Monday, February 8, 2016

Intergenerational Equity - Change in the Eighties

John Edwards (Australian Financial Review March 2015) said "Elected on a platform of opposition to the Campbell recommendations and of budget expansionism, the Hawke Government abruptly moved in the reverse direction".

And there is no shortage of people working for big corporations or their political or media cheer squads who are happy to regard the 1980s and 1990s as a halcyon era of political and economic reform which served Australia well. The argument goes that floating the dollar, pulling down tariff barriers, deregulating the financial markets, and implementing National Competition Policy, laid the foundation for economic growth and rising living standards in the years that followed. It is said that Australia's income per head rose during this period as a result of these changes.

But less simplistic and more detailed analysis suggests that the deregulation and destruction of industry support, and the ripping up of the Australian Settlement which occurred in these years and subsequently, has not been the claimed road to paradise. Much of Australia's increased income has been a consequence of exports to China. China's increased prosperity has led to demand for Australian commodities, particularly minerals. The mining boom could not go on forever, and it has not. It has come at the cost of narrowing our economy, when we need a broader, more resilient, one.

Secondly Bob Birrell and Ernest Healy have pointed out that the achievements of the 1990s were not just attributable to the protection offered by the low Australian dollar and therefore vulnerable to the currency rise that came with the mining boom, much of the elaborately transformed manufacture (ETM) exports of the 1990s can be attributed to foundations which had been established during the protectionist period, which the market liberal policies of the 1980s and 1990s dismantled.

Peter Sheehan and colleagues showed that ETM exports from the mid-1980s to the early 1990s were predominantly those which had benefited from "industry specific policies directed at increased outward orientation and export levels". (P. J. Sheehan, Nick Pappas and Enjiang Cheng, 1994, The Rebirth of Australian Industry, Centre for Strategic Economic Studies, Victoria University, p. 30). The industries included telecommunication equipment, cars, computers and pharmaceuticals.

Motor vehicles were a standout, with an average annual rate of export growth of 16 per cent over the decade to 2000-01. Pharmaceutical exports grew by 21.4 per cent per annum during the same period, to $2.4 billion. (Jonathon Coppel and Ben McLean, 2002, 'Trends in Australia's  Exports, Reserve Bank of Australia Bulletin, April 2002, p.3).

New enterprises were not significant contributors. Bob Birrell and Ernest Healy present the heretical hypothesis that the tariff protection and industry policy support of the pre-reform era laid the foundation for Australia's ETM export successes in the 1990s, and that once this support was removed in the 1990s and 2000s that the success was short-lived.

Dennis Glover, Lecturer Graduate School of Humanities and Social Sciences at the University of Melbourne, draws a parallel between what happened to English workers in the first three decades of the 1800s and what happened in Australia from the Mid-eighties and the 2015. ("The unmaking of the Australian working class - and their right to resist", The Conversation, 3 August 2015).

Dr. Glover says that at the end of the eighteenth century the English working class of hand loom weavers, agricultural labourers, iron workers, miners and so on lived a largely rural existence, employed at home or in small workshops, with strong connections to village or parish life. But by the 1830s many had been agglomerated into large factories. Towns like Manchester, Liverpool and Leeds had been transformed into the "dark satanic mills" of Blake's poem. Crammed into dangerous slums, many died young and poor. The old world had been physically transformed: bricked over, blackened, cheapened, uglified.

Dr. Glover says something just as dramatic happened in Australia during the past three decades. He says the transformation from the industrial to the post-industrial era has been so total as to constitute the sociological equivalent of an extinction event. (Ibid). "The queues of workers' cars lining up each morning to get through the factory gate - gone. The publicly owned banks and utilities - gone, or about to go...... Secure, full-time employment, with its guarantee of holidays, sick pay and promotion - in many industries long gone. The working class dream of home ownership and upward mobility via cheap land, equal educational opportunities and cheap land - all are on the way out"(Ibid).

Dennis Glover describes this as the un-making of the Australian working class. "Just as 18th century England's green and pleasant fields were paved over with brick, its vocations replaced by the steam-powered machine, its pastoral life rent asunder by the regimentation of the Industrial Age, in just 30 years the world of the Australian working class, with its factories and unions and quality public services and the communities they supported, has been made all but extinct, wiped out, like the dinosaurs, by the fiery asteroid of creative destruction". (Ibid).

He describes this as the revolution the little people lost, and makes the astute observation that the little people, the losers, refuse to go away. They vote against more "economic reform" - they won't support a higher GST and they won't support more privatisations. One might add that they voted out the party of Workchoices and they don't support deregulated university fees or Medicare co-payments either.

Dr Glover asks why they don't thank Paul Keating for liberating them from their dull, monotonous, supposedly unskilled and unimportant jobs making cars? He answers by saying that Australia's working class won't easily give up without a fight, won't voluntarily accept poverty, and won't surrender its culture and traditions without a struggle. "Australia's wilful working class deserves to be rescued from the condescension of the economic reformers. Just like the members of the English working class who went through the Industrial Revolution, the people who have experienced the destruction of their industries and communities in places like Dandenong and Doveton in Melbourne's South-East, Norlane in Geelong, Broadmeadows in Melbourne's north, and Elizabeth outside Adelaide, where the car factories and canneries are still being closed and unemployment is still well above 20per cent after 25 years of economic growth, have something important to say to us" (Ibid).

He concludes with the observation that we should try to make economic change work for everyone.

Right wing commentators and economists regularly say the world is changing, and changing rapidly, and nations must change in order to survive. This is a classic case of seeking to profit from their own wrongdoing. Much of the change that is happening is being driven by policies advocated and implemented by right wing commentators. Much of the change is not inevitable. The fact that it is making it tougher to survive should be cause to question our policy directions, not head even faster towards the cliff.

One of the defining features of modern political life is a pervasive loss of faith in government's ability to solve problems, or indeed do anything much at all. Sally Young, Associate Professor of Political Science at the University of Melbourne, says we are living through a lost era of policy making. She says that politicians of today are suffering a crisis of confidence about whether their policy making can make a big difference. (The Age, 1 April 2015, p.20 ).

She notes that the Prime Ministers of the seventies built things. Gough Whitlam left behind Medibank, women's health centres, the Family Court, single-parent pensions, public transport projects, sewerage systems, the Arts Council, the National Gallery, Triple J and Legal Aid. He gave us free tertiary education, the Trade Practices Act, no fault divorce, needs based schools funding, the abolition of conscription, the Heritage Commission, aboriginal land rights, voting at age 18 and fair electoral boundaries.

But the situation since the 1970s has deteriorated dramatically. Erik S. Reinert from The Other Canon Foundation set this deterioration out in detail in 2012 in his paper "Neo-classical economics: A trail of economic destruction since the 1970s". He says that three decades of applying neoclassical economics and neo-liberal policies have destroyed, rather than created, real wages and wealth.

Reinert starts by observing that after the Second World War Two institutions were established which provided the conditions for an unprecedented increase in human welfare. The 1947 Marshall Plan paved the way for the re industrialisation of Europe and other nations all the way to Japan. The 1948 Havana Charter established rules of international trade that made this industrialisation possible. It allowed for "infant industry protection" where unemployment was present in a country. There was a tripartite political setting, with a balance of power between business, labor and government.

Countries with a diversified economy prospered. For example South Korea diversified away from agriculture and raw materials and into manufacturing industry. It did not continue to rely on its 'comparative advantage' in agriculture, instead using heavy-handed industry policy to break into manufacturing. On the other hand Somalia was richer than Korea until the mid 60s, but in Reinert's words "continued to specialise according to its comparative advantage in being poor".

Reinert says that the theory of "comparative advantage" advanced through David Ricardo's free trade theories was in practice only applied in the colonies. He says that the US Washington Consensus free trade theories were for a long time mainly intended for export, not for use at home. He says that "Unfortunately, in the end the West also started believing in the propaganda version of its own economic theory".

The world development record, expressed as a growth rate of GDP per capita, is described by Reinert as excellent from 1950 to 1973 but dismal from 1973 to 2001. He says that during this period Latin America experienced a string of 'lost decades'. Real wages in Peru were more than halved when the free trade shock and subsequent deindustrialisation hit Peru starting in the mid-1970s. Africa's beginning industrialisation was reversed, and the communist economies became poorer than they had been under a notoriously inefficient communist planned economy. Reinert concludes from this period that a nation with an inefficient manufacturing sector is much better off than a nation without any manufacturing sector at all.

Reinert says that even the United States finds that too much free trade has undermined its manufacturing base. The West has embarked on an attack on wage levels and purchasing power in the name of austerity. The results are likely to be just as harmful to real wages and purchasing power as they have been wherever they have been applied. A wave of neo-classical wealth destruction hit Latin America in the mid-seventies. It also hit the little industry Africa had managed to build. Another wave of destruction hit the centrally planned economies after the fall of the Berlin Wall. The fall of the Wall heralded a period of Western triumphalism, an in particular a failure of mainstream economics to distinguish between the financial sector and real wealth creation. This has now caught up with country after country in Europe and beyond.

Three economies which have done well during these lost decades have been Brazil, India and China. Reinert notes that they escaped the free market fundamentalism and free trade shock that accompanied the fall of the Berlin Wall. In these countries neoliberalism was met with resistance from a critical mass of economists.

Reinert says that what is needed is to recapture the middle ground. He supports the principles of the Havana Charter, unanimously approved by the members of the United Nations in 1948, as a blueprint for a world economic order that creates, rather than destroys, mass welfare. He says that of the three political systems which brought financial capital under control during the 1930s, - communism, fascism, and the New Deal - there is little doubt what most people today would choose. But that needs to be kept as a live option, and neoclassical economics is failing to do this. It fails to distinguish between the real economy and the financial sector, with the risk that financial sector stops adding value to the real economy, but starts to parasitically destroy value. (This paper is online at

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