As the world searches for new models to address the after-effects of the global financial crisis, Australia deserves a closer look. The country is now the envy of the industrialised world, having recorded faster growth than the United States this decade, even as it provided universal health care and other social services that the U.S. does not. The economy has also weathered the crisis better than its peers: unemployment is at 5.7% (compared with 10.2% in the U.S. and 7.9% in Britain); the equity market has reached 12-month highs; the Aussie dollar is heading toward parity with the greenback; growth forecasts are so bullish that Australia is the first G20 nation to raise interest rates since the global downturn, and it is widely praised as the best place to invest because it is free of banking crises.
When John Howard became treasurer 32 years ago, Australia was an over-regulated and over-protected nation, weighed down by chronic inflation and union militancy. By the time Mr. Howard retired as prime minister in 2007, the country had undergone a thorough transformation, including financial market deregulation, tax reform, freer labor markets, import-tariff reductions and privatisation of state-owned enterprises. Wages, economic growth and the stock market were up, while unemployment, inflation, and even interest rates were down. The Coalition government had paid off its predecessors' AUD$96 billion debt and AUD$10 billion budget deficit.
The irony, however, is that the current government, led by Kevin Rudd, is in the process of repudiating the free-market approach that has served Australia so well and is rolling back the reform agenda of the last three decades. In the past year, it's become fashionable to blame capitalism for the world's economic ills and to predict the end of the three-decade bull run in economic conservative ideas that began with Margaret Thatcher's election in Britain in 1979 and Ronald Reagan's ascendancy in the U.S in 1980. The specter of big government has returned to haunt Australia.
In essence, Mr. Rudd champions a new paradigm that shifts his nation's priorities from private to public power. He is interpreting this moment in history as a mandate for a renewed activist state. He insists that "the great neoliberal experiment of the past 30 years has failed", and that it has "not served Australia well in preparing for the current crisis." In many respects, the Australian Labor leader's economic-stimulus packages-taken together with his laws to beef up union power in the workplace, plans to introduce an emissions trading scheme and efforts to increase the power of public-health system-reflect this new interventionist mindset.
There has long been a statist culture Down Under. Since independence from Britain in 1901, big government had manifested itself in various ways: import protection to guarantee domestic profits and an arbitration system to stand between capital and labor by guaranteeing a share of the protected pie for workers. Not surprisingly, this stifled the nation's development, and by the early 1980s, Australia was economically insular, bogged down by protectionism, over-regulation and chronic inflation.
The tide began to turn when a group of free-market-oriented thinkers took a stand against the prevailing culture and went on to play a significant role in the country's public life. In the late 1970s, the free-market position was adopted by conservative Liberal party "dries", including the-then treasurer Mr. Howard. From 1983 to 1996, Labor Prime ministers Bob Hawke and Paul Keating floated the Aussie dollar, reduced import tariffs, and deregulated the financial system, as well as state-run industries such as aviation and telecommunications. From 1996 to 2007, Liberal prime minister John Howard-ably supported by his long-time treasurer Peter Costello-corrected Labor's debts and budget deficits, finished off the job of slaying inflation, pursued labor-market flexibility, improved waterfront productivity, privatised government businesses and implemented income- and business-tax reforms.
The results: 17 years of uninterrupted vigorous growth; record low unemployment of 4% in 2007; a less inflation-prone economy, lower interest rates, a wider choice of goods and services at lower prices, a strong and stable financial sector, and the weathering of the 1997-98 Asian financial crisis, the 2000-01 dotcom-inspired equities crash and the post-Sep. 11 meltdown. While the commodities upswing and China's demand for Australian raw materials from 2003 onwards also helped prolong the boom years, it was a testament to the dynamism of a modern, flexible economy that it was able to weather external shocks and keep growing.
Most of the credit for creating the miracle economy belonged to innovative managers and hard-working employees. But Canberra's leaders-on both sides of the political divide-helped create a new culture of competition and hard work that drove the nation to new heights by taking the politically brave step of pushing a reform agenda onto a skeptical electorate.
During the past 30 years, public opinion polls and surveys have consistently showed that the Australian populace remained deeply uneasy, and even overwhelmingly hostile, toward market reform, free trade and foreign investment. Still, from the interventionist mindset that delivered economic turmoil in the 1970s, Australia had moved to an era of sounder policy and more durable prosperity. Free markets and prudential financial regulation occupied the moral and policy high ground. Good policy really matters.
In this utterly changed economic and political environment, Mr. Rudd ran for prime minister on the Labor Party ticket with a campaign slogan of "economic conservatism." Mr. Rudd not only styled himself as an "economic conservative"; he also mimicked Mr. Howard on most public policy issues. Such tactics worked a treat. He convinced key segments of the socially conservative working and lower middle classes in marginal suburban and regional electorates to vote Labor again after their 12-year affair with the Coalition. Widespread embrace of the market consensus meant that the new center had moved to the right.
That was a mere two years ago, when the Australian economy was roaring and free of public debt. Unemployment was on the brink of breaking the 4% mark, and mutual fund managers were becoming celebrities. The world now is quite different; words like turmoil, crisis, hurricane and tsunami are freely thrown about. And the Labor leader who ran as Howard-lite now thinks the dire global financial circumstances have given his government license to remake the nation in a more interventionist image. In so doing, Mr. Rudd's new direction marks a strong contrast with not only the Howard-Costello era but also the Hawke-Keating years. It is a grave mistake.
In February, Mr. Rudd announced a giant A$42 billion spending package on top of last October's A$10 billion stimulus package. As a result, he has thrown the government back into deficit and debt to the forecast tunes of A$57 billion and A$200 billion respectively. Add to this his government's plans to implement an emissions-trading scheme to limit the carbon pollution he says causes global warming, as well as its new laws to roll back labor market flexibility and boost trade union power in the name of a "fairer" workplace. The economic crisis will serve as a stepping stone to a radical shift in the relationship between people and their government.
What, then, is one to make of all this? There are several reasons to raise serious doubts about this new agenda. First, Mr. Rudd says free-market economic reforms "have not served Australia well in preparing for the current crisis." Never mind that the economy is better prepared to weather the global storm precisely because of those very economically conservative policies such as deregulation, economic liberalisation and prudent regulatory oversight of the nation's financial institutions. Never mind, too, that Australia has had nearly a dozen years of budget surpluses and can now spend tax dollars to try to fuel a recovery from a strong position. Never mind that no Australian bank has suffered a run or subprime mortgage default in the past 15 months. Never mind that all of Australia's major commercial banks are highly profitable and in the top credit bracket of the world's banks. Never mind that there is no evidence of regulatory failure. In fact, the only financial institutions in trouble are those debenture funds that had to freeze redemption. Far from being the fault of any market fundamentalism, this was primarily due to the Rudd government's ill-considered decision in October to guarantee bank deposits at taxpayer expense.
Second, Mr. Rudd misunderstands the causes of the financial crisis. He downplays or ignores the argument that Australia's short-term problems came courtesy of inappropriate government interventions overseas, as well as poor regulatory oversight of the U.S. financial sector and the bursting of asset-price bubbles in the U.S. Thus, he unfairly tars the Howard-Costello government with the flaws of the Federal Reserve and the Clinton and Bush administrations.
In fact, only one senior political figure in Australia read the national and global economic landscape and caught the significance of the aforementioned events: Peter Costello. On at least half a dozen occasions between the subprime mortgage collapse in September 2007 and the federal election two months later, the then-treasurer predicted that the subprime collapse would "create other problems around the world." In late October, he forecast a "huge tsunami would roll through the financial markets, as the subprime home lending debacle ran its course in the United States." Though the Australian economy was in good shape, it was imperative that our leaders held their nerve and did not panic. "At a difficult time like this," he declared in October, "it is important we keep our economic management strong, in experienced hands, and that we keep Australia's economy growing strongly."
This brings us to the third response to the Rudd thesis: serious doubts dog the Government's Aus$42 billion stimulus package which passed in parliament in February. The jury is out on the extent to which the big spending agenda has protected the economy from the global downturn. But it seemed reasonable for the Liberal-National Opposition to question not only the size but the make-up of the government's package. Borrowing money from the public and then redistributing that wealth only digs Australia deeper into debt. And Canberra has borrowed so much already that if it adds too much more debt, or spends it poorly, it could precipitate a global crisis of confidence in Australia-leading to a run on the Aussie dollar-and encourage tax increases in the future to pay for the spending spree.
If the problem wasn't the size of the Rudd government's fiscal stimulus, it was certainly its design. The package was badly composed, handing out lump sums of cash for special interests and Labor pet projects rather than instituting income tax cuts and spending on economic infrastructure. Of course, most economists agreed that some kind of fiscal stimulus might help the economy, and that running budget deficits may be appropriate in a recession. But the debate should have focused on the quality of stimulus. Is increased government spending on schools, homes and the automobile industry a more effective way of stimulating the economy than creating incentives for individual businesses and workers to create wealth?
In any case, Australia continues to weather the economic storm. So much so that in October the Reserve Bank of Australia raised interest rates to 3.25% from 3%, making Australia the first G20 nation to tighten monetary policy since the crisis began last September, and this month the RBA raised its benchmark interest rate to 3.5%. In the last quarter, 40,600 jobs were created and unemployment fell to 5.7% from 5.8%. The share market, meanwhile, is at 12-month highs and the local dollar is fast approaching parity with the greenback. Yet the Rudd administration refuses to contemplate winding back its large-scale budget stimulus more quickly than scheduled.
Mr. Rudd and Treasurer Wayne Swan maintain that Labor's big spending stimulated consumer spending and thus insulated Australia from the global contagion. Several economists point to China's rapid rebound from the crisis. But the primary reason for Australia's resilience has more to do with its starting point. Australia went into this global recession in an incredibly strong position. Unlike Britain and the U.S., Australia had a budget surplus and no public debt. Unlike Britain and the U.S., Australian banks were well-regulated, well-capitalised and profitable. And unlike Britain and the U.S., unemployment was at a record low of 4%. All of this gave Australia considerable padding and insulation. It was a position of unique strength bequeathed to the incoming Labor government. This is why the RBA is now talking up the economy, even though the government is talking it down.
It is true that the Australian economy, hitched to a China-driven Asian growth engine that has decoupled from the recession-plagued U.S. and European economies, is being pumped up by mining and energy exports to the north. But if, as Messrs. Rudd and Swan say, the Labor government's fiscal stimulus package explains why Australia is immune to global contagion, why haven't similar big spending programs implemented by Messrs. Brown and Obama kept Britain and the U.S. out of recession?
In this climate, the onus is on bastions of free markets to defend unapologetically the economic reform record of the past three decades and remind skeptics that the nation became economically secure, not less, by exposing itself to competition. Without the so-called "neoliberal" reform agenda, Australians would have been poorer during this period, unemployment would have been higher, the fall in the Aussie dollar several years ago would have fed a vicious cycle of higher inflation, and we would have had much less to spend on social services such as health, education and roads. Free-marketers, meanwhile, should also unashamedly highlight the perils of Canberra's big government, pro-regulatory agenda as well as point out the merits in a more market-oriented policy approach of reducing disincentives to hard work and innovation.
More than 30 years ago, former California governor Ronald Reagan met with then British opposition leader Margaret Thatcher for what was scheduled as a rudimentary 20-minute session between two right-of-center politicians from opposite sides of the Atlantic. The conversation instead lasted more than two hours and, as Mr. Reagan later put it, they immediately identified each other as "soul mates" in promoting the cause of "small government and economic freedom." Though Mr. Howard never met Mr. Reagan, he confided with the Iron Lady on several occasions since the 1970s. The rest is history.
Thirty years later Messrs. Obama, Brown and Rudd have recognised one another as soul mates, but the comradery is insincere, since at least in the case of Brown and Rudd, they conveniently supported opposite ideological positions during the previous decade. At any rate, their repudiation of the 30-year "neoliberal" experiment is fraught with danger.
Australia is weathering the global storm precisely because of the past few decades of economic reform. And yet Mr. Rudd, like Messrs. Obama and Brown, is effectively proposing that Australia alter the relationship between the federal government and private sector, a relationship that has been in place for nearly 30 years. Then the private sector led the economy; now Canberra will chart its course and, according to leading Labor economist Ross Garnaut, risk entrenching a damaging expansion of government regulation.
Of course, Mr. Rudd maintains that a market economy will prevail and in recent months he has lectured the world on the perils of unchecked spending programs and protectionist economic policies. Still, in the Rudd era it's becoming clear that the private sector is going to be demoted to a secondary role. This may not be socialism, but it is not the system that has produced Australia's miracle economy.
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