Unlike in 1891, deliberate if tentative policies were adopted in response: a large currency devaluation against the British pound (which had itself depreciated against gold and the US dollar); limited expansion of public works as unemployment relief; wage and interest rate cuts; and measures to ease the burden on the unemployed. These policies were conceived within an explicit if incomplete framework of shared sacrifice. They were developed, with the assistance of most leading economists, by the Scullin Labor government in its dying days in 1931 and implemented by the Lyons conservative government. The new policies helped bring about a recovery more rapid than in Britain and much more so than in the United States.
The Great Depression left a legacy of even more pervasive regulation and diminished prospects for economic growth. The regulation of external trade and payments was extended during World War II, and its aftermath saw restrictions continue in response to foreign exchange shortages in the British-led Sterling Currency Area, of which Australia was part.
A spike in demand for wool in 1950 and 1951, with tension and then war on the Korean Peninsula, lifted Australia’s terms of trade to unprecedented heights. The temporary surge in export prices generated a burst of high inflation. These were Salad Days of economic policy. The economists’ Keynesian insights from the 1930s were moulded into policy by advisers brought together under Curtin and Chifley and retained by Menzies after 1949. The community grumbled but was tolerant of restrictions on short-term private consumption for long-term national gain. After a short and shallow recession, inflation quickly fell to low levels. The second of Australia’s long booms followed, lasting till the early 1970s (only broken by a brief recession in 1960–61). Until the late 1960s, the country saw high productivity growth by previous standards – although it was well below contemporary performance in other developed countries. There were only modest expectations of rising incomes, combined with consistently low unemployment alongside high immigration and population growth.
A JAPAN RESOURCES BOOM FOLLOWED BY INSTABILITY
The early restoration of healthy trade and diplomatic relations with Japan after the war was an achievement with economic as well as strategic dimensions. Japan’s post-war industrialisation brought the centre of gravity of the global economy closer to Australia. Reduced transport costs created new opportunities for the export of bulk commodities: iron ore, coal, and raw and lightly processed aluminium and nickel ores. Through the 1960s, small towns grew rapidly and new towns appeared in remote regions of northern and western Australia.
Australia’s terms of trade rose in the early 1970s to the highest levels since the Korean War boom as Japan’s industrial growth approached its apogee, and energy prices were lifted by restrictions of oil supply in the Middle East. Our terms of trade increased by 46 per cent in three years from December 1971 (a low point). Australia spent most of the higher income as the money was received. Between September 1970 and September 1974, a burst of inflation and belated currency appreciation lifted the real exchange rate by what was then an unprecedented 17 per cent. The Australian econometrician Adrian Pagan, cited by Ian McLean in an important recent economic history of Australia, described this rise in the real exchange rate as ‘disastrous’ and as bringing the post-war boom to an end.
The higher oil prices were the immediate trigger for a global slump. The developed countries in the northern hemisphere entered recession, and Japan shifted gears from rapid to moderate growth in 1974. Commodity prices declined swiftly, leaving Australia hopelessly uncompetitive with its high real exchange rate. The nominal exchange rate fell from late 1974, but real incomes didn’t, which entrenched high inflation despite recession. Australia entered nine years of low growth, high inflation and unemployment.
These years of economic instability incorporated a brief resources boom from 1979 to 1981. The restriction of Middle Eastern oil supplies from 1979 in the Iran–Iraq War encouraged export-oriented investment in thermal coal for the first time. Japan sent its energy-intensive and highly polluting industries offshore, which underpinned investment in aluminium smelting in Australia.
The collapse of this boom in 1982 again left Australia with a cost structure that was out of line with global economic reality. Unemployment rose to a new post-war peak in early 1983, while inflation remained high.
TWO PRECONDITIONS FOR REFORM
The economic disappointments between 1974 and 1983 were followed by a remarkable Reform Era. This began with the election of the Hawke Labor government in March 1983. It reached its apogee in 1989–91. It was weakened by a deep recession in 1990–91 and the long period of high unemployment that followed. It ended following the political contest over the Goods and Services Tax (GST) in 2000.
What made the Reform Era possible? One precondition was the abolition of the White Australia Policy. Discriminatory immigration had stood in the way of productive relations with Australia’s neighbours in Asia. A second precondition was growing understanding in the populace of the need for economic reform if Australians were to continue to enjoy the living standards of modern developed countries.
The first breach in the White Australia Policy was made by the Holt Coalition government in 1966. The Whitlam Labor government brought racial discrimination in immigration formally to an end in 1973, but the practical effects of this were diminished by big cuts in the number of migrants. The Fraser Coalition government ushered in large-scale non-European immigration for the first time since Federation with a politically courageous decision to accept substantial numbers of refugees from Indochina. The White Australia Policy was laid to rest in practice as well as in principle in the mid-1980s, when the Hawke government applied the new non-discriminatory policies to a large-scale immigration programme.
Each of these steps was made possible through public education and advocacy by informed members of the community – private people across the partisan political divide coming together to promote a change in policy that was judged to be in the public interest. An informed independent centre of the polity created a climate of opinion in which it was possible for leaders to make changes. However, four prime ministers over two decades had to absorb bitter criticism from parts of the community, to accept political costs and to take political risks.
The centrepiece of economic reform, and the area subject to strongest opposition from business and trade union interests, was the winding back of protection. Awareness of the costs of protection and the benefits of reform began with independent analysis, at first by a small number of people in the universities. The analysis was extended and publicised from the late 1960s by the Tariff Board (the predecessor of today’s Productivity Commission).
From its formation in the 1920s, the Tariff Board had mostly been comfortable working within the established consensus on protection. It changed in the late 1960s, under the leadership of individuals who asserted their independence from government and business pressures and were prepared to take bold professional stands in the public interest.
The work of academic economists and the Tariff Board was introduced to the wider Australian community by a small number of journalists, who put effort into understanding and explaining complex arguments, and who were allowed to do so by their editors, boards of directors and proprietors.
By the mid-1970s there was an understanding of the costs of protection to the Australian standard of living within a substantial group of independent and public interest-oriented citizens – ‘elite opinion’, as it came to be characterised by some political leaders and commentators in the early twenty-first century. There was widespread although by no means universal understanding that Australian economic performance had been relatively poor. There was widespread but by no means universal understanding of the value of far-reaching changes. There was widespread but by no means universal understanding that the necessary changes included reducing barriers to the international exchange of finance, goods and services.
Independent repo
rts commissioned by governments widened public understanding of the need for and benefits of reform. The Fraser government’s Campbell Committee Report helped to build understanding of the value of financial reform. Although the Fraser government itself did not implement many of the report’s recommendations, together with the Hawke government’s own Martin Report it was an important part of the background to the swift and comprehensive reforms in the mid-1980s. My own Australia and the Northeast Asian Ascendancy, presented to Prime Minister Bob Hawke in October 1989, caught the public imagination by linking opportunities in Asia to reform at home. The Hilmer Report in 1993 helped build support for the widening of the scope of competition policy into the states following major advances in the commonwealth from 1987.
Cutting back protection allowed the Australian government to participate actively in multilateral trade negotiations for the first time. In turn, this supported the inclusion of agriculture among measures to reduce global protection. Australia’s sponsorship of Asia-Pacific Economic Cooperation from 1989 and its promotion of the idea of ‘open regionalism’ (regional trade liberalisation without discrimination against outsiders) was an important influence on many Western Pacific countries up to the Asian Financial Crisis of 1997–98.
When it came to winding back protection, there never was anything like majority support. Protection remained popular even when its removal was playing a major role in increasing Australian living standards during the 1990s and 2000s. Vested interests were well organised to spend heavily to block reform through lobbying, donations to political parties and public presentation of arguments against reform.
Nevertheless, through the Reform Era, the influence of both popular opinion and vested interests on the policy process was constrained by the presence of a substantial, well-informed independent centre of the polity. This independent centre ensured that leaders seeking political advantage by pandering to populist or vested interests would suffer harm to their reputations. It also ensured that a leader wishing to make major change in the public interest would have support.
REFORM AND THE RECESSION WE DIDN’T HAVE TO HAVE
The willingness of Australians to accept change increased during the economic instability of 1974 to 1983. Hawke took office just as unemployment rose to its highest level since the Great Depression, reaching 10.3 per cent in March 1983 and remaining there until September. Jobs were the first priority of the new government; structural change to raise long-term growth would proceed slowly until people were confident that employment was growing. But structural change to promote long-term growth was part of the government’s story about itself from April 1983: some steps were taken along that track from the May Statement of 1983, and few steps were taken that were inconsistent with the long-term direction.
Economic performance through the reform period breaks into three contrasting parts. The first seven years saw strong growth driven by the expansion of employment: from June 1983 until June 1990, economic output increased by 37 per cent and employment (total hours worked) by 29 per cent. By contrast, in the preceding nine years, output had increased by 21 per cent, and in the five years to June 1983 (collection of these data began only in 1978), employment had increased by a mere 2 per cent.
Prosperity was threatened in the mid-1980s by a large fall in the terms of trade, which took the exchange rate down with it. This was the first episode of a weak dollar after the floating of the exchange rate. It created alarm at the time, and was used by the government to galvanise action on reform. The low exchange rate of these years helped the winding back of protection.
Late in the 1980s, domestic spending began to grow at historically high rates, fuelled by a lift in the terms of trade and rapid credit expansion. Fiscal policy was firm from 1984 and tight in the late ’80s, with budget surpluses around 1.5 per cent of GDP – but not tight enough to offset the boom in private spending. Interest rates were raised again and again. The real exchange rate rose by one-third from a trough in September 1986 to a peak in September 1990. The vigorous expansion of manufactures and services exports from the beginning of the Reform Era now stopped.
Interest rate increases continued after political crises in the Soviet Union and China and then recession in the northern developed countries caused export prices to fall. In a familiar Australian pattern, the retreat of temporarily high terms of trade and the puncturing of a boom in debt-funded spending combined to cause recession. Monetary policy was tightened too late to stop the emergence of boom conditions, and then excessively and for too long so that it precipitated a deep recession.
This was the second part of the economic story of the reform era: the deep recession of 1990–91. Output fell by 1.6 per cent from peak to trough. Employment (monthly hours worked per adult) started falling earlier than output, fell more and kept falling for longer. Unemployment, which had fallen below 6 per cent in 1989, rose quickly to a new post-Great Depression peak of 11.2 per cent in December 1992.
There were two silver linings. The recession ended the high inflation that had persisted for two decades. But the costs were substantial: the loss of value in the recession itself; persistent long-term unemployment through much of the 1990s; the corrosion of skills; and the loss of confidence in market-oriented reform. We did not have to have the deep recession. Low inflation could have been purchased at a much lower cost.
The second silver lining was that leaders relinquished political control of monetary policy. Both the large increases in interest rates of the 1980s and the timing and extent of their easing were closely associated with Treasurer Paul Keating and the Hawke government. It is unlikely that the policy would have been different at this time if administered by an independent Reserve Bank: perceptions did not vary much across the senior echelons of the official family. However, after the recession no one in government wanted to argue for continued control of monetary policy. The Reserve Bank quietly assumed, then asserted, its independence. This was formalised by the incoming Howard Coalition government in 1996.
In the third part of the economic story of the Reform Era, Australia enjoyed the first half of its long boom. It entered the longest period of expansion unbroken by recession in its history – or in the modern history of any developed economy. The last decade of the Reform Era was characterised by low inflation. From the recession of 1990–91 through to 2000, Australian total productivity growth was the highest in the developed world, after being close to the lowest through most of the twentieth century.
REFORM FOR OPENNESS AND EQUITY
The removal of old barriers to trade began early and made Australians aware that they were living in an economy in which the relevant benchmarks were the best international practice.
Reductions in protection were gradual, with important decisions being taken each year from 1983 to 1991. First came the removal of quantitative restrictions on steel and a number of other major products. Large across-the-board cuts in tariffs were announced in 1988 and 1991. The March 1991 Statement, delivered in deep recession, covered the single largest step in the dismantling of protection: phased reductions extending to 1996 for most goods and to 2000 for the most highly protected.
Other major distortions were removed in 1983 and 1984: the system for allocating crude oil that had separated the domestic and international energy markets; and the requirement for government approval of the terms of all export sales of major resource commodities. Comprehensive regulation of prices and quantities for rural producers – notably the dairy industry – was removed in successive steps through the 1980s. From sharing with New Zealand the distinction of having the highest protection against imported goods (agricultural and industrial products together) of all developed countries in the early 1980s, by the mid-1990s Australia with New Zealand had the lowest.
The reforms led to even greater change in our international trade in services. Changes in education policy supported by adjustments to immigration in the mid-1980s saw the emergence of
education as a major export industry. The removal of exchange controls led to direct overseas investment by Australian-based firms, which facilitated the rapid growth of a range of service exports. Civil aviation reforms were important to the rapid growth of tourism, with the ratio of inbound to outbound visits doubling over the period.
Financial reforms were commenced in 1983 and mostly completed by 1985: the removal of all foreign exchange controls and the floating of the dollar in December 1983; the removal of controls on interest rates; and the issue of licences for new foreign-owned banks for the first time since early in the twentieth century and on a scale without precedent.
Despite the high real exchange rate of the late 1980s, export volumes grew at a compound rate of over 7 per cent per annum throughout the Reform Era. Services and manufactures exports grew most rapidly. By the end of this time, Australia had a diverse range of exports, with similar contributions from services, resources, manufactures and rural products.
From 1983 until the end of the century, there was far-reaching public finance reform: the targeting of social security on people with lower incomes and without large assets; restraint in spending and removal of tax concessions as part of a strategy to balance the commonwealth budget over the economic cycle; the first commitment by an Australian government to limits on revenue, expenditure and the deficit as a share of the economy in Hawke’s ‘Trilogy’ of 1984; cuts in income tax alongside the broadening of the tax base to cover previously exempt (capital gains, ‘fringe benefits’) and largely exempt (superannuation) income; resource rent taxes for projects within commonwealth jurisdictions; and the replacement of the wholesale sales tax, and some state-based taxes and a small part of the income tax, by a broadly based value-added tax introduced by the Howard government in 2000.
Dog Days: Australia After the Boom (Redback) Page 4