ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
'Prophetic' Garnaut warns of belt-tightening to come
, July 20, 2013
Professor Ross Garnaut has been effusively hailed as “our most prophetic economist” by the economics editor of the Sydney Morning Herald, Ross Gittins, in an article he wrote with the headline, “Garnaut cries from the wilderness” (SMH, June 3, 2013).
Not everyone would necessarily share Mr Gittins’s enthusiasm for Professor Garnaut’s prophecies. Garnaut has been in the public eye for the past three decades and been a preferred source of advice for the Labor side of politics, at least since the Hawke/Keating era. Quite possibly, he might have been among those academic voices that successfully urged the Whitlam Labor government in 1973 to unilaterally cut Australian tariffs by 25 per cent.
What we know for certain is that Garnaut, as the Labor Prime Minister Bob Hawke’s principal advisor, was the driving force behind the then government’s decision to implement the main provisions of what became known as the Washington Consensus.
From the early 1980s, the US government was keen to persuade those countries which had maintained close associations with the US during the period of the postwar Bretton Woods agreement to continue following the US lead on economic policy in the period that followed.
The Washington Consensus was an economic program promoting greater deregulation of capitalism. The program was devised jointly by the US Treasury, the International Monetary Fund and the World Bank — the same group that was behind the push to create the World Trade Organisation.
Essentially, these bodies proposed deregulation of financial markets to allow the free movement of currency across borders; free trade, by dismantling of existing trade barriers and making certain they could not be re-erected; the privatisation of public utilities; and a commitment to the view that market forces rather than governments could best generate economic prosperity.
Under the urgings of Garnaut and other similarly-inclined academics, either close to the Labor Cabinet or actually working in ministerial offices, the Hawke government enthusiastically embraced this new form of economic management. Former Prime Minister Hawke, only a month ago, in a customary outburst of self-congratulation, once again championed the “economic reform agenda” of his government.
According to Mr Hawke, it entailed, necessarily, the repudiation of the so-called dead hand of McEwen protectionism — a reference to the industry policies devised and implemented by John McEwen, the Country Party leader and Trade and Industry Minister in the Menzies Liberal-Country Party coalition government.
What Mr Hawke chose not to recount was that the Menzies-McEwen era saw Australia enjoy an unprecedented period of rapid economic growth, full employment and a sustained rise in living standards for all.
By the time Mr Hawke became Prime Minister in 1983, it was inevitable that the McEwen model would need adjusting. An essential element of the McEwen policies was the global trade policy framework that followed the 1944 Bretton Woods agreement. This maintained stable currency exchange relationships among the 46 countries subscribing to it.
However, in 1971, the United States administration under President Richard Nixon unilaterally cancelled the direct convertibility of the US dollar to gold. This radical step ended the Bretton Woods system of international fixed exchange rates and inaugurated the era of floating currencies that we have had ever since.
Denied the currency stability afforded by the Bretton Woods agreements, tariffs could no longer provide a satisfactory foundation on which to build our industry and trade policies. In the new circumstances, movements in exchange rate relativities between Australia and its trading partners, which we were powerless to control, could add to or detract from the protective impact of the Australian tariff. In other words, tariff policy was out of our hands.
Most of the world’s trading nations could cope with this change more easily than could Australia. For them, tariffs were not a protective device. They had chosen to bargain away their industrial tariffs in various trade negotiating rounds within the General Agreement on Tariffs and Trade (GATT). Instead, they had adopted other more flexible protective devices — notably, a variety of less transparent quota arrangements.
None of this was in Professor Garnaut’s mind when he was able to persuade the Hawke/Keating Labor government that Australia’s interests would be best served by opening up all elements of our economy to the full blast of international economic competition. He was more concerned to eliminate what he deemed the inefficient elements from our economy, particularly farming and manufacturing. These, he confidently predicted, would be replaced by new, more efficient industries.
Other nations, we were told, were moving in the same direction. The overall impact of open trade policies and unrestricted capital flows would create new opportunities for our farm produce and manufactures in export markets.
But, even if this were not so, it would still benefit us to undertake the recommended “reforms”. Competition from imports would result in cheaper goods for our consumers, with beneficial effects from this supposedly flowing right through our economy.
Yes, many businesses would go the wall, and workers would be displaced from industries no longer able to meet import competition. But new, efficient businesses would spring into existence to absorb the newly unemployed, quite possibly at better wages.
We would then all benefit from these changes and be better able to accommodate ourselves to the globalising world economy.
This then was the economic gospel preached by the prophet Garnaut, under the influence of the Washington Consensus. The Hawke/Keating Labor government became an immediate and dedicated convert.
Some 30 years on, we are now in a position to review the results of this experiment.
Consider first the level of employment, perhaps the most important issue for any economy in a democracy. We have not had full employment since Whitlam’s unilateral tariff-cutting exercise in 1973. (Full employment means full-time jobs, at liveable wages, for all who are willing and able to work).
We have languished at around 4 to 5 per cent unemployed ever since — and this after several changes in the definition of unemployment, designed to conceal the real numbers. Furthermore, the Hawke government and all succeeding governments have resigned themselves to accepting this level of unemployment. Orthodox free-market economic theory asserts that we need a pool of 4 to 5 per cent unemployed to curb inflationary pressures — even though inflation is not always, or even usually, generated by high wages.
Adopting the Garnaut policies has certainly ensured that we have had no difficulty in maintaining this “necessary” pool of unemployed. Even more disturbing, the data tells us that of those displaced from regular employment by free trade polices, fewer than 30 per cent ever regain comparably well-paid jobs. More than 10 per cent never work again.
It is true that per capita GDP has risen steadily over the period of the Garnaut “reforms”, although that is no more than might be expected, given population growth and advances in technology over the period. However, the distribution of wealth gains has favoured the rich over the poor and middle-income earners. Also, working hours and conditions have become more arduous and intrusive into family life.
By far the greatest boost to national income during the last 30 years has been Australia’s quite fortuitous mining boom. The economic rise of China to industrial giant status enormously boosted both demand for and the price of our iron ore and coal. For a time, many believed the boom would last forever, but all now agree it is coming to an end. Future economic growth within China will rely less than before on our coal and iron ore.
Then there is the matter of the Australian exchange rate. Relative to its major benchmark, the US dollar, it appears, until recently, to have risen. Actually, it hasn’t. US exchange-rate policy has triggered the change. The US has reduced interest rates to drive down the dollar and so make US businesses more internationally competitive, as part of its recovery strategy from the global financial crisis (GFC).
As a result of that strategy, the world is now engulfed in what polite society calls “competitive devaluation”, or what would more accurately be described as a currency war.
Australia, committed as it was to the free-market ideology of Garnaut, had until very recently chosen to stand apart from the game of competitive devaluation. All elements of our economy, both domestic and export, except finance, have paid a heavy price for our government’s inaction. Its ultimate impact may be measured in terms of declining business activity and rising unemployment.
Ross Gittens, in his Sydney Morning Herald column referred to previously, has urged us to heed Professor Garnaut’s “cry from the wilderness”. But what is that cry?
It is time to pay for the folly of relying so much on the mining boom. Australians who benefited least from the boom must now be prepared to accept even lower livings standards.
Garnaut’s points are very interesting. We must not, he warns, expect to be compensated because imports rise in cost as the exchange rate falls.
But wait a moment! Were we not told all those years ago that free trade would deliver the cheapest possible goods to consumers and the whole economy would benefit? Now we are being told that the exchange rate policy will make that impossible and consumers will have to grin and bear the subsequent higher prices.
Next, Garnaut tells us: “Interest groups have come to feel less inhibition about investment in politics in pursuit of private interests.” That’s code for saying interest groups have become successful at bending politicians to their will.
Three decades ago we were solemnly assured that this could not happen if we allowed market forces to prevail. Government would withdraw from its involvement in the economy and would thus be immune to special interest pressures.
Now it has been revealed that markets have not protected us from the lobbying of interest groups and from the negative consequences of a fortuitous boom. Despite the fortunes some people made during the mining boom, this so-called golden age came with a hefty price tag. And the burden of adjustment will fall most heavily upon those who benefited least from the boom.
And this painful adjustment is explained away as being necessary to sustain an economic experiment, which the evidence from the global financial crisis alone demonstrates to have been deeply flawed.
If, after all this, Professor Garnaut can offer us nothing more than belt-tightening, would Australians not be better advised to look to someone else to show us a way forward?
Colin Teese is a former deputy secretary of the Department of Trade.