February 13th 2016

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Articles from this issue:

COVER STORY Democratic Progressive Party ousts Kuomintang

CANBERRA OBSERVED Barnaby Joyce: enigma, loose cannon, deputy PM?

NATIONAL AFFAIRS Temporary protection visa holders left exposed

ENVIRONMENT Bob Carter, RIP: mythbuster and fact finder extraordinaire

FAMILY AND SOCIETY Farewell, religious liberty, farewell, conscience

EDITORIAL Syria: U.S. backdown opens door to peace talks

ECONOMICS Bubble has burst on globalisation project

EUTHANASIA Media drives sales in the death market

CULTURE What does a good music review sound like?

CULTURE Can we put a rocket under religious Sci-fi?

CINEMA A melancholy heroism: Snoopy and Charlie Brown: The Peanuts Movie

BOOK REVIEW Partial but thorough

BOOK REVIEW Brutality of battle


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Bubble has burst on globalisation project

by Colin Teese

News Weekly, February 13, 2016

So far as global economics and finance is concerned, 2016 began with a whimper and a bang. Then kicked up a bit.

Globalisation proponents have

chosen their spokesmen well.

Our Prime Minister took office with the proud boast that there had never been a better time to be an Australian. It seemed a bold opinion at the time, but three months later, as we enter 2016, he might be wishing he had never given it.

Fragile! Which way up?

Our economy appears to be in a decidedly fragile state, while the prospect for things improving by the end of the year are not strong.

It is worth recording that some 30 years ago the incoming government of Bob Hawke and treasurer Paul Keating promised much the same – a bright new economic world from which would emerge unbridled prosperity on the back of “enlightened” economic reforms.

It hasn’t quite worked out the way Hawke and Keating hoped – at least not for most Australians. What was not predicted was wage growth proceeding at the slowest rate in 40 years: real unemployment (that is to say, people unable to find full-time work) affecting about 15 per cent of the workforce; and an exchange rate so high that local businesses could not compete with imports.

We were not told how much our economy’s wellbeing would come to rely on strong commodity prices and be so ill prepared to deal with the consequences of a price collapse in commodities.

Nor were we prepared for being part of a global financial crisis almost as bad as the Great Depression.

It would be comforting to believe that all of these misfortunes could be attributed to a series of unanticipated and unpredictable circumstances – Black Swans, as some like to call them.

Sadly, that does not hold up. In very large measure most of these problems have their source in economic policies that Australia and most Western economies chose to adopt some 30 years ago. Worse still, contemporary policymakers have so far not recognised the connection between the problems we face today and the policies we have been following so assiduously for the last 30 years.

Quite how these policies came to be so attractive to so many Western governments is not altogether clear. At the time it had become the trend to describe an action no more exciting than “change” with the buzz-phrase “economic reform”. The phrase has since become so much part of everyday speech that the word “change” has disappeared from usage.

Sun rises on globalisation

In search of so-called “reform” we embraced what came to be known as the Washington Consensus. You don’t recall that? Don’t be surprised. The term wasn’t much bandied about. Still isn’t.

Economic reform came to mean discarding what we were doing in favour of free trade, including the free flow of capital across national borders, privatisation of public instrumentalities, labour-market deregulation and the so-called virtues of small government.

The whole lot was wrapped up in a kind of package called globalisation, which was sold as being as inevitable as the sun rising. Technological innovation, especially in the area of transportation, meant that nations could no longer remain independent; rather they could not avoid being gathered up into a world where interdependence prevailed.

National independence, which we once called sovereignty, was now constrained by the new reality of interdependence.

In this world, markets dominated governments, not the other way around. They could and would deliver the best of all possible economic outcomes. The belief in this doctrine became widespread and was elevated to the status of a religion.

The new religion grew out of the ideas advanced by an American economist named Jeffrey Williamson, who later insisted his ideas were misused. They were taken up enthusiastically by the International Monetary Fund, the World Bank and the U.S. Treasury, and made into an economic reform plan. Backed strongly by the economic establishment in the most important universities in the English-speaking Western world, the Washington Consensus quickly became the new economic gospel.

Without being conspiratorial it can be pointed out that the new gospel coincided with the emerging economic interests of the United States and Europe, and especially supported their efforts to refashion the international trade landscape.

Certainly changes were needed. The Bretton Woods agreement had collapsed. Concluded in 1944 to regulate trade and monetary policy in the postwar period, it comprised a trade and payments system based on the idea of Western economies keeping their currencies in line with a U.S. dollar valued against the price of gold at $US35 an ounce.

The collapse of Bretton Woods left the trade and payments of the world in disarray.

So far as Australia was concerned these developments troubled both the Whitlam and Fraser governments in office, although the push for change at the time Hawke and Keating took office still came as a shock.

Nobody yet can say why that incoming Labor government embraced the Washington Consensus ideas so enthusiastically – especially since they effectively destroyed minimum-wage provisions and emasculated trade unions, which had been the basis of Labor power since the party’s inception.

Fundamentalist capitalism

For whatever reason, Keating, in particular, took up the challenge. Almost overnight he became a firm promoter of a fundamentalist form of market capitalism with all its trappings. In the process he changed his own party and, indeed, our overall political and economic system in the most basic way since Federation.

Keating had all the jargon. Modernising our economy. New approach needed if we were not to fall behind the rest of world. There was even talk that we risked becoming the “White Trash” of Asia.

Only “reforms” could turn it all around. Provide new levels of material wealth.

It all got off to something of a bad start. There were massively high interest rates leading to the recession that Keating said we had to have – whatever that might mean. There were references to “banana republics”.

In the earliest days there was the attempt to install a consumption tax – which was another part of the “reforms” that Keating was pushing. For Hawke, that was a step too far; as prime minister, he ruled that out. What wasn’t stated was that we needed a new revenue stream to make up for what we lost by giving up tariffs.

Incidentally, the history of a consumption tax is an interesting example of universally applicable political hypocrisy. Keating first could not persuade Hawke to allow him to introduce a consumption tax. A few years later he defended his prime ministership against the efforts of John Howard and John Hewson to introduce a consumption tax.

At the next election, John Howard won by promising, among other things, that the idea of a consumption tax was dead. Three years later he campaigned for a consumption tax, and almost lost against Kim Beazley, who had supported Keating in Labor’s first attempt to introduce a consumption tax.

Phew! Now we have Bill Shorten opposing any change in the present tax.

Despite all their success, it has not been all plain sailing for the proponents of globalisation. And, over the last 30 years there have been criticisms of the ideas behind globalisation. Indeed, it should be said that in recent years the term has fallen somewhat into disuse.

Globalisation proponents’ response to criticism has been clever. Unable to rebut their critics, providing arguments with credible responses, wisely they have chosen to remain silent.

One such critic has been the Centre for Economic and Policy Research (CEPR), based in Washington and currently headed by Dean Baker. This independent agency has been skeptical of the claims made for free market economics from the start.

In the year 2000 the CEPR published a research document entitled, “The Emperor has no Growth: Declining economic growth in the era of globalisation”. In a better world this document could, on the basis of the facts it produced, have changed the course of economic thinking. Space precludes a full analysis of this admirable document, but enough can be gained from a look at some of the basics.

To make its analysis meaningful, the CEPR compares economic growth performance in the period 1960–80 (before globalisation) with the following 20 years (1980–2000).

It starts with real wages in the U.S. In the period 1960–80, real wages rose by 80 per cent. In the period 1980–2000, there was no gain. U.S. output per person grew by 83 per cent from 1960 to 1980; from 1980 to 2000 it grew by 33 per cent.

In 77 per cent of the countries surveyed by the CEPR, income per capita fell by more than 5 per cent between the period 1980–2000 and 1960–80.

Growth rates for Latin America and Africa were disastrous comparing 1980–2000 with the earlier period. In South-East Asia where the 1980–2000 performance was much better, they still weren’t as good as for 1960–1980.

Only in East Asia were rates of growth better in the period 1980–2000 compared with 1960–80. And here this is mostly explained by China. Its GDP increased fourfold over the later period and it accounts for 83 per cent of the region’s population.

Of course, the IMF and the World Bank don’t boast about China’s growth in the period 1980–2000. It has not embraced globalisation; it manages its currency, and maintains restrictions on capital flows.

What does the CEPR tell us about Australia? 1960–80 real per-capita growth: 61 per cent; 1980–2000 growth: 52 per cent. Those are the facts. Yet we are repeatedly told how much better off we are with globalisation.

Moreover, this is not the whole story the CEPR has to tell. To tell more will have to wait for another occasion.

Colin Teese is a former deputy secretary of the Department of Trade.

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