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The Post-Socialist and Post-Capitalist Australian Economy

The Australian economy is usually described in generic ways that give little indication of its uniqueness. Like most government agencies, the Department of Citizenship and Border Protection defines it with clichés, such it being a safe place for investment, and the mundane observation that is dominated by service industries (as is every other first world country.) Such superficial observations sell the Australian economic miracle short.

Until the 1980s, the Australian economy was best described as a national socialist economy with an under-developed free market. Major industries such as health, banking, education, telecommunications and transport were either government owned or heavily regulated by the government with the aim of achieving a social justice outcome. In addition, wages were regulated and protection given to Australian industries and workers so that they would not face non-British competition.

Commencing in the 1980s, the federal government implemented a number of reforms that transformed Australia into a post-socialist society. These included privatising government industries and opening up the market to foreign competition. Ironically, some reforms, such as compulsory superannuation, also transformed Australia into a post-capitalist society by making a capitalist class out of all workers. Rhetoric about ‘class warfare’ and ‘control of the means of production’ is thus redundant in Australia.

The Reforms

 

1983 - The accord

In the early 1980s, the Australian economy was characterised by high inflation, industrial disputes and high unemployment. The federal government (Labor) recognised that the economy needed restructuring but it needed industrial peace to implement its policies. To move forward, it struck a deal with the Australian Council of Trade Unions (ACTU) that proposed that unions would restrict wage demands in return for a government pledge to minimise inflation, implement social services and allow for unions to be merged. (Business was not included in the deal.)

Bob Hawke - The accord

Industrial disputes can destroy companies leading to lose lose outcomes. When devising the accord, Labor prime minister Bob Hawke believed industrial relations should lead to win win outcomes.

1983 - Floating the dollar

In 1983, the Federal government (Labor) floated the Australian Dollar, which allowed the market to fluctuate its value between US48c and $US1.10. When the dollar was high, imports became cheaper and exports less profitable and vice versa when the dollar was low. In theory, floating the dollar allowed the market to assess the value of the Australian economy relative to others and adjust the dollar accordingly. This made the economy more adaptable to change.

Although economic performance generally followed the theory, currency trading provided an opportunity for private power to abuse its power to the detriment of the whole. For example, during the 1997 Asian financial crisis, currency traders like George Soros bet that the currencies of Asian currencies would go down and with the wealth at their disposal, they had the means to sell the currencies to push them down. Seeing the currencies being attacked, other traders sold the currencies with the expectation that they would go down further. If the currency was pushed significantly below the true value, then it was purchased again with the expectations of a rise where it could be sold again. Australia was caught up in the currency attacks but managed to withstand them better than the likes of Malaysia, South Korea and Thailand. These attacks artificially affected the profitability of some Australian businesses.

Exchange rate - Australian dollar

Exchange rates are not always logical reflections of an economy's health. For example, in 2008, structural problems in the US economy led to the subprime mortgage crisis and the collapse of numerous American banks yet the Australian dollar fell relative to the US.

1980/90s – Deregulation of the banking system, privatisation, and Reserve Bank independence

To regulate or deregulate the banks has been a perpetual argument in the world’s economies over the last century. Bank regulation in Australia can be traced to a speculative property boom in the 1890s that led to 11 commercial banks going bankrupt, which in turn pushed Australia into recession. Over the next 100 years, successive governments introduced restrictions against foreign banks entering the market, created government controlled banks and took it upon themselves to set interest rates.

In the 1980s, the federal government (Labor) allowed foreign banks to enter the Australian market and for banks to set their own interest rates. The government increased competition further in 1992 when it privatised the Commonwealth Bank. In 1996, the Liberal government built on the reforms by giving the Reserve Bank of Australia the autonomy to make decisions concerning interest rates and inflation independent of the elected government.

The outcomes of deregulation have been mixed. On one hand, it could be argued that the policies have been a failure as a form of non-official bank collusion seems to have prevented significant price competition. As a result of a decision by banks not to compete on price, Australians pay among the highest charges in the world. Furthermore, the Reserve Bank has set interest rates at a level higher than most people would like and by extension, higher than a politician would like. Like bank fees, these interest rates are higher than that paid in much of the world.

On the positive side, deregulation, banking independence and bank profitability spared the Australian banks the conditions that led to the 2007/08 Global Financial Crisis, which stemmed from banks being too regulated in some areas but insufficiently regulated in others. Specifically, America’s Clinton administration instructed government sponsored mortgage giants Fannie Mae and Freddie Mac to give home loans to low socio-economic groups that lacked the capacity or inclination to repay the loans. To further ease entry to the market and stimulate the economy, Alan Greenspan, Chairman of the Federal Reserve, set interest rates at just 1%. The new entrants into the market increased demand and so created a property bubble.

With interest rates so low, banks were unable to make money via the traditional loan interest model. Consequently, they turned to derivatives, a largely unregulated area, to make profits. Derivatives are financial instruments that have no intrinsic value but derive their value from something else that may or may not have value.

Derivative trading was particularly harmful when low socio-economic groups starting defaulting. Banks referred to the default as a sub-prime mortgage, and created derivatives based upon the default. Other financial institutions bought the derivatives because they didn't really know what they were. The trade and ultimate valuelessness of the derivatives led to the GFC as banks discovered that the derivatives were worthless. Unable to repay their own debt, they too defaulted, which started a chain reaction of bank collapse in the US and Europe.

Although Australian banks also gambled in derivatives, because profits from loans and charges allowed them to operate like banks rather than bookies, the derivative market was far less advanced. Furthermore, due to the separation of government from banks, Australian governments hadn’t been able to use the banking system to assert a social agenda in the housing market that would eventually crash like a house of cards.

 

1988 - Removing import protection

After World War 2, high wages, low economies of scale and strict environmental regulations made it increasingly difficult for Australian manufacturers to compete with manufacturers in Asia, even with the help of duties, quotas and tariffs on imported goods. Instead of raising the protectionist policies even further, in 1988, the federal government (Labor) started removing them. It was a concession that since Australian manufacturers could not compete, it would be better for the Australian economy to adapt so that the workforce was in an area where Australia had a comparative advantage.

As the protection was removed, the prices of goods fell, thus reducing inflation and lowering costs for businesses that relied on imported goods. Against expectations, manufacturing was not wiped out. Although there was a fall in the manufacture of textiles, footwear and clothing, over the following two decades, innovation allowed the manufacturing sector to actually grow by 40 per cent. The agricultural sector also adapted admirably to the increased competition with significant value adding achieved by using labels like 'organically grown', 'hormone free', 'free range' in addition to refined produce like gourmet cheeses and wine.

Perhaps the lifecycle of computers provide the best example of how the removal of protections led to a favourable balance of trade. 87 per cent of computers are manufactured in China by workers earning a barely subsistence wage. Despite the low wages paid to workers, they are sold to Australia on low profit margins. In Australia, the computers are used in the design of computer applications, software, advertising, marketing and other intellectual industries with high profit margins. When the computers are outdated, they are sold back to China as e-waste. Extracting the chemicals from the e-waste poses significant health risks and some of the Chinese centres that extract the chemicals have now polluted their ground water and whole communities suffer significant health issues. By not trying to compete with China in the manufacture or recycling of computers, Australia benefits socially, environmentally and economically. Ideally, the Chinese government would raise minimum wages and enforce environmental regulations but it is too focussed on being the factory of the world to risk losing some industries to another country that likewise wants the prestige of making everything.

ewaste

Ewaste on a Chinese lady's porch. In regards to the life cycle of computers, the balance of trade between Australia and China is environmentally, socially and economically in Australia's favour. (Picture from Edward Burtynsky Manufactured Landscapes)

1991 - Privatising government businesses

History has repeatedly shown that private enterprise is more innovative and efficient than government enterprise. For this reason, government ownership of business is only justified in industries that the private sector would not provide a good or service, the private sector would not provide it in a way that serves the interests of the whole or that the private sector would not provide in a way that deals with a social justice concern. For a number of decades, the aviation, telecommunication and banking sectors were areas where governments felt the the need for government ownership.

In 1991, the federal government (Labor) embarked on a policy with privatisation with the sale of the Commonwealth Bank. In 1992, it followed this up with the sale of Qantas. In 1997, the new federal government (Liberal) sold Telstra. Meanwhile, state governments sold their banks, insurance companies and some power producers and distributors.

Since being sold, the Commonwealth Bank has increased in profitability and along with Westpac, ANZ and NAB, it has been the backbone of a profitable banking sector that easily navigated the 1997 Asian Financial Crisis and the 2007/08 Global Financial Crisis (European and American crisis). With the sale of Telstra, telecommunications have seen a proliferation of competition and a diversification of services provided. Aviation has been a concern. Critics have argued that privatisation of Qantas led to corners being cut on safety and new entrants to the market have struggled to turn a profit.

telecommunications

Privitising the state-owned Telstra has enabled more competition in the Australian market place, which has in turn benefitted Australian consumers.

Compulsory superannuation

In 1992, the federal government (Labor)  implemented compulsory superannuation. By 2013, 11 per cent of the weekly wages of Australians were being redirected into a variety of industry, retail or self-managed superannuation funds and more than $1.6 trillion was under management.

Compulsory superannuation stimulated massive growth in the financial industry as professionals were needed to manage the funds. In addition, enterprises had avenues other than banks to access investment capital.
Aside from changing the economy, compulsory superannuation has been causing a change in social values. As compulsory investors in the stock market, all wages earners in Australia have a personal interest in the economy succeeding. Furthermore, because they are the capitalist class, old notions of class warfare are difficult for politicians to exploit.

As well as changing some of the values of the average wage earner, compulsory superannuation seems to have changed the values of the financial industry. Instead of being solely motivated by short-term profit (like most financial industry workers) wage earners also care about sustainability, ethical practice, and corporate governance. If wages earners feel that the superannuation fund doesn’t share their concerns, they can chose another one. Consequently, superannuation funds and companies that want the wages of workers have needed to alter some of their practices.

New Daily

Due to compulsory superannuation, investment decisions are not always made with profit as the sole focus. Instead, superfund managers may be guided by an ideological desire to support sustainable business practices or ethical practices. The financing of the left-wing news site The New Daily by Australian Super, United Super, and Industry Super Holdings, is perhaps an example. The establishment of the paper makes little commercial sense because news media is in declining in profitability and left-wing editorial policies tend to alienate advertisers. Despite the limited commercial prospects, the super funds invested.

 

1993 - Enterprise bargaining

Industrial relation regulations reflect a government response to the eternal battle between unions and employers about what is a fair wage. For much of the 20th century, relatively generous wages and conditions were determined Australia-wide by the Industrial Relations Commission. Arguably, corrupt union officials disliked governments setting wages because it eroded their ability to blackmail employers to give under-the-table payments to call off a strike. Employers also disliked governments defining wages because it prevented them from being able to use income as an incentive to improve productivity.

In 1993, the federal government (Labor) ended centralised wage-fixing and introduced collective bargaining at the enterprise level. In 2005, the Howard government (Liberal) promoted individual contracts to reduce union power and end reliance on industrial rewards.

Since the dismantling of the Industrial Relations Commission, a number of police and government investigations have found significant corruption in unions while some manufacturers have left Australia out of frustration with union activities. On the positive side, some businesses have been able to use individual contracts as an incentive for those workers who have the talent and work ethic to be of greater value to the company.

1996 - Goods and Services tax

To address a number of agendas, in the 1996, the federal government (Liberal) devised a goods and services tax accompanied by income tax cuts. One agenda was to simplify the tax system with a flat rate of 10% on goods and services bought. Previously, goods were taxed at varying rates, which made accounting procedures inefficient. A second agenda was to address tax avoidance. Among high income earners, it was common to use loop holes to avoid paying tax. Under a good and services tax, high income earners would still have to pay tax each time they purchased anything. A third agenda was to address tax evasion. Businesses evaded tax by engaging in black market trading. By allowing businesses to claim the tax they paid on the goods they purchased as a tax deduction, the GST made it easier for the Australian Tax Office to track the inputs into a business in order to ascertain what revenues the business should be making.

A fourth agenda was to encourage savings. In theory, taxing someone by how much they spend rather than how much they earn should result in the more frugal members of society having more money available to deposit in the bank, which would in turn result in interest rates being lowered. In Australia’s situation, the tax cuts and GST were far too low for this benefit to be significant.

In 1998, Australia's richest man Kerry Packer he won a court battle with the Australian Tax Office to cut his three-year income tax bill from $40 million to nil; however, with a GST in operation, the government was still able to tax Packer according to his spending habits.

 

Non-testable

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Australian Economy and Market

Our Australian Story

What differentiates an Aborigine from a Torres Straight Islander?

The Convict Story

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The Depression

Migration and the Snowy Mountains Scheme

Treatment of Aborigines

 



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