ANU economics professor Ross Garnaut might be stating the bleeding obvious when
it comes to Australia’s economy – but thank God he’s saying it writes Crikey’s
political editor Christian Kerr.
The Australian is very excited today by its op-ed item by ANU economics
professor Ross Garnaut, who it describes as the man “given some of the
credit for Australia’s long boom”.
“The 2004 election contest is premised confidently on continued
prosperity. But a harder reality is likely to intrude before the next
parliament has finished its work,” he writes in The Australian.
No! You don’t say?
“There has been a gradual corrosion of support for and less and less
action on productivity-raising reform during the past decade. Much of
the legacy of the reform period remains, including a much more open
economy, more competitive domestic markets, deep integration into Asian
economies, an economically productive immigration program and a
somewhat more flexible labour market,” Garnaut continues.
“But there is now little political interest in removing remaining barriers to Australian economic efficiency…
“The decline in support for productivity-raising reform in Australia
has already contributed to less efficient resource allocation. It would
compound the costs of any economic downturn in the period ahead.
“The problems from excessive demand expansion are already acute. For
several years, real private consumption and total domestic demand have
risen more strongly than over any comparably long earlier period, and
real public expenditure has not been held back to offset them. Private
consumption has been driven by one of the strongest sustained real
expansions of bank lending.
“The real domestic demand expansion of recent years is at least as
virulent as that which precipitated the extreme monetary tightening of
the late ’90s. The savings share of household income fell in the boom
of the late ’80s, but remained in the range of 8 per cent to 10 per
cent. It was minus3 per cent in the March quarter of 2004.
“We now know that interest rates were increased too much in the late
’80s. That error should not be repeated. But to react too little to the
problem that has emerged would be to err in another way, with different
immediate but regrettably similar medium-term consequences…
“The corrosion of competitiveness has been symptomised by the collapse
since 2000 of the strong export growth that began with the
reforms from the mid-’80s. From the March quarter of 1986 to the March
quarter of 2001, the volume of Australian manufactured exports
increased by more than 600 per cent and of services by more than 200
per cent. The volume of agricultural exports grew by about three
quarters and resources by almost 200 per cent over the same 15 years.
“By contrast, over the three years from March 2001 to March 2004, the
volume of manufactured exports increased by a total of 4 per cent and
services by 1 per cent, while rural and resources exports both declined…
“Domestic demand has to be reduced significantly from its present
trajectory for a start to be made on correcting the dangerous
imbalances in the economy. The anticipated correction in the housing
market can deliver only part of the adjustment that is required.
“The necessary policy adjustment would be less damaging to long-term
growth the earlier it came. It would be least disruptive if it were led
by a tightening of fiscal policy. But this is hardly likely in the
febrile depths of a year-long election campaign – or soon after a
campaign has been won by one party or the other by promising that the
easy times will continue forever.
“If budget surpluses were increased for the duration of the excessive
domestic demand, monetary tightening would still be necessary, but
would not have to go so far. The increases in interest rates would be
less the earlier they came. Leave it too late and the markets will
impose their own sudden and disruptive solution. But judiciously timed
monetary policy, too, is constrained by the year-long election.
“When it comes, the tightening of monetary policy will temporarily
exacerbate the problem of competitiveness, by lifting the dollar (or,
more likely, constraining the fall that would otherwise be associated
with the weak external payments). Like it or not, sustainable,
non-inflationary improvements in competitiveness may be preceded by
what seems a backward step…”
Prof, I did economics in Year 11 back in 1981 and lasted through four –
or maybe only three – lectures in the subject at uni, but hasn’t this
been bleeding obvious for ages?
Here’s The Australian’s former editor, Paul Kelly, from the current issue of the Centre for Independent Studies journal, Policy:
“Australia’s future influence will be determined, in part, by these
assets – GDP, population size and technological sophistication.
“Our improved relative economic performance since 1983 has been a trigger for favourable global re-assessments of Australia.
Globalisation while constituting a challenge for Australia is also a
distinct opportunity. Australia has been more successful in
adapting to globalisation that many other nations. This is a
function of our ability to embrace economic reform and a more flexible
economy, the quality of our institutions and governance and our
capacity to maintain a skilled workforce. However, despite this
success there is a deep uncertainty about the place of Australia in the
global economy and the political left and right seek to repudiate the
framework of the past generation.
“The logic of Australia’s position is to convert the non-availability
of any political or economic union into a plus – that means becoming a
state-of-the-art exemplar of the globalisation model. It requires
becoming one of the most open and competitive economies in the world
exposed to global markets and the disciplines they demand. This
is the direction in which Australia has been heading since 1983,
however there is a reluctance among political leaders to articulate
this goal as a national strategy.”
What’s gone wrong? Kelly explains:
“This is because they fear it will frighten too many people and vested
interests and, in turn, provoke a backlash. This reflects the
Howard years – Howard is a ‘two steps forward and one step back’
reformer, not the neo-liberal depicted by his critics. However,
this political/psychological threshold needs to be crossed.”
Here are some thoughts from CIS thinker and former Howard Government
staffer Andrew Norton from Liberalism and the Australian Federation,
the party’s own official Centenary of Federation publication:
“The Australian Settlement was a ‘settlement’ because it was bipartisan…
“Australia’s liberalisation has not generally been a response to
majority sentiment. In all cases for which I can find public
opinion evidence, policy began to change before the polls, though at
least in economic policy governments were pursuing an outcome of
improved economic performance that did enjoy public support…
“The difficulty Australian liberalism faces is that while Australia has
a relatively individualistic culture, and public pinion has become more
liberal over the past twenty years, only a minority clearly supports
the whole liberal package.
economic issues, conservatives and social democrats have less
converted completely to liberalism than adopted and adapted liberal
institutions to achieve their growth and efficiency goals. Hence,
we have market social democrats such as Bob Hawke and Paul Keating, or
a market conservative like John Howard. Each needed the wealth created
by market-driven growth to fund their programs …
“Particularly on economic issues, the old Australian Settlement has not
been going peacefully. Throughout the reform period there has
been vocal dissent, from the left, fulminating at the ‘betrayal’ of
Hawke and Keating; from the ‘Wets’ within the Liberal Party; and, since
the end of the Cold War also ended the right-wing alliance against
communism, from conservatives as well. This dissent, however,
only acquired electoral significance after the federal election of
March 1996 … The election of Pauline Hanson as Member for Oxley
(Queensland) showed that the populist right could win seats, a fact
confirmed at the 1998 Queensland State election. More
significantly, it marked the partial reversion of Labor back to its own
interventionist and populist roots. The reform agenda of the
1980s and the 1990s had been possible because / Labor was enacting
policies either already supported by the Liberals or acceptable to them
… Labor was not the constructive Opposition the Coalition had
been during its thirteen years out of office.
“While acknowledging these serious challenges, I believe there is a
possibility of a new more liberal Australian Settlement, which is
multi-racial, free trading, enterprise and individual bargaining, and
state facilitating, helping people help themselves rather than
“Despite talk of ‘reform fatigue’ and ‘backlash’, public opinion has clearly shifted in all areas except protection …
“While many people are not happy with what has happened, there is
little sign that they can present a plausible alternative, or even a
coherent one. Pauline Hanson is famous for her policy muddles,
socialism remains completely discredited, and much of the left is
preoccupied with identity politics …”
Yet John Howard won’t move. He continues to trash the surplus and increase the tax take.
Garnaut might be stating the bleeding obvious – but thank God he’s saying it.
Here’s how The Oz summarises his piece: Costello downplays slump prediction
“The economist given some of the credit for Australia’s long boom has
warned that the economy is heading for a slump, no matter who wins the
“Ross Garnaut says Australia is losing competitiveness in world markets
and lacks the political will to make the economic reforms that might
prevent the bust.
“And he says political sensitivities ahead of the looming federal
election are putting off a needed increase in interest rates to dampen
the domestic spending boom while encouraging government spending
increases and tax cuts which are worsening the trade and budget
“Writing in The Australian‘s Opinion page today, Professor Garnaut
takes a swipe at both sides of the political divide for basing their
campaigns on promises that assume ‘the good times will continue for
We might be right, but we’re ratbags. No-one listens to us.
Here’s hoping that the PM – or the two men who would be PM, Messrs
Costello and Latham, listen to the prof. Please.