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Building prosperity: Australia's future as a global player

By Wolfgang Kasper - posted Tuesday, 12 December 2000


It's often said that one can't argue with success. In fact, one can and one should, for complacency can be an enemy of sound judgement. And this is particularly the case when the discussion turns to the state of the Australian economy.

It's certainly true that the Hawke, Keating and Howard eras brought overdue economic reforms-tariff cuts, freer capital markets, freer industry policies, tax reform, some privatisation, enhanced fiscal management and more stability-oriented macroeconomic policies. And it's certainly true that these free-market reforms helped Australia boost productivity and economic growth while slaying the inflation dragon-which in turn helped Australia weather the Asian financial crisis two to three years ago.

Unfortunately, such success has led to much smug, glib satisfaction in policy circles. Specifically, it's led to the widespread perception in the community that no further economic reforms are needed.

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This is wrong. After all, the Australian economy remains only half reformed and fully 'globalisation fit'. So instead of taking a pause, blinding themselves to the reality that the forces of globalisation do not rest, our policymakers should fully embrace the free markets, individual enterprise and global capitalism. In so doing, they should look to the lessons of economic history.

A look at 250 years of economic history shows recurrent patterns of 20-30 years of growth acceleration that are carried by innovations and new leading, as-yet-unregulated industries. Steam and rail once played this role, later electricity and motor cars, lately the e-economy. Stable prices, low interest rates, and low social conflict typically help the supply potential to grow fast.

Alas, such exhilarating phases have always been followed by 10-20 years of deceleration and disappointment, such as in the 1930s and 1970s. Then, it typically becomes harder to profit from technical opportunities, as imitators crowd in.

New regulations and taxes burden the leading growth sectors. What is now for example occurring are high fiscal burdens on third-generation telecoms, as governments artificially limit the supply of licenses and then pocket billions of license fees obtained at auctions. The economic tide turns often when unexpected raw-material bottlenecks emerge. Is the recent oil price explosion a harbinger of a cooling in the global growth climate?

Social conflicts and ruthless redistribution battles typically increase. Labour becomes more aggressive and manages to gain clout. The reregulation of New Zealand labour markets, with compulsory unionism, higher minimum employment conditions and growing 'administrative guidance' is typical of coming downwaves. And it should be noted that the reactionary labour market policies in Wellington are eagerly watched by the newly reform-shy ALP.

International competition comes under populist attack. One is reminded of the blinkered economic nationalism of the 1920s and 1930s that created the Great Depression when one listens to the Single Issue Promoters that protest in Seattle and Melbourne.

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Finally, decelerating supply-side growth is often accompanied by growing security burdens. Prospective Australian defence reactions to more instability to our North would fit historic patterns.

To be sure, none of the points makes a rerun of the 1930s or 1970s an immediate prospect. But an intelligent reading of the history of long waves of economic growth should forewarn us: We ought to think about coping with the prospect now while the going is good. When the easy global supply growth ebbs away, the ill-prepared are always hit hard.

The next time round, globalisation will accelerate and reinforce the impacts of bad policies.

Australia is still a small and peripheral player. To be noted in the world's decision-making centres, we have to be more competitive and creative than those at the centre.

To attract investments, skills and knowledge, we have to offer more hospitable institutions, simpler and better laws that are reliably enforced. And legislation must not discriminate between citizens and classes of people.

Against this background one has to note the sad fact that the volume of Commonwealth legislation in the 1990s - the rhetoric about deregulation notwithstanding - has exceeded the cumulative page volume from 1901 to 1990! Quarterly Business Activity Statements and frequent tax returns are not the way to go.

Discriminatory redistribution schemes, specific subsidies to specific industries, R&D policies, political selection of what next-generation telecom we will be able to use and develop; these are not the way to become an attractive high-flier in the era of globalisation.

Our political leaders need to protect our economic freedom better.

And that means small government. The entire public sector should not claim more than 25 per cent of the national product, down from 32 per cent now, but very reasonable by historic standards.

Outright expropriation of private property is not an issue in this country, but property owners lack actionable rights for compensation if parliaments diminish the value of their property by regulation. Much international credibility could be gained by a strict regulatory constitution that subjects the visible hand to a new, strict discipline.

To make Australia fully 'globalisation fit', there is a need to impose formal, constitutional limits on the size of budget and deficits. Confining the Reserve Bank's task explicitly to the only job a central bank can nowadays do - producing stable money - would also be a good idea.

And while the Australian Constitution looks competitive, much historically grown, politically opportunistic overgrowth could profitably be pruned back. The centenary of Federation is a good opportunity to reflect about the big constitutional design by which we live.

There is also a need to think about how the judiciary can be made to return to cultivating the law and to desist from social engineering. Under globalisation, we need clear rules to proscribe harmful behaviour. We do not need prescriptive tinkering with market outcomes by ill-prepared judges.

In the open economy, government should concentrate on its protective function, defending the taxpayers against external assaults and cultivating sound general internal rules that lower the transaction costs of doing business.

There's still much room for cutting back the productive function of government by privatising schools, hospitals, health insurance, telecom, rail and other relics from an earlier era.

And the power of central government should be significantly curtailed. After all, the redistribution by coercive government has been the real growth industry of the late 20th century. This is now endangering the prosperity and governability of many Western welfare states.

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This article first appeared in the Australian Financial Review on December 12 2000.



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About the Author

Professor Wolfgang Kasper is a Senior Research Fellow at the Centre for independent Studies.

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