Decades of economic reform have underpinned a long period of Australian economic growth. However, in believing that we are invincible, we may have learned the wrong lesson from the global financial crisis. If we allow any sense of complacency to consume us, what will the cost to Australia be in the long term? Retreating from globalisation like we have seen in other countries is not the answer to our economic problems. It is only with an open orientation and invigorated sense of engagement with Asia that our future prosperity can be ensured. This is the approach that ought to be embraced by our political leadership.
A generation’s worth of unbroken economic growth. That is Australia’s boast.
There may be people reading this who have never experienced a recession. People who have never had to confront the awful prospect of falling out of work and never having the opportunity of earning anther dollar in their lives. That is something to be celebrated. But has past success set Australia up for future failure? Has it made the population complacent?
Do we understand the reasons for past success? Is there any memory of the policy effort that was required to build an economy capable of generating 25 years of unbroken growth? Have we retained the capability to identify national challenges and opportunities, and to develop strategies to make the most of them? Do we even care?
If we were to judge by the quality of what we tolerate in policy debate in Australia today, we would have to answer these questions in the negative. The recent global financial crisis should have served as a national wake‐up call, but instead it appears to have encouraged an attitude of Australian invincibility. It should have reminded all Australians of the fragility of our financial linkages to the rest of the world—linkages that have been critical to Australian prosperity.
We take these linkages for granted, even as we observe continuing financial fragility and growing protectionist sentiment almost everywhere we look. Three things, in particular, provide compelling evidence that we have learned the wrong lesson from the crisis. First, an inability to repair the fiscal position of the Commonwealth, putting at risk the AAA credit rating that underwrote much of what we were able to do in 2008 to protect the Australian economy.
Second, an increasingly fearful attitude toward various foreign investment proposals, which is putting at risk our ability to join regional partnerships. And third, a populist infatuation with the profitability of the larger domestic banks, putting at risk the robustness of the very institutions we rely on to provide dependable channels to global debt markets—funding that provides reliable financial support for homeowners, investors and businesses.
A country bogged in these populist quagmires cannot possibly have a sufficient understanding of the reasons for past success. It can’t possibly have any memory of the policy efforts of the 1980s and 1990s that underwrote 25 years of economic growth. And it can’t possibly be capable of developing strategies that would make the most of contemporary challenges and opportunities.
We are not invincible. To the contrary, our economic prosperity is at greater risk now than at any time in my working life.
How did we get here?
A couple of months ago, a majority of those who turned out to vote in a UK plebiscite determined that it would be better if their country were no longer a member of the European Union. According to various political commentators, the vote reflected a protest from ageing conservatives, who resent being told by foreigners—in this case, people in Brussels—what they can and cannot do, and a protest vote by others who feel that they have been taken for granted or simply ignored by their politicians.
Similar frustrations might explain Donald Trump’s emergence as the US Republican Party’s presidential nominee. And they might also explain, at least to some extent, why a significant proportion of the Australian population voted for minor parties in our recent election.
There are serious issues here. Globalisation has not been of equal benefit to all. And not everybody has the same political voice. As political debate has decayed to populism, most Australians would have good reason to believe they have been treated cynically.
Perhaps more importantly, virtually all industrialised countries have experienced significantly slower aggregate income growth in the last decade relative to the decade that preceded it. And there is an emerging consensus that this lower growth has been shared much less equally, with most of the gains accruing to the wealthiest citizens.
We should not be surprised that the vast majority, having been disappointed by economic outcomes, in a world that they observe to be globalising at an unprecedented pace, might conclude that globalisation is the problem.
And yet, the lesson of history is that a retreat from globalisation would be far more damaging to living standards, especially those of the less well‐off, than anything that might properly be ascribed to post-war internationalising forces. Thus, while I have read numerous reports that blame globalisation for the recent global financial crisis, that crisis, like the Great Depression 80 years earlier, provides a graphic illustration of what happens when globalisation shifts into reverse gear.
The global financial crisis was a consequence of an extreme retreat to nationalism, with financial intermediaries and regulators unprepared to trust anybody beyond their sovereign borders. What caused the lack of trust was not globalisation either. Rather, it was a set of domestic policy failures in several systemically important developed economies in the northern hemisphere.
The global financial crisis illustrates what can go wrong when national policy makers and regulators fail to meet the rigorous demands of globalisation. The importance of matching policy and regulation to the demands of globalisation is something we learned in the 1980s. And this is the thing that we seem now to have forgotten.
Where do we need to be?
Throughout its history, Australia has benefited greatly from its generally internationalist orientation across economic, financial, social and inter‐governmental dimensions.
With the right domestic policy choices, we will continue to benefit from being an open economy. Right now, the challenge is to make the most of the opportunities presented by the Asian century. The potential benefits for Australians are enormous, across an extensive set of commercial, social and cultural activity.
But in respect of domestic policy capability, we are some distance from the place we need to be. In that place, political activity would be predictable, with policy based on sound theory and robust evidence. It would, therefore, be a place in which government policy avoided short‐termism and had no taste for protecting vested interest; a place in which government had the intellectual capacity and political courage to articulate a compelling vision of what could be, the challenges and opportunities confronting us, the strategies that would best meet those challenges and opportunities, and the investments in capabilities, systems and processes required to ensure successful implementation of those strategies.
How do we bridge the gap?
History tells us that there is no substitute for political leadership. And the most important attribute of political leadership is communication that provides positive motivation. The world’s politicians understand this, of course, but they don’t seem to be able to put this understanding into practice. Political discourse, in many countries is, instead, constructed on platforms of fear and anger. But that is the antithesis of what is required. What we need is political leadership capable of constructing a compelling narrative that contains a realistic assessment of present circumstances, articulates an attractive vision of what could be, and explains the strategies that will best secure that vision.
Dr Ken Henry AC FASSA FAIIA was Secretary to the Treasury and a member of the Board of the Reserve Bank of Australia between 2001 and 2011. As Special Adviser to Prime Minister Gillard in 2011 and 2012, Dr Henry was responsible for leading the development of the White Paper on Australia in the Asian Century. Dr Henry is Chair of National Australia Bank and the Sir Roland Wilson Foundation at the ANU. In February 2016 he was made a Fellow of the Australian Institute of International Affairs.
This article is taken from a speech given by Dr Henry at the AIIA in NSW on 30 August. It is published in two parts with the second to be published next week.
This article is published under a Creative Commons Licence and may be republished with attribution.