November 2nd 2002

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Articles from this issue:

COVER STORY: Bali: after the dust settles ...

CANBERRA OBSERVED: Vultures circle Crean after Cunningham debacle

NEW ZEALAND: US links free trade to repeal of NZ nuclear ships ban

NEW ZEALAND: Kiwibank on target for 100,000 customers

STRAWS IN THE WIND: Global systems / The splitting of the West / After the earthquake

WESTERN AUSTRALIA: 'Unlawful' electoral changes: McGinty tries again

AGRICULTURE: Farmers' overwhelming support for alternate sugar package

LETTERS: Bush doctrine (letter)

LETTERS: Accepting responsibility (letter)

LETTERS: Drinking age (letter)

ECONOMICS: Getting to work on the world economy

COMMENT: Holding on to the centre

COMMENT: Monash shootings and the irresponsibility culture

COMMENT: Affirmative action illuminated

EUROPE: New members, new problems for European Union

ASIA: Behind Pakistan's Islamist revival

BOOKS: Marriage: Just a piece of paper?

Books promotion page

Getting to work on the world economy

by Colin Teese

News Weekly, November 2, 2002
When the flagship magazine of the free market argues that the world economy is in the doldrums and recommends some of those "discredited" government policies from the past, times might really be changing. Colin Teese explains.

Believe it or not, the state of the world economy and Labor's dramatic loss of the NSW seat of Cunningham are connected. Last weekend, Labor became the first opposition party in fifty years to lose a seat at a by-election. Some achievement!

Politically, Labor is on the ropes.

Labor's constituency appears to have delivered its verdict upon the much vaunted "reform package"; upon which the party's leader staked so much of his reputation, after ramming the package through the special Federal Conference a few weeks ago.

Stripped of all the rhetoric, the essential purpose of the package was to cut Labor adrift from the unions - ostensibly with the intention of making the party more acceptable to the wider electorate.


Based upon the result in Cunningham, the strategy seems already to have failed.

Mr Crean, understandably devastated by the outcome, is casting around for solutions; predictably, all the usual suspects have been rounded up. Better sales pitches to the electorate, better leadership, unity within the party. Everything except what really counts.

If the leader thinks that the fortunes of his party can be turned around in this way, then the party had better start looking elsewhere for its leadership. The real issue is that Labor is looking like a party moving further away from its core support base with every passing week.

If this analysis is true, then it is hard to see how the party, in its present mindset, can hope to regain office.

One thing which might help the party understand its problems would be to muse on the observations of one of its better officials, former National Secretary, Gary Gray. At the time of his departure from office in 1999, Mr Gray reminded his party that it was now four times more dependent than previously upon the financial support of the corporate sector.

Disturbingly, some in the party took comfort in this fact, if only because it could be used to demonstrate that Labor was drawing away from its union roots.

The fact is that under its present policies Labor has begun to dig its own grave. For a start, why would those who want a business-oriented party want to look beyond the Coalition? If you want business policies, why vote for a party apparently converted to that position, rather than one whose entire philosophy is built around that ideal?

All of this leads us to the conclusion that if Labor genuinely wants to deal with its problems then it must take a close look at its economic policies. At the moment, it has the same attitude as the Coalition on economic issues. And the fact is the Coalition can handle the politics of free market economics much better than Labor.

That does not mean going back to socialism - if, indeed, Labor was ever there. It is not a matter of socialism or capitalism. That debate is over. But it is a matter of taking a hard look at the experiment with free market-dominated capitalism - which Labor has supported over the last twenty years - sometimes more enthusiastically than the Coalition. The fact is that this experiment has been tried and has failed - world-wide - for the second time in a little over one hundred years.

Various names

In its current form, variously described as "the Washington Consensus", "economic rationalism" (in Australia), and as "neo-classical economics" the idea asserts the superiority, for all economies, in all circumstances, of unrestrained financial markets, free trade and privatisation of government-run enterprises.

This form of economic organisation - promoted most enthusiastically by the US Treasury, and the Washington-based International Monetary Fund and World Bank - has enjoyed widespread and unbending support, especially in English-speaking countries for the past 30 years.

It replaced and discredited the interventionist form of capitalism which distributed such widespread prosperity in the 30 years after World War II.

In recent years the signs of the new order coming apart at the seams have become steadily clearer, and more widely acknowledged. Except in Australia, where all but a few sceptics - widely considered as eccentric - continue asking the embarrassing questions.

Authoritative studies now a couple of years old (the results of which were recently analysed in News Weekly) presented us with the first signs of trouble. There has been a steady stream of data ever since.

And, of course, there has been practical evidence of failure - including the Asian financial crisis of the late nineties, which, more recently, has been duplicated in Latin America - particularly in Brazil and Argentina.

None of this seems to have shaken the confidence of local devotees to free market capitalism, but overseas it has been a different story. Perhaps because in Europe and North America observers are less easily able to shield their eyes from what is happening, and what is likely to be the consequences for them.

Britain's most prestigious weekly journal, The Economist, appears to be the latest convert to scepticism about free market economics unencumbered by government intervention. Indeed, it reports that the system is under threat, not from anti-globalists - whose aims (destruction of capitalism) are too absurd, and whose arguments are too incoherent - but from within. The journal reports:

"A growing chorus of insiders from [IMF] staff members to Wall Street bankers is asking whether the Fund [IMF] and the rich countries that largely determine its policies know what they are doing."

Failed prescription

These critics of the "Washington Consensus" point to events in Asian and Latin American financial markets - to which are added the crises in Russia and Mexico (all of whom followed IMF prescriptions) as evidence of failure too important to ignore.

Elsewhere in The Economist, the problems of the US economy are examined. It is pointed out that consumer borrowing, driven by low interest rates, continues to outpace income growth. Eventually, consumers will, however, have to begin saving to pay debts. This will result in several years of slow growth or even depression. Falling US share prices are transmitting problems to Europe and Japan; and the US Federal Reserve Bank, limited by the policy option open to it, can't do a thing about it.

At present US economic policies aren't working. The US needs to grow slower if the bubble in share prices is to be burst; so higher interest rates seem to be the logical option. On the other hand, slowing growth, with current inflation levels so low, could tip the economy into deflation from which recovery may take years.

The other alternative - US$ devaluation - would only export the US deflationary problems to the rest of the world.

Without explicitly condemning them, The Economist makes clear that none of those orthodox free market solutions presently being canvassed is appropriate. Instead, it reminds us of the point made by J.M. Keynes, the noted British economist, who is credited with rescuing the world from depression in the 1930s. Keynes insisted that as inflation approached zero, interest rates could not properly insulate the economy from the impact of deflation. In such circumstances, only government spending could achieve that aim.

Now The Economist wasn't actually saying so, but it did acknowledge what Keynes had prescribed seventy years ago. Moreover, by explicitly condemning suggestions of budget cutting as a way out of the world's present troubles, Britain's most influential weekly journal on economics came as close as it dared to taking us back to the Keynesian way: which, by the way, is the opposite of what unfettered free market economics prescribe.

Perhaps if the Labor Party is genuinely looking for a way out of its present dilemma it might begin by reading carefully through The Economist of 28 September. There is no doubt that the material in that issue of the journal could provide Labor with ideas for a shift in economic policy direction, which could help win back their support base and differentiate them from the Coalition parties.

But unless they are quick about it, the present Prime Minister might beat them to it. At this moment, he seems less committed to the idea of free market economics than does the Opposition. If Mr Howard does embrace the new economics, he might keep what he already has in terms of corporate support and, as well, bite deep into Labor's traditional support base.

  • Colin Teese was Deputy Secretary of the Department of Trade and Australian negotiator at GATT

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