Friday, January 15, 2016

Intergenerational Equity – The Australian Settlement

The argument over protection versus free trade has been around for well over a hundred years. Indeed it was the dominant political debate at the time Australia was becoming a nation. And many of the arguments of the time sound familiar to our ears and ring true today. Bob Birrell writes in his book "A Nation of Our Own" that free trade was seen as the policy of the pastoralists (p.169). That is still true. It is the agribusinesses that push hardest, by a mile, in favour of the free trade agreements that Australia has entered into in recent years.

And back then, as now, the protectionists were people who wanted to promote a diverse industrial base. Protection was also seen as crucial to the well-being of the working class. The great Liberal Alfred Deakin declared in 1901 that "if federal protection increases the manufacturers' profits, state laws must provide that the employee shall secure his share, perhaps by means of special boards for wages and hours, according to the plan partly adopted by Victoria". (Robert Birrell, "A Nation of Our Own", p. 170.)

A similar insight into why the protectionists did not support free trade comes from the Bulletin's leader writer, James Edmond, in his 1900 tract "A Policy for the Commonwealth". He says "No country ever became a great industrial state under free trade unless it had cheaper labour than its neighbours, and cheap labour means degradation and slavery... Nor can any nation, in these days of cheap freights, remain a great industrial state under free trade unless it pays as low wages as the cheapest of its rivals, or unless its workers can hold their own by exceptional skill". (Ibid). Observers watching the way in which nowadays the rich get richer while low paid workers are becalmed or going backwards might think Mr. Edmond just as relevant today.

The view of many protectionists and particularly the social democrats among them was that Australia should learn from the mistakes of the 'old world' and become a 'new world’, free of both the social divisions and strong class boundaries of the United Kingdom, and the slavery which had blighted the United States.  We were to do our own dirty work rather than expect someone else to do it. Australia was not to be like America, where competition reigned supreme at the expense of workers' long-term will-being. This outlook was egalitarian, and helped give the Australia of the Federation era a democratic culture – that Jack is as good as his master, and down with "tall poppies", or at least those who give themselves airs. (Ibid, p. 281).

Bob Birrell concludes that the Federation era and the 'Australian Settlement' offers ideals directly relevant to our present dilemmas, and that it is a shame that it has been disparaged by Australia's cultural gatekeepers. (Ibid, p. 283).

It has been fashionable for years to deride the Australian economic, political institutions and culture of the Federation era, often referred to as the Australian Settlement. And the Settlement itself was effectively torn up several decades ago.

But I believe many of the things done at that time served Australia well and indeed are key reasons why we developed a more egalitarian, more prosperous, fairer society than many other countries were able to accomplish. Darin Acemoglu and James Robinson have written a book about why some nations have succeeded in generating sustained economic growth through industrialisation and others have not, titled "Why Nations Fail" (Crown Business, New York, 2012). They regard Australia as a success story.

They focus on the role of what they describe as "inclusive institutions", which include democratic accountability and the rule of law. Once they are established, these institutions create circumstances where the government is accountable and responsive to citizens, and where the great mass of people can take advantage of economic opportunities. Acemoglu and Robinson say that these institutions tend not to emerge in "extractive economies", where the economy is based on natural resources, and their exploitation is dominated by a narrow elite. Too often the elite uses its political power to prevent the development of inclusive institutions which could provide a pathway to industrialisation. (Ibid).

Argentina is a classic example. It is a country rich in natural resources, and at the turn of the twentieth century it was prospering; it was as wealthy at the time as Australia. But its large landholding elite conceded little to either urban or rural work forces. It did not industrialise, and remained an extractive economy and society. It was therefore highly exposed to commodity downturn in the 1930s and it did not handle the Depression and its aftermath well. Political turmoil led to military coups in 1943 and again in 1976. From being one of the world's most affluent nations at the start of the twentieth century, it finished the century a long way down the chart. In 2001 it defaulted on its debts.

Australia could have had a similar experience, but we did not. New South Wales was indeed an ideal location for an extensive pastoral industry based on cheap convict labour. In the early nineteenth century its political leaders wanted to turn New South Wales into an extractive economy free of inclusive institutions. Their first problem was the British Government, which was persuaded to lay the foundation for a working democracy in the colony of New South Wales.

Their second problem was Victoria. The Victorian gold rushes of the 1850s led to direct conflict between the gold diggers and the pastoral landholding class. Victoria got limited parliamentary democracy, and then small farmers. The Victorian Government also took up the cause of protection to provide additional employment opportunities and in order to create a more self-reliant society. Protection was strongly, but unsuccessfully, opposed by the pastoral elite and their merchant supporters, and by the end of the nineteenth century, in Victoria, although not in New South Wales, most leading politicians were committed protectionists.

The Victorian Alfred Deakin was both a protectionist and a radical social democrat. His parliamentary group wanted to create an Australia free of the old world class and caste differences. Deakin was able to implement much of the protectionist agenda, including its social democrat dimension, between 1905 and 1909 when he was Prime Minister of a government which ruled with the support of the Labor Party.

Deakin expressly set out to make Australia a more diverse and self-reliant industrialised economy. He and his supporters were worried that Australia could become, in his words of 1905, an economy of "hewers of wood, drawers of water, shearers of wool, and growers of wheat". (Bob Birrell, "Federation, the Secret Story", Duffy and Snellgrove, Sydney 2001, p. 203). Furthermore the Deakin Government linked receipt of tariff protection to the payment of 'fair wages', establishing the Commonwealth Arbitration Court, which incorporated the principle of a living wage into its determination of industrial awards. Australia developed a reputation as a 'working man's paradise'.

Australia was hit hard by the Depression, but the Australian Settlement and the Federation-era institutions survived the test. There was little social unrest, and after the Second World War Australia's manufacturing exports expanded and we enjoyed a golden age of prosperity.

Between 1946 and 1974 real per capita GDP increased at an average annual rate of 2.2 percent. From 1974 to 1991 it slipped to 1.5 percent, and between 1991 and 2010 it was still lower than in the post war years, at 2 percent. (Ian McLean, "Why Australia Prospered", Princeton University Press, 2013, p. 16).

Of course during these later years the Australian Settlement has been abandoned. Industrialised countries benefit from the productivity gains that flow from adopting the latest technology in manufacturing. On the other hand, economies based on natural resources face diminishing returns. Miners have to dig deeper or exploit ore bodies with lower mineral content. Farmers have to farm less productive land, or add more fertiliser or water to their crop. This leads to lower returns on capital and labour.

But before the Australian Settlement was abandoned, Australia had a vibrant manufacturing industry, thriving in such diverse areas as pharmaceuticals, chemicals, automotive, iron and steel, and telecommunications.

Our pharmaceutical industry had prospered due to the Labor Government's Factor F scheme. This piece of industry policy paid drug companies who increased their research and development, production and exports from Australia. It was successful in increasing exports of pharmaceuticals from $321 million in 1990-91 to $894 million in 1995-96 and $2.3 billion by 2001-2, jumping by a factor of seven in just over a decade. Later on the program was cut and in the decade after 2001-2 we built up a trade deficit in drugs of $6.9 billion. Pharmaceutical company executives contrast the present situation with the Factor F era. According to the head of AstraZeneca it manufactures in Australia because the Labor Government "incentivised pharmaceutical companies to invest in sophisticated manufacturing facilities in the 1980s". ("Pharmas need to more drugs", Nigel Bowen, The Age, 19 May 2014).


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