Australia’s unfinished economic reform goal should be to make Australian capitalism work better by directing capital towards productive enterprise and away from dependence on asset inflation.
With the 2020s being seen as Australia’s weakest decade for living standards since Federation have come familiar calls for higher productivity. Economists debate tax reform, deregulation, competition policy and workplace flexibility. Governments promise another productivity agenda. Yet productivity is better understood as the symptom than the disease.
The deeper question is whether Australia ever completed the economic transformation that began in the 1980s.
The Hawke and Keating governments deserve credit for recognising that the old protectionist settlement had reached its limits. High tariffs, tightly regulated financial markets and an increasingly insulated manufacturing sector were becoming barriers to economic renewal. Australia needed to open its economy and expose itself to greater international competition. That reform was necessary. But necessary reform does not necessarily get to the desired destination.
With 40 years of hindsight, Australia’s economic journey looks different from the story we usually tell ourselves. Rather than moving from protectionism to a genuinely productive and innovative market economy, Australia increasingly moved from protectionism to rentierism. The old economy protected industries. The new economy increasingly protects assets.
Markets were expected to direct capital towards Australia’s most productive opportunities. Instead, they directed capital towards the opportunities offering the highest private returns within the institutional settings governments created. Mining remained highly profitable. Banks increasingly became mortgage lenders. Housing became Australia’s preferred investment. Property values became a measure of economic success. Population growth sustained housing demand and headline GDP. Capital responded rationally to the incentives before it.
The consequence has been an economy that has become exceptionally good at generating wealth through existing assets, while becoming progressively less successful at creating new productive capability.
Business investment outside mining has disappointed. Productivity growth has steadily slowed. Manufacturing has continued its long decline. Research intensity remains modest by international standards. GDP has continued to grow, but GDP per person has increasingly struggled.
Australia modernised its markets without fundamentally changing its economic structure.
This also explains why reform has become so much more difficult than it was in the 1980s. Protectionism largely protected particular industries. Rentier capitalism protects the accumulated wealth of millions of Australians. Homeowners benefit from rising property values. Banks depend upon mortgage lending. Governments rely heavily on property-related revenues. Superannuation funds hold major property and infrastructure assets.
What began as an economic model has become a deeply embedded political settlement. Escaping rentierism will therefore be considerably harder than escaping protectionism.
The answer is not to reverse the Hawke-Keating reforms or rebuild tariff walls. Australia still needs open markets and international competition. But markets alone have not delivered the productive transformation that many expected.
The next reform era must therefore be different. Its purpose should not simply be to make markets work better. It should be to make Australian capitalism work better. That means directing more capital towards innovation, advanced manufacturing, scientific capability, clean industry and productive enterprise, while reducing the economy’s dependence on asset inflation as the principal source of wealth.
The Hawke-Keating governments completed the first stage of Australia’s economic transformation. The unfinished task is to complete the second. Australia has escaped protectionism. It has yet to escape rentierism.
The views expressed in this article may or may not reflect those of Pearls and Irritations.