Weatherproofing our Prosperity
By Wolfgang Kasper
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With its half-reformed policy framework, Australia is ill-prepared for a possible slowdown in global economic growth.

The 1990s were a period of accelerated economic growth. In Canberra policy circles, this has paved the way to smug triumphalism and suggestions that all necessary reforms have been done to ensure a comfortable future. Political attention has turned from Ôeconomic rationalismÕ and wealth creation to Ôsocial justiceÕ, Ônation buildingÕ and other wealth-consuming priorities.

Yet if history is any guide, the good times will not roll on indefinitely. AustraliaÕs economic structures and institutions look far from resilient enough to weather a cooling in the global economic climate. Now is the time to weatherproof our prosperity.

The current smugness in policy (and some business) circles is oddly reminiscent of the self-satisfied worldviews prevalent in the late 1960s, the 1920s and the ÔFederation BoomÕ when economic growth exceeded expectations as innovations fuelled new, as-yet-unregulated industries. At the start of the 20th century, electricity, the telegraph, chemicals and new urban development propelled a wave of accelerated economic growth. In the middle of the 20th century, motor cars, jet transport and automation fuelled AustraliaÕs Ônew economyÕ. Now, it is information technology, communications and globalisation. In each case, however, accelerated growth was followed by an unexpected slowdown and disappointment, such as during the 1930s and the 1970s. Similar patterns had shaped development in the 19th century.

Long waves of economic growth

The Australian experience fits a general though loose pattern of long waves of 20-30 years of accelerating growth followed by 15-20 years of deceleration. The phenomenon has been named ÔKondratieff cycleÕ after the Russian statistician who demonstrated that economies run periodically into bottlenecks, rigidity, low profits, stalling investment and social conflictÑvery much as Karl Marx had predicted in his major opus Das Kapital. But Kondratieff also found that after a decade or two the capitalist crises were overcome. The great Austrian-American economist Joseph A. Schumpeter showed how the capitalist economy tended to reinvigorate itself, as entrepreneurs created new, as-yet-unregulated growth industries.1  These long waves are a phenomenon of the supply side of the economy, that is the structure and flexibility of the production apparatus. They have little to do with the familiar three- to five-year business cycles in aggregate demand.

In the late 1970s, I used this supplyside approach to advocate deregulation and the opening of the economy.2  The real reasons for AustraliaÕs poor economic performance were a closed economy, pervasive political meddling, industrial rigidities and excessive state ownership of productive resources. At the same time, emerging technologiesÑin particular, the infotech revolution, new materials, biotechnology and energy savingÑpromised to become the engines of renewed worldwide growth. Some of us asked: What can this relatively young, well-endowed and well-placed nation do to be amongst the forerunners of the emerging Kondratieff upswing?

Our analysis led to considerable debate and became the basis for deliberations in a loose group of leading academics, parliamentarians, business leaders and publicists that called itself the Crossroads group.3  Unfortunately, Australians failed to catch the new wave because of the unimaginative, protectionist policies of the Fraser era. A belated start in the right direction was made by appropriate but selective economic reforms during the Hawke-Keating years. But instead of distributing adjustment burdens across the board, the government exempted labour markets, socialised welfare provision and itself. Consequently, many Australians suffered from the uneven impact of liberalisation. Eventually, after a little more reform by the Howard government, we were swept into the Ôgolden 1990sÕ.

Now the crucial question is: How can we prepare for a cooling of the global economic climate? Growth typically subsides after some two to three decades as the benefits of new technologies are exhausted and new industries become enmeshed in webs of stifling regulation. Seen from this angle, one cannot look beyond 2005 with smug complacency.

Harbingers of slower growth

The big patterns of economic history admonish us to watch for possible harbingers of a coming economic deceleration. Previous Kondratieff slowdowns were associated with food and raw material shortages; rising input prices for the urban-industrial sector and higher costs for investors and producers; rising pessimism and a swing from enterprising to defensive societal attitudes; regulatory rigidification; and sharp distribution battles between governments, workers and businesses.

Should we consider the petrol price rises of 1999-2000 as an early warning sign of things to come? Do the weakness of the Australian dollar and AustraliaÕs high and growing international indebtedness foreshadow an end to the present prosperity? Should we see the growing protests by anti-globalisation anarchists, renewed union activism and increases in protectionist sentiment as indications that the tide is about to turn? Is the sympathy of politicians and industry leaders for single-issue activists a sign that their commitment to free trade, competition and private initiative is waning? Are Internet-driven campaigns against biotechnical innovation a manifestation of a new Luddism? Will the rapid advances in the internationalisation of trade and investment lead to political backlashes? Will costly government licenses of third-generation telecoms choke off the growth impetus in that industry? Will possible security threatsÑfrom Asia, the former USSR, growing illegal migration and rising international crimeÑraise AustraliaÕs security costs, making growth harder?

None of these questions can be answered with a confident ÔnoÕ. Although deceleration of global economic growth is not imminent, it seems sufficiently likely to induce a rethinking of the half-reformed policy framework, and to remind ourselves that political opportunism can quickly unhinge beneficial exchanges and investments.

Governance under scrutiny

Without doubt the rapid advance of globalisation has changed the fundamental rules of political governance. Past policy designs that served us well, or did not hurt overly, may now be a serious handicap. Globalisation challenges the institutions by which we cooperate and to which we cling because institutional change often seems troublesome and costly. We have to adapt internal institutionsÑfor example our work ethics, and habits of saving and spendingÑand the political rules (external institutions).4 

The quality of institutions can make a huge difference to economic well being and security. Economic freedom is now essential for productivity and living standards. Detailed, outcome-oriented regulations of markets and opportunistic political cartels in parliament undermine secure property rights and the freedom of individuals to experiment in the marketplace, thus hampering economic growth.

This is borne out by the pick-up in the pace of Australian economic growth from an average 2.8% p.a. between the mid-1970s and mid-1980s to 3.9% p.a. since the recession of 1992. This improvement would not have been possible without the preceding changes in the rules that govern macroeconomic and monetary management, international trade and investment, and the freedom to work, start new businesses and create jobs in domestic markets.

As expected, liberalisation also enhanced the gains derived from the use of knowledge and skills rather than work and capital investment (Ôtotal factor productivityÕ). Skills, knowledge and restructuring are now contributing some 2.5 percentage points annually to aggregate growth, up from the traditional 1 percentage point. Undoing many dumb regulations has made Australia a more clever and prosperous country. These gains can be increased further by shrinking government and freeing up labour markets, the waterfront and the professions. Such liberalisation would probably enable Australia to attain an aggregate growth rate of around 5% p.a., or about 3ý% per-capita. Then we would really begin to utilise our great potential and close the gap with the leading economies, such as the United States.

Economic growth depends on the quality of regulations, not their absence. It is hampered by opportunistic parliamentarians and executives setting up prescriptive interferences to mandate politically opportune outcomes and to redistribute incomes earned in markets. Such interventionism distorts market signals and disenfranchises the citizens whom politicians are meant to serve. The worst enemies of economic progress in Australia sit in parliaments where political cartels (parties) typically vie for re-election and political advantage instead of serving the citizens. Public administrations, unions and favour-seeking businesses connive with parliamentarians to extract political favours, thus helping to erect political obstacles to prosperity.

If parliamentarians and administrators desist from creating privileges and concentrate on producing simple and secure institutions that subject everyone to the same rules, people can confidently pursue long term plans. This means neither anarchy nor chaos. The market economy and civil society function well when the rule system focusses mainly on prohibiting fraud and the abuse of force and power. In a complex and dynamic world, governments should support a market order in which individuals can act with confidence and low compliance costs. AustraliaÕs institutional regime does not do that job very well.

As in other mature democracies, political party machines dominate rulemaking. They thrive by surreptitious favouritism, arrogating knowledge that no politician or political adviser can have. In Australia, specific regulations have mushroomed, notwithstanding the rhetoric of deregulation. The Commonwealth Parliament alone inflicted over 40 000 pages of new legislation during the 1990s, more than the cumulative aggregate from 1901 to 1990.5  This plays into the hands of single-issue lobbyists, but damages the common good. Ordinary citizens can no longer understand most legislation or pay taxes without hiring agents, who themselves are often confused. The 300 pages of detailed prescriptions in the Workplace Relations Act, for example, were bound to turn a supposed reform into failure. In addition, Australian judges are increasingly attempting social engineering instead of cultivating laws that average citizens can understand and obey.

Competing from the periphery

Good governance will be essential in the future because international capital flows and trade are now responding faster and more pervasively to poor institutions and intrusive governance. The now dominant service sector also depends on good institutions. When Australians operated in a closed economy, overbearing government and economically irrational industrial relations could be sustained. Now grandstanding employer and union representatives inflict greater harm, and economically challenged quasi-judges cannot know what makes Australian jobs world competitive. Instead, they produce unemployment which economists call ÔnaturalÕ.

The task is no longer to ÔreformÕ industrial relations, but to replace the system by secure and simple work contracts under the common law. Nor is the burden of pervasive social welfare affordable any more. In 1995, taxes and handouts redistributed some 18.7% of the national product. Sometimes, statistical comparisons with the ageing and sluggish welfare states of Europe are used to show that Australian public welfare expenditures are Ôbelow the normÕ. Such comparisons are invalid. Ours is a much younger population. We aspire to better job opportunities than those in Europe and compete with the US and the new industrial countries of East Asia, where welfare has remained a private matter and a family responsibility.

Progressing globalisation accentuates one fundamental problem for Australian public policy that is poorly understood. Although the traditional Ôtyranny of distanceÕ has disappeared, a Ôperiphery handicapÕ persists. Australian producers are not automatically noticed and in demand in the global centres; we are too small and distant. To thrive in the global economy, operators on the periphery have to be more attractive than those at the centre. This was clearly understood in peripheral Singapore, which made itself highly competitive by offering good productivity and reliable institutions. Over time, as foreign capital, technology and enterprise came in, Singapore incomes and tax revenues rose. Singaporeans now enjoy average incomes some 40% higher than Australians do.

Australian policy used to address its pronounced historic periphery handicap through specific interventions: assisted passages, tariffs and other preferments for selected businesses. In the process, interventionism proliferated and rigidified the economy. The reforms of the 1980s corrected this, coincidentally at a time when the costs of long-distance transport and communications dropped dramatically. But the periphery handicap is still with us. The only way to succeed as a successful global player is to outperform those in the centres, such as New York, Tokyo and along the London-Frankfurt-Milan axis.

To protect or to compete?

Lowering wages and taxes is one way to compete, but this would not be an attractive alternative for a high-income country like Australia. It would be socially divisive and disheartening. The only way to unleash productivity growth is through a thorough and systematic overhaul of the institutional framework. Admittedly, such reforms inflict losses on those workers and capital owners who refuse to redeploy their assets in the process of ongoing competition. In future, parliamentarians and policy advisers should not be permitted to side with the well-connected who are unwilling to compete.

International perceptions of Australia are not helped by an uncertain commitment to the reforms adopted so far. Recent opportunistic shifts have distanced the Australian Labor Party from the reform record of the Hawke-Keating era and foreshadow more union-friendly labour market regulations and bigger spending. This has been noted internationally. Moreover, the example of New Zealand, which went from star reformer in the early 1990s to smug complacent drifter and then to ham-fisted regulator of labour markets and the environment in early 2000, does not help the Australian position. It is apparent that neither major Australian political party is nowadays committed to advancing economic freedom; Ôdry politicsÕ is considered passŽ. This is now factored into international investor assessments and currency valuations.

Weatherproofing our prosperity for a cooling in the global economy will require a fundamental change in outlook among the public, the press, parliament and executive government. Standard comparisons with the past make Australia look good, but the relevant benchmark is the comparison with the freest economies. Failure to aspire to be amongst them would be a betrayal of future generations.

Constraining parliament and executive

Good, internationally competitive governance will require new and effective constraints on parliamentary and executive opportunism. Lord ActonÕs dictum that power corrupts, and absolute power corrupts absolutely, also applies to parliaments and governments. The Westminster system, in which parliamentary majorities enjoy fairly absolute though temporary power, has helped to erode individual liberty and creates an inherent uncertainty about the fundamental rules of coordination. Rules can be made and unmade in committees where 51% or a few interested individuals shape the agenda. This suits political parties, but is rarely conducive to private trust and confidence. There is a need for new constitutional safeguards against political opportunism, party discipline regardless of basic liberties and the influence of single-issue groups over legislation and regulation.

Around the world, numerous constitutional innovations are now being discussed to constrain parliamentary opportunism: changes to electoral laws; a high court or third chamber that imposes universal principles of non-discrimination; citizen-initiated referenda; non-party methods of candidate selection; rights of recall; and strict constitutional limits on the budget expenditures and public loans in peacetime. Such devices are worth examining in the Australian context, too, if Australia is to develop government for the open dynamic service economy of the 21st century and is to remain governable.

One critical point is the better protection of private property. It is true that property is well protected from outright seizure without compensation. But private rights to dispose of and use what one owns are regularly abridged by regulations. If this country is to compete in attracting financial, physical and intellectual property, the taking of freedoms to dispose of oneÕs property by regulation and without compensation needs to be outlawed. Of course, agreed collective purposes sometimes need to be pursued by interventions, but government should then compensate the private owners whose property rights are taken away.

Modest government

When the current growth wave begins to subside, heavily indebted players (such as Australia) may be forced to take painful emergency action. Producers will have to respond quickly and constructively. A system will have to be in place that allows affected players to use their individual knowledge and resources to respond creatively. Secure economic freedom based on good institutions will be decisive. It would be perilous to repeat the mistakes of the 1930s and 1970s by persisting defensively with yesteryearÕs ideas.

The centenary of Federation would seem a good opportunity to re-examine the constitutional ground rules and initiate overdue institutional house cleaning. The aim should be to make governments more modest and oblige them to concentrate on what they can do best, namely protecting the law.

Modest government will require a recasting of the welfare state. Massive redistribution distorts market signals and creates huge disincentives. Governments cannot engage in confiscation and redistribution and credibly enforce private property rights at the same time. Public welfare will have to focus on genuine misfortune and poverty. The normal provision for a rainy day should be left to the family and voluntary help. In any event, a lighter tax burden will empower many more citizens to look after themselves.

In addition, much public production of goods and services is still to be transferred from costly government monopolies to competing private producers. Modern measurement and information technology now enables private enterprises to compete in previously public areas. Thanks to transponders, for example, motorists may soon get monthly usage bills for road use, similar to electricity bills, and pay lower motor taxes. Education and health care for all can certainly be provided without socialised production of these services. The era of public mega-hospitals and government-run schools is likely to end. Past issues of Policy are full of other cases where privatisation and competition promise to have advantages over the present Ôone size fits allÕ method.

People have become more cynical regarding politiciansÕ promises and programmes. The list of broken electoral promises is longÑtax cuts supposedly written into ÔL-A-WÕ, the building of certain facilities, the provision of jobs, the eradication of child poverty, improved Aboriginal health outcomes, enhanced services and amenities, and so on. If political parties continue to dream up more and more new public activities that governments cannot deliver in the era of globalisation, and if these grand plans drive up tax burdens, Australia will become ungovernable.

I estimate that the share of government could be pruned back to 25% in national expenditure instead of the present 32%. Politicians and bureaucrats will of course resist such reductions. They have in recent years shown little taste for cutting public programmes, alleging that private markets would fail to supply much-needed goods and services. But political entrepreneurs who understand the new competition between governments will sooner or later offer voters considerable cuts in public spending and taxes.

Competitive federalism and administrative innovation

A redistribution of the various tasks of government seems urgent. The Australian federation has long been subjected to political and judicial centralisation, to the extent that many now doubt the usefulness of State and local governments. Yet much can be said for devolving government tasks when the conditions of life become more diverse and changeable. Once people are exposed to the forces of global competition, they appear to cherish local identity and community.

When international economic integration was limited and most capital was invested where it had been saved, governments enjoyed considerable monopoly powers within their jurisdictions. Globalisation has begun to change that. As a consequence, interjurisdictional competition is now essential to stimulate creativity in governance. Organisational innovations are being tested to cut the unit costs of public administration and improve customer service. What matters is how reliable, confidence-inspiring and expedient government services are. In Australia, this requires much cultural change in public administrations and parliaments.

An excellent school for competitive government is intra-State competition within federations. Australian State governments and voters began, for example, to learn important lessons when the Newell Highway became a one-way road from Victoria to Queensland. Since then, Victoria has turned into an administrative innovator that sets standards for other States.

AustraliaÕs centralist federalism is not a good test ground for overdue administrative innovations. What will be required is genuine competitive federalism, based on the principles of subsidiarity. What can be done at State level should not be done by the Commonwealth. It should only be assigned tasks in which the centre has demonstrated advantages, for example in defence, foreign affairs and setting common criminal law or communication standards. There should also be an exclusive assignment of specific public tasks to only one level of government. The administrative duplication of parallel federal and State health and education bureaucracies are burdens which internationally competing taxpayers will soon not be able to afford.

Competitive federalism also requires fiscal equivalence. Each State must have the autonomy and the political responsibility for raising its own taxes to finance its own expenditures. The present practice of vertical fiscal remittances, tax sharing, hierarchical controls and top-down meddling is a fossil from the socialist, closed economy era. Under fiscal equivalence, each State determines and raises its own taxes. A welcome by-product of such fiscal self-responsibility would be that the perpetually mendicant States will be forced to adopt policies to cultivate their own tax base and tailor their spending aspirations to their resources.

Competition only works if competitors are obligated to play by the rules. Just as the most-favoured nation clause in international trade prevents discriminatory actions by nations that would destroy world trade, competitive federalism requires the prevention of wasteful Ôsubsidy warsÕ between State governments. States have to be barred from offering preferential subsidies to lure potential investors by a new non-discrimination rule.

The level of government that affects most citizens most directly is local government. It is also responsible for much of the spreading disaffection with government. Some simply accept that local governments are badly run. In reality, local councils suffer from poor institutional design. At present, local authorities have little interest in cultivating local economic development. The principles of subsidiarity and non-discrimination in administration can and should be applied to local government. If local communities had to raise their own funds locally, they would facilitate economic growth from the bottom up. At the same time, much community spirit and creative local action can be mobilised if local councils have real responsibilities and have to compete. Australian traditions of local civic engagement should be revived, and not only for material reasons.

Conclusion

A robust economic constitution requires a political constitution that controls the governmentÕs powers. In Australia, parliamentarians no longer control the executive. This failing is made more evident by globalisation, but the insight is not new. As far back as 1801, US President Jefferson defined what is essential for Ôa happy and prosperous people . . . a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government.Õ It is also the sum of what is needed in the 21st century.

Endnotes

 1 ÊÊÊÊÊÊÊÊÊ J.A. Schumpeter, Business Cycles, 2 vols (New York: McGraw Hill, 1939). See also W. Kasper, R. Blandy, J. Freebairn, D. Hocking, and R. OÕNeill, Australia at the CrossroadsøøOur Choices to the Year 2000 (Sydney-New York: Harcourt Brace, 1980), 22-24.

 2 ÊÊÊÊÊÊÊÊÊ W. Kasper, ÔAustraliaÕs Economic and Industrial Structures: Past Patterns and Prospective TrendsÕ, in W. Kasper and T.G. Parry (eds), Growth, Trade and structural Change in an Open Australian Economy (Kensington: Centre for Applied Economic Research, University of New South Wales,1976), 90-124; and Kasper et al., Australia at the Crossroads.

 3 ÊÊÊÊÊÊÊÊÊ A good account of the intellectual history of reform and the role of the Crossroads study in the reform debate is given in Paul Kelly, The End of Certainty (Allen & Unwin: Sydney, 1992), 40-43.

 4 ÊÊÊÊÊÊÊÊÊ For definitions and details, see W. Kasper, Property Rights and Competition (Sydney: The Centre for Independent Studies, 1998), ch. 3.

Institute of Public Affairs, Facts 42:1 (2000): 2.

Author

Wolfgang Kasper is Emeritus Professor of Economics, UNSW, and Senior Fellow, The Centre for Independent Studies (CIS). This article outlines some key ideas in his new CIS book, Building Prosperity: AustraliaÕs Future as a Global Player.

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