DEBATING THE IMPACT OF ECONOMIC LIBERALISM IN AUSTRALIA (2002)
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Articles Endorsing Economic Liberalism +

Articles Endorsing Economic Liberalism (in reverse date order)

Some claim that productivity boom is over, and that gains from reform were overstated. But productivity growth accounts for 4/5 of past average income rises. ABS data shows a large productivity rise between 1993 and 1998 - though this reduced later (eg because of drought). Work intensity does not explain increased productivity? Causes include: increased exposure to trade and investment; increased R&D; and increased innovation in using ICT technologies. Countries with low restrictions on market competition and labour-market flexibility do better [1]

There is a myth that micro-economic reform generated a surge of productivity - and this is seen to prove that more reform is needed. However overall from 1993-94 total factor productivity growth has been 1.2% pa - the same as long term average .[1]

Australia's productivity growth surge in 1990s (which has since moderated) was associated with (a) increased global economic integration (b) increased R&D and (c) innovative use of ICT. However it was policy reform which which provided the flexibility for these changes to occur [1]

Australia has reversed its long term relative decline in per capita GDP [1]

Productivity Commission's annual report shows that economic reform of past 2 decades has enabled Australia to rise from 15th to 8th in per capita GDP. The most important reform involved opening borders. This put pressure on firms, who sought ways to reduce costs. This started second wave of reforms - of public utilities, and of industrial relations. [Future reform priorities were also outlined] [1]

Australia's return to higher productivity in the 1990s was driven by removal of barriers that had been stopping world's best practices. One school of thought is that this is a one off gain. However (a) Australia's productivity still lags lead countries - especially the US. In the 1950's Australia had the 5th highest OECD productivity - and 18th by early 1990s. Even with solid gains of 1990s - ranking is only 16th now (b) many gains from improved industry structure will be ongoing - particularly associated with competition - which requires firms to embrace new technologies faster, (c) it is not certain that global productivity will slow down. Most of gains in US productivity were not associated with use of ICT - and others have scope for catch up. Greenspan argued that new technological innovations result in productivity gains for two decades. Australia has a tradition of adopting new technology - but faces problems that cost and availability of telecommunications is only average in international terms. Business spending on R&D is also low. (Bassanese D., 'Time for us to catch up', FR, 18/6/03)

The federal government has had seven years in power which were much less economically volatile than for similar seven years of Hawke government. The reasons for this is reduced international volatility associated with shift to consumption of services away from manufactures - and partly due to better management (eg inflation targeting by central banks) (Mitchell A. Labor's seven year itch', FR, 4/6/03)

Economic globalization has brought many advantages to Australia, and to other countries (Callick R 'Global monster brought to heel', FR, 27/5/03)

Australia's real national income has increased over 50% since the economy was opened to international trade 20 years ago - according to DFAT Economic Analytical Unit study. Developed economies that have gone global enjoyed faster growth over the past two decades than those maintaining protective barriers. Higher growth was accompanied by improved environmental standards. Governments need to play a significant role in redistributing wealth - via education, welfare. In East Asia gains from globalization were unequally distributed - and there are many governance and institutional development challenges for globalization to benefit all citizens. Lower farm trade barriers are needed for developing nations to escape from poverty - which Western Europe, US and Japan spend $US1bn daily to prevent. The federal government is currently pursuing US free trade deal despite evidence of negligible gains from doing so (Wallace C., 'Open economy hurt but it was good for us', A, 27/5/03)

Pusey's. The Experience of Middle Australia" The Dark Side of Economic Reform, detailed reactions of 400 Australians to 20 years of economic reform. It has been well received. It argues that economic reform has increased unemployment, reduced job security, caused overwork, delayed / reduced fertility, increased mortgage payments, eroded public schools and transport, undermined small business, fostered social paranoia and racism, created unfair distribution of wealth, instigated unhappiness and depression and generally made people 'angry'. The data do not support many of these views. Given perceived lack of demand for reform, why did poll-driven politicians take no notice of public opinion. This is never answered - because it is argued that politicians were captured by narrowly trained neo-classical economists in the bureaucracy. The major villains are seen to be corporations - as Pusey argues that reform agenda was about increasing corporate profits. This does not explain why Labor Governments were the main reformers. In fact Labor policy was 'middle of the road social democracy' - with a commitment to public services, and increasing revenue by growing economy. Pusey has done nothing to correct the misperceptions about the effect of economic reform which his survey highlights (Norton A., 'Unproductive attack on nation's economic progress', A, 12/5/03)

The Hawke government started the process of deregulation of the Australian economy in 1983 with: floating of the dollar; bank deregulation; the introduction of foreign banks; slashing tariffs; and establishment of compulsory super and a national system of corporate regulation. In the Economic Summit, business found that the Whitlam government's successor was business friendly. This process turned Australian business upside down, and changed the nature of economic management. 20 years of reform have now followed 40 years of torpor. Reforms allowed Australian business to expand globally - and were overwhelmingly positive for improving business competitiveness. This was not without cost - as some failed. A static controlled banking system had produced a static, controlled business community. Banks were like Gods. Once others could create credit, banks lost this status. Deregulation meant that there was a lot more money available. But deregulation produced a lot of unintended consequences. Prior to 1983 credit had been rationed. Then entrepreneurs emerged - and many later disappeared. The system also failed on corporate regulation - arguably because the federal minister did not properly fund the national element of a cooperative system with the states so that it would not work (Ryan C., 'A revolution made by breaking a few eggs', FR, 4/3/03)

The effect of opening to competition was that Australia's unions, manufacturers and wage tribunals found themselves transplanted into a global economy that did not care about cherished notions such as comparative wage justice or all round protection. Even sheltered industries could see competition coming. . Reform could not have been achieved unless the opposition were also committed to it. The opponents of reform (eg manufacturing and their unions) were thus marginalised. Now people enjoy the benefits of rapid productivity growth. Floating the dollar led to wild exchange rate swings - because it took markets a long time to see what Australia's economic fundamentals were. The recession of 1991 was due to applying the economic breaks - when no one knew how the economy would respond. It is now impossible to imagine going back. Now credit goes to the most profitable sectors of the economy - and as a result is much cheaper. (Mitchell A., 'Economic reform a barrel of thrills and spills', FR, 3/3/03)

Australia's export performance has been said to have improved significantly over the past two decades [1, 2]

Australia on key indicators is the fittest economy in the world. Education is the last critical area that needs to be tackled. Australia has had 11 years of prosperity - the longest in 100 years. Wealth has grown more over the past 11 years than in the preceding 30, and average wealth per person is 2/3 greater than in 1990. Australia is now richer, more optimistic, more willing to change, more confident of its place in the world and more unequal. The expansion as changed: private education; private health care; house prices and household debt. Australia prospered through two waves of recession in Asia. The exceptionally high growth of productivity was encouraged by the float of the dollar in 1983, financial deregulation in 1984, big tariff cuts in 1998 and 1991, the switch from arbitration to enterprise bargaining in 1992, the adoption of competition policies in the early 1990s, the independence of the Reserve Bank in 1996 to pursue anti-inflation target. The introduction of ICT technologies also transformed business. But in the last year or two there has been even more change - the role of exports in the economy is changing and becoming much more significant. Labour costs per unit of output are going down not up. A cheap currency often raises real after-inflation exchange rate back to where it was - but in Australia's case the low rate of inflation, low rises in labour costs and cheap currency have led to more competitive exchange rate. The real exchange rate for exports has fallen by 20% since 1991. This explains some of Australia's export success - ie exports are up to 22% of GDP from 16% with a shift towards manufactures and services. Given cuts to exchange controls in 1983, investment flows have increased for the past 15 years. More comes in than is required to balance net payments abroad, and more is going out. Capital inflows are now 10% of GDP. Inward investment was $20bn and outward investment $22bn. Australia now has more direct investment in US, than the reverse. The result of global integration is that concern about reform fatigue is now irrelevant. These changes can not be reversed - though globalisation has no domestic political advocates. Australia's success no longer depends on capital, but on the skills of the workforce - so the education system is critical. Inequalities also need to be addressed. (Edwards J., 'The last great economic challenge', FR, 24-29/12/02).

Australia’s economic strength over the past decade is due to structural reforms made by Hawke and Keating governments – which were mainly about reducing dominance of producer interests and empowering consumers. Though there have been some negatives, the overall effect was beneficial. Less intrusive regulation of product markets, a floating currency, enterprise bargaining and reforms of government business enterprises have eliminated entrenched inflation of 1970s and 80s. The regressive effects of tariffs and quotas on lower income earners have been reduced. In the developed world the cost of allowing producer groups to dominate is clear. Strategies that made sense in the industrial era (of size and certainty) tend to inhibit growth and innovation in a services dominated economy. The crisis in Japan and inadequate growth of western Europe show the effect of producer dominance. Prescriptive and anti-competitive regulation comes at a price – eg the present federal governments prescriptive approach to digital TV. Australia must in future avoid favouring producers at the expense of consumers. Thus bodies such as the Productivity Commission and the ACCC are essential – even though they don’t always make perfect decisions. (Tanner L. More power to consumers a capital idea’, Australian, 22/2/02) 

Liberal economic policies are widely criticised - eg for causing declining industries and employment, increasing inequality and diminishing our cultural and economic identity. However (a) Australia achieved a 25% increase in average living standards in the 1990s - double the rate of increase in the 1970s and 1980s (b) rapid growth was due to liberal economic reforms - more than to the application of technology according to Productivity Commission analyses (c) the Reserve Bank says that Australia is no longer so susceptible to international pressures (d) all health measures have increased, fewer hours are being worked on average (e) wages and profits shared equally in the growth of business income (f) increased inequalities were compensated by social welfare provisions (g) rural and manufacturing exports grew strongly - and population growth in rural areas was only slightly below that in cities (h) service industries expanded rapidly to absorb unemployment lost in manufacturing. Similar reforms need to be continued (Moore D., 'Thriving on competition', Financial Review, 16/1/02) 
CPDS Comments +

CPDS Comments

Counter Views

Other analysts have expressed various views that have different implications about the strength of Australia's economic preformance. For example:

Dr Peter Brain's 2001 Deakin Lecture took the view that a substantial strengthening of Australia's system of representative democracy was needed to allow the state to more effectively influence economic outcomes in the public interest (see outline of Dr Brain's views - with CPDS comments).

Borrowing (and a significant increase in household debt levels) have been seen as a significant fact in Australia's rapid growth rates [1] - which clearly is not a sustainable basis for growth.

A housing boom has been seen as the primary basis for 'feel-good' economic conditions [1]

Financial deregulation allowed households to 'gear up' to invest in property, which (a) drove strong growth and (b) created increasing difficulties in managing a highly leveraged economy - because of the effect which increased interest rates would have [1]

Simply forcing people to work longer and harder is seen as a likely source of increased productivity in the 1990s [1, 2] and also of very great social stresses [3].

A decline in public capital formation has been seen as causing high unemployment, manufacturing decline and rising inequality - on the grounds that such spending would have stimulated the development of industries that otherwise can not exist (see The Price of Civilization).

Early estimates suggesting a productivity boom in the 1990s have been revised downward, and it is now only in the 1993-94 to 1998-99 period of economic recovery that productivity growth was above average. A high rate of IT adoption may account for most of this [1]

Because of a slowdown / reversal of productivity growth towards the end of the period from 1993-94 to 2004-05, overall total factor productivity growth has averaged 1.2% pa - the same as long term average. [1]

Liberal market reforms over the past 20 years have been designed to suit the 'big end of town' and have led to an increase in inequality and have alienated ordinary people [1 - which includes CPDS comments]

A declining wage share of national income and increase in the profit share has been a factor in Australia's economic performance over the past decade - made possible because increasing workforce participation by women has allowed employers to restrict wage growth [1]

Despite the perceived productivity surge of the 1990s it appeared that: Australia's international productivity ranking did not significantly improve (and remained much worse than it had been 5 decades previously); and productivity was well behind leading countries [1]. Moreover in the later 1990s multifactor productivity growth slowed significantly - and for the decade as a whole productivity growth was slightly below the long term average [1].

Since 1998-99 Australia's multifactor productivity growth has been below the long term average. Though it has been suggested that the federal government has 'dropped the ball' on microeconomic reform, this process has continued - and the Productivity Commission forecast that this should add 1% pa to Australia's growth.  [1]

Australia's long boom was due to combined effect of highly unusual circumstances - banking deregulation, devaluation, improving terms of trade, loose US monetary policy combined with low inflation [1]

Increased income in Australia over the eight years from 1996 were simply the outcome of a high rate of spending using borrowed money [1]

Australian companies have tended to respond to competitive pressure by cost cutting, but have become so lean and mean that this is no longer possible - and productivity growth has stalled [1]

Increasing workforce patination, due to unwinding of the impact of 1990 recession and high unemployment, contributed to stronger growth in the 1990s - but this can not be expected in future [1]

The emergence of commodities demand from China significantly improved Australia's terms of trade (ie the value of exports relative to imports) and thus made a major contribution to increasing Australia's income levels by international standards [1]

CPDS' reservations about Australia's economic performance were outlined (see Note 3 on Queensland's Challenge, February 2001).

This referred to:

  • the claimed ‘statistical vanishing act’ of the very rapid productivity gains that Australia was initially said to have achieved (an issue that remains subject to disputation - see Productivity);
  • national decline in per-capita incomes relative to international standards [though comments below can also be noted]; 
  • the  steady devaluation of the $A in the 1990s which also devalued Australia's economic production and allows good economic and productivity 'growth' statistics to be achieved simply because its international value is being restored. For example, suppose goods and services with a value of A$100bn (initially $US75bn say) are produced, and then, through devaluation, those goods and services are declared to be worth $A125bn. However the fact is that they are still worth exactly what they were in $US  (eg $US75bn) - and as they are bought at that value it appears that producers 'productivity' is growing rapidly in $A terms. The more rapid 'productivity' growth identified in resource rich states of Queensland and WA, and the observed productivity slowdown since the late 1990s - which corresponds to the period when $A exchange rates relative to $US ceased falling and began rising - can also be noted;
    • [On the other hand the fact that devaluation allows economic 'momentum' to be maintained should be noted [1] - even though devaluation could have been self-defeating if it had ignited inflation; Also:

    • the author has not analyzed this effect in detail (and neither, apparently, has anyone else). GDP estimated are validly corrected for changes in the terms of trade (ie for export relative to import prices) but this does not allow for the impact of devaluation on productivity measures. Thus all that can be said with confidence is that the actual impact is unknown (but perhaps significant)].

  • the growth of the current account deficit to the point where a currency crisis has periodically threatened; 
  • the loss of ownership and control of many Australian enterprises, because the corollary of the current account deficit was large capital inflow to buy those enterprises. One result must be a loss of future potential to acquire the strategic information which is required to build competitive advantages and raise productivity (and to advise governments about sensible economic policy options). It is unlikely that those takeovers in themselves resulted in loss of much strategic intelligence, as if those enterprises had been strong in this respect their economic productivity would have tended to be high and little scope would have existed to profit from takeover; 

Evidence of Unsatisfactory Performance

It has been suggested that Australia's perceived 'miracle' economic performance has been a myth (as shown by stagnating export performance) and that the failure to continue liberal-market reform initiatives is largely to blame [1] - though at the same time other observers saw evidence of excellent export performance [1, 2, 3].

Indicators of unsatisfactory performance are presented in Queensland's Economic Strategy, and this refers (in addition to concerns about exports) to: diversification into strategically difficult capital intensive activities; declining innovation ranking; under-employment (reflecting poor job quality) and persistent unemployment; a need for large increases in welfare payments to prevent inequality increasing; and a lack of policy sophistication.

The urgent need for a new round of economic reform in 2005 - in the face of of an economic environment where production was encountering serious constraints while demand escalated - is a further indication of unsatisfactory performance.

Analytical Complexities

Moreover there seem to be complexities which make it hard to assess statistics which appear to show strong macro-economic and productivity 'growth' by OECD standards. For example, analysts do not seem to have commented on the impact of constant devaluation on creating an impression of faster growth (as above), or to have assessed the impact of:

      Australia's generally faster population growth (due to immigration) which requires correction to per-capita growth for fair comparison;
    • potentially un-sustainable trends in the global economic environment (eg instabilities in the global financial system; the growth of an asset bubble in the US - which supported high consumer spending; and the constraint on inflation provided by cheap imports which overcame the impact of loose US monetary policy);
    • (possible) statistical difficulties in determining economic value-added in Australia - because of the combination of (a) Australia's capital intensive economic focus and increasing capital inflow [1] (and foreign ownership) in the 1990s (b) the tax advantages of 'transfer pricing' or excess payments for corporate services / intellectual property to shift the perceived earnings of foreign owned firms to other jurisdictions.
    • statistical difficulties in determining CPI inflation - which is the benchmark from which 'real' productivity growth is determined. It has been plausibly (if over-enthusiastically) suggested that the way in which the CPI is measured in the USA is likely to under-estimate inflation [1] - and similar methods presumably apply in Australia. 

    Furthermore, while the Australian Productivity Commission has shown [1] that in purchasing-power-parity terms the long term decline in Australia's per capita incomes was reversed in the 1990s, the problem with this is:

    • while purchasing-power-parity indicators show a reversal in the decline of per-capita incomes, indicators based on market exchange rates are unlikely to do so. Thus while the purchasing-power-parity data probably gives a realistic measure of the greater affluence the community experiences - this:
      • does not show the extent to which this (real) effect on perceived affluence was due to reforms the Commission listed, or to the effect of ongoing devaluation (or to the causes that others have suggested); and thus
      • does not guarantee that such gains are sustainable;
    • a major component of the gains which the Commission identified were the result of changes to government utilities. Unfortunately a side effect of the of those reforms (which have seen governments attempting to become more business-like) is that they have become seriously less government-like - and thus are tending the fail in their primary role of governing (eg see The Decay of Australian Public Administration; Growth Management in SE Queensland; and Infrastructure Constraints on Australia's Economy).

    More is Needed

    Defects in Economic Tactics, Strategy and Outcomes, which refers specifically to Queensland's situation but has national parallels, suggests that more was required than economic liberalism for Australia's performance to have been satisfactory.

    Though constructive economic changes took place in Australia during the 1980s and 1990s, the rate of change was slower that many other countries achieved (perhaps because, in Australia, leadership in economy-wide change was seen as the role of government with too little complementary economy-wide leadership in the community).

    Uncritical acceptance of the perception that Australia achieved an economic 'miracle' in the 1990s (perhaps because of distorted macro-economic data) risks leading to a dangerous over-confidence, as pressures for much far better economic performance in future are intensifying (see comments in About Queensland's Economic Strategy).