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Thriving in competition

Economic rationalism has proved itself, writes Des Moore,
who argues for more of the same

AFR 16 January 2002

Liberal economic policies — sometimes labeled economic rationalism — continue to receive a bad press. Some claim the greater exposure to competition inherent in such policies is causing declining industries and employment, increasing inequality and is diminishing our cultural and economic identity.

They draw little encouragement from the response to international competition of Australia’s sportsmen and artists — strong performance and portrayal of identity — let alone of our exporters.

Nor do they recognize much merit in the astonishingly high 25 per cent increase in average living standards between 1992-93 and 2000-01 — double the rate of the 1980s and 1970s.

Importantly, Productivity Commission analysis suggests this rapid growth was due less to the business cycle recovery or the application of information technology than to economic reforms. In short, economic rationalist policies pursued by Labor and Coalition governments made a major contribution.

Little wonder that the Reserve Bank Governor suggested recently that the days are over when Australia was helplessly buffeted by the changing fortunes of the global economy. Better government policies (including greater exposure to international competition) and the private sector response have actually improved our identity.

Faced with these material gains, some critics fall back to assertions that increased stress and excessive materialism have led to a deterioration in the quality of life. Yet in the 1990s almost every health measure shows continued improvement and Australians are also living longer; average working hours have not increased, the main exceptions being professionals and managers (but increasingly they have compensated by choosing shorter working lives); and the arts flourished as never before.

Complaints by the gloomsters that inequality has increased also fall to the ground. The large increase in real incomes was shared equally between wages and profits and, although the distribution of wage and salary earnings became somewhat wider, total incomes were largely equalised through our generous social welfare system. The average person classified as "poor" in 1992-93 is 25 per cent better off now.

But greater competition has caused declines in some industries, with accompanying job losses. Following Hanrahan, some even suggest manufacturing and rural industries have been "rooned". So rooned, indeed, that their production and exports increased strongly in the 1990s and the population in rural areas grew only slightly slower than in capital cities.

True, the more efficient manufacturing industry needed fewer workers. But, with expanding service industries, total employment increased quite strongly and unemployment fell. It would surely have been unfair to ask the rest of the community to keep subsidizing the protected sector when there are more efficient alternative businesses and forms of employment. It is also more socially healthy to have a community with as few as possible not dependent on others.

Brushing the material successes aside, many still argue economic rationalists care too much about economic results and not enough about what happens to people or the environment. Yet there is almost universal support for government intervention to assist those disadvantaged or on low incomes, and to protect the environment. The argument revolves around the extent of intervention, not the fact.

With our high and rapidly increasing living standards, there should be no need to provide income support to over 20 per cent of the working age population. It is particularly anomalous that the top 40 per cent of incomes receive nearly 15 per cent of government benefits and allowances. Unless eligibility for health benefits is limited to lower income groups, as the population ages there will be a massive blow-out in government spending (and hence taxation) on health alone.

The provision of extensive social security and associated benefits has also outdated the need for a tribunal to keep low wages up. The continued role of this tribunal is all the more extraordinary given that more than half of low wage earners live in high income households. Of course, the legal and judicial systems need to ensure that both employees and employers are able to conclude and maintain mutually acceptable working relationships, and to protect individuals against intimidation or exploitation. But this does not require the antiquated plethora of regulations of employer-employee relations that act as a deterrent to employment.

These regulations also contribute to the 20 per cent "productivity gap" between Australia and the USA. The belief among some in the business community that this can be overcome through faster immigration and a larger population is mistaken: a recent OECD publication shows that high productivity and high living standards are readily achievable with small and even slow-growing populations.

The lesson of the 1990s is that Australia thrived in the more competitive environment flowing from reforms initiated by both political parties. The third Howard Government has an obligation and an opportunity to carry forward that reform process.

Des Moore is Director of the Institute for Private Enterprise. This is an edited version of an address to the Young Liberal National Convention on 4 January.