Peter Costello


Address to Centre for Independent Studies Consilium Conference



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.

7 Aug 2003

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