ADDRESS TO THE

CENTRE FOR INDEPENDENT STUDIES

CONSILIUM CONFERENCE

HYATT REGENCY, WARREN ROAD, COOLUM

THURSDAY, 7 AUGUST 2003

Over most of the 20th Century there was a substantial rise in the size of government

and the regulation of the economy in the Western democracies. In the US there

was the New Deal, World War II mobilisation and Johnson’s Great Society.

In Britain things got cracking with the Labour Government’s creation of

the Welfare State post-World War II.

The predominant economic orthodoxy, Keynesianism, gave the State a pre-eminent

role in managing demand.

Whilst the Welfare State proceeded at different paces in different countries

under different governments the movement was always in the direction of increasing

the size and role of government. Under the Whitlam Government, perhaps the climax

of the welfare state fantasy in Australia, Commonwealth expenditure increased

41 per cent in Frank Crean’s 1974 Budget.

In the 1970s think tanks were established to begin the counter-revolution of

promoting a different organising agenda, embracing the ideas of liberty, choice

and the market. In Australia one of those think tanks was the Centre for Independent

Studies. In the UK the Centre for Policy Studies was founded in 1974 to promote

ideas such as privatisation – a proposal not just to slow the growth of the

welfare state but to actually reverse its direction.

These ideas of liberty, choice, and the market were not new, but they were

updated and re-invigorated in this period. Gradually over the last 30 years

the concept of the market as principle driver of economic growth has moved from

an eccentric fringe idea to a central organising idea for economic policy.

The process was very much aided by the collapse of communism. Before that from

the beginning of the 20th Century there was a competing economic model, which

had its own economic text and its national champions. In some periods it had

successes such as the rapid industrialisation of the Soviet Union in the 1950s.

When Kruschev pounded his shoe on the UN Podium in New York in 1956 and claimed

“We will bury you” he was making an economic claim.

By the 1980s the game was up with Communism. As an economic system it had failed.

And no sane person could pretend otherwise.

Once this economic idea failed and was acknowledged as a failure by nearly

all of the countries that had tried it the liberal-market model went virtually

unchallenged. It is the model that the international Agencies, such as the IMF

and the World Bank, recommend to emerging and developing countries. In later

years the OECD (much more heavily influenced by the Europeans) has been increasingly

supportive of pro-market reforms.

In Australia, at times, this idea has held sway in the Labor Party. Labor privatised

Qantas and the Commonwealth Bank. But the support is shallow and fickle. Labor

opposes the privatisation of Telstra. Labor supported deregulation of the financial

market but it has never supported, and never will support the deregulation of

the labour market. There are times when Labor has supported economic reform

– option C in 1985 – and times when it has opposed economic reform for

all it was worth such as the introduction of the New Tax System in 2000.

Sometimes Labor wants to portray itself as in favour of economic reform –

in which case everything good that has happened in Australia arose from the

Hawke/Keating years. But mostly Labor wants to oppose economic reform in which

case every ill in the economy can be sheeted home to the Coalition. Whatever

it says however, Labor’s voting record is ruthless in combining with the

Greens and the Democrats to stop economic reform in the Australian Senate.

There are many opponents of the liberal market model but they have failed to

come up with a competing organising idea.

For a while the Third Way was put forward for this purpose. It was to be the

new organising principle between socialism and market capitalism. But I do not

know how many true believers in the Third Way there are in Australia. At last

year’s Consilium Peter Botsman genuinely and thoughtfully defended it.

The Third Way had its height under the Clinton Administration (Sidney Blumenthal

in his recent book tries to explain it) and was the guiding mantra of Tony Blair

and ‘New Labour.’

The Third Way in the UK was a device for taking the benefit of most of Mrs

Thatcher’s reforms and, whilst refraining from reversing them, not actually

endorsing them. The Third Way allowed people to argue that whilst they had been

right to oppose economic reform, because of the way it had been done, there

was no point reversing it now. This is how Labor reconciles its position on

GST here in Australia.

But when it came to Iraq, British Labour’s Third Way didn’t look

all that different from the Bush Administration’s First Way. Most of the

Australian Left and Labor were passionately opposed to the Coalition of the

Willing in Iraq. The purpose of the Third Way had been to make people think

that they were modern and pro-market and progressive like Tony Blair. But on

Iraq they didn’t want to be like Tony Blair at all. So all of a sudden

there was a bit of a lull from the exponents of the Third Way. When they resurface

it will be either to bury the Third Way or to explain to us how Tony Blair himself

fell apostate and departed the true Third Way which has always been properly

understood to oppose the allied engagement in Iraq.

Whilst the liberal market economic principle is not seriously questioned in

a theoretical sense, this does not mean that many countries are actively pursuing

it in a practical sense. Economic reform almost always threatens entrenched

interests and entrenched interests usually have political clout. And political

opposition is a powerful barrier to economic reform.

The political opponents of economic reform are well known. In Europe under

the Common Agricultural Policy we think of the French farmers opposed to reform,

in Japan there are the rice growers, in the US there are the steelworkers. In

Australia the opponents of economic reform are politically entrenched as Labor

Senators.

But notwithstanding these opponents of economic modernisation, Australia’s

progress has been better than many other countries and the pay-off has been

better. This is not just a theoretical issue for us. We have practical experience

of pro-market reform. We are now one of the world’s principal case studies.

And the results have been overwhelmingly positive.

Critics of the left and the right foreshadowed there would be huge failure

and human misery from these reforms. In 1992 John Carroll and Robert Manne wrote

a book called: “Shutdown: The Failure of Economic Rationalism”.

Critics on the left such as Michael Pusey forecast inequality and misery which

they still believe they can or will find to prove this has all been a great

failure. But unfortunately for them things have not gone so badly. Some on the

left have even brought themselves to acknowledge reality.

Clive Hamilton, Executive Director of the Australia Institute, in an address

to the National Left/Trade Union Conference in May 2002 said this:-

“Difficult as it may be to admit, social democrats and democratic socialists

have a psychological disposition to believe that a mass of people are suffering

from material deprivation.”

“But we must face up to the facts of today’s world. While rooted

in historical fact, the left’s deprivation model is today the opposite

of the truth. The dominant characteristic of Australia is not deprivation

but abundance.”

“In real terms, Australians today are at least three times better off

than their parents were after the war, and the fact is that the distribution

of income is about the same. Unpalatable as it is to concede, inequality is

not substantially greater than it was forty years ago.”

Even more importantly Australia has improved its position as against the rest

of the world. Particularly since 1997 Australia’s economic performance has

shone out compared to our region and the rest of the developed world.

Australia is now increasingly held up as a model for other countries. It was

not always the case.

In 1990 I was particularly struck by an interview given by Lee Kuan Yew to

mark the 25th anniversary of Singapore’s independence. When asked about

Australia’s performance, as against Singapore’s, over that period

he said this:

“There is an unfortunate cliché: Lucky Country. It means Australians

don’t have to make the effort. Nature’s working for you. God’s

on your side.”

The point Lee Kuan Yew was making was that countries like Singapore, which

had no ‘luck’ knew they would have to work to make their future.

He believed this would be a strength for Singapore. He believed our ‘lucky’

position would become a weakness for us.

I think Australians also came to see this attitude as a weakness. And the focus

on economic reform underlined this point. The message of economic reform was

that we could not rely on luck. We could not rely on fun-loving, beach going,

happy-go-lucky attitudes. Australia would have to change to make its future.

And we have. Over the last 20 years, Australians have increased average working

hours, for fulltime workers, from 38½ hours to 41 hours per week. Whilst

part-time work has increased the number of average hours for part-time workers

has also increased.

More importantly Australia’s productivity (GDP per hours worked) growth

lifted to average 2.3per cent per annum in the late 1990s making Australia one

of the standouts in the OECD. By the late 90s productivity growth was double

the rate of the late 80s.

When I first became Treasurer in 1996 processions of businessmen would visit

and urge me to adopt the Asian model of economic success which involved guided

investment, relational lending between banks and business, development projects

that were promoted by or the subject of investment by Government Agencies. The

Japanese MITI was considered an enormous success in those days. These days I

am rarely urged to follow this example.

Back in the early 1990s there was a lot of interest in the Asian model. And

it is not hard to remember why. In the period 1980-1997 the four “Asian

Tigers” – Korea, Taiwan, Singapore and Hong Kong averaged 7.3 per

cent growth per annum, considerably more than double Australia’s average

annual growth of 3.1 per cent. However in the last five years 1998-2002 Australia’s

average growth lifted to 3.8 per cent, and growth in the Tiger economies more

than halved. Australia equalled the average annual growth rate of the Asian

Tigers over the period. In this period either we became tigers or they became

tame. Like the Asian Tigers we lived through a US recession over this period,

unlike them we lived through extreme drought. Unlike us they succumbed to the

Asian financial crisis.

So our country has changed and our prospects have changed. We should see ourselves,

as others do, as a case study of the benefits of economic reform.

And if we have a healthier view of our position we would be more resistant

to fads. In the 1980s the ACTU had a program called “Australia Reconstructed”

which wanted us to follow the Scandinavian model of big government and regulation.

In the 1990s it was the Asian model of the guided economy. In the early 2000s

it was the New Economy – ICT model that was supposed to be leaving us

for dead. This model reached its zenith of popularity amongst writers and opinion

leaders just at the time it was falling apart. I recall giving speech after

speech on the subject pointing out that manufacturing ICT was not the point,

harnessing it for use in all sorts of industries including the “Old Economy”

was where the value could be obtained. But no-one was much interested.

People who spruik a new model for the economy usually have a new model tax

break that is required to encourage or facilitate it. And the one thing they

don’t want to hear about is an open economy with strong competition where

goods and services that do have a market are profitable and those that don’t

aren’t. In a market economy you have to let companies fail. That is how

investment gets directed out of unproductive uses and into productive ones.

Australia is a model of the way medium term and strong fiscal policy, structural

reform and opening up markets increases competitiveness and economic growth.

Other Anglo countries have had success with some of these reforms. Some of the

central European Countries have been successful and, overall, I would class

East Asia and South Asia as having been successful in moving towards market

reform. One of the reasons why this has been more successful in the Anglo Countries

may be the nature of the society or the nature of the social capital we have

in our societies.

But success stories in Africa are hard to come by. And there is no real model

of a vibrant market economy in the Arab world. There are rich countries in the

Arab world – Saudi Arabia, the Gulf States, but they are not liberal market

economies and they have extreme income inequality.

As the process of rebuilding Iraq begins, which of its neighbours provides

the best model for it to emulate?

I think that our strong economic story has given Australia confidence in other

areas. It has helped to market the country for investment purposes. It helped

to showcase “know how”and increase the export of services to the

region and the world. It has helped our business and professional people who

are now sought out all over the world and the Australians who head some large

global companies. The sporting successes, the accomplishment and success of

Australians in the film industry, and the success of the Sydney Olympics were

also important for a sense of achievement on the world stage.

The role of Defence personnel has also demonstrated Australia’s capacity

to take its place, with allies, in significant military operations in Iraq and

Afghanistan. And the lead role in peace-keeping operations in East Timor and

the Solomon Islands is consistent with a country able to give positive (and

expensive) leadership in the region.

We recognise and value our elite sportsmen and women. We recognise and value

our elite soldiers, like the SAS. We should recognise and value our elite scientists

and researchers. The word ‘elite’ is mostly used for disparaging

purposes in politics these days. It is designed to mean unrepresentative. But

let us be careful not to denigrate achievement or excellence. People who do

achieve by talent or work or ingenuity may be in the minority, they may be out

of step with the rest but their achievements can inspire others to achievement

and their achievement should be acknowledged.

Our under achievements in policy are in the areas where reform has been the

least – mostly blocked by vested interests. Unemployment could have been

lower by now. Many more Australians could be in work if the labour market had

been opened up more and if the welfare system could be better targetted. Universities

could be giving higher standards of education if they were freed from the shackles

of centralised control and funding models. Schools could be giving better education

if they were more responsive to parent’s wishes and were rewarded according

to educational successes. Excellent achievement and elite performance in education

are things we should aspire to just as much as we aspire to elite performance

in the sporting arena.

And we should aspire to achievement in economic reform. Just as the work of

previous years has produced benefits today – the work of today will determine

the opportunities of tomorrow. There is still so much to be done.