate or implement relevant policies (see 2001 indicators of dysfunctional government [1, 2, 3]) - noting:
By 2010 even Australia's political leaders were starting to realize that there was something wrong (see The Need for Nation Building).
Much better performance should be expected of governments than is currently evident. Some undoubtedly inadequate speculations about what may be needed to enable Australia's system of government to become more effective and efficient are in A Nation Building Agenda.
Unfortunately what are currently seen as ‘solutions’ to the failure of effective government seem likely to further compound the problem, because emphasis continues to be given to trying to boost the efficiency of government operations by methods that don't suit most public sector functions, while the desperate need to boost governments' ability to 'govern' continues to be ignored (see Reforming State Governments: Does Queensland's Commission of Audit Have the Answer?).
However deteriorating governance is not all that is undermining the foundations of Australia's competitiveness.
Constraints are also arising because many individuals' ability to contribute to a competitive economy is declining while the cost burden they impose on the community (and thus on taxpayers) is rising.
Constraints on individuals' ability to contribute seems to reflect a variety of mutually-reinforcing factors, such as:
These social dysfunctions are compounding the constraints on economic competitiveness that an aging population imposes in terms of increasing the dependent / working population ratio and (together with rising community expectations) leading to increased welfare costs and increasing demands on available tax revenues
They are also putting at risk the political and economic advantages that derive from liberal legal and government institutions (ie those based on presumptions of moral interpersonal relationships can be ensured by individual consciences responsible to God (see Eroding the Moral Foundations of Individual Liberty)
There seem to be several primary causes of these social dysfunctions, namely:
Though traditional approaches to welfare have been under challenge for some years (see Whatever happened to welfare?), large increases in transfer payments under the Howard Government were to at least some extent able to compensate for potentially rising social inequality (and thus limited those living in perceived poverty to around 10% of the community) but this created a budgetary position that seemed to involve a structural deficit - because the revenues generated by the capital gains associated with a once-off economic boom were being committed on an ongoing basis (see The Long Term Impact of the Global Financial Crisis, 2009).
Australia's fiscal difficulty is clearly increasing in 2013, though the contribution of social dysfunctions to this has not yet been formally analysed and there are others factors involved (eg the effect of global financial instability and economic change).
There are thus growing limits to governments' ability to deal with these social dysfunctions through programs to support the disadvantaged or address the consequences of individual irresponsibility. Moreover as with programs to 'assist' business the effect of direct government social 'assistance' can be to create reliance on artificial support and thereby impede the development of effective economic and social environments that would otherwise be able to provide the necessary support in many cases without government involvement.
This does not imply that government support to individuals or government programs to target the effect of individual irresponsibility (eg drug abuse, domestic violence) should be eliminated. There will always be situations where the difficulties that individuals face are simply beyond remedy by more effective economic / social systems. However precedence should be given to creating economically and socially self-sustainable solutions to those problems over those that are based on public spending / regulation.
More generally it needs to be recognised that attempts by Australia's federal government to exploit the fiscal imbalances in Australia's federal system to micro-manage solutions to presenting problems (as compared with getting back to government's core business of 'governing', ie making it possible for others to contribute in diverse ways to resolving those problems) is arguably seriously counter-productive, not only because of the costs involved but because of the inadequacies of 'central planning' in dealing with complex systems (see Centralization is Part of the Problem: Not the Solution).
Finally it is noted that access to strategic information is a vital component in building economic competitiveness and in effective governance. Economists validly recognise knowledge as the key factor in economic growth. Understanding what is going on is equally critical to prospering in a complex / contested geopolitical environment. And the potential global economic and geopolitical instabilities that are suggested below imply that making sensible decisions about governments' budget options is increasingly dependent on such intelligence.
However Australia's ability to access and assess such intelligence has been weak (eg consider Poor Evaluation of Strategic Issues and More Competent External Support to Parliament). This weakness (and the resulting dominance of domestic assumptions over external realities) arguably results from: (a) Australia's history of dependence on foreign investment and externally-generated policy options; (b) the 'curse' (ie poor leadership) typically associated with reliance on natural resource wealth; and (c) community dependence on external institutions to generate wealth and on governments to redistribute it widely.
The need for vastly better intelligence can be illustrated by the economic opportunities and immense cultural challenges posed by Asia's rising political and economic importance because:
The importance to Australia's future prospects of a serious approach to strategic Asia literacy is argued in Comments on a Australia's Strategic Position in 2030.
However it is not only in relation to Asia that the world is changing rapidly - and to meet market opportunities in the future requires access to high quality market and technological intelligence as well as solid understanding of geo-political and environmental realities. Methods to improve the access by larger firms and clusters of smaller firms to such intelligence should make a major contribution to Australia's competitiveness.
There is no doubt about the need to address the issues were discussed in Australia's Competitiveness: From Lucky Country to Competitive Country.
However there is a need to do things differently and better than when very similar challenges were identified 3 decades ago. A core requirement for success will be that Australia's civil society itself takes responsibility for doing what needs to be done, rather than lobbying governments (whose primary strength is in redistributing wealth) to 'do something' to boost Australia's competitiveness.
The effectiveness of any initiatives will be constrained by many weaknesses (eg underdeveloped economic systems, government incompetence, social dysfunction and a lack of strategic intelligence) unless arrangements are put in place to simultaneously deal with several complementary agendas simultaneously. A strategic management approach (such as that suggested in A Case for Innovative Economic Leadership) can potentially achieve this, but collaboration amongst a variety of apolitical groups with complementary goals and competencies is needed to make it happen.
The alternative is to continue down the self-destructive path towards the 'banana republic' that Paul Keating foresaw as Australia's future.
|U: Making Australia's Competitiveness Everyone's Business||
Making Australia's Competitiveness Everyone's Business - email sent 20/5/13
I have been privately advised that CPA Australia is taking the constructive view that boosting Australia’s competitiveness is ‘everyone’s business’ and that there is a need to ‘get on with it’.
That feedback followed my email ('Australia's Competitiveness': Some Suggestions) which had commented to Michael Enright and Richard Petty on their useful research into competitiveness indicators and requirements in conjunction with CPA Australia.
I should like to provide further feedback in relation to ‘making competitiveness everyone’s business’ and on CPA Australia’s suggestions in response to that research (eg in CPA Australia's call to action) and CPA Australia’s response to the 2013 federal budget (eg in Forget the Minutia – where is the vision?).
Unfortunately it seems unlikely that what is currently being done will be sufficient to achieve a major breakthrough, because:
|V: Beyond Strategic Navel Gazing||
Beyond Strategic Navel Gazing - email sent 24/5/13
Re: Partisan Stories leave Australia defenceless, Business Spectator, 23/5/13
Your article is spot on in relation to the lack of attention to Australia’s strategic position in the introspective and partisan approach that is being taken to the 2013 federal election. However, while the risks that you outlined are all too real, the situation is even more complex (eg see Fasten Seat Belts: Rough Weather Ahead).
The biggest issue that is being overlooked is arguably that China (which kept Australia’s economy afloat as a strong customer for the first few years of the GFC) is anything but a ‘centrally planned economy’.
Rather, like Japan, China has a neo-Confucian system of socio-political-economy (though in China the central catalytic role has been played by the so-called Communist Party, rather than by the bureaucracy as it was in Japan). And that system not only accounts for the economic ‘miracles’ that have been achieved in East Asia, but also for much (though not all) of the global financial and economic crises and disruption of recent years because the neo-Confucian systems involve investment on the basis of elite consensus rather than calculations of expected return on capital (eg see Evidence; Understanding East Asia's Neo-Confucian Systems of Socio-political-economy, 2009; Impacting the Global Economy, 2009; World facing 'Crisis of non-Capitalism': Non-economist, 2011; and The Infantile US vs China Debate, 2015).
The second biggest issue that is being overlooked is that Japan (Australia’s second biggest customer) could well be on the point of national ‘bankruptcy’ because of its neo-Confucian financial arrangements (see Japan's Predicament). And while China’s position is not yet quite as bad, it faces a far broader range of obstacles (see China: Heading for a Crash or a Meltdown).
If any attempt had been made to understand how East Asian systems worked, it would have been obvious for years that the favourable international financial imbalances that are required to reduce the risk of financial crises in neo-Confucian systems were likely eventually to disrupt the global economy and thus Australia’s ‘stronger for longer’ resource boom (see Structural Incompatibility Puts Global Growth at Risk, 2003; GFC Causes, 2008; The ‘Bigger, Longer and Better’ Resource Boom Hypothesis; 2010, and Counter-cyclical policy can't solve structural problems, 2011). Unfortunately ‘strategic navel gazing’ has long been seen as all that a ‘Lucky Country’ needs (see Inadequate Intelligence and Strategic Assessment, 2003+; and Babes in the Asian Woods, 2009+).
Some suggestions that may be relevant to dealing with the politically-ignored crisis that now seems likely in 2014 are in A Nation Building Agenda (2010); Comments on Australia's Strategic Edge in 2030 (2011); and 'Australia's Competitiveness': Some Suggestions (2013).
|W: Australia's Hazardous Foreign Liabilities in an Unstable International Environment||
Australia's Hazardous Foreign Liabilities in an Unstable International Environment - email sent 27/6/13
Re: Lurking beneath Australia’s AAA Economy, Online Opinion, 25/6/13
Your article raised concerns about the risks associated with Australia’s very substantial foreign liabilities in an environment in which it will be much harder to attract capital inflow to roll over existing liabilities and balance Australia’s persistently-large current account deficits.
A parallel speculation appeared on my web-site in 2008 (see Defending Australia from the Financial Crisis?). The problem that appeared likely at that time was averted because strong fiscal and monetary policy responses elsewhere (especially in China and the US) maintained demand for Australia’s commodity exports and capital inflow.
You validly endorsed Professor Garnaut’s view that because the international environment is changing Australia needs to get cracking on "the other industries we're going to have to get the growth from".
Some suggestions about how the development of new high value-added tradeable industries might have been accelerated are in Lifting Productivity: Considering the Bigger Picture (2010). However it will probably be much harder now to put such innovative tactics into practice as the international economic environment is unlikely to be supportive (see Credit Bust First: 'Sixth Revolution' Later, 2013). Countercyclical fiscal and monetary policy measures that kept the global economic boat afloat were not sufficient or sustainable in the face of fundamental structural obstacles (eg see Counter-cyclical policy can't solve structural problems, 2011). There has been little progress towards making global economic growth sustainable, and those primarily counter-cyclical responses have arguably; (a) escalated the financial / economic risk; and (b) almost reached their ‘use by date’.
I would be interested in your response to my speculations.
|X: You must be psychic||
You must be psychic - email sent 22/8/13
Re: The land of the long white mirage, Inside Story, 21/8/13
Your article suggests that Abbott and Hockey believe that NZ’s economic strategy has been excellent and worth copying. You are better than me. I have been quite unable to deduce anything about their economic logic.
However they are going to be confronting a very difficult (perhaps impossible) economic challenge in the next year or so (assuming that they get elected) because the factors that have made Australia’s economy look good (ie a commodity boom and very low federal government debts) seem to be unwinding. I strongly suspect that the global economy is finally going to go into reverse because debt levels can’t be increased indefinitely (see Debt Denial: Stage 3 of the GFC?) and that Australia’s economic dependence on the ‘stronger for longer resource boom’ hypothesis will prove to have been unwise (as suggested in 2011 in Do Blind Spots Cloud the RBA's 'Lucky Country' Vision?). And, even though Costello engineered a near zero net federal debt on the basis of strong capital gains tax receipts in the early stages of the China boom, it seems that the federal government already had a structural deficit the last time the Coalition was in power (because boom-time revenues were committed to ongoing tax reductions and middle class welfare) – see The Long Term Impact of the GFC. And politics since then (from both Labor and the Coalition) seems to have been focused on increasing that structural deficit – even before the risk of a revenue collapse associated with the end of the China boom became apparent.
Boosting productivity is going to be vital to avoid an economic, fiscal and political crisis. I don’t see any sign that either Labor or the Coalition has the slightest idea how to achieve this. And the external environment is unlikely to allow even the best tactics that might have been used under normal circumstances (see some speculations) to be effective.
Whoever wants to be in government in 2016 would probably be well advised to do their best to avoid getting elected on September 7th.
|Y: The most difficult five years except for the next Five??||
The most difficult five years except for the next Five?? - email sent 22/8/13
Re: Doing the Maths on the Coalition’s Job Figures, Business Spectator, 21/8/13
Your article suggested that there was nothing ambitious about the Coalition’s claim to create 2m new jobs over the next 5 years. This is valid so long as it is presumed that similar outcomes were achieved under Labor “during the most difficult economic time since the Great Depression”.
However it seems to me to be likely that the most difficult economic time since the Great Depression has not happened yet because measures put in place to deal with the global financial crisis provided a temporary boost to economic activity while doing nothing about the underlying problems (especially the structural international financial imbalances that make continually escalating debts by countries with current account deficits an essential, but unsustainable, foundations for growth in the global economy).
Some reasons for suggesting that the next few years are likely to be far more challenging (so that creating 2m new jobs, or perhaps any net new jobs, may be essentially impossible under any government) are outlined in the attached email.
|Z: Stimulating Practical Action on Productivity||
Stimulating Practical Action on Productivity - email sent 1/9/13
Re: A more sustainable Australia: let’s get creative about productivity, The Conversation, 29/8/13
I should like to make some ‘left field’ suggestions in relation to your article about a creative way to boost Australia’s productivity.
My basic suggestion is embodied in a number of documents on my web-site (namely A Case for Innovative Economic Leadership, 2009; Lifting Productivity: Considering the Bigger Picture, 2010; Fixing Economics, 2012). However it needs a little explanation. It also needs enhancement as proposed more recently in 'Australia's Competitiveness': Some Suggestions (2013) - eg by measures to make governments more effective, reduce social dysfunctions and improve access to strategic intelligence about an increasingly difficult international environment.
Your article referred to numerous possible options to improve Australia’s productivity through innovation (eg the proposals in various reports, and measures that would boost information interchange).
However, while there are policy options to improve the situation that can be identified through various studies, the most effective way to identify and implement productive changes would probably be through a process of ‘strategic management’ / ‘indicative planning’ in a market context. This would involve stimulating / enabling all components of various industry clusters and regional economies to identify the options available to themselves to benefit in taking advantage of major (market or technological) opportunities that seem plausible to those with a leading role in those clusters / regions. How this might be achieved to speed ‘learning’ / development within such clusters / regions was outlined in A Case for Innovative Economic Leadership. Experiments with the use of such methods have been reasonably successful in the past – though experience also shows that productivity gains are unlikely if political ‘push’ is able to dominate over market ‘pull’ in determining outcomes (see Creating a Fertile Environment for Innovation Requires Politics to Take a Back Seat).
The goal of such processes would be real-world opportunity-focused market-driven action / initiative, as well as identification of additional supportive policy options for governments to consider.
The alternative (ie relying on studies of the requirements for boosting productivity / innovation capacity in the abstract and the deliberation of committees) would be neither able to take account of real world considerations that are unknown to analysts / committees nor mobilize constructive and complementary real-time initiative. The importance of complementary / simultaneous initiative within different segments of an industry cluster / regional economy can’t be overstated. As your article highlighted, innovation depends not only on what happens within an enterprise but on support from its economic / regional environment. For example a key feature of a region that can support innovation will be a large pool of people with various types of experience relevant to the successful development of innovative businesses. Individual enterprises acting in isolation can’t create the support systems on which their ability to succeed depends. Creating scope for complementary and simultaneous initiative potentially overcomes such ‘chicken and egg’ constraints.
Merely removing constraints on initiative by enterprises / individuals has been the main thrust of Australia’s efforts to boost economic productivity in recent decades, but has been insufficient (see Review of National Competition Reforms: A Commentary, 2004).
I would be interested in your response to my speculations.
|AA: Achieving Stronger US Export Growth Perhaps Requires Rethinking Economics||
Achieving Stronger US Export Growth Perhaps Requires Rethinking Economics - email sent 22/10/13
Your group’s recent analysis suggested that US export performance primarily depended on the strength of growth in trading partners' economies and on exchange rates, and that seeking better international trade agreements would be the most useful policy option. However this presumes that nothing can be done to alter international competitiveness – an assumption that, though valid under mainstream economics, may not actually be correct.
The productivity and competitiveness of an enterprise can be increased by innovation – ie by gaining the higher value added that can often be associated with emerging market-attractive products and services in the interval before they can be provided by competitors. It is submitted that (providing great care is taken) that it is possible to achieve similar transitory gains by systematically stimulating market-oriented and apolitical learning / adjustment within industry clusters / economic systems as a whole. How this might be achieved is suggested in Developing a Regional Industry Cluster (2000), which describes a generic process in a very rudimentary way, and A Case for Innovative Economic Leadership (2009), which makes a case for using that generic process in relation to specific requirements for economic development in an Australian context. The former includes suggestions about the ‘secrets of failure’ (which include many conventional ‘industry policy’ tactics), while the latter points to the breadth of potential areas in which the suggested generic process could be used.
Some comments on the implications of this for economics generally are in Fixing Economics (2012) and Probable Breakthrough in Understanding Economic Development (2004). In brief these suggest the economics conventionally seeks to be a ‘science’ like physics and thus to ‘understand’ how an economy works, whereas the real challenge (and the key to economic development / competitiveness) is to ‘change’ the way that it works. While change can be achieved through the initiative of individual enterprises, such initiative can often be constrained by the absence of support from the rest of an industry cluster / economic system as the latter’s support may not exist until large numbers of enterprises exist who demand that support. Overcoming such ‘chicken and egg’ constraints is the potential advantage of the methods that I have suggested.
Something like this seems to have been foundational to the achievement of catch-up economic ‘miracles’ in East Asia in recent decades - because of radically different ways of thinking and using information in such societies (eg see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy).
Another option to boost US export performance is arguably to draw the attention of international economic forums to the non-transparent trade-distorting financial systems that have been part of East Asian economic ‘miracles (see Resist Protectionism: A Call That is Decades Too Late, 2010 and China may not have the solution, but it seems to have a problem, 2010+).
I would be interested in your response to my speculations.
After strengthening sharply in the immediate aftermath of the global recession, U.S. export growth has slowed over the past two years, as global economic growth has downshifted. If our forecasts of global economic growth and the real value of the dollar come to pass, then our model suggests that real exports of U.S. goods and services will grow roughly 7 percent per annum in 2014 and 2015. Although these forecasted growth rates are twice as strong as the 3.5 percent rate that was registered in 2012, they are well short of the 15 percent per annum growth rates that are needed to reach the goal of doubling U.S. exports in five years that President Obama set nearly four years ago. Is there anything that policymakers can do to achieve stronger growth in U.S. exports?
|BB: Doing More for the Car Industry||
Doing More for the Car Industry - email sent 4/11/13
Re: Car loss would be devastating, Financial Review, 4/11/13
Your article pointed to the costs to Australia’s economy if car manufacturing were to cease (eg in terms of investment, employment, skills, training, technology transfer, research – as well as spillovers to other sectors).
I should like to draw your attention to the apparent rationale that seems to be the basis of the Communist Party’s willingness to sustain an ongoing process of heavy industrial / infrastructure investment in China – even though individual projects may not meet normal financial criteria (see Outline of 'Rise of the Ferro Dollar'). This refers both to the sorts of ‘real economy’ impacts that your article mentioned and to the synergies between various functions that can be created but are not captured in the accounts of any particular undertaking.
However it also seems likely that those benefits (while real) will not prove sufficient to compensate for the rapidly escalating debts that the Chinese state is accumulating in under-writing such efforts.
The latter link includes reference to alternative methods of promoting additional economic value-adding within industry clusters that could be used without reliance on state transfers and might usefully be considered in relation to Australia’s car industry (see A Case for Innovative Economic Leadership )
I would be interested in your response to my speculations.
|CC: Reform: It's Not That Easy (Further Observations)||
Reform: It's Not That Easy - email sent 16/12/13
Professor the Hon. Stephen Martin
Re: Stop the reviews, start the reforms, Business Spectator, 16/12/13
I should like to suggest that the ‘reforms’ that are needed are not as obvious as your article implied. Others have pointed to the morass of ‘reviews’ that the federal government risks getting bogged down in – and some comments on why this is probably inevitable with the poor institutional support that Australia’s political system has available are in The Choice Between Evils that Governments Now Face: 'Process Addiction' or Bad Decisions
Everyone knows what reforms are needed from their own point of view. In an election campaign candidates seek to be ‘all things to all people’ to build support. But in government they can discover that there are many different significant viewpoints that need to be taken into account. And unless there is existing machinery to deal with this (eg a professional public service or effective communication / coordination amongst well-developed civil institutions so that there are no major surprises in store), these differences can make the direction of reform that is needed much less obvious than it previously seemed. The more complex the situation is the more this is a problem.
For example some of the issues mentioned in your article are arguably not as simple as you implied.
Taxation reform is vital. But if the shambles that Australia’s system of government has become is to be overcome, a primary focus of such reform needs to be on overcoming federal fiscal imbalances (for reasons suggested in Fixing Australia's Federation, 2010). However many analysts who have been concerned with taxation reform do not seem to have considered this dimension.
Increasing innovation has been an obvious priority for diversification of Australia’s economy for the past 30 years. Yet little has been achieved because attempts to create an environment for innovation have been politically motivated and politically driven. The greatest obstacle to innovation has been and remains the lack of commercial competencies and organisation to support innovative individuals / enterprises. Where attempts are made politically to overcome such obstacles the result tends to be government ‘assistance’ of various sorts – whereas what is needed is real economic development (which government ‘assistance’ impedes). How real development might be achieved was suggested in A Case for Innovative Economic Leadership (2009). A key requirement for success is that the political system creates an environment in which apolitical market-oriented leadership across industry clusters / economic systems as a whole is possible. The things that government itself can do are of much less potential benefit.
The car industry is an excellent example of Australia’s failure to develop an environment supporting innovation. However this failure needs to be viewed in context. Manufacturing was the highest productivity economic sector in the early 20th century – and was the core of highly developed economies. However from the 1960s this started to be challenged as low wage economies developed the skills required to support capital intensive production and obtained the capital (by savings or foreign investment) to capture markets for manufactures. This led to the phenomenon of de-industrialization in Europe and North America in the 1970s and 1980s – and for a need for diversification into new (often knowledge-and-skill-based) functions if relatively high wage rates were to be sustained. Market liberalization strategies were widely put in place to facilitate such adjustment (as politics would otherwise impede change). Even though Australia had never had a highly productive manufacturing sector, market liberalization was also favoured here from the 1980s to facilitate diversification from Australia’s traditional ‘lucky country’ reliance on resource wealth. However while market liberalization requires individuals / enterprises to compete, it does not ensure the existence of a supportive environment in which they can do so in highly productive activities (see Beyond Market Liberalization, 2010). Australia’s car industry apparently suffered from: (a) being an ongoing ‘political’ project; and (b) Australia’s failure to establish market-oriented arrangements to develop the economic systems and capabilities in which competition could help very large numbers of individuals / enterprises to develop highly-productive economic functions.
I would be interested in your response to my speculations.
Reply to Professor the Hon. Stephen Martin (CEO CEDA) - 18/12/13
Thanks for your reference to CEDA publications concerning which I have appended a couple of comments below. I would greatly appreciate permission to reproduce your comments on my web-site with Reform: Its not that Easy.
Your response highlighted the importance of initiative by CEDA members and the broader business community. In relation to this I would primarily suggest that CEDA’s broad membership could make the greatest difference by not ‘pushing the reform button with our elected representatives’ but rather pressing strategic learning / change buttons with industry clusters or real world economic systems as a whole (using methods such as those suggested in Developing a Regional Industry Cluster, 2000). This would involve: (a) encouraging a focus on emerging opportunities which can become more feasible if there is complementary initiatives across numerous organisations; (b) networking organisations that could potentially take initiatives; and (c) allowing a market-driven response. Experience suggests that this can have huge potential economic impacts. However this will only work if politics is kept at bay.
Efforts are being made by the federal government to engineer a forward-looking response to new opportunities in regions affected by car-industry decline. This is great in theory. But in practice even well intended political leadership will be economically damaging (for reasons suggested in Economic solutions are beyond politics (1995) namely that: (a) anything that is widely enough known to be politically understood can’t be a commercially-successful and economically productive new option; and (b) politics attracts rent-seekers rather than market-oriented initiative).
The political system can help, not by trying to lead a reform process, but rather by: (a) creating an environment in which apolitical leadership of learning / change within industry clusters / economic systems is possible (eg by approving appropriate protocols in the same way that government determines company law without trying to set the directions for all companies) and (b) responding constructively and in the public interest to whatever implications emerging from such apolitical processes in terms of required government programs or policies. Attempts by governments or committees to come up with a ‘reform’ agenda without the drive of real-world economic opportunities will lead nowhere.
This report constitutes a valuable collection of insights into the sorts of changes that will achieve the necessary goal of boosting Australia’s competitiveness productivity. A couple of observations on the basis of only a very brief (and inadequate) scan of the start of what is a quite substantial document it is suggested that:
|DD: Non-CEO tells business to get on with reforms||
Non-CEO tells business to get on with reforms - email sent 6/1/14
Re: CEOs tell government to get on with reforms’, Australian Financial Review, 6/1/14
Your article recorded calls by various business leaders for government to ‘just get on with’ what those leaders believe to be a fairly obvious economic reform agenda. However such calls seem a bit simplistic, as the challenges facing the federal government are not straight forward (eg see The Choice Between Evils that Governments Now Face: 'Process Addiction' or Bad Decisions and Reform: It’s not that Easy). The complexities that governments face and the weak institutional support that is now available (eg as a result of public service politicisation) are significant constraints.
However if business leaders want an improved economic environment (and one is definitely needed) then they themselves are arguably the ones who could do most in the short to medium term to achieve this (eg see Making Australia's Competitiveness Everyone's Business and Stimulating Practical Action on Productivity).
One problem has been, and remains, that business / community leaders are so busy lobbying for political changes that they never seem to stimulate the development of industry clusters and economic systems as a whole. Doing so could arguably make at least as much difference to the operating environment businesses face as government policy changes – and would provide a clear publicly-saleable motivation for complementary policy reforms. Political leaders are intrinsically incapable of taking the lead in such systemic economic development (because of the pressures they respond to). Moreover without encouragement they are unlikely to get out of the way (ie to approve protocols under which others could act).
|EE: Families Matter||
Family Issues - email sent 8/1/14
Re: Harrison D., Liberal MP Warren Entsch attacks Cory Bernardi on 'gay obsession', The Age, 8/1/14
You were quoted as criticising Cory Bernardi for having an obsession with gay people and for writing a book which expressed concerns about abortion and non-traditional family arrangements.
While I have not followed Senator Bernardi’s arguments in detail, I should like to suggest that you may be on the wrong side of history in this respect. Australia seems to be experiencing severe social dysfunctions which: (a) arise in part but not only from dysfunctional family arrangements; and (b) have the potential to adversely affect our economic prospects and government budgets.
Indications of those social dysfunctions are in Erosion of the Moral Foundations of Liberal Institutions (2003+). The latter was introduced by the suggestion that:
Social dysfunctions are economically significant because they undermine individuals’ / communities’ ability to contribute to a productive economy (see Capable and Responsible Community in ‘Australia’s Competitiveness: Some Suggestions). The latter suggested that economically significant social dysfunctions are arising as a consequence of: (a) an unbalanced approach to economic reform; (b) individual irresponsibility- eg as reflected in dysfunctional family arrangements; (c) official emphasis on rights rather than responsibilities; (d) public welfare support for individual irresponsibility; and (e) official cover-ups of social dysfunctions. For example, despite official obsession with investigating child sexual abuse in institutions it seems that the vast majority of cases (eg over 99%) arise in dysfunctional family settings (see The Problem). And it seems that many (most?) of those who are ‘gay’ were the victims of abuse and neglect as children (see A Comment on Causality).
There have recently been proposals (through the Gonski review) for substantially increased public funding for education partly to overcome very real problems of regional inequality in educational outcomes. However this represents far too narrow a view of the problem (see Gonski Review: An Example of the Limitations of Government Initiatives). Problems in educational outcomes do not simply reflect deficiencies in the education system – as poor educational outcomes seem to disproportionately affect children from families affected by other stresses.
I submit that it would be desirable to seriously consider such issues rather than criticising those who try to raise them.
I would be interested in your response to my speculations.
|FF: Spilling the Beans on Government 'Assistance'||
Spilling the Beans on Government 'Assistance' - email sent 2/2/14
Re: A rogue Liberal spills the beans on SPCA, Business Spectator, 31/1/14
Your article suggested that a structural adjustment subsidy to SPC Ardmona has been quickly and incompetently dismissed as corporate welfare (which would be incompatible with open markets) – even though compelling arguments for providing such support have been put forward by Sharman Stone, the local member in the Goulburn Valley and a Liberal backbencher. The case for assistance would rest on the jobs involved, the impact on the supply chain, the costs of retraining, lost tax revenues, wastage of past irrigation investment and the adverse effect of high $A due to mining boom.
However there are ‘big picture’ considerations related to the economic impact of government ‘assistance’ that also need to be considered.
Manufacturing industries had long been the backbone of the high productivity achieved in European and North American economies. However their competitiveness was eroded increasingly from the 1960s as low wage economies (especially in Asia) developed the skills required for capital intensive manufacturing – and de-industrialization became a major concern in the developed northern hemisphere. The response in ‘Europe’ tended to involve government adjustment assistance. In the early 1970s the OECD produced analyses which suggested that the effect of this was to slow adjustment dramatically – and to lead to high unemployment and considerable budgetary costs. This recognition of the consequences of supposedly-constructive ‘assistance’ was the foundation of the market liberalization economic reforms that were widely endorsed worldwide in the 1980s and 1990s. The notion of 'industry policy' which had been proposed as an alternative in the 1980s lost credibility because it was recognised that it was impossible in democratic systems to disentangle rent-seeking politics from such policy (see The Industry Policy Debate, 1997).
However while market liberalization reforms eliminated some of the adverse consequences that can arise when ‘assistance’ is on offer and companies focus more to political lobbying than on market opportunities, they were by no means enough to ensure the emergence of a highly productive and competitive economy. Reasons for this were outlined in Review of National Competition Policy Reforms: A Commentary (2004) – which referred for example to the fact that:
There has long been a need to move beyond both government ‘adjustment assistance’ and idealistic market liberalization. How this might have been achieved was suggested in Developing a Regional Industry Cluster (2000); A Case for Innovative Economic Leadership (2009) and Non-CEO tells business to get on with reforms (2014). Robert Gottleibsen recently pointed to the possibility that SPC Ardmona’s problems might be overcome by the complementary interests of other enterprises (eg see How SPC can be saved, Business Spectator, 31/1/14). While I have no way to know whether or not this is correct, I submit that: (a) endorsing protocols under which such potential complementarities within economic systems and industry clusters as a whole are more likely to be discovered can potentially make a difference to industrial competitiveness and the prospects of individual enterprises; and (b) those methods, if regionally focused, could be expected to create much stronger regional economies (eg see Reinventing the Regions,2010).
I would be interested in your response to my speculations.
|GG: Introducing Social Equity into the Economic Agenda||
Introducing Social Equity into the Economic Agenda - email sent 6/2/14
Re: Why Abbott can’t delete ‘society’ from his economic growth script, The Conversation, 5/2/14
Your article suggested that the Prime Minister’s address to the World Economic Forum (WEF) was deficient in not referring to ‘social’ issues. I should like to suggest some other aspects that also need consideration.
The ‘small-government-free-market’ solution is also constrained by the existence of unresolved structural problems in the international financial system. Even if the equity issue is ignored, there is an ongoing risk of financial crises which would dislocate economic growth and create massive problems for low and middle income earners (see Trade is not Enough for Global Economic Progress). The latter highlights the fact that:
The erosion of middle class job opportunities has been contributing to inequality and reducing opportunities for social mobility in developed economies because of the increasingly successful competition for such roles from low wage economies since the 1960s. The problem was reduced to some extent in the 1990s by the fairly rapid growth of post-industrial (ie knowledge intensive) economic functions.. However one of the most significant of these new functions involved financial services (the complexity of some of whose operations have, as noted above, contributed to the instabilities of global financial systems). Also the erosion of high wage job opportunities was exacerbated as: (a) hierarchical organisation styles that had been associated with mass production were replaced by networked styles with fewer middle management positions; and (b) businesses increasingly operated globally so that in all but one or a few locations there would only be relatively low-level / branch-office job opportunities.
Australia has been protected from the economic dislocations suffered in most high wage economies since the start of the GFC by a strong demand for commodities (especially iron ore) from the non-capitalist neo-Confucian Asian economies (especially China). Furthermore some years ago the federal government used the capital gains tax revenues generated by the commodity investment boom to reduce the risk of social inequality by increasing government transfer payments (and reducing tax rates). However this depended on one-off revenue sources and thus seemed to create a structural budget deficit (see The Long Term Impact of the Global Financial Crisis, 2009). This problem has been exacerbated (and finally even been officially acknowledged) as the resource investment boom has come to an end (op cit).
In the US it has now been recognised that the federal government will face a fiscal crisis in a few years if structural budget deficits are not reduced. Thus whatever President Obama intends to do to reduce social inequality must presumably be associated with a reduction in government transfer payments. And, though Australia’s problem is not yet so severe, there is arguably a need to move in the same direction (ie to reduce social inequality by increasing the wealth-generating capacity of middle-and-low-income earners while reducing their reliance on transfer payments). Thus in some ways, though Mr Abbott did not mention social equity his ‘solution’ was probably a contribution to that goal.
However additional options for creating increased numbers of high-wage job opportunities have long been available (eg as suggested in A Case for Innovative Economic Leadership, 2009 and Developing a Regional Industry Cluster, 2000). The problem has been that these methods have not been used – and can’t be successful if democratically-accountable interest-group-responsive political elites are expected to dominate the process. Some suggestions about how changes to Australia’s tax system might also be of value in boosting the availability of high-income job opportunities (and thus in reducing the risk of inequality) are outlined in Economic development incentives.
I would be interested in your response to my speculations.
|HH: Modernizing Australia||
Modernizing Australia - email sent 10/6/14
Re: Tony's partying like it's 1979, Technology Spectator, 10/6/14
Your article suggested amongst other things that:
A parallel suggestion that there is something a bit dated about the federal government’s 2014 spending priorities in Australia is in And the Winner of the 2014 'Pink Batts' Award is ....
The main theme of your article was that Australia needs to create a venture capital capacity that is not (as one observer suggested) ‘an unmitigated disaster’. Some suggestions about how an environment that would support viable venture capital operations were outlined in A Case for Innovative Economic Leadership (2009).
II: The Australian Economy: Alternative Reform Options
The Australian Economy: Alternative Reform Options - email sent 15/8/14
RE: The Australian Economy: Where we’ve come from, where we’re going, Queensland Economy Watch, 2014
I was interested in, and would like to comment on, your observations about Australia’s economy (which, for convenience, I have reproduced below with comments inserted). It is extremely valuable to set out a well-considered account of economic history and prospects as you have done. Doing so provides a starting point for refinement – and I should like to suggest both that refinement is necessary and what changes might be appropriate. Some of the latter (eg at end of the document) you may find quite radical. However they are the product of working on these issues fairly consistently for over 30 years (see CV).
I would be interested in your response to my speculations
Copy of recent speech by Gene Tunny - The Australian Economy: Where we’ve come from, where we’re going (reproduced with permission) – with comments inserted
Good morning. You may have seen it reported last week that Australia’s unemployment rate has increased to 6.4%, the highest rate we’ve seen in twelve years, and there is some concern over the short-term economic outlook. There’s certainly a risk that Australia’s dream economic run, of unbroken economic growth for more than two decades, may come to an end if housing construction doesn’t replace the economic boost provided by mining investment in recent years. But it’s too soon to tell how long the weakness in the labour market will continue, or whether it’s a sign of worse to come.
Over the last decade or so, Australians have typically been used to good economic news, or at least better economic news than in other countries. Since the financial crisis of 2008, the Australian economy has been a standout performer among the advanced industrialised economies that make up the OECD. Of course, this was not because our economy has been performing exceptionally, but because we avoided a recession unlike the US, UK and Europe.
Partly this may have been luck, partly good management. There have been arguments about the effectiveness of the short-term fiscal policy response – Keynesian pump-priming through the stimulus packages, incorporating the Rudd money, Pink batts, school halls, et cetera – but there is a lot of agreement that the Australian economy has been made much more resilient through reforms to our economy that have occurred, particularly since the 1980s.
As well as making our economy more resilient, these reforms have led to a material increase in our living standards, particularly relative to our OECD peers.
Australia has done quite well since the GFC started also because of three booms: (a) high levels of investment in developing mineral / energy export capacity that was stimulated by China’s initial GFC response (ie a massive increase in property / infrastructure investment); (b) a significant increase in infrastructure spending to address backlogs – which contributed to cost blow-outs because it coincided with the mining / energy investment boom and in Queensland’s case contributed to an unsustainable level of public debt; and (c) very high rates of immigration.
After starting in the top third of the OECD when it was set up in the 1960s, we had dropped down to the bottom third by the 1980s, before regaining a top third position in the 2000s. In my view, and that of the Commonwealth Treasury and Productivity Commission, economic reforms since the 1980s have been important to achieving this.
Those reforms achieved some, but not enough, benefits perhaps for reasons suggested in the ‘Alternative Conclusions’ at the end of this email. Productivity growth stalled.
Today I’m going to touch on the reforms that I think were most important. It’s important to consider these reforms because their benefits will endure and will not be erased by any short-term downturn the economy may come to experience if our luck finally runs out.
But before discussing the important economic reforms we’ve seen in Australia, I’ll give a sketch of Australia’s economic history since 1788. This will allow us to understand how profound the changes we’ve seen have been.
As we catch up to the present, I’ll then turn to where the economy is going. I’ll refrain from commenting on the short-term outlook, which is typically highly uncertain, and instead focus on the longer-term. This will allow me to discuss some profound trends, including:
Sketch of Australia’s economic history
We are all broadly familiar with Australia’s history since 1788, and Australia’s history of convicts, soldiers and settlers coming to a land sparsely inhabited by its Indigenous population. Our first economic success was in agriculture, and in the 1820s and 1830s there was a pastoral boom based on merino sheep.
While Australia developed at a reasonable pace in the early nineteenth century, it was gold that transformed Australia, with the gold rushes in Victoria in the 1850s encouraging mass migration to Australia, from Europe but also from China and elsewhere. In the 1850s, Australia’s population nearly trebled from 400,000 to 1.1 million.
Much of the prosperity of the late nineteenth century was based on gold, and its benefits are reflected in the lasting grandeur of the city centres of Melbourne, Ballarat and Bendigo, among others. Closer to home, the discovery of gold in Gympie in 1867 saved the Queensland economy from depression and the Government from bankruptcy.
So mining has always played an important role in Australia’s economic history, although, its importance has waxed and waned over time, fluctuating in a range from 2-10% since Federation, and for a good part of our history Australia has ridden on the sheep’s back, particularly in the 1950s when we benefited from the wool boom associated with the Korean War. Economic historians have shown that agricultural industries contributed 20-25% of Australia’s GDP for the first half of the twentieth century, but this share had dropped to 5% by 1980 and is even lower now.
As agriculture declined in importance, other sectors rose to prominence, particularly manufacturing, which increased from around 12% of the economy at the time of Federation to 25-30% of the economy in the fifties and sixties. However, its share dropped to around 20% in the early 1980s and has progressively declined even further.
Australia’s manufacturing sector, to a large extent, particularly for the automotive and textile, clothing and footwear industries, was supported by tariffs. For example, at one time, the tariff on passenger motor vehicles was set at 57%.
Australians have always had a mixed attitude to free trade, accepting its importance in some circumstances – for example, the desire to have free trade among the Colonies motivated federation in 1901 – but protection from foreign manufactured goods has often been seen as desirable. The infant industries argument for tariff protection was very fashionable for a time – we just needed to protect our infant manufacturing industries long enough so that they could become economically viable.
As an island nation with a small manufacturing base, Australia has always been heavily dependent of overseas trade and overseas investment – indeed, Australia has traditionally imported capital from overseas, borrowing money or receiving investment dollars from other countries, traditionally the UK, but also the US and Japan, and now China is playing a huge role. Broadly speaking, Australia gets the foreign exchange we need to import the goods and machinery we need by exporting minerals and agricultural goods (now much less important than the minerals) and also from foreign investment and borrowings from overseas.
Having lived through the 1980s and Paul Keating’s period as Treasurer, you will be well aware of Australia’s persistent current account deficit, which is a reflection of our position as a small country with lots of investment opportunities that is reliant on foreign capital.
We can’t consider Australia’s economic history without acknowledging that Australia has suffered from some significant financial panics and economic depressions, particularly the great depressions of the 1890s and 1930s, each of which was associated with very high unemployment and each of which in its own way transformed Australia. The 1890s depression helped foster the growth of the Labor Party and the trade union movement, and arguably contributed to the very rigid, centralised industrial relations system we eventually found incompatible with the dynamic prosperous economy we want to be.
The Great Depression of the 1930s, of course, profoundly altered the attitudes of the population and contributed to the creation of the welfare state after the Second World War, where the Commonwealth Government, in particular, assumed greater responsibilities for social security. This was aided by the Commonwealth having assumed income taxation powers during the war, and the High Court decision in the Second Uniform Tax Case in the 1950s, in which the Court decided it was too late to turn back the clock and return income taxation powers to the States. This along with a number of other High Court decisions, including the Tasmanian Dams case, has entrenched Commonwealth dominance in federal-state relations, which desperately requires reform, as I’ll discuss later this morning.
Apart from our strong population growth and changing population composition, one of the most remarkable changes in the Australian economy in the last 100 years has been the massive expansion of Government in terms of its spending, regulation of the economy, and intervention into the social and family realms on a previously unimagined scale. This occurred with largely bi-partisan support in the post-war period, with significant expansion of education, health and social security under conservative governments in the post-war period. Of course, as is well known, the Whitlam Government of 1972-75 was responsible for a big leap in Commonwealth involvement and spending, particularly through offering free university education.
In his fantastic overview of Australia’s political history in the 1980s and 1990s, The End of Certainty, former editor of the Australian newspaper Paul Kelly described the critical elements of Australia’s economy for much of the twentieth century, which he defined as the Australian settlement. Those elements included:
The need to reform the Australian settlement was probably already clear when Britain joined the common market, particularly as Australia’s relative economic performance was deteriorating and the age of stagflation, with simultaneously high unemployment and inflation was beginning. We were slipping down the OECD table in living standards, as we were being overtaken by recovering European countries and Japan, and we had restricted the dynamism and productivity of our economy through heavy regulation and government ownership.
The 1970s saw the end of the long boom we had enjoyed since the end of the war. The long boom was propelled by strong population growth due to the baby boom – with the fertility rate reaching over 3 children per woman in the early 1960s – and strong immigration particularly from war-ravaged Europe. Australia’s population grew from 7½ million at the end of the war to 14 million in 1975 and now 23 million in 2014.
Pressure for economic reform arose from belated recognition in the late 1970s that Australia had been in long-term relative economic decline since the start of the 20th century (eg in terms of GDP / capital relative to advanced economies). The core problem was: (a) high dependence on natural resource wealth (ie on natural comparative advantages) though the productivity of commodity-based industries had been in long term decline relative to those involving competitive advantages (ie advantages created by strategy and initiative); and (b) being content to rely on natural wealth (as Paul Kelly suggested) to benefit the community generally and in trying to diversify the economy through tariff protectionism
The end of the long boom forced Governments starting with Whitlam’s to consider hard policy choices. Whitlam, despite his faults on economic policy, actually did make a number of sensible policy choices. For example, the 25% tariff cut in 1974 and the breaking up of the old Postmaster General’s Department and the creation of Australia Post and Telecom, which ultimately led to greater efficiency in postal and telecommunications services.
But there was much more reform to be done. Whitlam was too beset with political and pressing macro-economic problems to do much in the way of micro-economic reform, and unfortunately the Fraser Government largely wasted its opportunities for reform, with Fraser apparently acting as a block to his reform-minded Treasurer John Howard (although Fraser denies this). Regardless, economic reform was on hold under the Fraser Government. It was with the election of the Hawke-Keating Government in 1983 that Australia’s major economic reforms began – reforms, which in the interests of being non-partisan and balanced, were largely supported by the Liberal Party.
Australia’s transformation since the 1980s
These reforms were well intended and appropriate in terms of conventional economics. However not enough attention was paid in developing the reform agenda to what had actually been happening in the world economy (eg see Defects in Economic Tactics, Strategy and Outcomes, 2000+ and A Simplified Historical Context, 2014)
Australians were probably unprepared for the economic policies of the Hawke-Keating Government, not suspecting that a Government that won office largely on the basis of a public health care scheme, Medicare, would engage in such significant market liberalisation, approaching though not as radical as what happened under Thatcher in the UK and David Lange and Roger Douglas in New Zealand.
Economic reform in the 1980s really began with the floating of the Australian dollar in December 1983. Previously the Reserve Bank of Australia maintained a fixed exchange rate but there was huge pressure for the dollar to devalue as the rate was too high and foreign investors were pulling their money out of Australia.
There was a lot of debate about whether floating the dollar was a good idea, and it’s been reported the then Treasury Secretary John Stone was concerned that a floating dollar would be a speculator’s plaything, and that Australian industry would suffer due to large swings in the dollar that would result from speculation. But eventually pressures from financial markets were too strong to resist floating the dollar, and the Government decided to float in December 1983.
Floating the dollar probably emboldened the Government for further reform and indeed helped show the need for further reform as the currency fell and concerns over Australia’s economic future and living standards intensified. Pretty soon, as Paul Keating famously noted, every pet shop galah was talking about microeconomic reform – meaning the reform of markets, regulations affecting businesses, and government-owned businesses.
Major reforms undertaken by the Commonwealth Government included financial market deregulation –the relaxation of many restrictions on financial markets in the mid-1980s, which led to the establishment of many new providers and the entry of foreign banks into Australia, and the privatisation of the Commonwealth Bank in the 1990s.
The Commonwealth also sold Qantas and State Governments privatised or corporatised a number of their businesses, particularly utilities and railways. The pressure for further market-oriented reforms eventually led to the high watermark of microeconomic reform in Australia – the Hilmer Report and the adoption of National Competition Policy in the early 1990s. This committed governments across Australia to removing unwarranted restrictions on businesses and to competitive neutrality with business – i.e. so government businesses don’t gain unfair advantages such as not paying tax when competing with private businesses.
These reforms led to the abolition of a lot of uncompetitive practices, many of which were promoted by State Governments, particularly marketing boards, such as the Queensland Sugar Board. Marketing boards, while supporting prices for primary producers, by controlling the supply of products in an economy, were costly to consumers, who paid the price of support to producers. Some uncompetitive practices died hard, however. Government-imposed restrictions on sugar marketing lasted until 2006 in Queensland.
Queensland had long practiced a form of state-corporatism – also referred to as ‘agrarian socialism’. In Europe ‘state corporatism’ had been linked with fascism.
“Corporatism is one of the three main Western traditions of political economy (the other two being liberal capitalism and socialism) (Williamson, Varieties of Corporatism). Traditional state corporatism was mainly a European phenomenon from the industrial revolution up to 1940 (when credibility was lost due to its association with Mussolini's regime). It involved rejection of both socialism (ie state ownership of the means of production) and of the individual liberty required for market capitalism (initially because of concern about moral laxity which liberty was seen to imply). Under this politically authoritarian system, the means of production were privately owned, but represented and regulated by 'corporations'. The economy was administered, rather than being organised through market relationships amongst firms. This system was deployed most noticeably in Queensland in: the organisation of agriculture; the highest level of economic regulation in Australia; the past protective ownership through Treasury financial institutions of controlling interests in major Queensland firms; and (to some degree) in the corporatisation of government owned enterprises and in the means used to orchestrate responses to major investments.” (from Assessing the Implications of Pauline Hanson’s One Nation, 1998)
“Despite 'free enterprise' rhetoric many firms look to government for assistance when difficulties arise (not to one another or to market opportunities). Local firms have at times been systematically protected. For example, 'agrarian socialism' protected rural producers from commerce by regulation; and government investment supported 'private' firms (eg 45 of 60 listed companies had Suncorp, a large state owned financial conglomerate, as a major investor - Buckley A., 'Suncorp gives the lie to Joh's Promises', Financial Review, 2/3/87). As with tariffs, such protection discouraged innovation to build competitiveness. This protection reflects `traditional corporatism' where privately owned firms are viewed virtually as an extension of the state (see Williamson P., Varieties of Corporatism: Theory and Practice, Cambridge University Press, 1985; Stewart A., 'Private has a Different Meaning in Queensland', Canberra Times, 19/9/88; and Demster Q. 'Waiting for Benefits from Corporate State', Sunday Mail, 1/2/87). Government financial strength has been seen as a measure of economic performance, though it was sometimes achieved at the expense of developing the economy; (from Notes on SEQ 2001: A Plan for an Under-developed Economy - SEQ Economy, 2001)
The main centre of state corporatism in Queensland (and of resistance to liberal market reforms) was the State Treasury – eg via its financial subsidiaries. Treasury apparently saw the state economy as a source of public revenue through its fairly narrow tax options that bore little relationship to the economic 'value added' (which would be the criteria for rising community incomes and a stronger federal income-tax base)
Microeconomic reform was also seen in the reform of many government-owned businesses, many of which were eventually corporatised, such as Queensland Rail and our power businesses Energex and Ergon which you may recall were once electricity boards such as SEQEB and NORQEB. Corporatisation led to much cost-cutting as government-owned businesses strove to cut costs and improve productivity.
‘Corporatization’ was simply a continuance of Queensland’s traditional state-corporatism (agrarian socialism) in another way. Such entities remained politically accountable – and thus not genuinely market responsive. There are massive obstacles to really increasing productivity through proclaiming that politically-accountable organizations are ‘commercial’ (see The Limited Economic Effect of Commercialization, 2001).
The main effect of corporatization seemed to be that Treasury gained direct control of all GOCs and was able to use them as to boost state revenue – often by dubious means (eg in the 1990s by requiring entities to borrow large amounts to pay special dividends to boost government ‘revenue’). The outcome of ‘corporatization’ in Queensland has been a serious lack of transparency about Queensland’s capital account which may have much greater problems than have been acknowledged (eg see Recovering from Queensland’s Debt Binge, 2012)
Finally, the Hawke-Keating Government committed to cutting tariffs and industry protection, which was particularly high in the automotive industry and the textile, clothing and footwear sector. The Government’s commitment to reducing industry protection, a move that would significantly reshape our economy in the 1990s, especially so as tariff reductions at the start coincided with a major recession that led to a large loss of manufacturing jobs. You may recall commentary in the early 1990s about Victoria being a rust belt, and certainly weak economic conditions in Victoria led to strong interstate migration to Queensland.
The combination of economic reforms in Australia in the 1980s and 1990s translated into historically high productivity growth in the 1990s. Productivity can be thought of as a measure of how much we can produce with one labour hour, and this measure grew strong in the 1990s.
Australia’s reported ‘productivity’ rose strongly in the 1990s. However it is difficult to be sure how much of this was due to economic reform and how much was due to steady and significant devaluation of the $A (eg see Analytical Complexities, 2002). There were certainly many indicators in 2002 of quite poor economic performance in Queensland
This was possible due in part to people being worked more intensively, a point repeatedly made by John Quiggin, but there’s no doubt the increase in productivity markedly improved Australia’s economic performance, particularly relative to the traditional productivity leader, the US.
Although many major reforms had already been undertaken by the Hawke-Keating Government, as John Howard took office in 1996, there was still urgent need for reform in two key areas: the tax system and industrial relations.
Howard and his Treasurer Peter Costello did well to convince Australians that we needed to reform our tax system to introduce an efficient Goods and Services Tax (GST) and to replace a range of less efficient taxes, such as sales tax. Unfortunately the States didn’t abolish all the inefficient taxes they should have and we still have stamp duty in Queensland, which creates a significant restraint on property transactions, reducing the mobility of people to where jobs are, and leading to higher insurance bills. Also, in bringing in the GST, a deal with the Democrats led to exempting fresh food and many health and education items, reducing somewhat the efficiency of the GST.
Regarding workplace relations, while the Keating Government undertook significant reforms in the early 1990s, bringing in Enterprise Bargaining, much remained to be done. Truly flexible workplace agreements between businesses and employees couldn’t be reached because of the no-disadvantage test, which meant agreements couldn’t leave workers worse off than previously. But in some workplaces, particularly some public sector agencies or government-owned businesses, workers had very favourable agreements that probably needed some reform. Also, unfair dismissal laws were a major disincentive for employers to hire staff, because they’d worry that if they hired a bad staff member it might be very difficult to get rid of them.
WorkChoices was hence a much-needed reform, in my view, but was very unpopular with the electorate and arguably cost John Howard the Prime Ministership. With the election of the Rudd Government, WorkChoices was substantially unwound. But with unemployment increasing and business concerns about the cost of employing people in Australia, no doubt industrial relations will re-emerge as a major policy issue sometime in next decade.
Where are we going from here?
So that brings us up to the present day, and it’s time to consider where is the Australian economy going from here?
There’s significant concern over the immediate outlook with mining investment dropping and unemployment rising. Many commentators are worried about what happens after the mining boom, and they’re asking where will the jobs come from?
Various other observers’ views about this are outlined in How Durable is Australia's Strong Economic Performance (‘Luck’)? in The Challenge and Potential Cost of Inequality and Insufficient Income (2014)
But there will always be jobs for people to do, especially in the services sector, which now accounts for over 75% of the economy. Recent forecasts from Deloitte Access Economics suggest strong jobs growth over the next few years in services, particularly in health, education and aged care, the latter a result of the ageing of the population, as the large baby boomer cohort moves into retirement age.
There may be a ‘need’, but the federal government seems unwilling / unable to pay for a boost in health, education and aged care jobs. If they don’t / can’t, who will?
Incidentally, this has implications for consumption patterns and the types of goods and services in demand. There will be a great emphasis on cost-effective lifestyle and wellness goods and services by baby boomers. People who can help baby boomers age gracefully and keep fit and healthy will do well. I expect personal trainers, yoga instructors and other service providers will respond to the demands of retiring baby boomers with time on their hands, many of whom would have significant disposable incomes. Tourism providers will also benefit, and not just from grey nomads, but they will need to provide superior and interesting tourism experiences for baby boomers, many of whom have already traveled to many interesting places around the world.
In the medium to longer-term some important global trends will be important in shaping our economy.
First I’ll discuss collaborative consumption or the sharing economy – “what’s mine is yours” as Rachel Botsman, the expert on collaborative consumption, describes it. We’re realising that it no longer makes sense to own as many things as we once did, as the internet makes it so easy to find people who own something we want to borrow or hire, such as a motor mower or car.
Think about the ride sharing service Uber, for example, which now threatens the traditional business model of the taxi industry, which is protected by government regulation. Similarly Air BnB is providing an emerging threat to hotels and serviced apartments, by making it easy for home owners to temporarily rent out their houses or rooms.
The internet also makes it easy to find people who might want to barter or offer services in the expectation they’ll eventually be rewarded – an economy that operates on karma. An example of this is couch surfing websites that let people find places to crash in foreign cities.
Another important global trend is that technology is improving at an incredible rate in a wide range of areas. Longevity may increase significantly owing to medical advances, meaning that the growing senior section of population will have an even greater transformative impact on our economy. There are also potentially large implications from wearable technologies, such as Google glasses or wearable computers that constantly monitor our health and alert us or medical authorities to possible heart attacks or strokes.
Automation and robotics are also profoundly important. Major car companies such as Volvo have invested billions of dollars in developing driver-less cars, which will lead to great efficiencies on the roads and in car parks, as cars drive closer together, have fewer accidents, and find car parks for themselves, so you can spend more time doing what you want to do rather than parking a car.
Regarding robots, if you see the quality of robots being developed in Japan, it’s not unreasonable to expect in a few decades perhaps robots will undertake a wide variety of jobs as well as our housework. Some people worry about whether this will cause mass unemployment, but I’m not so worried about that.
Robots will massively increase the productivity of our economy and will mean that, in theory, we can all work fewer hours to enjoy the same standard of living as robots will be doing a lot of the work. Of course, much will depend on who owns the robots and its possible robots could create further inequality if the rich own the robots and a large segment of the population don’t have robots and can’t find employment. This is a possibility, but because society would be richer we could afford to spend more on welfare and I expect wealthier robot owners would have to support the losers in the robot age. Hence it’s possible we could see further expansion of the welfare state. As with the internet and globalisation, improving technology such as robotics would add to inequality – a global trend recently highlighted in French economist Piketty’s best-selling book Capital in the 21st Century.
It is appropriate to dismiss robotics as a threat. Mechanized production at the start of the industrial revolution (of which robotics is basically an extension) actually boosted higher wage job opportunities – because reducing unit costs stimulated a sufficient increase in demand to increase overall labour demand.
So as long as Australian Governments remain committed to a progressive tax system and income redistribution, it’s possible Australia could remain reasonably egalitarian and meritocratic despite these trends, although of course there has been a significant bulge in the incomes and wealth of the people at the top end, the so-called 1%, in recent years.
The challenge of inequality seems very real and to have its origins in the international economic environment (see Who Is Failing the Lower and Middle Classes? , 2014). It seems most unlikely to be resolved by government income redistribution (see Supporting the Disadvantaged when Governments Can't Afford to Do So, 2014).
Finally I think market reforms and the trend toward deregulation will continue. People are demanding greater choice in their lives and greater responsiveness from businesses and service providers. People expect a 24/7 economy, and regulations that are incompatible with this, such as Queensland’s archaic retail trading hours restrictions, are bound to be reformed sooner rather than later.
‘People’ are probably in for a shock because they haven’t put in much effort to understand what is happening in the broader world – eg as suggested below.
To conclude, Australia has transformed itself over the last few decades, both as an economy and as a society. We have less government intervention in business, but in some social and family areas there is a growing reach of government, particularly in childcare. Our future looks bright but requires careful management and an ongoing commitment to reform, particularly in the areas of taxation and industrial relations, which will remain controversial economic issues over the next decade at least.
|Australia's Crisis is Broader than Economics||
Australia's Crisis is Broader than Economics - email sent 14/10/14
Re: The economic crisis a complacent Australia has to have, The Conversation, 13/10/14
Your article highlighted indications that Australia’s is facing serious economic problems (such as a shrinking tax base; an aging population; a lack of infrastructure; poor productivity growth; and increasing inequality) and the lack of serious efforts to confront these problem in the absence of (as yet) of an obvious crisis.
While agreeing that Australia is headed for an economic crisis, I should like to suggest that there is a need to rethink the nature of the reforms that are needed because:
An attempt to place Australia’s economic challenge in a broader context (involving growing debates about the need to rethink democratic capitalism itself as a system of political economy) is in Restoring the Viability of Democratic Capitalism. This points to: the strength of democratic capitalism from the time of the industrial revolution; post WWII challenges that have arisen from ‘bureaucratic non-capitalistic’ economies in East Asia; the financial / economic disruptions that have occurred in recent decades / years because of incompatibilities between Western-style democratic capitalist systems and ‘bureaucratic non-capitalistic’ economies in East Asia; and the rising global risks of economic instability and conflicts.
Some (working draft / incomplete) speculations about the probable need for a new economic paradigm to overcome the challenge to liberal institutions from the authoritarian alternatives that have been emerging are speculated in Towards a New Economic Paradigm.
I would be interested in your response to my speculations.
|Some Suggestions to Complement: An Action Plan for Australia's Future||
Some Suggestions to Complement: An Action Plan for Australia's Future - email sent 14/10/14
Thanks for the reference to the government’s new strategy to promote competitiveness.
While the proposed initiatives seem reasonable in themselves, I should like to submit that there is a need for complementary initiatives that go beyond the bounds of conventional economics to achieve the government’s aspirations because:
My reasons for suggesting this are outlined in Australia's Crisis is Broader than Economics. The latter was written today - though not in the context of the government’s proposed competitiveness agenda.
|Turning Australia Around||
Turning Australia Around - email sent 10/12/14
Re: Australia adrift: Lost decade beckons as good fortune wanes, Business Day, 9/12/14
I should like to suggest for your consideration that, while your observation about the fact that Australia has an economic challenge is undoubtedly valid, some local knowledge is needed in prescribing solutions.
My Interpretation of your article: Australia could be headed for a lost decade. It has avoided recession for two decades. The government has a sound fiscal position compared with others. Vast resource deposits exist with infrastructure to support exports in place. But China's slowdown due to government efforts to rebalance the economy have devastated commodity prices. The federal government has reduced Australia's ability to deal with a difficult future. The budget has been needlessly austere - cutting education / health / welfare spending. Nothing has been done to diversify from dependence on China. Government has encouraged the reserve bank to loosen money policies - which may be pushing Australia towards a subprime crisis. There has been apathy about frothy real estate prices. The Financial System Inquiry called for reductions in housing tax breaks. Austerity policies need to be reconsidered - as large spending on education and training as well as on infrastructure may be the only way to turn Australia around.
Some points that might be worth noting in relation to your suggestions are that:
I would be interested in your response to my speculations
|Develop a Productive Economy - But Don't Pick Winners||
Develop a Productive Economy - But Don't Pick Winners - email sent 17/12/14
Re: Hockey must revive Andrew Robb’s vision, Business Spectator, 15/12/14
Your later article (Australia is Drifting Into a Perfect Economic Storm, Business Spectator, 16/12/14) was a reasonable account of Australia’s complex economic challenges. However its endorsement of ‘Andrew Robb’s vision’ which had been outlined in the above earlier article requires caution.
My Interpretation of your earlier article on ‘Andrew Robb’s Vision’: The deficit blowout means that the federal government no longer has the money to drive the economy. The Coalition recognised this in opposition and Andrew Robb (as shadow finance minister) developed a plan to cope. This has been pigeon-holed. Bad government by past and current administrations has contributed to the deficit blow-out and Australia’s deep economic problems. Years of government mistakes have been compounded by dramatic terms-of-trade changes. The Treasurer and Treasury have ignored the Robb plan. The latter did not envisage big falls in oil / coal / iron ore prices but could still restore Australia to health. Robb’s plan was based on recognition that continued Australia prosperity required two basic elements: (a) taking advantage of the emergence of an Asian middle class; and; (b) stimulating those who will employ Australians in future (ie small enterprises / independent contractors). Government also needed to be more efficient to reduce need for tax rises. The Robb plan had 9 points: (a) end federal / state duplication in education and health to save $10-20bn pa; (b) ensure banks can lend to SMEs (as Murray inquiry also suggests) by ending large enterprises’ unfair contracts with SMEs; (c) ensure that ATO complies with law in taxing independent contractors; (d) realign university system as future supplier to Asian market; (e) promote the benefits that could come from FTA’s with Japan, South Korea and China; (f) reconsider whether motor vehicle industry might be saved by employing robots and supply chain technology to become efficient; (g) support direct action on the environment; (h) increase infrastructure investment, while involving the states more and emphasising water infrastructure / northern development; and (i) addressing the looming gas shortage.
There is no doubt, as your article suggested, that Australia’s economic capabilities and government effectiveness need to be enhanced.
However it is extremely dangerous for central authorities to ‘pick winners’ in an economic context – and the ‘Robb plan’ as you outlined it seems to do so. Australia needs infrastructure to be developed but it does not need central authorities to ‘pick infrastructure winners’ whether they be the federal government’s current preference for roads (see And the Winner of the 2014 'Pink Batts' Award is ....) or an alternative preference (eg for water infrastructure and northern development). Infrastructure should emerge from well developed machinery to identify and act on projects that accord with regional needs not from central authorities’ guesses (see also Infrastructure Obstacles and Opportunities: Submission to Productivity Commission).
Australia’s Reserve Bank was quite convinced a few years ago (see Do Blind Spots Cloud the RBA’s ‘Lucky Country’ Vision, 2011) that the was no need to do anything about the risk that Australia’s commodity boom might be followed by a bust (as such booms always have been before when rapidly escalating supply encountered stagnant / falling demand). The RBA’s expectation that Asia’s growth guaranteed a ‘stronger for longer’ resources boom ultimately proved to be wrong.
And while an emergent Asian middle class may offer huge opportunities to Australia, it is also possible that it will not. Japan’s position is desperate (see Japan’s Predicament) and China seems to be headed for the same sort of debt-driven financial debacle that crippled Japan’s prospects in the early 1990s (see Heading for a Crash or a Meltdown?) and to be trying to avoid this fate by creating an international ‘Asian sphere’ that would neither be compatible with Australia’s liberal political and economic systems nor necessarily involve a consumer ‘middle class’ (see Creating a New International 'Confucian' Financial and Political Order). Australia needs an economy that is not targeted at any particular politically-favoured ‘winners’.
Elements of another possible ‘plan’ for dealing with Australia’s challenges are briefly alluded to in Turning Australia Around.
|Beyond Competition Policy||
Beyond Competition Policy - email sent 27/3/15
Professor Ian Harper
Re: Kelly J., ‘Ian Harper competition policy review’s path to growth’, The Australian, 27/3/15
I should like to try to add value to what (the above article suggests that) your review panel is recommending to boost Australia’s economic growth.
There is little doubt that tidying up Australia’s competition laws would be a useful step. However there are significant limits on what can be achieved by a focus on creating an effective competitive environment – for now-somewhat-dated reasons that were outlined in Defects in Economic Tactics, Strategy and Outcomes (2000). A basic constraint is that while market liberalization / competition policy requires and makes it possible for individuals / enterprises to compete, this does little to ensure their ability to compete successfully in the high value added industries that a high-wage economy such as Australia’s requires. A whole range of complementary economic capabilities have to exist within an industry cluster to maximize the prospects of any individual enterprise and there is a ‘chicken and egg’ constraint on the emergence of those complementary capabilities.
The use of modified versions of the ‘bureaucratic’ methods of government that were traditional in East Asia prior to Western expansion allowed economic miracles to be achieved in that part of the world in the late 20th century. Some experiments in achieving similar results in ways that would suit a democratic capitalist environment were reasonably successful in Queensland in the 1980s – but never actioned on a large scale because of the across-the-board politicisation of public services.
Options to accelerate the development of the complementary capabilities that are required for high productivity internationally-competitive industry clusters to emerge were suggested in Developing a Regional Industry Cluster (2000); Probable Breakthrough in Understanding Economic Development (2004); A Case for Innovative Economic Leadership (2009); Lifting Productivity: Considering the Bigger Picture (2010); and Reinventing the Regions (2010).
Thus I submit that it would be desirable to consider ways to complement the development of a finely-tuned set of competition laws.
I would be interested in your response to my speculations
|Creating an Environment in Which Australians Can Succeed if They 'Have a Go'||
Creating an Environment in Which Australians Can Succeed if They 'Have a Go' - email sent 23/5/15
Re: For Australian start-ups, it's more than just ‘having a go’, Technology Spectator, 22/5/13
Your article validly identified that the component that is missing from the federal government's exhortation for Australians to ‘have a go’ is any serious attempt to create an ‘ecosystem’ that shifts Australia towards an innovation and knowledge-driven economy. It then suggests various programs that government could put in place (eg a national innovation agency, increased venture capital funding and incentives) to achieve that goal.
I should like to suggest for your consideration that, while your goal is highly desirable, political attempts to lead the transformation must result in failure. Reasons for this are suggested in Economic solutions are beyond politics (1995). This draws attention to the interest group entanglements that inevitably affect any political program and the inadequacy of ‘what everyone already knows’ (that must characterise the political system’s understandings) in leading change in economically productive directions.
By way of background, I note that in 1983, while working for the Queensland Government, I wrote one of the very first proposals for achieving the goal that your article referred to. And in fact that proposal (‘Toward a Strategy for Technological Development in Queensland’) identified the need for an effective innovation system (which you called an ‘ecology’). However, despite government enthusiasm for an innovative / knowledge-intensive economy, politically driven efforts have achieved very little because the political system always wants to control outcomes – rather than allowing them to be market driven.
Ways to get around this were suggested in A Case for Innovative Economic Leadership (2009). This basically required that the political system get itself out of the way by empowering apolitical leadership in the development of an appropriate economic ‘ecology’ – using methods that had been trialed with some success in Queensland in the 1980s (eg see Developing a Regional Industry Cluster, 2000), before the politicisation of Australia’s public services put an end to such efforts.
Progress now also requires that apolitical groups (eg business) are willing and able to take the lead in making change. However does not happen (eg see Making Australia's Competitiveness Everyone's Business, 2013). Business in Australia sees that its contribution is limited to lobbying the political system - even though programs to support innovators can’t succeed if they are provided by democratically accountable institutions. Direct government 'assistance' is an obstacle to the emergence of the sort of 'ecology' that is needed, rather than a path to real economic development.
Thus, while your goal is to be applauded, I submit that some reconsideration of the methods used to achieve it is needed.
I would be interested in your response to my speculations
|Are Service Exports to Asia Australia's Best Economic Options?||
Are Service Exports to Asia Australia's Best Economic Options? - email sent 12/11/15
Re: Great presentation by HSBC’s Paul Bloxham on the economic outlook to ESA Qld, Queensland Economy Watch, 11/11/15
I would suggest that there is a need to consider the context to HSBC’s argument that service exports to Asia are Australia’s best economic option.
HSBC may be presenting an argument that would benefit itself – rather than necessarily being most beneficial to Australia. HSBC’s ’s base and major commercial interests are in China. HSBC Australia is a subsidiary of HSBC Holdings PLC - a British multilateral banking and financial services company headquartered in London. However HSBC Holdings was established there and is dominated by the Hong Kong and Shanghai Banking Corporation whose prospects depend primarily on China’s future success.
The data HRBC emphasised (ie that in Australia’s next growth driver: The role of the services sectors) took the view that China’s prospects are great and suggested how Australia could prosper in that environment through service exports – presumably with HSBC’s help in arranging deals. However the presumption seems overly simplistic. It can be noted, for example, that:
For reasons suggested in Lifting Productivity: Considering the Bigger Picture (2010), Australia could have many excellent economic opportunities that are not simply related to service exports to Asia that might be facilitated by HSBC. The latter should be considered – but not in the absence of an understanding of Australia’s economic environment and opportunities that is much broader than HSBC has provided.
I would be interested in your response to my speculations
Playing Political Games When Major Economic Reforms are Needed
Playing Political Games When Major Economic Reforms are Needed - email sent 27/9/16
RE: Global Leaders Change Direction While We Play Political Games, Brisbane Times, 25/9/16
Your article (which I have outlined here) suggested that there are weaknesses in the federal government’s policy agenda and that it needs to recognise that a new sense of economic direction is being recommended by the ‘trumps’ in the OECD and IMF (ie collectively increasing growth friendly government spending to counter a current global trend towards economic stagnation). I should like to suggest that there is nothing new about insubstantial populism dominating Australia’s political system / economic agenda and that the new fiscal policies that the OECD and IMF ‘trumps’ are advocating would be no more constructive.
Lightweight policy has been a constraint on progress in Australia for some decades (see On Populism, 2007+).
In the increasingly dysfunctional government environment that emerged from the 1980s, Australia adopted an economic reform agenda that suffered huge limitations (see Broken Governance and Ineffectual Economic Strategy: Two Sides of the Same Coin?).
Unfortunately the new ‘growth friendly public spending’ strategy that the global ‘trumps’ (OECD and IMF) have now advocated (and which both the RBA and your article have endorsed) can’t be effective for reasons suggested in Alternatives to Monetary Policy (2016).
Alternative to Monetary Policy also suggested that, instead of increasing public spending on infrastructure, it would be better to:
The latter relates mainly to the non-profit-oriented / non-transparent financial systems associated with the achievement of ‘real economy’ miracles in major East Asian economies – and their adverse side effects such as requiring: (a) domestic demand deficits that are a structural obstacle to global economic growth; and (b) monetary policy responses that risk financial system instabilities. How this probably also makes the ‘trumps’ proposed collective ‘growth friendly government spending’ option unworkable is outlined on my website. International Regulation of Lending Standards (2016) suggested how the G20 might have addressed that constraint.
As your article suggested, it is disgraceful that Australia’s elected leaders are content to play political games when there seems to be a need for a significant change in economic direction.
An Interpretation of 'Global Leaders Change Direction While We Play Political Games'
Malcolm Turnbull and Scott Morrison keep travelling overseas for discussions with the world’s heavies (ie at the OECD and IMF) – but come back none the wiser. Those at the leading edge are concerned about the world economy and are recommending a change of direction. Policy needs to swing back to the centre but Australia’s coalition drifts to the far right. The OECD is worried about a global low-growth trap with poor growth in trade / investment / productivity / wages. Poor growth combined with inequality and stagnant wages is making it harder to pursue policies that would support growth / inclusiveness. Trump, Brexit and the resurrection of One Nation won’t help deal with this. Weak demand growth has an adverse effect on supply as a result of weak business investment, weak productivity growth and atrophication of the skills of the long term unemployed. Potential growth in OECD countries has halved to 1% since GFC. Trade growth is weak. Low interest rates are distorting financial markets (including overblown share and property values) creating risks of future crises. There has been too much reliance on loose monetary policies – which is leading to financial distortions and risks. There is a need to shift to a collective fiscal (budgetary) and structural (micro-policy) policy response – in order to boost demand and raise productive capacity. All countries are seen to have room to do this. The OECD and IMF believe that Australia has plenty of room to borrow for productivity enhancing infrastructure – space that is increased by very low interest rates on existing / new debt. The OECD suggests supporting well-targeted active labour market programs and basic research. Well-targeted growth-friendly spending could reduce debt / GDP ratios by adding more to GDP than it adds to debt. The RBA has told government that monetary policy can not solve the problem and that infrastructure investment should be emphasised. The question is how long Australia’s politicians will take to realize the importance of returning to the sensible centre.
Financial System Constraints on A 'Market Friendly Government Spending' Solution
Unfortunately the global ‘trumps’ (OECD and IMF) have been no more able than the G20 has been to come to grips with the implications of non-profit-oriented / non-transparent financial systems in East Asia.
‘Real economy’ miracles have been able to be achieved by the use within ethnic social hierarchies of methods like those often used to stimulate strategic change in (hierarchical) Western bureaucracies. Profit-oriented / transparent financial systems have not been developed. How this worked has been hard for most Western analysts to understand for reasons explored in Babes in the Asian Woods, 2009+; Why Understanding is Difficult, 2011; and Understanding China Matters, 2016.
The major non-capitalist systems (eg in Japan and China) have created serious global problems (see Structural Incompatibility Puts Global Growth at Risk, 2003; GFC Causes, 2003; Impacting the Global Economy, 2009; Towards a New Economic Understanding, 2010+; and Should Donald Duck?, 2016).
For example for decades the ‘non-capitalist’ systems required large / defensive structural demand deficits to guard against financial crises. And. as economies such as Japan’s (and ultimately China’s) became globally significant, their structural demand deficits would have stifled global growth unless others had been willing and able to provide demand well in excess of their income (eg by stimulating asset inflation as the US Federal Reserve had done from 1987 with easy money policies so that rapidly increasing household / corporate / government debt levels seemed to be 'affordable'). The US, it is noted, had been acting as the world’s ‘consumer of last resort’ to encourage the global spread of liberal economic and political systems – though it eventually lost its enthusiasm for doing so (see Limiting the 'consumer of last resort' , 2011).
China, which has the world’s second largest economy and is the largest without a profit-oriented / transparent financial system, decided in 2013 that it would be necessary to boost domestic demand to drive growth because supposedly ‘growth friendly investment’ that had been China’s response to the 2008 Global Financial Crisis (and whose cost the Chinese government eventually carried) was resulting in national debt growing much faster than GDP. However China found this transition hard to achieve (see Context to China's Sharemarket Boom and Bust) and apparently eventually gave up (see Importing Risks from China). And, as the latter suggests China now seems to be headed towards a financial crisis like that that Japan experienced in the late 1980s because of the excessive (often hidden) debts that have been needed to maintain growth.
Thus the emphasis on ‘growth friendly public spending’ that the economic ‘trumps’ are now advocating collectively-by-all-major-countries seems unlikely to be realistic.
And Australia seems to be headed in much the same direction as China (see Don’t Overlook Australia’s Risk of a ‘National’ Credit Crisis, 2016). Australia apparently has: (a) the world’s second largest debt / GDP ratio (190% after China’s 290%); (b) a rate of debt growth (like China’s) that is several times greater than GDP growth; and (c) rapidly increasing government debts due to structural budget deficits – and thus rising difficulties in justifying the federal government's AAA credit rating and its credibility as a guarantor of Australia’s banks as they borrow offshore / increase Australia’s national debts to cover ($60bn+ pa / 4.6% of GDP) current account deficits.
It is the Economy, and It Needs More Than the PM's Attention
It is the Economy, and It Needs More Than the PM's Attention - email sent 2/1/17
Professor Peter Van Onselen,
Re: It’s the economy, Malcolm, and it needs the PM’s undivided focus, Weekend Australian, 31/12/16
Your article suggested that the federal government needs to focus on the economy. But your article itself focused on budgetary challenges rather than on the national economic problems that are the main source of the budget problem.
A way is suggested below to: (a) identify realistic solutions to the economic challenges; (b) create an environment in which they can be politically accepted; and (c) support credible projections of rising government revenues and reduced spending. This involves encouraging various groups of experts and practitioners with diverse specializations to openly and realistically identify and analyze economic challenges and other complex / contentious issues - in ways that would: (a) boost public understanding; (b) facilitate useful non-governmental initiatives almost immediately; and (c) identify public policies and programs for political consideration.
Australia has a significant economic problem. Attempts from the 1980s to diversify its historical reliance on natural resources towards higher value-added (especially knowledge intensive) functions were of limited benefit. Market liberalization created incentives to compete without overcoming the ‘chicken and egg’ constraints on the development (especially in economically marginal regions) of the support functions often needed for competitive success (see Defects in Economic Tactics, Strategy and Outcomes, 2000). The inadequacy of reliance on mainstream economics' assumptions about economic development in a free market has been further increased by the distorting effect of reserve banks' ultra-easy monetary policies (ie encouraging investment in paper assets that will benefit from ever-lower interest rates rather than from development of 'real' economic capacity).
Over the past decade growth has depended on a resource investment boom driven largely by China’s massive industrial, property and infrastructure investment (including an initially-emergency response to the disruption of export-oriented manufacturing by the GFC). Dependence on massive often-wasteful investment to maintain growth created financial risks for China’s economy and attempts were made from 2013 to diversify it towards reliance on domestic demand to drive growth. This invalidated many analysts’ ‘stronger for longer’ resources boom hypothesis.
At the height of the resource investment boom, the federal government received huge capital gains tax receipts. These were committed to reducing tax rates and increasing welfare transfers. This ensured a structural budget deficit if and when the resource investment boom eased – as it has now done (see Australia's Future Tax System: The Cost of the Financial Crisis and the Opportunity to Fix Government, 2009). The latter again pointed to the need to adopt a more sophisticated approach to developing a broader base of internationally competitive high value added economic functions – and suggested how this might be achieved (eg by creating financial incentives for state administrations, that have the greatest influence on economic development, to encourage high economic value added functions rather than those with the high economic turnover that existing arrangements favoured. Doing so would have: (a) reduced demands on government spending (eg in meeting the welfare needs of those who could not find well paid employment in poorly developed regional economies); (b) increased governments’ tax base / income; and (c) reduced dependence on China’s economy. Dependence on exports to China is becoming hazardous because of its slow economic diversification and its risk of a debt crisis due to chronic reliance on over-investment to maintain the rapid growth that has been its authoritarian regime’s main basis for ‘legitimacy’ in the eyes of its people (see Importing Risks from China, 2016).
As the resource investment boom eased, Australia’s growth came to depend on high rates of investment in real estate which: (a) created immediate jobs; (b) significantly increased national debt levels; but (c) contributed relatively little to future national income or tax receipts. Due to prolonged reliance on growth driven by unproductive investment, Australia (like China) now has a national debt / GDP ratio which suggests that a debt crisis is possible – especially as probably-rising interest rates globally will now increase the cost of debt service and refinancing (see Australia's Risk of Financial / Banking Crises as Growth is Driven by Rapidly Rising and Often Misdirected Debt, 2016). Federal government budget deficits are relevant to Australia’s risk of a national debt crisis (because of their effect on the credibility of government guarantees of Australia’s banks that seem to be exposed to the risk of what has become a real estate bubble). However the key to avoiding a national debt crisis is to focus on strengthening the economy – not just on balancing the federal budget. And projections of favourable future government budget outcomes can be highlighted, if a realistic strategy for development of Australia’s economy has been identified and started to be implemented independently of governments.
Moreover, as your article indicated, the issues that Australia’s political leaders have to contend with are not limited the economy. For around 2 decades political stability has been undermined largely (though not only) because of concerns by disadvantaged groups in economically-marginal reasons about their predicament (see Assessing the Implications of Pauline Hanson's One Nation, 1998). Now in Australia (as in Europe and America) large segments of the grassroots community are becoming concerned about issues where there has been a refusal to allow realistic assessment of elites' assumptions about necessary policy responses to complex issues (see Incorporating the Alienated: A Challenge to Australia's Civil Society, 2014 and The Church of Political Correctness Threatens National Progress, 2016).
In order to create an environment in which realistic solutions to Australia’s economic challenges can be found and politically accepted, it would probably be desirable to encourage the establishment of competing politically-independent panels with expertise and experience in diverse areas to:
A focus on economic challenges and opportunities themselves should allow Australia’s budgetary difficulties to be reduced (eg by giving credibility to projections of increasing revenues and declining spending). However the reverse is unlikely to apply. Some earlier suggestions about dealing with Australia’s economic challenges are outlined on my website.
I would be interested in your response to my speculations.
Some CPDS Suggestions about Australia's Economic Challenges and Opportunities
|Big Four Bank Chairmen Need to Get on with Federal Budget Repair||
Big Four Bank Chairmen Need to Get on with Federal Budget Repair - email sent 4/1/17
Cc: Catherine Livingstone (CBA), David Gonski (ANZ), Ken Henry (NAB) and Lindsay Maxsted (Westpac)
Re: Big four bank chairmen plead for federal budget repair, The Australian, 3/1/16
Your article highlighted major banks’ call for political bipartisanship in repairing the federal budget to avoid losing Australia’s AAA credit rating.
This is foolish. Is it is the major banks and other significant business groups who are best placed to actually repair the budget – ie by taking the lead in enabling a vision of ways to strengthen Australia’s ‘real economy’ to be identified and become the target of non-governmental initiatives to achieve practical improvements. The federal budget problem is a reflection of weaknesses in Australia’s economy. Exposure to yet another commodities investment boom encouraged government fiscal generosity which is unaffordable as that boom is ending. The gap between spending and revenue could be significantly cut by reducing current economic weaknesses (ie an economy overly-dependent on commodities’ exports) thereby: (a) strengthening the tax base; and (b) reducing demand for government transfers to those who are struggling to cope.
How change might be achieved was suggested in It is the Economy, and It Needs More Than the PM's Attention .
There are severe limits on what Australia’s politicians can do to solve the budgetary problem, or reduce weaknesses in Australia’s ‘real economy’. They are bogged down in infighting about sharing out what has become an inadequate ‘pie’, and can’t take the lead in stimulating the developments in the ‘real economy’ that are needed to make the ‘pie’ bigger because of the interest group pressures they are subjected to.
Australia’s major banks can’t themselves know details of how to strengthening the ‘real’ economy because their emphasis is on the ‘financial’ economy. But they are well placed to recognise the need to strengthen Australia’s ‘real economy’ and to create a framework within which those with the necessary information and experience can identify likely ‘real economy’ answers and thus give direction to almost-immediate independent / collaborative initiatives to try to strengthen existing economic systems and regional industry clusters.
Australia’s big banks and other major businesses need to be pressured to ‘get on with it’. Lobbying politicians for budgetary changes in the hope that this will overcome weakness in Australia’s ‘real economy’ is a cop-out.
|GDP is a Critically Important 'Sustainable Development Goal||
GDP is a Critically Important 'Sustainable Development Goal' - email sent 9/1/17
Re: How and why we are moving beyond GDP as a measure of human progress, The Conversation, 4/1/17
Your article pointed to the development through the UN of Sustainable Development Goals (SDGs) that would be used as a measure of economic progress in parallel with GDP.
I would like to submit for your consideration that: (a) a prevailing failure to genuinely measure GDP has become an obstacle to human progress that is as severe as (and much more immediately dangerous than) the risks associated with any of the SDGs; and (b) it is necessary to devote a lot of effort to ensuring that the SDGs genuinely represent ‘progress’, rather than just being assumed to represent ‘progress’.
GDP measures overall value added in an economy. This mainly involves business profits, employee wages and government tax receipts. However, in what is now a large segment of the world economy, ie East Asia, ‘profitability’ has often not been taken seriously for decades (see Evidence) because of distortions in national financial systems (see Understanding East Asia's Neo-Confucian Systems of Socio-political-economy). Resource allocation has not been based on assessment of return on / return of capital by independent enterprises, but rather on a consensus about the use of national savings held by state-linked banks based on consideration of a diversity of factors (eg market share, national power, employment – and environmental goals recently in China).
This has caused serious international and domestic problems (see More on: Should Donald Duck?). Those consequences have included: (a) an effective subsidy on production which distorted industrial competitiveness; (b) a need to suppress domestic consumption to ensure current account surpluses to provide capital for investment without international borrowing; (c) international financial imbalances – and a dependence on trading partners’ willingness and ability to sustain ongoing current account deficits and rising debt; (d) a need also for trading partners to adopt ever easier monetary policies so as to maintain demand in excess of income – policies which: distorted investment; increased social inequality (because gains mainly came to those with significant existing assets); and political instability; and (e) eventual financial crises in the countries where profitability was not taken serious (eg first Japan in the late 1980s and various emerging Asia economies in 1997-98).
The current consequences include: (a) a threat to economic globalization similar to that at the end of the 19th century that led to WWI; (b) increasing geo-political tensions; and (c) a likely financial crisis in China which has become a major driver of global economic growth (see Importing Risks from China). Unless these problems are remedied, economic progress in terms of any of the SDGs is now highly unlikely.
While there is undoubted value in examining other indicators of economic progress, a very high priority needs to be given to ensuring (eg as suggested in International Regulation of Lending Standards) that GDP (especially business profitability) is actually reliably measured so that distortions in international financial systems (and their economic, social and political consequences) can be eased.
Finally I submit that it is necessary to devote a lot of effort to ensuring that the SDGs genuinely represent ‘progress’ because there are some areas in which the assumed nature of ‘progress’ is uncertain and where there has often been a reluctance to evaluate whether those assumptions are reliable (see The Church of Political Correctness Threatens National Progress).