Opinion & Commentary
Building Prosperity
In this special publication, Wolfgang Kasper reviews Australia’s economic development over the past two decades and looks forward to the 2020s. He cautions against the prevailing triumphalism in Canberra policy circles, arguing that periods of plenty are the best time to prepare for eventualities such as slowdowns in global economic growth by cutting back on unnecessary government activity and placing economic freedom on more solid foundations.
Kasper points out that it is during periods of easy economic growth that social and economic contradictions build up, and policy typically shifts from giving priority to economic growth in favour of redistribution to pressure groups and political activists as well as the conservation of old structures. Thus, just as the conservative, complacent and protectionist Menzies era laid the basis for the economic pain of the Whitlam-Fraser years, so will the fundamental settings of the coming decade influence the economic fates of the 2010s and 2020s.
'He cautions against the prevailing triumphalism in Canberra policy circles'
His analysis is loosely underpinned by the concept of long waves of accelerating economic growth lasting 20-30 years, followed by 15-20 years of deceleration. This phenomenon has been dubbed ‘Kondratieff cycle’ after the Russian statistician who demonstrated that economies run periodically into bottlenecks, but rejuvenate. Thus, the Reagan and Thatcher reforms, such as deregulation and privatisation, accelerated economic growth in the 1980s and 1990s, whereas institutional ossification slowed growth in the late 1960s and 1970s.
Kasper first used the concept of Kondratieff cycles in an Australian context back in the late 1970s when he co-authored Australia at the Crossroads—Our Choices to the Year 2000. The Crossroads group, as the authors became known, identified a closed economy, pervasive political intervention, industrial rigidity and excessive state ownership of productive resources as the main reasons for Australia’s poor economic performance. They advocated the need for deregulation and the opening up of the Australian economy so that Australia would be better placed to catch the next Kondratieff upwave driven by internationalisation, technological changes, energy saving and biotechnology.
Thanks to the reforms of the early Hawke-Keating years, Australia eventually did catch this upwave. Australians, however, had to master more structural change than either Americans or Europeans. The reason for this is that Australians had to cope with the consequences of the liberalisation of international trade and capital flows at a time when the pace of global change accelerated.
But the Hawke-Keating reforms were partial and partisan. Thus, international trade as well as product and capital markets were subjected to free market rules in the 1980s under the Hawke-Keating government, whereas labour markets remained centrally guided and the social security system still largely unreformed.
Although the Howard government widened the ambit of reform somewhat, Kasper argues that Australia has nonetheless entered the millennium with a set of economic institutions that falls far short of what is needed for sustaining prosperity in the face of adversity. The weaknesses in our ‘economic constitution’ may not weigh all that heavily now, as we are surfing the current global Kondratieff upwave. But they will prove a costly liability when global economic growth slows down again, as was the case in the late 1880s, 1930s and 1970s.
'A redistribution of the various tasks of government also seems urgent'
Global competition is forcing a review of the size and functions of government. When international economic integration was limited and most capital was invested where it had been saved, governments enjoyed considerable monopoly powers within their jurisdictions. Globalisation has begun to change all that. In the future, good governance will require new and effective constitutional constraints on parliamentary opportunism such as strict limits on budget expenditure in peacetime—for example, a rule to limit the public sector’s claim to no more than 25% of the national product.
A redistribution of the various tasks of government also seems urgent, as globalisation is placing a premium on administrative creativity and the agility and cohesion of small responsive units of government. The Australian federation, however, has long been subject to political and judicial centralisation to the extent that many now doubt the usefulness of both State and local governments. Much can be said for devolving government tasks to the lowest level of government so that local problems are addressed by local means.
Kasper recommends that Australia adopts a decentralised model of ‘competitive federalism’ to improve governance and enhance economic freedom. A re-examination seems timely now, as Australia can enjoy the luxury of reform where necessary while the economic tide is high.
About the Author:
Wolfgang Kasper is Senior Fellow at The Centre for Independent Studies and Professor Emeritus of Economics at the University of New South Wales. This article is a summary of his most recent publication for CIS, Building Prosperity: Australia's Future as a Global Player.
