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Mining and farming are part of Australia's remarkable prosperity but the mother lode has long been a skilled, educated workforce and flourishing services sector, writes John Edwards.
June 14, 2015 It may strike us as weird in these despondent times, but running through many of the 25 contributions in the nearly 700 pages of the new The Cambridge Economic History of Australia is one recurrent question: how come the Australian economy has done so well? And not just OK well. Amazingly well, over most of the time since European settlement in 1788. If it is true, as the ANU's founding vice-chancellor, Douglas Copland, famously remarked, that Australian history is largely economic history, then who and what we are today must have been shaped by this astonishing economic success.
The story is clear enough, even if the explanation is not. One hundred years after Captain Arthur Phillip's fleet of leaky ships landed its cargo of criminals, the Australian colonies enjoyed a living standard that easily exceeded that in the mother country, and the United States. So rapid was the success that some of the children of those first convict settlers would have lived to see it. So young is the society that created it, the grandparents of many of us alive today would have been born before that success was attained.
It's true that this striking achievement was then followed by 45 years of calamities, from the depression of the 1890s, through World War I, and then the Great Depression. In 1935, as Martin Shanahan points out, Australians were no better off than they had been in 1900. Though England and the US shared most of the calamities, they had done relatively better.
But Australia then came out of the Great Depression earlier than the US and much of Europe, reconfigured many of its economic arrangements in World War II, and emerged after the war on a new and more prosperous growth path that kept pace with the US economy and bettered Britain's. Australia had remade itself. The golden years from the end of World War II to the late 1960s were, as Michael Keating writes in his chapter on postwar economic policy, of such splendid success that the nation was indignant when the jobless rate rose above 2 per cent. It did so only once.
Built into that success, we now know, were problems that became vividly apparent in the 1970s. Wage increases won by militant unions were often passed on to the rest by the Arbitration Commission. The Reserve Bank was constricted by a fixed exchange rate. High tariffs raised the costs of export industries, yet despite the tariffs, Australian manufacturing was about to chopped up by a new wave of competition from Asia. Though it was slowly changing, the White Australia policy limited Australia's engagement with Asia and narrowed its conception of itself. It was a set of arrangements ill-suited to meeting either the new waves of competition from Asia, or the shock of high global inflation following the OPEC oil price increases of the early '70s.
After a decade of unsuccess, Australia once again remade itself with sweeping reforms. By the 200th anniversary of Phillip's landing at Port Jackson, the White Australia policy was long gone, the exchange rate was freely floating, the finance sector had been largely deregulated, wages growth had slowed, tariffs were being dramatically cut and the government was selling off government businesses and enhancing competition laws. Compulsory wage arbitration would before long be restricted to an underlying safety net, with wages otherwise bargained. Australia then slipped into a deep recession â€“ a costly mistake, but one that took inflation, a problem for 20 years, to zero. After that, the central bank was able to keep it low.
Recovering from that recession, Australia entered a long upswing which continues today. It is highly likely that in September of this year we will begin the 25th year of unbroken prosperity. Flattered by a high Australian dollar a few years ago, Australian incomes were once again much higher than those in the US â€“ as they had last been more than a century before.
How can we account for this success over most of the two-and-a-quarter centuries since European settlement? Might we have done better? Might we have done worse? And given the trajectory of our economic history, where are we now and where are we going? For these questions, The Cambridge Economic History of Australiasuggests some fresh answers.
CONVICTS BROUGHT QUALITY
Part of the explanation of Australia's early success is the familiar story we learned at school. Wool and then gold were two high-value and easily transportable products which, within a few decades of European settlement, made the London authorities sit up and take notice of the remote Australian colonies. Then there was the benefit of British legal and commercial culture, and British ideas of representative government, which the early settlers brought to the Australian colonies.
It is also true that most other advanced economies have done well over the same period, so it follows that much of what accounts for Australia's economic success is widely shared. Australia happened to be settled by Europeans at the same time as the industrial revolution got under way in England, beginning the vast rise in global living standards that continues today.
But as several contributions in the new history argue, there is more to Australia's economic success than the luck of abundant land, easily mined gold, English cultural inheritance and a global technology revolution.
In his opening chapter, William Coleman reminds us of what Noel Butlin showed decades ago. Using new estimates, that pioneer economic historian was able to demonstrate that, while wool and gold were important, economic growth between 1860 and 1890, some of the best years, was actually led by manufacturing, building and services. And as Tim Hatton and Glenn Withers point out, from quite early on, a surprisingly high share of Australians worked in services rather than farming or mining. According to Jakob Madsen, the services sector, which today accounts for more than two-thirds of Australian output, has been the biggest sector since 1842. It "dominates the Australian economy", as Monica Keneley writes in her thoughtful contribution.
Australia began well. Thought of as the dregs of society, literal outcasts, convicts brought to the colonies a high level of manual and intellectual skills, and familiarity with the most advanced technology of England, which was in that respect the most advanced economy in the world, Madsen points out.
Education and work skills are to the services sector what ore grade is to mining or soil quality to farming. They were nourished by colonial governments, which moved faster than most in introducing compulsory primary education. Referencing David Pope, Andrew Seltzer notes that primary education became nearly universal in early colonial Australia, driving a huge increase in educational attainment from 1870 to 1910.
Australians were also healthier. With a better diet, uncrowded cities, more open-air work and a standard of living sufficiently high to sustain a competent medical profession, the health of English Australians was markedly better than their relatives in England and Ireland.
The quality of the workforce was sustained and increased by immigration, another long-running theme in Australian prosperity. As Glenn Withers argues, immigration has added not only to the growth of the economy but also to incomes per head, not least because immigrants are on the whole younger and better skilled than the average in Australia. From the convicts of 1788 to Chinese migrants today, Australia's growth has been helped by newcomers. (Even today, Australia's population is growing faster than those of most other advanced economies, largely because of immigration.)
Technology is also part of the story. Australians have always been good at innovation. As Madsen argues, it is not otherwise possible to account for increasing prosperity per head â€“ at least since 1870, when increased gold production or new farmlands could no longer drive rising living standards. Australia has been able to stay on the international technological frontier since European settlement, not least because it has always imported much of its capital equipment. Australia's technological prowess depends far more on imported technologies than on our own invention, as indeed must be true for almost all successful economies. Even so, Australia also has a surprisingly good record of invention, as Gary Magee documents.
Australia has always imported labour â€“ and also capital. Investment has almost always exceeded domestic saving, although savings have usually been quite high compared with Britain and the US. That characteristic has permitted Australia to grow faster than domestic savings would otherwise allow. So, what we were taught in school was right, so far as it went. Wool and the gold were, indeed, essential to Australia's early success in the global trade, and there is no doubt farming and mining have continued to make important contributions. But the Cambridge Economic History of Australia shows that in the long run of Australia's success has depended at least as much on services as on either mining or farming, and it has been sustained by education, training and migration as much as by the country's physical resources. Coming off a mining investment boom, it is worth bearing that history in mind.
RETHINK ON TARIFFS
Australia has done well, but should we have done better? It is a common view that Australia's economic development was held back by too great a dependence on government to get things done, by protective tariffs and welfare dependence. A lucky country, as Donald Horne wrote, run by second-rate people.
Colonial Australians were said to be more dependent on government than Americans or the English, a characteristic ascribed to European Australia's convict beginnings. The "statist" inheritance has left us without initiative, the argument runs, expecting governments to provide. An outstanding example is the building of railways, undertaken by governments in Australia at a time private businesses were building railways in Britain and the US. But as Henry Ergas and Jonathan Pincus write in their well-argued contribution, the government's role was both sensible and essential.
American private development of railways depended less on the revenue from operating them than on the revenue from selling the grants to the land through which the railway was laid. Australia had less arable land than the US and to run sheep or cattle profitably vast areas were needed. The settlements were accordingly smaller and further apart than in the US. In Australia, the US model could not work. Nor would a British or European model, in which railways could be supported by dense populations. Australia had big cities â€“ at times among the biggest in the world â€“ but nothing much in between. If there were to be railways at all, they had to be built by government. It was, as Ergas and Pincus conclude, "a novel and effective" way to do things. Statism worked.
Another common argument in Australian economic history is that we would have been better off without tariff protection for manufacturing industry. Among the first to put it was influential economist Professor E.O. Shann, who argued in the 1930s that Australia was destroying its economic advantage with tariffs to encourage manufacturing. Australia's strength was agriculture, and it should stick to it. He wrote that "big sheep men are the most characteristic and economically important Australians".
The argument over tariffs takes a new twist in the Cambridge history, with several contributors arguing that tariffs were not as important as widely assumed. For example, Madsen writes that government policies (including tariffs) were not as important in explaining the big shift to manufacturing as changing demand and changing technology. Lionel Frost claims tariffs do not explain the big shift to manufacturing during and after World War II. Madsen also claims tariffs played "no role" in recovery from the Depression.
I'm sceptical that tariffs made little difference to the growth or shape of manufacturing, if only because it is difficult to otherwise account for the zeal with which manufacturers sought high tariffs. They surely knew the numbers. What is certainly true is that Australian tariffs were quite low until the onset of the Great Depression, and concessional tariffs were extended to one of the world's biggest manufacturers, Britain. The basics of iron and steel were there but Australian manufacturing did not rapidly expand until after World War II. Tariffs probably helped, as did the rapid increase in the population and the industrial capacity and infrastructure acquired during World War II. Tariffs helped but, by the 1970s, not even very high tariffs could protect Australian manufacturing from Asian competition, a challenge not only to Australia but also to Europe, Britain and the US.
Revered now for his early criticism of tariffs, Shann was decidedly not a prophet. Agriculture remains immensely important to the Australian economy, but now accounts for less than one-fiftieth of Australian output, and one-hundredth of Australian employment. And while farm exports have never been bigger than they are today, service exports are 50 per cent bigger than farm exports, and growing quite as quickly. Shann's notion of Australia's future was entirely wrong. So was the counterpart notion of Britain's future as a leading global manufacturer, to which Australia would remain a supplier and customer. The big sheep men faded into the past, along with British manufacturing.
Was Australia impeded by high taxes and a correspondingly high level of welfare payments? On the contrary, Shanahan argues, Australian governments also created what it is still one of the most effective systems for taxes and welfare. Even now, he shows, Australia has markedly lower taxes than New Zealand or Canada or almost all of the OECD, and markedly lower government spending compared with the size of the economy than either of those two countries, or most of the OECD.
A touchy issue only incidentally addressed in the Cambridge volume is whether Australia would have been better off without the White Australia policy, introduced first in the colonies and then in the Federation to prevent the entry of cheap and abundant labour. It would certainly have been a different style of country, one where labour-saving technologies would have been introduced more slowly, where large-scale horticulture might have been more viable, and textile and other high-labour content manufacturing might have been more competitive for longer.
But would this vast poor population of cheap labourers, mostly not speaking or reading English, have been admitted as potential citizens, expected to form families and vote their political preferences? Or would they have remained perpetual guest workers, supporting a pampered white citizen aristocracy? That was the South African road and the culture of the southern US. And would the creation of an Asian underclass in Australia â€“ the outcome the White Australia policy was designed to prevent â€“ have made us more or less able to understand the new Asia which emerged after the Pacific War?
Maybe we could have done better, but the evidence is not compelling. At one time or another we have tried most things â€“ government businesses, soldier settlement, schemes to make the deserts bloom, textiles and footwear, motor vehicles, tariffs, subsidies, arbitration, fixed exchange rates, decentralisation. Some were for a while successful, others not. What has survived is what we have found works, at least for now. It is not easy to point to wasted opportunities, to roads to greater prosperity not taken, to unnecessary self-imposed constraints and impediments that precluded Australia from becoming a more prosperous economy than it became.
With a little less care, a little less luck, a little less learning from comparable societies, we could almost certainly have done worse.
We could, as a number of contributors mention, have followed the path of another settler economy with rich farmlands, Argentina. At one point, Argentina's growth outpaced ours. Its success with meat matched our success with wool. But Argentina then fell way behind, not because its industry failed but because its state failed. A land system that entrenched power for a ranching aristocracy and an army that sought civilian power, engendered a corrupt tyranny in which business could not thrive. Had the squatters got their way and obtained title to all the lands they occupied, if they had been able, as they wished, to extend convict transportation or import cheap workers from India and China, Australia's trajectory might more closely have resembled Argentina's.
Another closely related peril avoided is the Dutch disease, in which one successful export commodity, often controlled by a local cabal or by foreigners, chokes off the growth of other industries. It might in Australia have happened with wool. That is the Argentine analogy. It might have happened with minerals and energy resources. That is the Saudi analogy. Despite many predictions that it would, in Australia it hasn't happened. Perhaps power was too widely distributed, alternative economic activities too well based and migration, trade and capital flows too disruptive to permit one industry to be too dominant for too long.
A survey the size of the Cambridge history demonstrates the remarkable stability of some Australian economic characteristics, from early colonial times to now. These include the high level of immigration and capital inflow, our preference for living in big cities on seaports, the importance of resource exports, political stability and our tolerance for large concentrated businesses and limited competition in transport, retail, communications and finance.
It reminds us, too, of some very big changes. Richard Pomfret depicts the abrupt swing away from the British market and towards Asia after World War II, with Australia now integrated into the Asian market. Rodney Maddock recounts the evolution of the finance sector, from its rickety beginnings to the massive structure today. Another big change has been in the ethnic and cultural composition of Australia's population. It was only after World War II that Australia began to encourage non-British European migrants, and less than 30 years since Asian migrants have been admitted in any great numbers.
Less than 70 years ago, nine out of 10 Australians were born in Australia, and almost all the remainder were born in Britain, Ireland or New Zealand. By 2011, as Hatton and Withers show, for the first time since European settlement, the number of Australians born in Asia exceeded the number born in Britain, Ireland and New Zealand. The proportion of Australians born in Australia was by contrast back down to a share last experienced before Federation.
MINING HAS ITS LIMITS
If we have done so well, how come we are so dissatisfied with our economic prospects today? Can our economic history help our understanding of where we are now and where we are going?
There are a couple of useful pointers. One is that while mining has long been part of Australian prosperity, it has never been more than a part. The bigger part has always been Australia's human capital, the education and skills of the workforce. That workforce has for most of the time predominantly been employed in the services sector, which for most of the time (and more so now than ever before) has accounted for most Australian output.
Despite what may well be the biggest boom in mining commodity prices ever experienced in Australia, and despite a mining investment boom bigger than we have seen before, mining remains a useful but not dominant sector in the economy. Even today, 12 years after commodity prices took off, the whole of the mining industry accounts for less than 3 per cent of employment and one-tenth of GDP, around 1 per cent of GDP bigger than it was 20 years ago. It's true that falling mining investment weighs on GDP growth, but this is more than offset by the increased mining output the investment was intended to produce.
The loss to GDP from the fall in mining investment between 2012 and 2014 was less than half of the gain to GDP from higher exports of iron ore and coal. And while mining investment has been falling, service sector investment has over the last year risen quite strongly. Already eight times bigger than manufacturing, investment in the broader services sector may well exceed mining investment this year or early next.
Another useful reminder from the Australian experience over several hundred years is that our political arrangements have worked reasonably well. When necessary, things get done. Policies are remade. In the economic realm, colonial Australia had effective arrangements: Federation introduced uniform tariffs and a single national market; the conservative Nationalist government of Stanley Bruce co-ordinated state and Commonwealth borrowing; the Labor Curtin government secured an effective income-tax monopoly for the Commonwealth and created an effective central bank under government control; the Menzies governments enhanced federal authority; the Hawke and Keating governments abruptly changed policies on the exchange rate and finance, tariffs, taxation, competition and wages. The Howard government brought in the GST. Through it all, Australian governments led the way in public education and health, two major social investments essential to the development of human capital. The place has not previously been found to be ungovernable. It is surely unlikely that, after several centuries of success, it has become so today.
There is a vast amount of useful material and thoughtful reflection in the Cambridge history. I would have liked to see more on government and policymaking in the years before the end of World War II, a bit more on productivity trends and something more on the way changing economic theories change economic policies. But what is there is of good quality and to accomplish publication of a new economic history after earlier unsuccessful attempts is a major achievement in itself.
While the Australian economy has flourished, the teaching of economic history has not. Hit by the same shift of student interest towards degrees in finance and accounting rather than economics, teaching and research jobs in economic history in Australian universities have been disappearing for years. Like Ian McLean's wonderful 2013 Why Australia Prospered, The Cambridge Economic History of Australia is a gallant refusal to surrender.
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