28 September 2015

Free Market Success Stories #2: Australia’s rise


For a long time, policies such as trade restrictions, centralized wage negotiations and governmental intervention in the economy obstructed economic development in Australia. This all changed during the 1980s and the 1990s, when a wide range of pro-growth policies were implemented. For example, growth-inhibiting taxes were cut; free capital markets were introduced; labour markets were liberalized and wage negotiations became more decentralized. At the same time, fiscal responsibility led to more solid government finances. Perhaps somewhat surprisingly, those responsible for this free-market success story were not  conservative Thatcherites, but rather Bob Hawke –  who led the country’s Labor party to victory in four consecutive federal elections: 1983, 1984, 1987 and 1990 – and perhaps even more importantly his reformist treasurer Paul Keating.

Keating served under Hawke from 1983 to 1991, spearheading Australia’s shift from a protected economy with little dynamism, to a vivid market economy. Then, in 1991, he challenged and beat Hawke for the Labor leadership. However, the new prime minister faced a tough challenge. After ten years in power, many considered the 1993 election unwinnable for the Australian left, not least since the nation experienced a recession in the early 1990s. Nonetheless, Keaton’s market-oriented stance won the party yet another election. It is unlikely that the Australian Labor party would have won so many consecutive victories had it not succeeded in keeping unemployment in check through successful reforms.

The Labor leadership stressed the fact that their growth-oriented policies encouraged innovation, entrepreneurship and job growth. The party also argued that market-oriented reforms were not a necessary evil, but a desirable change in order to create a higher living standard for the population as a whole.

In his 1993 victory speech, Keating remarked: “We will see ourselves as a sophisticated trading country in Asia and we’ve got to do it in a way where everybody’s got a part in it, where everyone’s in it.” He continued: “The people of Australia have taken us on trust and we’ll return that trust and we’ll care about those people out there, particularly the unemployed – we want to get them back to work.”

The policies worked remarkably well. Australia had fallen from being the world’s 5th richest (in terms of GDP per capita) economy at the dawn of the 20th century, to being the 15th richest nation in the early 1990s. Market reforms made it possible to climb back to become the 8th richest nation in 2002. Average annual labour productivity growth increased from 0.8 percent in the late 1980s, to 2 percent in the mid-1990s and 3.3 percent towards the late 1990s. Interestingly, rising tides indeed lifted all boats in Australia – the shift towards freer markets took place without a significant corresponding rise in income inequality.

It is remarkable that Australia did not experience a strong increase of income gaps at a time when the nation received large inflows of immigrants and, like the rest of the world, moved towards an economy that depends more and more on knowledge and skilled labour. The market reforms that increased employment seem to have counteracted the expected rise in inequality. For example, the Australian system creates one of the top societies for foreign-born individuals to get established on the labour market. Ann Harding, professor at the University of Canberra, has remarked on this fact: “Strong economic growth and continuous fall in unemployment have resulted in private income growth, especially at bottom end”.

It is hardly surprising that the Australian Labor party enjoyed its string of success. Its policies has created opportunities for growing wealth, and clearly also benefited the less well-off and the new migrants. Initially, the opposition to reforms was widespread, not least amongst previous stakeholders who believed that the implemented changes went against their own interests. A clear example is the move towards decentralized wage formation, which was promptly criticized by labour unions. The Labor government, however, ultimately went ahead with its reforms and even managed in the process to win over some support from the unions.

Australia’s centre-right finally won an election in 1996, after which they pursued a path of reform similar to that of the previous Labor governments. The new government continued to emphasize the need and desirability of structural changes toward further market-friendly policies. Four consecutive centre-right governments won the voters’ trust until, in 2007, Labor again returned to power. After a Labor re-election, power again shifted to the right in 2013. Interestingly enough, the country’s economic freedom score has decreased somewhat during this new government, showing that it is anything but a given that center-right governments promote economic freedom.

The Index of Economic Freedom explains: “Australia’s strong commitment to economic freedom has resulted in a policy framework that has facilitated economic dynamism and resilience. Although overall economic freedom has declined slightly over the past five years, the Australian economy performs remarkably well in many of the 10 economic freedoms. Regulatory efficiency remains firmly institutionalized, and well-established open-market policies sustain flexibility, competitiveness, and large flows of trade and investment.” The Legatum Prosperity Index also shows that Australia is doing remarkably well, being a society where people feel that they can rely on each other in times of need and where opportunities for entrepreneurship are good.

Currently Australia, which managed to grow even when the global financial crises of 2007/2008 was pulling other economies into recession, is experiencing somewhat of a downturn – which coincides with the reduction of economic liberty. However, if the country’s market friendly policies and sound government finances continue, it will most likely continue the road to prosperity.

The Australian experience can teach us much about how a good society can be fostered. As an example, the average life expectancy in Australia is higher than in even the high-tax Nordic welfare states. This might at first glance seem odd, given all the deadly animals TV teaches us that Australia has and the fact that the country has a limited public sector. But then again, in a system where people prosper through individual responsibility and have access to dynamic markets, limited public sectors can be enough to create social good. Another lesson is that parties on the left can create wide-ranging benefits for their core voters by pursuing economic liberalizations as an alternative to socialism. This might be worth pondering for the British left, in light of the recent decision of British Labour party delegates to elect radical socialist Jeremy Corbyn as their leader. Although the spelling of their party names differ slightly, British Labour could perhaps learn from the history of Australia’s successful Labor rule?

Dr. Nima Sanandaji is a research fellow at CPS, and together with professor Stefan Fölster the author of Renaissance for Reforms (Timbro and IEA). The book can be purchased from the IEA.