So she’s gone. I’ve talked about her, her meaning and her impact since this diary began, so over to you. How will Pauline Hanson be remembered?

 

Last year several readers recommended a speech Dr Peter Brain made in Melbourne on globalisation, Australia and the health of our democracy as part of the Alfred Deakin lecture series. Regular Webdiarist Peter Gellatly is the latest, so here it is. Reading it in the light of Pauline’s withdrawal from politics is a fascination. (The Deakin lectures are available on Radio National’s webpage, http://www.abc.net.au/rn/deakin/default.html)

 

Dr Brain is the Executive Director of the National Institute of Economic and Industry Research (NIEIR). He co-founded NIEIR in 1984 and has since participated in over 150 economic consulting projects in South Africa, Australia and New Zealand. He was one of the few economists to forecast the current economic crisis throughout the Asia region. His most recent is Beyond Meltdown – The Global Battle for Sustained Growth.

 

BEYOND GLOBALISATION

 

By Peter Brain

 

Introduction

 

A hundred years on, Deakin’s economic objective of strong state regulatory control over strategic industry operations and his vision of the state supplying strong leadership and resources to drive national development, are almost the exact opposite of the prevailing Australian political wisdom.

 

The prevailing conventional wisdom as defined by the doctrine of extreme economic rationalism is that the market, that is the private sector, knows best, both in terms of maximising the efficiency of short term resource use and in terms of the mobilisation and allocation of resources to drive economic development.

 

The role of the state under extreme economic rationalism is largely passive, confined to the protection of state borders and property rights. Under this doctrine the active role of the state focuses on measures to remove any constraints on businesses’ and households’ ability to pursue whatever objectives they select. Since the private sector knows best, this policy objective by definition will maximise national economic and community welfare.

 

Deakin was right. Any economy which is currently well placed to exploit the 21st century opportunities of globalisation has followed the Deakin vision of using the state to drive the creation of the high technology industries, used the state to create world best practice infrastructure, and the strategic regulation of industry. The examples extend from the North Asian economies to Western Europe and back to the United States. The US Government’s long term support for its military-industrial complex is the most important explanation for the recent renaissance to the US economy. The crushing of the anti-Deakin New Zealand by the Deakinisque Ireland in terms of economic performance over the last 15 years is a clear cut example of the model’s superiority.

 

Unlike these countries, Australia has not developed to any significant extent the 21st century industries of advanced electronics, information technologies, biotechnologies and advanced materials. Further, unlike Norway which used its strong mining industry to build a world best practice heavy engineering industry, Australia has virtually destroyed that industry.

 

My aim tonight is to offer an explanation of why extreme economic rationalism have uniquely flourished in Australasia and the current and future cost of this outcome.

 

The clue to why it has flourished lies in the fact that extreme economic rationalism is essentially an anti-democratic doctrine. Its central proposition is that the community should not extend its control into many areas that are important to community welfare. Implicitly, economic rationalism endorses the primacy of established private interests over future private interests as well as over current and future collective community interest. Representative democracy of course was designed to obtain a fair balance between the individual and collective interest.

 

An undemocratic doctrine can flourish only in an undemocratic society. The core argument of this address is that in Australia this indeed is the case for strategic economic issues and it has imposed considerable costs on the nation. I want to make clear that my link between democracy and policy only applies to policies influenced by economic rationalism.

 

It also follows that for Australia to be better placed to exploit the opportunities of globalisation and to manage its threats it is necessary to understand how Australia’s political context has retarded performance in the past and that therefore the solution lies in changes to political rather than economic structures, processes and institutions.

 

 

1. The Australian political institutional context

 

To describe a society as democratic is not a very useful guide to public policy formulation. It is about as useful as inferring personal characteristics from the fact that somebody is described as a Christian.

 

A far more useful approach is to specify models of policy determination and to assign models on the basis of outcomes on an issue by issue basis. By issue is meant the process of finalising the outcome for specific community and economic policies that require a parliamentary solution.

 

There are at least four such models, namely:

 

* grass roots democracy;

 

* representative democracy;

 

* dictatorship by the political leadership; and

 

* dictatorship by established interests.

 

Australia has a strong institutional democracy in that the competition for political power is intense. A strong institutional democracy is a necessary, not sufficient, condition for democratic practice. Democratic practice can only be determined by assigning the actual decision model used on an issue by issue basis.

 

 

1.1: The importance of the representative democratic model

 

By far the most important decision making model in terms of the long run protection of the national interest is the representative democratic model.

 

There can be no general blueprint for social and economic development as economic life does not conform to a coherent or predictable pattern. Change and chaos are the constants, not stability, and change involves continued pressure being brought to bear against the established social and political fabric. Intellectual paradigms and ideologies rise and fall as events and facts change.

 

There is no fixed compass for the present and the answers are further complicated by the fact that decisions also have to be made which will affect future generations, who are as yet unrepresented. Such decisions typically involve a tradeoff of lower current living standards in favour of higher future living standards.

 

For the general electorate the issues are far too complicated for effective analysis and in any case there is no general permanent solution. All that can be done is for elected representatives to be provided with a framework so that the necessary conditions for representative democracy are in place. In turn, governments can use the countervailing power provided by representative democracy to manage existing established interests, ensuring that they do not secure a stranglehold on niches of economic and political power. It can also encourage new entrants into all facets of society and constantly promote competition for economic and political power.

 

Grass roots democracy is no substitute for representative democracy. Grass roots democracy only works in Australia when the issues are simple and affect a significant proportion of the population. Further, it can only generally act to remove actual or proposed resolutions to issues.

 

To survive, representative democracy must have strong institutions and leadership. Democracies are unstable and there is constant pressure towards the dictatorship models for many core issues.

 

1.2: Australia is not a strong representative democracy

 

A working definition of a representative democracy would be one where the individual elected representatives are not without a degree of influence to, at worst, protect and, at best, enhance the interest of their constituents (whether by geographical location or interest group membership) irrespective of the government of the day. The representative democratic model prevails when elected representatives, applying pressure through parliamentary institutions, play a strategic role in determining outcomes.

 

Australia, of course, has little of the institutional characteristics of a strong representative democracy. Australia up to now has:

 

* a strong two party system;

 

* strong party discipline with members who do not toe the line as laid down by the leadership group facing de jure dis-endorsement as is the case with the ALP and de facto dis-endorsement as is the case with the Liberal Party. At the very least members who are not judged team players cannot expect a career beyond that of a backbencher;

 

* on the floor of the House of Representatives a government generally faces no prospect of defeat; and

 

* representatives have almost no direct role in designing and drafting legislation.

 

Under the Australian Federal model, the process to begin the introduction of new policies, or to amend existing policies, requires the support of a small number of senior ministers, bureaucrats and senior party officials which comprise the political leadership group of the government of the day. The resolution of many issues in Australia therefore operates under the dictatorship of the political leadership model. It is in the interest of any leadership group to impose the dictatorship model if allowed. It makes management of the political process much easier and limits and controls the competition for leadership positions. The mantra used for control to support the dictatorship of the political leadership in Australia is “disunity is death”.

 

Sometimes there appears to me to be little difference between the roles of the parliamentary deputies under the Communist system and their current Australian counterparts. The role of the backbencher is that of a listening post in his or her electorate, to travel to the centre, feed the information in, and receive back the revised spin on the leadership group’s performance and objectives. They then travel back to impart the new wisdom to their electorates.

 

The Senate in Australia is a representative democratic institution. However, its weak mandate and the small number of representatives holding the balance of power, rightly, weakens its power.

 

The leadership group dictatorship model is unstable. Without the strong countervailing power of representative democracy the political leadership dictatorship model in many cases is either merged with the bureaucratic leadership model or is replaced by the dictatorship of the established interests model. Under this model issues are resolved without significant modification in favour of established interests irrespective of the impact on the national interest.

 

1.3: Interests: dictatorship model eligibility

 

Of all established interests only a minute number are eligible to establish a dictatorship model. Eligibility requires the ability to deliver value to the political leadership group. The dictatorship model is limited to:

 

* interests which can build a favourable image of the leadership groups (that is, media interests);

 

* interests which have the credibility to audit the government’s performance (the finance sector);

 

* interests which are small, collective and can deliver a significant contribution to the national interest ( the mining sector); and

 

* interests which can give governments something governments cannot do such as short term pump priming (the finance sector again).

 

2. The dictatorship of the established interests: the ideological dimension

 

Dictatorship by established interests cannot be established or sustained without a supportive ideological framework. Extreme economic rationalism is ideally designed to establish legitimacy for regimes of dictatorship by established interests. It could only grow in Australia because representative democracy is weak and in turn it now legitimises weak representative democracy as the ideal.

 

Economic rationalism legislates the dictatorship of established interests in exactly the same way as Marxist-Leninist doctrine legitimised the dictatorship of the proletariat.

 

The doctrine of economic rationalism was used to crush the Deakinites in the Liberal Party in the 1980s decade. By replacing a broad church with a fundamentalist sect, on current trends, the Liberal Party will possible be restricted to representing the wealthiest areas in Australia.

 

The Labor Party, by using extreme economic rationalism to crush vision, passion and ideology within the Party, will probably not achieve its core objective of the natural party of government.

 

The National Party, representing the poorest electorates in Australia, by following a policy of de facto fusion with the Liberal Party representing the wealthiest areas in Australia, possible faces extinction.

 

It is worth noting that Deakin himself, of course, contributed to the political structures which would ensure that his political vision would eventually die. He rallied against the “three eleven” party structure that initially existed in the first three parliaments claiming that it was unworkable. He worked towards a strong two party system and eventually achieved this with the fusion of two of the elevens.

 

Why did it then take so long for economic rationalism to become pre-eminent in Australia? After all, the political structures that have facilitated its rise have been in existence for 92 years. The answer is external shocks. The first and second World Wars and the depression made nation-building and social balance imperative for the maintenance of economic and political sovereignty.

 

The turning point was around 1970 when leaders who had been in politics over the 1930s and 1940s started to retire. Their successors simply did not have the experience of nation-building and therefore the leadership qualities to offset weak representative institutions.

 

To sustain their support of the ideology of economic rationalism, institutions have to behave in the same way as the Marxist-Leninist institutions behaved when supporting the dictatorship of the proletariat. A prime example is the Productivity Commission, the official Economic Rationalist Institute.

 

By using so-called computerised general equilibrium models the Productivity Commission has been able to impose untested assumptions on the way the industries operate, and so guarantee that any model application will “empirically” validate the quantitative conclusions of economic rationalist principles.

 

Ideologically driven research methodologies allow the Productivity Commission to infer that productivity growth is independent of the rate of growth of output and, therefore, allow the it to claim that its general policy agenda known as microeconomic reform, has played a key role in the acceleration in Australia’s productivity growth over the last six years. In fact, the recent acceleration in Australia’s productivity growth is little more than would be expected from the acceleration in economic growth over the same period, even on the basis of the “dark age” outcomes of 1969 to 1974.

 

Microeconomic reform clearly has resulted in market improvements in productivity at the individual industry level. However, part of the productivity growth is either illusionary in that it has been driven by outsourcing, which transfers costs to other industries, or is achieved at the cost of long run productivity gains. The latter occurs through the elimination of the resources required for long run capacity expansion, research and development, knowledge-retention and nation building capacity.

 

In terms of general government and the media, some of the public servants and opinion writers seem just as brainwashed by the doctrine of economic rationalism as their counterparts under the dictatorship of the proletariat were brainwashed by Marxist-Leninism.

 

 

3. Australia’s increasing strategic weakness and the price of economic rationalism

 

The influence of economic rationalism, either directly as an ideology or indirectly through creating dictatorships of established interests, has led to a number of outcomes which have, and will continue to, weaken the ability of Australia to compete effectively in the globalisated world of the 21st century and to retain economic and political sovereignty. The weakness comes from the impact of economic rationalism on:

 

* industry development;

 

* the exchange rate;

 

* foreign ownership;

 

* the finance sector; and

 

* regional development.

 

3.1: The costs of non-representative democracy: industry policy

 

The standard approach to industry development policy in Western Europe and North Asia is straight-forward and heavily public sector driven. Governments decide what emerging industries are likely to be strategic for their economies. Public sector budget allocations then fund:

 

(i) research institutions with mission statements to become world best practice knowledge centres in the targeted technology;

 

(ii) educational and training programs to create the domestic skills to exploit the targeted technology;

 

(iii) heavy assistance to corporations to fund the innovation required to gain a competitive edge in the production phase of the new technology; and

 

(iv) capital subsidies of up to 50 per cent or more of cost to encourage factory construction in the new technologies.

 

This model has never been used in Australia to anywhere near the extent necessary to hold the share in manufacturing at desired levels. It has, and is, only being used to hold the size of motor vehicle industry in the face of tariff phasedowns. The fact that this model has not been used generally is the single most important reason explaining Australia’s chronic current account deficits and the steady degrading of national sovereignty through ever increasing foreign obligations.

 

Australia’s failure to adopt the standard approach is perplexing. When very weak versions of it were applied between 1984 and 1996, they were spectacularly successful in driving production growth in pharmaceutics (Factor f scheme), shipbuilding (subsidies), engineering (DIFF scheme) and export growth for industries which received export assistance. The benefits from these schemes were reduced or ended with the Coalition Government’s attack on business welfare based not on the facts, but on economic rationalist ideology. It is rough justice that, just when the government needs a strong manufacturing sector to offset general economic weaknesses, it has not got it, and this failure is partly due to its own actions. If Australia had a strong representative democracy in 1996 this would never have occurred.

 

Australia now has no concept of strategic industries, and the prevailing conventional wisdom is that a million dollars worth of output from any of the computer chip, wood chip and potato chip industries is of equal benefit to the economy.

 

Economic development in Western Europe and North America has been driven by the core premise that there are strategic industries and it is the role of government to do whatever is necessary to ensure that these industries take root in the economy. Governments in these continents know that economic development is about the application of new knowledge. Benefit from new knowledge can only be gained if it is embodied in a new product or process.

 

You know that you are living in a regime of a dictatorship of established interests when potato chips are valued equally with computer chips. By definition some dominant established interests (such as the finance sector) will become dis-established if governments come to believe that some interests are more valuable than others. This is particularly threatening to established domestic interests when the higher valued interests will have to be imported from overseas (as is the case for the most new technologies). This would upset the local power structure and balance. The potato chip equals computer chips mentality leaves the finance sector unconstrained to generate profits where ever it chooses.

 

The cost of the lack of industry policy in Australia is not just weak short term fundamentals. The main cost is that Australia is now ill-equipped for the economy of the 21st century. Economic growth is now being driven by “global city regions”, which have strong concentrations of emerging and traditional industries offering a diverse range of high income employment opportunities so as to attract the world’s best skills to work there. Diverse knowledge clusters and networks are formed which allow maximum innovation to be combined with existing information in traditional industries to drive broad-based industry development. Traditional industries, such as textiles, food production, engineering and motor vehicles, are benefiting just as much from “global city” structures as the new communication and electronic industries.

 

Australia, by not being experienced in the production side of most of the new technologies, is:

 

(i) eliminating an important conduit for the adaptation of the new technologies to traditional industry; and

 

(ii) is not gaining the innovation and management skills which will be required for participation in the world-wide supply chains of the future;

 

(iii) is not creating the long-run high-income employment opportunities required to offset employment losses that will stem from the application of the labour saving component of the new technologies to traditional industries; and

 

(iv) is ensuring that the benefits for research and development and education resources in the new technologies will accrue to other countries as Australia’s skills and knowledge migrate overseas due to higher returns.

 

In short, the destruction of Australia’s traditional non-resource manufacturing base will continue and the proportion of full time jobs paying reasonable wages will continue to decline.

 

If Australia had a strong representative democracy in the 1980s, the Norwegian route would have been followed with mining industry expansion and Australia would now have a first class heavy engineering industry.

 

3.2: Dictatorship by established interests: the finance sector

 

The doctrine of economic rationalism has been exploited by the finance sector, in conjunction with weak accountability to representative democratic institutions, to create a situation where monetary policy has de facto been privatised in Australia. By this is meant that in Australia monetary policy is largely run for the benefit of the finance sector and not in the national interest.

 

All monetary authorities have an inflation target in their objective set. In Australia the financial economists, whose views dominate the Australian media, have forced general acceptance of the view that the inflation target is the only appropriate target for the Reserve Bank. In effect they have reversed the monetarist dictum that money matters to one of money doesn’t matter. Moreover, where decisions are made to change interest rate settings, the reasons should be transparent and, therefore, predictable.

 

The first point to be made is that direct inflation policy targeting by monetary authorities is now a relatively low priority exercise. This is because skill-based technological change has broken the back of organised labour. The unions can no longer secure economy-wide wage increases on the basis of the principles of comparative wage justice. Secondly, the pressures of globalisation, and the impact of the new technologies in opening up international import competition, including across a range of service industries, has greatly limited the ability of producers to pass on costs.

 

With the RBA safely occupied with irrelevant CPI targeting, the finance sector has a free hand in exploiting opportunities across a wide range of revenue maximising opportunities. This is done by building the demand for debt to finance activity in the share, property, mergers, acquisitions and consumer credit markets. CPI targeting in a regime of low inflation rates means that the finance sector has unlimited scope to increase its revenue base at the cost of national financial instability.

 

And that is what has occurred. Between 1998 and 2000 the growth in private sector debt has meant that the financial deficit of households and non-finance private business total reached 6 per cent of GDP. By contrast the historical average up to 1980 was a surplus of 3 per cent of GDP. Australia has now reached the same financial deficit level that was reached in the United States in 2000 and that was reached in the United Kingdom in 1989, triggering that country’s severe 1990-1992 recession. It is the main reason why both the United States and Australia are experiencing, and will experience for some time to come, poor economic conditions.

 

Has the same thing happened in the representative democratic countries of Europe? The answer is no. Europe now enjoys financial balance across all the sectors – across the household, corporate and government sectors. As a result, Europe is likely to grow relatively strongly over the next decade. In Australia and the United States, if the finance sector calls for relief by too rapid an easing of monetary policy are delivered, both countries risk economic stagnation by debt constipation, Japanese style.

 

The reason for the European outcome is that monetary policy has not been privatised and there is an intermediate target which the European Central Bank pursues. It holds broad credit expansion at the desired expansion rate of nominal GDP, which is in the vicinity of 4 per cent a year. In Australia, by contrast, the rate of growth of credit has for a long periods since financial deregulation, been between 50 and 100 per cent greater than the rate of growth of actual nominal GDP.

 

The real threat of inflation in Australia over the next few years comes from the risk to the exchange rate, which in turn comes from the financial imbalances created by the lack of monetary policy. Australia will not create the pre-conditions for long run sustainable growth until the current dictatorship of the finance sector over monetary policy is crushed. This would involve paying real respect to a much broader range of monetary policy targets, including imposing maximum credit growth rates. Monetary policy changes must also become unpredictable once again.

 

However, close strategic regulation of the finance sector is also required. All countries with advanced manufacturing sectors have learnt that without regulation or strong incentives the finance sector will not, by itself, develop the high risk new industries required for success in the 21st century globalised economy. Australian governments have the following choices to develop these industries:

 

* they can do it themselves, as they did with telecommunications, energy, transport and biotechnology in the past (the Taiwanese strategy);

 

* they can heavily subside multi-nationals to do it (the Irish strategy); or

 

* they can, by regulation, compel the finance sector to do it (the North Asian and German strategy).

 

The current dictatorship by the finance sector means that the effective national interest is defined by the incentives in fund manager remuneration packages. What a stupid way to run an economy.

 

You know you are living in a regime of dictatorship of established interests when blatant hypocrisy is successfully employed to enhance interests. The finance sector argued long and hard in the late 1980s and early 1990s that Australia’s low household savings rate was detrimental to long term economic performance. The superannuation levy, with enormous benefit to superannuation funds, was imposed to increase household savings. The policy failed and household savings at the end of the 1990 decade were negligible, compared to the 9 per cent level at the beginning of the period. Judging by the strong endorsement of the finance sector to the strength of Australia’s economic fundamentals over the last few years, one can only conclude that negligible household savings are now good for sustainable development. Not unexpectedly this switch has gone without much comment in the media generally.

 

3.3: Non-representative democracy: the mining sector

 

In Australia there is no exchange rate policy other than allowing the exchange rate to fall to whatever level is required to protect the cash flow of the established mining and agricultural industries. The long run trend in the real prices of these industries’ products (excluding energy) is downwards. The continuation of this policy will lock Australia into stagnant or declining living standards in terms of world purchasing power.

 

The reversal of this stagnation will require governments to aggressively move Australian industry up the value added chain and to explicitly adopt a high exchange rate policy. Below a certain point, a low exchange rate coupled with the long-run expectation that the exchange rate will decline further, blocks the emergence of new industries in Australia. New industries require:

 

* skills, capital and technology to be imported from overseas;

 

* skills be retained in Australia;

 

* components be sourced from overseas from world best practice suppliers;

development and marketing funds be spent overseas; and

 

* the capital base of the industry be protected from takeover and elimination.

 

The lower the exchange rate the greater the cost and the greater the risks for the establishing of new technologies in Australia. Therefore, under the current exchange rate regime nothing of significance is likely to happen. One cannot be optimistic in regard to the future living standards of Australia in terms of world purchasing power.

 

It is difficult to be too hard on the mining and agricultural industries. The mining industry is preventing Australia from becoming the New Zealand economic basket case. The economic grind and suffering of farmers delivers to the cities a high living standard.

 

However, in the future an accord will be necessary with the agricultural and mining industries to set the conditions for Australia moving up the industry value added chain. This accord will be best negotiated in the context of a strong representative democracy.

 

3.4: Non-representative democracy: regional development policy

 

Nothing better illustrates the weakness of representative democracy in Australia than the absence of regional development policy.

 

In Western Europe regional development policy is seen as the strategic instrument for ensuring that skills, infrastructure, capital and income are distributed to all citizens.

 

In Europe regional development policy is integrated with industry development policy. The same is also true in the Untied States where the legislature imposes line item entries determining what budget appropriations are spent on and where they are spent.

 

Regional development policy cannot flourish without statistical regional performance measures. In Australia, as distinct from Western Europe and the United States, the regional statistical data are extremely poor. In my view this is a telling measure of the weakness of representative democracy in Australia vis-a-vis other jurisdictions.

 

What good regional development policy does is to extract resources from the winners of economic growth by taxation, and by government expenditure allocation to redistribute the benefits to lagging communities. This allows these communities to eventually directly benefit from economic growth without assistance. The absence of regional development policy, therefore, suggests that the direct winners from economic growth have imposed a dictatorship model to corner all the gains.

 

In Australia over the last two decades the winners from economic growth, heavily concentrated in the Northern and Eastern suburbs of Sydney and the Eastern suburbs of Melbourne, have used the weakness of representative democracy to prevent redistribution, even though this is required to ensure long run sustainable development. Based on social security data, the majority of country and provincial regions now have an unemployment rate of between 12 and 25 per cent compared to 2-4 per cent for the winner Sydney suburbs. South Australia and Tasmania have been particularly adversely affected. In part this is due to the fact that Australia now has an overall tax burden equal to the United States, while the European standard is 10 percentage points higher. The optimum for Australia, I think, would be half way between the United States and Europe, translating to a tax burden of about 35 per cent of GDP. The United States, a dominant economy, can afford lower tax rates.

 

If this was achieved, Australia would have the funds to:

 

(i) develop industries;

 

(ii) educate the population;

 

(iii) clean up the environment;

 

(iv) reduce regional and household income inequality; and

 

(v) put in place first class infrastructure for national development.

 

To continue as we are will ensure that the electorate will become more unstable until new parties emerge to force redistribution. However, by then Australia will be so far behind that catch-up costs will be very high. They may well be prohibitive in the context of maintaining political and economic stability.

 

If the National Party, over the past 50 years, had stayed on the cross benches and delivered to Australia a stronger representative democracy, the economic inequalities between Australian regions would now be a lot less – just look at what minority Labor Governments have done for regions in Queensland and Victoria over the past four years.

 

3.5: Non-representative democracy: foreign investment

 

Direct foreign investment can be both a driver of the globalisation of domestic industries and an international tool for the destruction of domestic industries to eliminate the threat they pose to existing globalised industries located elsewhere. Some direct foreign investment can be extremely beneficial and some can be extremely destructive. Destruction occurs when local firms with a competitive edge in global markets are eliminated from that market by foreign takeover. The skills, knowledge and technology in these firms is then transferred to foreign firms.

 

How much of recent foreign investment in Australia has been constructive or destructive is unknown. The Foreign Investment Review Board operates without accountability of any form.

 

The fact that a large share of Australia’s strategic companies is foreign owned, coupled with the fact that Australia over the past two decades has not grown any of the new national champions necessary for success in today’s integrated economy, is prima facie evidence that representative democratic accountability for the FIRB would have served Australia better. The evidence for this is to be seen in the recent blocking of the Shell proposal to take over Woodside.

 

The Woodside Decision

 

This decision shows the best and the worst of Australian democracy. The correct decision was made in the national interest. However, it was the isolated power of representative democracy that forced the Treasurer to judge the takeover in terms of the national interest. Without that pressure the takeover no doubt would have been allowed.

 

With a couple of honourable exceptions the response to the decision by media commentators was based on pure ideology. Economic rationalism dictates that market decisions are always in the national interest. By this criterion, the government has committed the mortal sin of allowing political (that is, democratic) principles to determine the outcome.

 

Shell’s diverse resource holdings meant that in deciding the scheduling of natural gas developments they had to act against some countries’ interest and these were good reasons for assuming that the Australian national interest that would be sacrificed.

 

What was more disturbing was the threat from some financial sector interests that if the Shell takeover was not allowed the Australian currency would be attacked. Unfortunately this is a portent of things to come. A quarter of a century of non-representative government and the associated economic policy errors has eroded Australia’s political and economic sovereignty on a large scale.

 

Media policy

 

Nothing better illustrates the current poor standard of representative democracy in Australia than the recent example when the electronic communications regulator (MARGO: The Australian Broadcasting Authority, via its head, David Flint) in effect advocated on behalf of the interest of the two dominant media purporters by arguing that since the media commentators were more influential than the proprietors. Therefore the degree of concentration in the media doesn’t matter. Only someone with an intelligence level of less than freezing point would accept this. Any representative democracy would have had the regulator sacked within 24 hours.

 

As the existing political system comes under pressure the attempts to control the role of the ABC will become more ruthless. In my view the strategic importance of the ABC to developing Australia’s representative democracy is so high that I would be comfortable with the role of the ABC being the only issue at the next Federal election.

 

 

4: Australia’s economic performance has been weak

 

The legitimacy of political regimes depends on whether or not sustained economic and social development is achieved. It is a sign of the lack of representative balance in Australia’s political structures that the strengths of Australia’s recent economic performance have been highlighted, while the weaknesses have been ignored.

 

The strong points of Australia’s recent economic performance which are continually highlighted are:

 

* high absolute and relative GDP growth rates;

 

* high productivity growth rates;

 

* low unemployment rates;

 

* low inflation rates; and

 

* strong government finances.

 

Growth over the second half of the 1990s has been high relative to Europe. However, part of the reason for this is statistical illusion. Australia, along with the United States, uses quality price adjustments to account for product innovation. The Europeans, so far, have not done this and as a result their GDP growth is statistically low, though in fact it probably is as high as that in the United States and Australia.

 

The official unemployment rate is 6.8 per cent. However, adjusted back to the 1990 methodology for measuring the rate, the current unemployment rate would be in the vicinity of 10 per cent. The main reason why the official unemployment rate is low is because:

 

(i) long term unemployed have been shifted into disability pensions;

 

(ii) beneficiary recipients have been required to do some hours of work a week which means they are counted in the Labour Force Survey as employed; and

 

(iii) youth unemployment has also been statistically reduced by benefit changes.

 

To be counted as employed in the Labour Force Survey all that is necessary is to work one hour a week, in some cases unpaid. The rate of full time to total employment has steadily fallen over the 1990s.

 

The productivity growth rates are no more than what would be expected given the statistical measure growth rates based on historical outcomes over the 1960 to 1980 decades.

 

Inflation is low but no lower than for any other comparable country. The reason why inflation is low is not Australia’s efficient economic management, but due to the nature of technological progress and the forces of globalisation, that is supply chain integration.

 

Public sector finances are now strong, but at the cost of a deterioration in private sector finances which is leading to the current rapid slowdown in economic growth.

 

Australia’s structural imbalances also deteriorated over the 1990s. The share of the manufacturing sector in GDP fell steadily due, in part, to the failure to enter new emerging industries in information, communication, biotechnology and advanced electronics and materials. Australia’s elaborately transformed manufacturing trade deficit is approximately 8 per cent of GDP, or at third world country levels signalling a dismal future.

 

Foreign ownership of Australia’s non-financial businesses is now 45 per cent of equity value and Australia’s net international obligations have steadily increased over the 1990s due to the continuing current account deficit. This has greatly increased Australia’s vulnerability to external economic shocks. Australia’s gross short term foreign debt (less than 90 days) in the late 1980s was 50 per cent of foreign reserves. Currently the level is three times reserves.

In short, over the 1990s, Australia deliberately denied itself the ability to develop a strong diversified, competitive economy.

 

The cost over the 1990s

 

Three quarters of a million people consigned to a subsistence existence. Limited effective choice in the trade-off between work and leisure. Australia is now doomed to the social darwinistic American labour model where the annual hours demanded from those with moderate to high income jobs will be in excess of 2,300 hours a year. Not for us the choice of the European standard of the Dutch with low unemployment, a happy labour force, a productivity equal to the US standard on a per hour worked basis, but with the average hours worked of 1,350 per year. Representative democracy in the Netherlands has enabled the Dutch to select a lower per capita living standard, still higher than the Australian level, but without the socially destructive American labour market model.

 

However, the greater cost will be incurred by future generations. Malcolm Frazer is right. To retain what is left of our effective political and economic sovereignty Australia needs to target a population of at least 40 million by 2050. The regional and household inequalities which have been, and will continue to be, built up will prevent this option from being realised.

 

5. The routes to greater representative democracy

 

For Australia to break out of the constraints of economic rationalism it needs to greatly strengthen representative democracy. There are only three ways of achieving this:

 

* constitutional change;

 

* the breakdown of party discipline; or

 

* the breakdown of the two party system.

 

The constitutional change option would involve adopting the New Zealand proportional voting system for the House of Representatives. This would require constitutional change and some established interests, via the media, would block the option.

 

A breakdown of party discipline would mean that both major parties would need to evolve towards the republic/democratic models in the United States. However, given the stranglehold of the slogan “disunity is death” this could only happen if both major parties simultaneously decided to reverse current practice. Not likely.

 

The only practical way forward is by the breakup of the current two party system where new parties, and groups of independents, emerge and control the balance of power in the House of Representatives. This will require the primary vote of the two political parties to fall below 60 per cent. This seems the route Australia will most likely follow, given current dynamics. However, the new representative democracy will only be secure in Australia if the new parties and independents use their balance of power strength to permanently change the institutional structure. Australia will have a representative democracy when the status of a Parliamentary Committee Chairman is equal to, or greater than, that of a Minister.