Globalising Australian Capitalism

GLOBALISING AUSTRALIAN CAPITALISM

GLOBALISING AUSTRALIAN CAPITALISM BOB CATLEY Department of Politics, University of Adelaide

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CAMBRIDGE

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Published by the Press Syndicate of the University of Cambridge The Pitt Building, Trumpington Street, Cambridge CB2 1RP, UK 40 West 20th Street, New York, NY 10011-4211, USA 10 Stamford Road, Oakleigh, Melbourne 3166, Australia © Bob Catley 1996 First published 1996 National Library of Australia cataloguing-in^publication

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Catley, Robert. Globalising Australian capitalism. Bibliography. Includes index. 1. Australia - Economic conditions. 2. Australia - Economic policy. I. Title. 330.1220994 Library of Congress cataloguing-in-^publication

data

Catley, Robert. Globalising Australian capitalism / Robert Catley. p. cm. Includes bibliographical references and index. 1. Australia - Economic conditions - 19452. Australia - Politics and government. 3. Australia - Economic policy. 4. International economic relations. I. Title. HC605.C374 1996 337.94'09'048-dc20 96-12001 A catalogue record for this book is available from the British Library.

ISBN 0 521 56246 5 Hardback ISBN 0 521 56618 5 Paperback Transferred to digital printing 2003

Contents

List of Tables List of Figures Preface and Acknowledgements List of Abbreviations Introduction 1 The International System and the End of the Cold War The Sovereign State System Opposing the Interstate System Soviet Withdrawal America and Free Trade The Cold War The Post-Cold War World 2 The World Market and the Industrial Revolution in Asia Industrial Revolutions Asian Industrial Revolutions An Asian Miracle? 3 The Australian State and Economic Development Settlement A National State Protected Industrialisation after 1945 Arrested Reform: the Whitlam Government Opportunity Lost: the Fraser Government

viii viii ix x 1 4 4 8 9 11 15 19 26 26 28 35 43 43 46 53 61 63

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CONTENTS

4 Economic Rationalism Changes Australian Politics

5

65

The Labor Party Adopts the Market The Non-Labor Left Non-Labor Moves Right Election Battlefields

66 71 73 76

Government and Business in Australia

87

Local State Apparatuses State Government Apparatuses The National Government Apparatus

90 94 98

6 The Public Sector Reinvented

107

Transfer Payments Service Delivery Infrastructure Provision Direct Production Quasi-economic Institutions

108 112 119 121 125

7 Australian Industry Restructures

129

8

Financial Deregulation Making the J-curve Work The 1990-91 Recession Structural Change Sectoral Policies Social Consequences of Restructuring

129 131 137 139 146 151

Geographic Dimensions of Change

155

The Satellite Economies National Cyclical Growth Regional Disparities Globalisation and the Regions: Growth Globalisation and the Regions: Problems Regional Development Policy Options

156 160 162 165 170 176

9 Australia Joins the Asia-Pacific Region: from ANZUS to APEC The Cold War and ANZUS Defeat in Vietnam Containing the Soviets The Labor Government Living with Asia APEC and Globalisation

181 182 184 189 193 197 205

CONTENTS 10 All in a Day s Work The Crisis of the Dual Economy Dismantling the Dual Economy Globalising Australian Capitalism Notes Index

vii 208 210 212 214 224 235

Tables

6.1 Current Balances as a Percentage of GDP 7.1 Commonwealth Budget Outlays, Revenue and Balance, 1960-61 to 1998-99

110 134

Figures

7.1 7.2 7.3 7.4 8.1

Wages Share of GDP (I) at Factor Cost Profits Share of GDP (I) at Factor Cost Budget Aggregates Trade/GDP Ratios Distribution of Population among States and Territories, 1901-83

132 132 135 139 158

Tables

6.1 Current Balances as a Percentage of GDP 7.1 Commonwealth Budget Outlays, Revenue and Balance, 1960-61 to 1998-99

110 134

Figures

7.1 7.2 7.3 7.4 8.1

Wages Share of GDP (I) at Factor Cost Profits Share of GDP (I) at Factor Cost Budget Aggregates Trade/GDP Ratios Distribution of Population among States and Territories, 1901-83

132 132 135 139 158

Preface and Acknowledgements

This is a book about the deepening integration of the Australian economy into the world market and the social and political changes which have accompanied that process in the last two decades of the twentieth century. I was initially a critic of these developments and politically active in the opposition to globalising Australia. Like many intellectuals of the anti-Vietnam War generation I joined the Left. During the HawkeKeating Labor governments, however, I tried to be realistic and served on numerous ALP decision-making bodies, including delegate to State and national conferences, worked for three ministers in Immigration, Community Services, Defence and Industry, and spent three years as a federal MP. During this period I came to the conclusion that the kind of structural changes described in this book were inevitable. In the university system, where I now again work, this viewpoint is generally accepted even less critically in economics departments. Elsewhere in the Arts and Social Sciences globalisation is generally opposed. I am now trying to enjoy it. I would like to thank Deborah Feagan, Natalie Mahoney, Chris Hill and Tom Conley for helping prepare this manuscript and John Playford for insisting I get it published. The book is for Pat. BOB CATLEY

Abbreviations

ABC ACCI ACTU AGPS AIDAB ALP AMWU ANZ ANZUS APEC ASEAN BCA BHP CBA CBD CEO CIA CPA CRA CSIRO DLP EC EFTA ELICOS ETM EU GATT

Australian Broadcasting Commission Australian Chamber of Commerce and Industry Australian Council of Trade Unions Australian Government Publishing Service Australian International Development Assistance Bureau Australian Labor Party Amalgamated Metal Workers Union Australia and New Zealand Bank Australia, New Zealand and United States (Treaty) Asia-Pacific Economic Co-operation Association of Southeast Asian Nations Business Council of Australia Broken Hill Proprietary Commonwealth Bank of Australia central business district chief executive officer Central Intelligence Agency Communist Party of Australia Conzinc Rio Tinto Australia Commonwealth Scientific and Industrial Research Organization Democratic Labor Party European Community European Free Trade Association English Language Intensive Courses for Overseas Students elaborately transformed manufacture European Union General Agreement on Tariffs and Trade

ABBREVIATIONS GBE GDP GE GNP GST HIA HMV ICI IMF LDP LGA MP MTIA NAB NATO NIES OECD OPEC SBSA SBV SDI SME TCF TDC UAP

government business enterprise Gross Domestic Product General Electric Gross National Product Goods and Services Tax Housing Industry Association His Master's Voice Imperial Chemical Industries International Monetary Fund Liberal Democratic Party (Japan) local government authority Member of Parliament Metal Trades Industry Association National Australia Bank North Atlantic Treaty Organisation National Industry Extension Scheme Organisation for Economic Co-operation and Development Organisation of Petroleum Exporting Countries State Bank of South Australia State Bank of Victoria Strategic Defence Initiative small to medium-sized enterprise textiles, clothing and footwear (industry) Trade Development Council United Australia Party

Introduction

This is a book about the impact of globalisation on Australia, particularly its political and economic systems. In his seminal work on the subject, geographer Peter Dicken says of globalisation that 'the tendency towards an increasingly highly interconnected and interdependent global economy will intensify. The fortunes of nations, regions, cities, neighbourhoods, families and individuals will continue to be strongly influenced by their position in the global network. In a rapidly shrinking and interconnected world there is no hiding place'.1 During the last twenty years this tendency has had its impact on Australia, producing profound changes in public policy and the organisation of national life. Other works have examined the effect on the national economic structure,2 and some attention is paid to this issue here. But the primary focus of this book is public policy, debates about it, and the effect of their outcomes on the national economic and social structure. Various methodological approaches might be taken to explain these phenomena. Elsewhere explanations have been offered couched in terms of the dominance of international capital, the end of the Soviet system producing the global dominance of market relations, the ideological triumph of neo-classical economic doctrines or, more simply, the pragmatic shift to the Right by the Australian Labor Party. The approach this work adopts is systemic and historical. In the international system of 200 sovereign states each has its own characteristics which determine the manner in which it has reacted to the post-Cold War world of globalisation. In order to explain that process the dynamics of the system and the manner in which each state has become party to it require exposition. The first two chapters undertake that task. In Chapter 1 the history of the modern state system is examined with

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reference to its origins in Europe and its dispersal throughout the world, mainly through the process of colonisation. This competitive political society spread with it a world economy initially in the form of discrete imperial orders. The collapse of the last of these, Soviet Russia, in 1991 heralded the triumph of an increasingly integrated global capitalist economy organised politically into around 200 sovereign states. The second chapter argues that in this post-Cold War world interstate competition is increasingly economic in form, though strategic dimensions of course survive. The emerging assertive zone in this global community is the Asia-Pacific region, which is growing economically more quickly than elsewhere, industrialising and creating the equivalent of four European Unions in the process. The Australian model of economic development - statist and colonial - is examined in Chapter 3. It is shown that the highly successful dirigiste dual economy formed at federation in 1901 could not survive the onset of globalisation in the 1970s.3 This produced a profound reorganisation of national policy debates about appropriate responses to intensified international capital movements, financial markets and trade in goods and services. During the 1980s the national political elite reached a broad consensus that Australia would need to open or internationalise its economy in order to meet the unavoidable challenge of globalisation. As described in Chapter 4, this eventually produced economic rationalist policies of deregulation and privatisation with a view to making Australia more competitive. The national state did not become irrelevant or less sovereign, but the focus of its strategy did change. The relationship between business and government has always been close in Australia, as in other capitalist countries. At a time of radical change, however, that relationship becomes even more important, as described in Chapter 5. And since Labor, with certain anti-business traditions, was in office this partnership became more contentious. Chapter 6 describes how the Labor government refashioned the Australian state to enforce a more efficient economy, while maintaining its electoral coalition. This was not always easy as Labor policy was often overturned to achieve this outcome. As oudined in Chapter 7, the impact of globalisation on the Australian economy has been profound. Some of this change has been produced by innovations in business practices and some by the pressure of government policy. Much of it has also been unwelcome. This reorganisation has also had geographic dimensions as some regions of the country have boomed and others declined. This has, in turn, affected the demographic and political structures, as described in Chapter 8.

INTRODUCTION

3

As the Asia-Pacific region has increased its economic weight in the international system during the period of globalisation, so has its significance for Australian diplomacy increased. In Chapter 9 the reorientation of Australian foreign relations towards Asia in particular is described. Note is also made of the greater significance attached to economic relations. Chapter 10 assesses the effect of these changes in Australian public life. It contends that while significant progress has been made towards a successfully globalised economy, that target has not yet been achieved. The country continues its long slide into debt, and of the alternative governments the incumbent has been so far unable to arrest the process and the Opposition unable to achieve power. There is a tendency in the literature on globalisation - particularly that written in developed English-speaking countries - to decry the process. It is undoubtedly producing dislocations in those societies. But it is also generating the most profound advances in material living standards ever witnessed throughout East Asia. Whether that is progress depends on your point of view.

CHAPTER 1

The International System and the End of the Cold War

The changes that have occurred in Australian economic, social and political life during the last twenty years cannot be understood without reference to the international system, for Australia is not a world apart. That system was evolving before European setdement of Australia, and both created and then moulded the contours of life in the new settlerdemocracy that emerged from the convict settlement. People, capital, technology, products, institutions and ideas were imported to the new communities which formed on the seaboard of the continent to spill inland and transform an ancient environment and civilisation. In the process these imports were changed and then augmented by new waves, always changing and bringing new baggage and demands. Periodically the settlers would resist this dynamic, but rarely to much avail. The trick has always been to adapt this relationship to Australia's advantage. The Sovereign State System

The modern international system has exhibited two principal characteristics since its evolution from Western Europe in the sixteenth century: conflict and co-operation between sovereign states; and the uneven but remorseless expansion of the world economy. Both processes are properly the subject of discrete scholarly disciplines - international relations and economic history - with an extensive body of foundational literature. Sovereign states evolved in Europe during the sixteenth century from the hierarchy of spiritual and temporal authority known as feudal Christendom. They asserted their right to sovereignty against the universal Church and the Holy Roman Emperor and often proclaimed this authority as deriving from the Divine Right of Kings. This new political entity, the state, was in fact enabled by the evolution of military, transport

THE INTERNATIONAL SYSTEM

5

and communications technologies which permitted the creation of unified political and economic structures within territories the size of England or France. Free labour and the evolving commitment to private property laid the basis for market economies organised on a national scale. They mobilised against one another to contest territory and resources, mobilisations which brought into play power of an almost unprecedented proportion and certainly unmatched extension. These new states competed ferociously among one another in commerce and war, a process which ensured the continuous development of improved techniques for trade and battle and their rapid geographic dispersal. The history of this international system can be written, therefore, as either the chronicle of rivalry between states arbitrated by war, or the evolution of an international commerce disrupted periodically by conflict. One influential recent study of the history of the interstate system has been Paul Kennedy's The Rise and Fall of Great Powers.1 Kennedy charts the history and extension of the interstate system as a process of ascension and decline of Great Powers seeking dominance or hegemony within it. He provides a moving picture of the changing power distribution within the system which begins with an Austro-Spanish axis of Habsburg powers fighting a coalition of Protestant powers plus France from 1519 to 1659. This gave way to a looser alliance system but one marked by the continuing attempts of France, the continent's largest power, to establish its hegemony. Under Napoleon it briefly succeeded before defeat in 1815 at the hands of a combination led by Britain and Russia. During the next seventy years Britain was able to achieve a loose domination of the system, particularly in the extra-European sphere, based on industrial and naval pre-eminence. By that time other powers led by Germany challenged Britain, and the resulting multi-power configuration broke into two alliance systems to fight the First World War. This proved indecisive; roughly the same set of powers realigned to fight the Second World War. This provided a more lasting settlement of two Great Powers dividing the system into two competing blocs, a bipolar system which lasted until the Soviet empire collapsed in 1991, leaving one Great Power, the United States. The strength of Kennedy's account lies in its capacity to analyse and summarise those factors and processes which led to the rise and then decline of each ascendant Great Power in the history of the system. He sees war as the final arbiter of power and therefore military might and its application as the immediate determinant. But he also sees that in the longer perspective economic power has determined the status of states in the system because it provides the underpinning of geostrategy. This is in turn determined by a complex of factors including the physical environment, the population's size and skill, the capacity to harness new

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GLOBALISING AUSTRALIAN CAPITALISM

technologies, a social structure open to change and enhanced efficiency, and a political system of sensitivity and dexterity. The interstate system has been in a continuing process of change, innovation and competition, and those states that have lagged behind have sometimes been made the poorer for it by war or by commerce. This competition within the system has, unlike the imperial economies of Rome or China, driven the inexorable expansion of its economy both geographically and economically. This, too, has been the subject of considerable literature and controversy. The Fernand Braudel Centre, initiated by Immanuel Wallerstein, pioneered the concept of a capitalist world economy or modern world system originating in Europe in the sixteenth century.2 In this analysis the market economies emerging in Europe at that time extended the world market through formal and informal empire and through commerce. By the twentieth century only one world market existed and it was free-market or capitalist in construction - supposedly feudal or state socialist economies by that period being merely inefficient subsystems of the larger whole. The European world economy emerged during the 'long' sixteenth century (1450-1640), a phase of European agricultural revolution, colonial expansion, population increase and a generalised rise in prices deriving from the conquest of the Americas and western Africa. The interstate system survived the Habsburgs' attempt to create a world empire. The second phase (1650-1730) marked a geographic consolidation of the system but an internal transformation as the early phases of urban industrialisation got under way in England and France. The core of the system then witnessed (1730-1815) a final attempt by France to resist English industrial-based power, culminating in Napoleon's defeat. Stage three saw the second great expansion of the world system during the nineteenth century to encompass the whole of the globe with improved technology, fire-power and particularly maritime transportation. All other independent regional systems, notably those in Asia, were eliminated in the process. Stage four followed the First World War and represented a conflict between a challenging 'state socialist' power - the Soviet Union - and the Western capitalist powers led eventually by the United States of America. The status of states in this system changed from time to time, but Wallerstein depicts them as falling into one of three categories: core, periphery and semi-periphery. A core state is that which incorporates the latest technologies of organisation, production and war, a strong state apparatus and a capacity to extend its power. Most Great Powers are core states. Peripheral states are generally poor, with low levels of technology and weak state apparatuses incapable of resisting domination. Colonies were usually peripheral states whose subordination was enforced by the

THE INTERNATIONAL SYSTEM

7

imperial power. A semi-peripheral state is one that has not firmly entered either category but has the capacity to become one or the other by appropriate action. States are continually altering their status in the system and can improve or worsen their status in competition and cooperation with other states. This is true for periods of peace as well as war. This interstate system is ferociously competitive, both between states and between individuals and institutions within them. Societies that did not adapt, like the Spanish or the Ottoman Empires, were likely to disintegrate and decline, although some, like Sweden, could revive and renew their status at the core. Other societies could be forced to peripheral status by their unwillingness or inability to embrace new technologies or techniques, like imperial China in the nineteenth century. Others in a similar situation could, like Japan after the Meiji Restoration, by ingenuity and innovation achieve core status fairly rapidly. Clearly the path to improved or reduced status was not the same for every state, but, also clearly, without adaptation, competition and appropriate government policy, decline in status was likely. This was the engine of change. Where this competitive state system did not prevail and was replaced by an imperial system, the incentive for change and progress was greatly weakened. It is commonly accepted that one of the reasons for rapid growth in Europe and relative stagnation in China during the sixteenth to twentieth centuries was the conservative nature of the Chinese imperial regime, which often prohibited and certainly inhibited change.3 Some theorists have adapted a similar argument to the Roman Empire.4 A state in the modern world system must compete successfully in order to prosper. It is not possible to opt out of the process. If a state's military capacity is not continually upgraded to the standard of the general system it invites disaster at the next conflict. If a state's economic institutions are not innovating in technique, technology and product, they will be relegated to the periphery by interstate commerce. A declaration of neutrality will not necessarily save a state from the first fate, nor will a trade barrier of heroic proportions save it from the second. Just as the pace of technological change has steadily increased, so the time required to fall behind the pace of the system's standard has shortened, as has, conversely, the time required to go from periphery to core. It took the United States 140 years from independent former colony to core state (1780-1920); Japan took sixty years (1879-1939); and Korea may achieve it in forty-five (1954-99). China could move from outcast to world primacy in a generation (1978-2002). As this system has encompassed the globe, each nation-state has been forced to compete within it. Unsuccessful nations have been frequently subjugated by conquest. But commercial conquest can also produce

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disastrous results. In the past this has taken the form of economic colonisation by core states. In the contemporary world market this can be replicated by a declining currency, asset sales to foreigners, low productivity, inefficient economic institutions and impoverishment of the population. Nations may go backwards in the system as readily as forwards. During the twentieth century the Argentine has slipped down the status and wealth league because of an inability to diversify from its beefexporting production base by appropriate investment strategies. Britain declined from its post-war pre-eminence largely because of a failure to structurally adapt its economy to a post-imperial form. Britain's former colonies similarly had to restructure themselves in a post-colonial environment. The South African white class/nation took a strategic route unacceptable to the late twentieth-century world. Others, notably in East Asia, have been able to take better advantage of the changing international system and have grown rapidly in power and wealth. Other states again have tried to escape the dictates of the system by opting out of it. Opposing the Interstate System

Many social theorists have found this system repugnant for the competition it engenders, the conflict it produces, and the suffering it creates for those who lose in the process. Its strongest and most influential critic was Karl Marx, who had two brilliant ideas. In his political writings, notably in the Political Manifesto of the Communist Party and the Eighteenth

Brumaire of Louis Napoleon, he argued that each society is governed by a class dictatorship organised through the state. He believed that the core capitalist states of his lifetime, particularly Britain and France, were ruled by the bourgeoisie or capitalist class and that the different parties or politicians merely represented different sections of that class. When these states went to war or conquered or acquired new colonies, they did so in pursuit of more profits for these capitalists. And in turn the sufferings, low wages and poor living conditions of the proletariat or working class were caused by the inexorable pursuit of profits before people's welfare. The only resolution for these problems was the seizure of the capitalists' property and communal ownership of the means of production under a state run by the workers: the 'dictatorship of the proletariat'. Marx's other brilliant idea was propounded in his economic writings, particularly the three volumes of Capital and other notebooks comprising a history of economic thought known as Theories of Surplus Value. He argued that the feudal landlord extracted economic value from his agrarian tenants by getting them to work for him for some of their work time or by contributing some product. He posited that the capitalist factory owner did the same by getting workers to produce more value

THE INTERNATIONAL SYSTEM

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than their costs, or wages, with the capitalist receiving the remainder as 'surplus value' or profit. Marx pursued this idea with great intensity: since goods exchange at their value in the market and value is determined by the goods' embodied labour time, expressed as its cost of production, labour will be sold at its value or cost of production. But since the output of labour can be augmented by capital, its output can greatly exceed its value and produce surplus value. Again, Marx believed, the only way to abolish this system of creating surplus value and exploitation was to abolish capital or private property and create communism. Although Marx was not clear what a post-capitalist society would look like, he was clear that it would necessarily come about through unavoidable contradictions in capitalism producing conflict between workers and capitalists, eventually resulting in the overthrow of the latter. One such problem was the tendency for the rate of profit to decline. Another was the likelihood of war between capitalist states, over the spoils of imperialism among other things. But all the same he admired this temporary system of production for its accumulation of capital, technological innovation, scientific enquiry and capacity to raise human living standards. He therefore held that no mode of production would end until it had exhausted its potential for progress. Yet only capitalism's demise could lead to a peaceful world system. Some of these ideas became powerful components of nineteenth-century political thought and deed and a key component of the twentieth-century socialist movement. They spread to Australia with European settlements.5 As Europe industrialised, so its new working class formed separate industrial and political organisations, as trade unions and then socialist parties. These European political parties, as in Australia, mostly sought to win the vote and use it to elect reforming governments to improve the condition of the working class at work, home and leisure. Marx's ideas were well known among the intelligentsia but not very strictly adhered to outside small sects or minority factions of some major parties. Yet by a series of unlikely circumstances, including military defeat, an obscure group of Marxists led by Lenin and other emigres were to seize power in Russia in 1917. They set about trying to withdraw from the capitalist interstate system. Soviet Withdrawal The Soviet revolutionary regime, far from withdrawing from the interstate system, created the last great European empire by forced industrialisation, savage surplus value creation, militarising its proletarian dictatorship, and territorial expansion. In its early years there were some efforts by the Soviet regime to avoid behaving like a conventional state in

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the international system, but in the 1920s the Soviets undertook the construction of a state apparatus and the military suppression of internal and secessionist revolts. They also created the Third International of revolutionary parties, to which the newly formed Communist Party of Australia was admitted. By the late 1920s they had made the Communist International into an agency of the Soviet state.6 By the early 1930s the Soviets had become a totalitarian one-party state differentiated politically from the fascist regimes of the period principally by its commitment to public or state ownership of property and its zeal for heavy industry reflected in its Five Year Plans. By forcibly moving people into city complexes, enclosing the land into state farms and importing foreign technology for heavy industry, the Soviets achieved rapid industrialisation, though probably at a pace no quicker than was achieved by late developers elsewhere, especially in East Asia.7 The Soviet state also devoted considerable resources to military expenditure, a policy consistent with the geopolitical traditions of its Tsarist predecessors, whose geography it had inherited, and the militarist ideology of MarxismLeninism. The economic regime which the Soviets created, however, was new. During the 1920s there was considerable controversy among the Soviet leadership about appropriate economic policy.8 There ensued what we now call the Soviet Industrialisation Debates. These were effectively won by the Left which by the early 1930s was led by Stalin. From that time the Soviet state embarked on state socialism. For sixty years the Soviet regime provided the only serious alternative to capitalism as a means both for industrialising a backward society and for running a modern state. It was to prove a failure. The first Five Year Plan (1931-36) was based on extreme repression and compulsion and was accompanied by a series of purges in the state apparatus that stretched by the late 1930s to the upper echelons of the Communist Party and the Soviet military command.9 The design of the economy derived in some measure from the complicated formulations in volume 2 of Capital, where Marx analysed what he described as the 'circulation of capital'. Soviet state planners, centralised in Moscow and known as Gosplan, set output targets for all state-owned enterprises which their managers were expected to meet. They also developed models of economic plans for all sectors to interrelate to produce national output under their direction. The results were enforced state ownership of agriculture (collectivisation) and the construction of a basic infrastructure for heavy industry including the large-scale manufacture of weapons. Growth of economic output was impressive, though most of the technology was imported despite the otherwise autarkic nature of the regime. Whether growth was quicker than it would have been without the Soviet revolution and its attendant political cost is an issue still under debate. This state form

THE INTERNATIONAL SYSTEM

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imposed on the Russians by the exigencies of the time became the model for socialism during the decades of its existence. As the Soviet regime expanded geographically it took this system of planned economy with it. This could not be clearly discerned in the 1920s and 1930s because Soviet expansion was chiefly into undeveloped areas of Central and East Asia. After the 1939 deal with Nazi Germany, however, the expansion of Soviet power into Central Europe began. Atfirstit involved the brief occupation of part of Eastern Europe under the Molotov-Ribbentrop Pact, 1939-41, until the Nazi armies ejected the Soviets in the first year of the war. Later, when the German military machine was driven westward, the Soviets reinstalled their rule. In those territories annexed to the Soviet state the Soviet dictatorship was replicated, and with it the nationalisation of capital and thefive-yearplan. Elsewhere the Soviets developed the idea of 'People's Democracy' and under that title imposed puppet or colonial regimes throughout Eastern Europe.10 The imposition of People's Democracies in Eastern Europe occurred between the time the Soviet forces re-entered the region in 1944 and the Berlin blockade and airlift in 1948. It was a process that varied in speed, timing and extent in different countries, but the issue was everywhere the same: these states would not be permitted to rejoin the world market. It was over Eastern Europe that the Cold War erupted between Moscow and the West, as intense differences emerged between the Soviets and the principal Western power, the United States, over the appropriate structure for the post-war world. It is of course true that there was a significant geostrategic component to this dispute concerning the Soviet's claim to a sphere of influence extending into Central Europe and part of Germany. Unlike the British, the Americans opposed such spheres in principle. But there was also an economic component involving the conflict between the Soviet state's pursuit of state ownership of capital, economic planning and state-controlled foreign trade, and the American objective of an open world trading economy.11 America and Free Trade

The Americans' pursuit of international free trade was one of the most successful strategic policies in the history of the international system, a success litde acknowledged and often masked by its less impressive pursuit of other counter-revolutionary objectives. The origins of the US pursuit of free trade lie deep in America's ideological and social traditions and in its experience of the international system. Just as the Soviets had created a strong, centralised state on the ideological basis of nineteenth-century ideas of public ownership and socialism, so the

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Americans had constructed a weak, decentralised state based on the earlier ideas of private property and liberty. They regarded the interstate system of Europe as immoral, war-creating and bad for business. When they had the opportunity, at the end of the First World War, US President Woodrow Wilson tried to modify the system of realpolitik by creating the League of Nations and abolishing the colonial empires of Europe. The US Senate would not accept US involvement in the European state system even on those terms and rejected the relevant treaties. The inter-war behaviour of the European states and the eventual outbreak of the Second World War only confirmed these American attitudes. It had another opportunity to modify the system at the end of the War, a conflict it had in fact entered with great reluctance. The Americans emerged from the War as the most powerful of the Great Powers by a considerable margin. They also had a large number of international companies anxious to re-engage the world economy on terms which, given their nearly exclusive access to large capital funds, would be favourable. During the later stages of the War the Americans pressed their objectives on their allies from a position of great strength; American loans were made dependent on their policy objectives being met. They wanted a new international organisation to modify the interstate system and replace the discredited League of Nations. They wanted a dismantling of the European system of colonial empires and the creation of sovereign nation-states. And they wanted a dismantling of trade barriers and the creation of an international free-trade regime. They were eventually to achieve all these objectives. The Americans pursued free trade in the 1940s for both short-term reasons of self-interest and also longer-term systemic purposes. The administration of the day had the task of selling its war aims to the American public and to Congress. In 1920 similar objectives had been rejected largely because of the American tradition of political isolation from the affairs of Europe. As a result, in the 1940s the advantages of the new multilateralism were oversold and, from that rhetoric, revisionist historians have exaggerated America's pursuit of corporate profits in Eastern Europe. Certainly the free movement of goods and capital would have benefited US corporations in the 1940s, because they were the chief providers of both. The US economy produced 50 per cent of world output in the late 1940s. The terms on which the United States offered its Marshall Plan aid to the Soviets and their emerging satellites would certainly have led US economic interests into both. The Western European states accepted the terms and were quickly invaded by American capital. The Soviets rejected these terms and insisted that the People's Democracies do so also. Clearly they were incompatible with the economic system which the Soviets had created and were imposing in their military

THE INTERNATIONAL SYSTEM

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sphere of influence. But this economic access to the Soviet sphere was only an incidental by-product of the larger US multilateral objective, which was global free trade. The American political analysis of the European-based interstate system was that conflict sprang from its sovereign states' pursuit of economic interests by statecraft, colonialism and military power. This could be replaced by free trade and by a multilateral political system based on the United Nations. The Americans saw the 1939-45 wars in Europe and Asia, with justification, as wars of competing imperialisms, and set about dismantling them. In this process they had the support of the other emerging superpower, the Soviet Union, which was pursuing decolonisation for ideological reasons deriving from Lenin's pamphlet Imperialism: The Highest Stage of Capitalism,1^ and from the exigencies of geopolitics. The United States also saw some opportunity to expand its own influence into emerging post-colonial regimes, attempting to use their newly independent state apparatuses to improve their peripheral status.13 As more states were emancipated, the strength of the UN anti-colonialist pressure mounted and contributed to the withdrawal of European power from colonial territories. This process of political emancipation also dismantled the economically restrictionist regimes for whose purpose colonial empires were mostly constructed in the first place. The multilateral economic system established with US prompting at the end of the Second World War involved a number of institutions which were designed to make free trade work. The first problem was the currency system. In the pre-war period a number of different arrangements prevailed. Each colonial power had its own currency bloc centred on its empire, in which convertible currencies existed with the foreign reserves held by the metropolitan power. Australia was in the British imperial bloc, with its currency tied to sterling. Across this system the pound sterling was used as the major international currency, though its role was, like the British economy, less ascendant by the 1930s. Under the agreement signed at Bretton Woods in 1944 this was replaced by a system of convertible currencies at values tied directly to gold and to one another at fixed rates. Although in the immediate post-war period many countries imposed restrictions on the movement of their currency, it was envisaged that as these were progressively removed currencies would be freely convertible. Australia became a party to this agreement but maintained a regulated currency with controls on its movement. It was recognised that real market-based currency values would fluctuate with a country's trading and economic performance, such that a fixed administered exchange rate would be difficult to sustain on a daily basis. The International Monetary Fund was established to assist states encountering financial difficulties, usually chronic external deficits, by providing

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short-term loans conditional on policies designed to rectify structural problems. These were to become known as IMF stabilisation packages and would usually be deflationary and painful. The World Bank (the International Bank for Reconstruction and Development) was also established to provide large loans on a commercial basis for substantial development projects. The purpose of these structures was to facilitate trade by making currency exchanges simpler and therefore trade between private economic institutions in different states easier. It was indeed to provide the basis for an emerging global financial market which was to reach maturity with the evolution of electronic transfer technology in the 1980s. By that time most major trading states had deregulated their financial markets and abandoned fixed exchange rates, which enabled currencies to be instantly traded on electronic databases. The main exception to this process was the continuing attempt by the European Community to maintain fixed rates within bands between member countries. Alongside this currency system, and again on American initiative, a treaty was concluded at Geneva in 1947 between twenty-three countries on a General Agreement on Tariffs and Trade. The GATT was designed to produce a continuing process of trade liberalisation by getting member states to commit themselves to a reduction in barriers to free trade. Its role was to increase global economic growth and employment levels by promoting international trade. It operated by getting an agreed set of rules for international trade, as a forum for negotiations to make trade more liberal and predictable, and as a venue for contracting parties to resolve trade disputes. It also operated through a series of 'Rounds' cycles of multilateral trade negotiations culminating in simultaneous agreements among contracting parties to reduce tariff and non-tariff barriers to trade. It also acted to prevent discriminatory trade agreements between member states, although developing countries were made an exception and permitted to receive favourable tariff treatment. The GATT was also used to persuade states to convert their various systems of barrier protection to the most transparent device, that is tariffs. The GATT has gone through eight Rounds of trade negotiations since its inception in 1947. The Uruguay Round concluded in December 1993 incorporated significant changes for services and agriculture and renamed the GATT as the World Trade Organisation in 1995. During that time the number of participating countries grew from twenty-three to 116. It was a centrepiece of the mechanisms for the creation of a global free-trade regime which was integral to the post-war aims of the United States. As such it proved a direct threat to the existence of the Soviet state. The Cold War was then both a competition of a classic kind between two Great Powers for ascendancy in the international system and a conflict between two systems of political, economic and social organisation, each with its own belief system or ideology. The first competition went through

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a number of different periods, but the second was fundamentally unchanged until the demolition of the Soviet Union in December 1991.

The Cold War

The conflict between the Soviet and American Great Powers existed at three different levels.14 The first, at the strategic level, was the arms race centred on nuclear weapons. Alongside it was the confrontation between the two central alliance systems in the Eurasian heardand, NATO against the Warsaw Pact, but also having extensions into Japan, Korea and Taiwan. Outside the central alliance systems the United States and its allies and the Soviet Union and its allies engaged in an earnest geopolitical competition, for the most part of a classic Great Power variety. But the competition also had an ideological dimension. When states entered the sphere of one side or another, they typically absorbed some of the social and economic systems characteristic of that bloc. In the mid-1970s three events appeared to move the geopolitical momentum to the Soviet Union's advantage. First, the Americans were defeated in Vietnam. Second, the OPEC nations successfully obtained a 300 per cent increase in oil prices in 1973, thereby damaging the argument for free trade by appearing to use a producers' cartel to transfer income and wealth from the Western consumers to the OPEC producers. This was to encourage other Third World countries to pursue state power as a means for the international transfer of wealth. These policies were justified by 'dependency theory', which in an extension of Lenin's theory held that the world market kept satellite states in a permanent condition of poverty and subjugation.15 Finally, the Third World Group of 77 at the United Nations launched its collective demand for a New World International Economic Order. At the same time Soviet power was extended in two ways: by development of their nuclear weaponry, and geopolitically. The Soviets acquired a number of new allied states by influence, such as Nicaragua, Ethiopia, Yemen, and by invasion, such as Kampuchea and Afghanistan. The total of these activities led many, and particularly the US Republican Party, to believe that the remorseless extension of Soviet power would continue.16 In 1982 the secretary of the Soviet Communist Party, Leonid Brezhnev, died. Domestically the Soviet ruling party appeared unchallenged and the ageing Central Committee headed a privileged nomenklatura of 3 million people as an effective ruling class. The American Republican Party depicted the Soviet Union as a powerful and threatening state accommodated in its aggressions by Democratic President (1977-81) Jimmy Carter. In fact the Soviets were in deep crisis, as was clear by 1985 when Brezhnev's heir truly achieved power in the form of Mikhail Gorbachev.

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Gorbachev was a reforming communist, but by 1986 it was not easy to reform the Soviet communist state and it was dismanded. Since the mid1970s Soviet economic growth had slowed and was probably negative by the 1980s, but this was difficult to prove since no one believed Soviet statistics which, among other things, had East German incomes higher than those of Britain. Soviet living standards were falling, life expectancy for men was declining, and Soviet foreign trade was only maintained by exports of raw materials like oil and gold. Many of the 'national minorities' - in fact colonised nations - were unhappy with Russian rule, particularly the Muslim nations of Asia where the populations were growing quickly and becoming more religious. In 1980 the United States elected its most anti-communist president ever, Ronald Reagan (1981-89), who immediately embarked on America's biggest peacetime arms build-up. By December 1989 the Berlin Wall was dismantled and by December 1991 the Soviet Union was dissolved. By 1982 the Soviet Union was an over-extended Great Power. Within the interstate system the expansion, over-extension and decline of Great Powers has been a common historical phenomenon. Colonies acquired for gain can be expensive to maintain, particularly when there are many of them and there is resistance from them. Other powers rise to challenge hegemony until the hegemon finds maintaining status too costly. The Eastern European People's Democracies had been acquired by the Soviets for sound geostrategic reasons in the 1940s: they sat across the great European plain through which an invasion of Russia would have to cross. Their exclusion from the West and the world market at Moscow's insistence had left their economies feeble, technologically backward and deficient in energy. By the 1980s they had to depend on Soviet financial and energy subsidies, and in order to maintain their regimes they also had to be garrisoned by Soviet troops. In the 1970s the Soviets added to this imperial burden by acquiring extremely poor and backward satellite regimes in the Third World which could only be sustained by economic subsidies. The Republican administration of Ronald Reagan was determined to add to these Soviet burdens.17 It did so in a number of ways: it stepped up the arms race; it built new nuclear weapons delivery systems; it intensified the economic blockade; and it assisted anti-Soviet rebellions. American military expenditure, directed at the Soviet Union, was increased in the last years of President Carter; it was increased greatly under Reagan with the express intention of exceeding Soviet military power. The American Navy was increased, a new-generation strategic bomber would be built, new medium-range cruise missiles would be deployed in Europe, and an entire anti-nuclear defence system - quickly labelled Star Wars - the Strategic Defence Initiative, would be researched. The SDI would give the

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United States the theoretical capacity to launch an attack on the Soviet Union and defend itself against retaliation. It also increased pressure on US corporations and companies operating in Europe not to provide technology to the Soviets which augmented their economic capacity. And the Americans also, mostly covertly, supported insurrections against Soviet-backed regimes in Central America, Africa, Indochina and Afghanistan. This 'Reagan Doctrine' increased the cost of supporting these regimes for the Soviets.18 As a result of these increased pressures Gorbachev was anxious to cut a deal with the United States as soon as he came to power. In 1987-89 a number of summit meetings were held with the Americans with a view to halting and reversing the arms race. But this was not enough for the Americans. They wanted the Soviets to stop their imperial activities and their promotion of an alternative international economic system and to dismantle the strategic weapons aimed at the United States. By 1989 Gorbachev had reached the conclusion that the Soviets would need to acquiesce in these demands if reform of the Soviet state was to be achieved.19 It is true that some of the reason for this was the cost of the imperial over-extension that he had inherited. It is also true that the cost of continuing the arms race was greater for the Soviet Union than for the United States, which had an economy at least four times larger. But the core of the problem lay with the Soviet domestic economic and political structure. The Soviet economic system was based on planned production, fixed distribution, and international autarky. The economic planners calculated what would be needed from the economy rather than having consumers make these choices by their purchases. As a result heavy weighting was given to military production, because of state external strategies, and to heavy industry, which was deeply embedded as a priority in Soviet Marxist ideology. State planners then had resources arriving at millions of points for processing. Often they did not arrive and enterprises had scouts looking (illegally) for appropriate supplies. Managers needing to meet quantity targets met them with little priority for quality. Enterprise workers could not generally be dismissed and so had little incentive to improve productivity other than bonuses. Increased wages could only provide an incentive if appropriate goods were available for purchase, and generally they were not. Housing was regulated, stateowned and in poor supply, and its acquisition was usually not pricerelated. Other goods were not provided for consumption demand but for planners' targets and were unsold. There was little quality control, and few Soviet products, except raw commodities, would sell on the world market. The system did work, however, partly because there were mechanisms

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outside the plan which did function effectively. The black market was endemic in any consumer product of value, including pilfering from enterprises, acquiring from foreigners, and large-scale organised crime by ethnic gangs. In addition some private production did take place and in sectors like agriculture private plots provided a substantial proportion of total output. And finally the 3 million or so members of the nomenklatura were not governed by the system but lived outside it. Not only did this apply to housing, where they received favoured treatment in the cities and access to country houses, but also in consumer goods where foreign currency allowed them to shop in outlets supposedly reserved for foreigners. They also had greater access to uncensored, usually foreign, news reports and business information. The Soviet system of economic production survived for sixty years, 1931-91. During that time it faced a very destructive invasion and occupation by Axis Forces, but other countries were also damaged by the same war. It also started from a low base, but one still higher than Japan and the East Asian countries that overtook it during that period. Its share of world GDP first rose during forced industrialisation and post-war recovery and then progressively fell. During those sixty years it first imported and used known technology and infrastructure, and then extended those throughout the economy - 'the Soviets plus electricity', as Lenin described communism. It then started to stagnate and as it added geostrategic burdens to its output it went into decline. During that period the Soviets introduced little new technology or products to the world market outside the military sphere. And by 1991 and the Gulf War the inferiority of their military equipment was also in evidence. In recognition of the deficiencies of the system, various attempts were made to introduce the market to the Soviet economy, but never with any success until Gorbachev, who set in train a process which dismantled the system. Even the much-vaunted post-1956 Hungarian experiment was only a success compared with other People's Democracies. Similarly, efforts to remedy the absence of a mechanism of technological innovation, notably by the state bureaucracy acquiring technology externally, were not very successful. Poland took this farthest, but the corrupt state apparatus misallocated the funds and seriously indebted the state without upgrading the production system. Gorbachev replaced the 1968 Brezhnev Doctrine with the Sinatra Doctrine that Soviet colonies could do it their way without subsidies. As Soviet imperial power was relaxed during 1988-90 the newly independent regimes of the former empire all undertook the same reforms: democratise politics; liberalise information; and join the world market in capital and goods. The Eastern European satellites transformed almost immediately. Vietnam and North Korea were among the slowest to adapt. Cuba baulked, perhaps for reasons of Castro's personality.

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The Soviet reformers themselves finally reached the same conclusion, but the system was more deeply embedded and longer lived than elsewhere. As a result Gorbachev faced resistance from the old communist elite in the form of a military coup in August 1991. His own performance during it led to his political demise, followed by the abolition of the Soviet Union in four months. His Russian successor, Boris Yeltsin, with more resolution put down another communist insurrection in October 1993. Russia would face a long path of social dislocation and political conflict as the necessary structural and institutional changes took place. Because its absence from the world market had been so sustained, the extent of readjustment would be correspondingly deep and prolonged, with Russian GDP falling 50 per cent in the early 1990s. The Soviets had led the most sustained, deliberate attempt to evade the dictate of the competitive capitalist world economy. The experiment had failed.20 The Post-Cold War World

The Americans had won the Cold War. The conflict which the United States had waged with the Soviets had gone through three phases: containment, detente and confrontation. Between 1945 and 1970 they had evolved a policy of containment which meant combating Soviet expansion at whatever level it was attempted: nuclear pressure, conventional assault, or revolutionary war. The relative decline of US capabilities and its defeat in Vietnam led the Nixon administration (1969-74) to pursue detente with the Soviets, a posture continued by Ford and Carter and intended to reduce American geopolitical commitments. This phase appeared to witness Soviet advances. The third period was inaugurated by Reagan and produced confrontation, which almost certainly accelerated the disintegration of the Soviet Empire. The Americans could now secure their 'peace dividend'. The American victory in the Cold War had been bought at great financial and economic cost. During the immediate post-war years the American economy had been world-dominant and the principal exporter of capital. It ran a large trade surplus that led other countries to control the movement of their currencies in order to maintain their value against the US dollar. The costly Vietnam War coincided with a series of trade deficits, and in 1971 the United States devalued its currency, taking it off the Bretton Woods fixed exchange rate system. The US dollar together with other leading currencies was floated during the 1970s, thereby creating the conditions for the real-time international financial market which emerged on the world electronic communications grid. The Reagan administration took the United States from being the world's largest creditor nation to its largest debtor in two presidential

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terms. The process was easily understood and widely known at the time. The American economy already faced trading difficulties by the early 1970s caused by the declining competitiveness of its industrial structure. After 1981 Reagan exacerbated this position by running large US domestic budget deficits. These were caused by increased government expenditure, chiefly on military purchases, and reduced income taxes, mainly from higher-income earners and companies. The expenditure helped fuel a boom both in the United States and internationally. The domestic deficit was financed by foreigners, principally Japanese, who were running trade surpluses with the United States and using the dollars earned to buy US Treasury bonds, property and corporate assets. This process would lead to a devaluation of the US dollar, making its imports dearer and exports cheaper and rectifying the trading account. This didn't happen immediately because, as the major international currency, reflecting the sheer bulk of the US economy, the US dollar was in continuing demand. In 1985 the Group of Seven major economic powers agreed to manage down the US dollar, and did so under the Plaza Agreement. But the US trade deficits quickly re-emerged in the 1990s and produced a continuing devaluing of the US dollar. In some measure this trade imbalance was a reflection of the declining power of the US corporate sector. During the Bretton Woods period multinational corporations had come to dominate international trade and investment. At first most of these had been US companies, and indeed the US government had defended its policy of free trade at home partly on the basis that this would happen. By the 1980s it was clear that this situation would not be sustained: multinational corporations based in, and owned by, other countries, particularly Europe and Japan, began to emerge in the world market, successfully competing with previously ascendant US corporations. This occurred in areas as diverse as automobiles, computers, electronics, telecommunications, aircraft and aerospace. They also began to invest in the United States to be nearer to the then world's largest domestic market. This was evident, for example, in automobile production. Japanese and European car-makers first began seriously to penetrate the US market in the 1960s. Then as the US dollar floated downward and imports got more expensive they found it more profitable to invest in establishing car assembly plants in the United States. The Japanese in particular introduced their more productive assembly techniques, involving just-in-time accounting, quality circles and better products, and almost matched Japanese output rates in their US plants. The American companies meanwhile were having a weapons bonanza which was to produce the dazzling technology of the Gulf War but no great export order book. It is true that the Japanese were coerced into contributing $13 billion to

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the cost of the Gulf War for the United States, but this was barely 10 per cent of the annual trade deficit. The United States, with a boom economy in the 1980s and almost zero barrier protection, had lost the trade war while using its domestic deficits to fight the Cold War. In these circumstances it is hardly surprising that there was some agitation in the United States for trade restrictions. This came chiefly from labour unions and some manufacturing companies, and from those Democrat politicians whose electoral constituency included those sectors. During the 1988 presidential campaign there was pressure on the Democratic candidate to campaign for the introduction of barrier protection. During the following years the Japanese emerged as more unpopular among the American public than the Russians. America had emerged from the Cold War to confront not victory but its now more pressing economic problems. As the Cold War ended the American position was challenged economically by two other centres of developed capitalist power: the European Community, centred on Germany, and East Asia, driven at first by Japan. Since the 1950s the developed countries of Western Europe had been moving towards an economic free-trade bloc. This initially involved only West Germany, France, Italy and the Benelux countries, which signed the Treaty of Rome in 1957. To some extent this was designed to integrate the French and German economies, with a view to ending the continuing wars between the two peoples. It gave rising German industry a chance to dominate Western Europe and, by erecting a complex system of tariffs and subsidies, protected the still large French agricultural sector through the Common Agricultural Policy. By the late 1960s this European Community, however, was being seen as a vehicle for combating American economic dominance of Europe. The French blocked British entry twice, believing the British would prevent this development because they were too close to the Americans. The British therefore retained their remaining Commonwealth economic links and created a rival and short-lived European Free Trade Association. Under the personal direction of conservative Prime Minister Edward Heath, however, Britain did join the EC in 1973 with other EFTA members. The price was acceptance of EC agricultural policies and severing Commonwealth economic preferences, although New Zealand gained a phase-out period of grace. That unilaterally ended Australia's favoured economic association with Britain and created attendant structural problems.21 During the 1970s and 1980s other European states joined the European Community. Its integrative ambitions were strengthened and its political powers were extended to a European Parliament. It decided to abolish all internal barriers to trade on 1 January 1993, thereby creating the European Union, the world's largest single economic market of 380 million people, with the EFTA members adding 43 million to the

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EC's 337 million. British Prime Minister (1979-90) Margaret Thatcher who, unlike Heath, had never been an enthusiast for diluting British sovereignty, opposed this strengthening of the EU and was dumped as Conservative Party leader and prime minister in 1990, despite having won three elections. Outside the EU, London could not become the financial centre of Europe; within its borders, European industry could be galvanised by state intervention to compete with the Americans and the Japanese. To this huge market, the newly liberated former communist states would be progressively added, starting with the old East Germany. The initial cost of reconstructing the East German economy was to impede German economic growth and add depth to the European recession of the early 1990s. But later growth would be enhanced. At the other end of the Eurasian continent the old civilisations based on Confucianism were similarly emerging as major competitors to corporate America. Japan had already overtaken American per capita GNP in the 1980s and had run substantial trade surpluses with America since the 1982 world recession. The other emerging export-oriented, industrialising nations of East Asia - the Four Tigers and the ASEAN states - all appeared to be using state-directed capitalism and exports to the US domestic market to achieve quite spectacular growth rates. By 1994 it was common to predict the date at which the Chinese economy would overtake that of the United States to become the largest in the world, again by using a combination of state control and export orientation. In 1993 China absorbed more foreign investment - US$30 billion - and grew more quickly at 13 per cent than any other significant country in the world. In their initial stages of industrialisation, these East Asian countries appeared committed to a modern form of mercantilism which regarded growth in economic output as the chief measure of a nation's success. They were development states in a post-Cold War world where economic competition was enhanced. Against this background it was widely feared that the world might be moving into a new period of trading blocs which would close their own domestic markets and compete against one another in ways reminiscent of the 1930s. As the global economy moved into its regular cyclical recession in 1991-92 this became an even stronger possibility. Europe stagnated as the German economy tried to absorb the East German former Soviet colony for which it had paid so much compensation to Moscow. It was estimated that it would need to rebuild about 50 per cent of its capital stock. In East Asia the Japanese bubble economy burst and it went into its first serious post-war recession in 1991-93. American growth became negative and in some measure led to the electorate dispensing with President Bush and in November 1992 electing a Democrat president, Bill Clinton, for the first time since 1976. In this climate it is hardly

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surprising that within the Democrat electoral coalition voices were to be heard crying for an end to America's pursuit of a liberal world economy.22 The formation of the European Union in 1993 created the largest single market in the world and would soon augment it by expanding eastwards. The East Asians were known mercantilists who had been waging economic warfare at America's expense for some time. The United States should adopt similar interventionist trading and industry policies and use the North American Free Trade Association formed with Canada and Mexico in 1993 for similar purposes. The new American administration resisted these blandishments. During the period between Clinton's election and inauguration, in December 1992 President Bush, with litde to lose, threatened retaliatory action against French products in North America if the EU did not agree to relax its import controls and subsidies to domestic agricultural products. After heated debates the French capitulated. Then in 1993 the LDP government in Japan fell, to be replaced by a series of Coalition governments committed to greater fiscal stimulation and an opening of the Japanese economy. The Americans began to exert stronger pressure for a reduction in controls over the Japanese domestic market, notably those on auto parts, mobile phones and construction contracts. In November 1993 the APEC Heads of Economies summit in Seatde committed the Asia-Pacific economies to freer trade in the region. A year later the GATT agreed to further reductions in obstacles to free trade, including agriculture and services, and in 1995 the Japanese complied with American pressure to open their auto market. The drift towards trading blocs had been averted. The creation of a unified world market in capital, finance and goods since the Second World War has resulted from a combination of political will and technological innovation. Great changes of that order require both these factors. The Roman Empire was overthrown not because it lacked technology but because it lacked the political and social mechanisms and incentives to use it, in large measure because slavery provided cheap labour. The Chinese imperial system stagnated after achieving world's leading status in technology, economic size and power projection in the sixteenth century, largely because its centralised power decreed an end to technical innovation and geographic exploration. The competitive states of Europe conversely used the technology of the day to create dynamic national economies as their monarchs used gunpowder against the feudal order and their unified economies against the Universal Church. They used steam power, iron and navigation to extend their writ to the world. In the early twentieth century the railway, telegraph, steamship and internal combustion engine permitted the creation of

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newly colonised continental nations, like America, Russia and Australia. After 1945 the Americans provided the political and strategic impetus for the creation of a world economy, and at critical points insisted on its formation. This was only possible, however, because of technological innovations which widened, deepened and compressed the world market. In transportation a range of inventions cheapened the cost of moving goods, such that the economic benefits of producing close to a market were often minimised. Large oceangoing ships reduced unit transport costs for cars, electronics, cameras, audio and video equipment among other consumer products. The range was diversified by use of container technology starting in the 1960s, which enabled mixed products to be moved in small batches. Conversely bulk carriers for raw materials and energy supplies became progressively larger and unit costs correspondingly cheaper. Aeroplanes were larger and the real costs of transporting both cargo and people steadily declined, particularly after the introduction of wide-body jets in the late 1960s. Telecommunications and computers enabled the 1980s to witness instant real-time international banking transactions as stock exchanges were computerised and personal credit cards internationalised. The 1990s would see the market further extended as fax machines and high-resolution television enabled the distant, accurate inspection of goods globally, and mobile phone networks permitted instant long-range commodity transactions. It is not possible to identify which came first, the institutional or technological base for the world market. But both now exist and are being extended. Australia cannot evade their consequences. The late twentieth century produced the political and technological basis for international free trade. Nation-states would find it progressively more difficult to avoid economic integration into that system. Those that insisted on doing so could become materially backward compared with those which accessed cutting-edge production techniques and world capital markets. The consequence of not adjusting to this highly competitive and rapidly changing system would be a diminution in wealth, status and power. The Soviet bloc's inability to match the dynamism of the capitalist world economy had eventually enforced its reintegration on unfavourable terms, a reintegration which would involve extensive dislocation of labour and capital in former Soviet bloc states while a more competitive resource allocation was determined. As a result the political upheavals in those states were massive. In such a free-trade environment capitalist states would find that nationally determined interventionist policies designed to protect or regulate economic activity only served to restrict adjustment to international change and to reduce national competitiveness. Indeed much of the framework for autonomous economic management techniques was

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being destroyed by the internationalisation of economic activity. In this situation states could only avoid adjustment by autarky with its implication of stagnation; the retardation of adjustment, in turn, was likely to make its eventual achievement more painful since more resources would require reallocation. To the extent that Australia avoided or delayed its transition from a prosperous, semi-peripheral province of the British imperial economy to a component part of an emerging free-trade world, the more painful would its adjustment prove. This process became known as globalisation. Each state found it necessary to adjust to it as the dirigiste regimes of the past became less tenable. The degree to which national authorities were able to change their economies to access the new patterns of world production and distribution would determine their success in the new environment. Many of the better performing states in this respect were in East Asia.

CHAPTER 2

The World Market and the Industrial Revolution in Asia

During the last decade Australia has begun to see itself as part of the AsiaPacific region. This has been manifested in a number of ways described later in Chapter 9, notably a reorientation of foreign policy towards the region, accelerated under Prime Minister Keating; a reformulation of defence policy to integrate Australia's strategy into regional configurations; and a new emphasis in Australian education policy to concentrate greater attention on Asia-Pacific issues. But underpinning this new awareness of the region lay profound economic changes which at first led to considerable alarm. During the 1970s it was widely feared, particularly in the Australian trade union movement and among the managers of protected industries, that the economic developments taking place in East Asia would be a potent threat to the Australian economy. It was feared that the combination of cheap labour, repressive governments, tax havens and export-oriented industrialisation would pose a challenge to Australian industry which it could not meet. During the last ten years a more mature perspective on economic growth in Asia has been developed. In addition, such growth is now being seen as an opportunity for the country as a whole, even though it may require changes and dislocations to pre-existing economic practices. In order to appreciate these challenges it is necessary to develop a balanced appreciation of the process of economic industrialisation at present under way in Asia. Industrial Revolutions

It is common in popular economic development literature to talk of the Asian 'miracle'. Indeed the World Bank in 1993 published a study of several East Asian economies, The East Asian Miracle, seeking to explain why their economic growth rates were so impressive.1 One factor considered was human aptitude. Elsewhere attention has been given to 26

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the peculiarities of the Confucian ethic. Some authorities devote attention to the East Asian model of state intervention. In fact there is nothing new or unique or even peculiar to the Asian experience. The region is undergoing a process of industrial revolution or modernisation already achieved in Japan, much of Europe and North America, which will probably spread much wider in the future. This is a process which has fairly clear dimensions that are shared by those societies that complete it. It is not necessary to develop a theory based on the superior aptitude of East Asian ethnic groups for using computer technology, as former Singapore Prime Minister Lee Kuan Yew has done, in order to understand the process of economic development. The first country to embark on the process of modernisation was Britain. The Industrial Revolution which occurred in that country between the late eighteenth and late nineteenth centuries has been perhaps more widely and deeply studied than the corresponding process in any other country. This is hardly surprising. The development of modern industry itself produced a huge database for the gready expanded number of historians that the national economy could now support, to fossick over for a century. This has created a situation where in some large measure the intellectual model of an industrial revolution is that of Britain. It is from the principal features of structural change which occurred in Britain during that period that the major structural changes which comprise modernisation may be identified. Britain went from a traditional, village-based agricultural society to an industrial state. The population increased gready from about 5 million at the beginning of the revolution to almost ten times that number when it restabilised at the end of it. These people were much more urbanised, more productive, and lived longer. The British state had been gready democratised and the liberties available to individual citizens before the law and access to health, education and welfare services had improved. Britain had become the first modern nation. It had simultaneously become the centre of a huge empire and had done much to create the embryo of the modern world market. Other aspects of this first Industrial Revolution have been the subject of considerable controversy. Why this should have occurred first in previously poor islands and then spread quickly through Western Europe has been the subject of much literature. Much of the answer is to be found in the interstate system of Europe, which enforced technological competition on its member societies: nation-states could only survive and prosper by adopting the best technological, economic and administrative practice within the system. By the twentieth century a modern nation had been achieved in Britain based on a high-productivity industrial sector using a better-educated urban population. The small part of the work force that remained in agriculture was nonetheless highly productive by the standards of the time,

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though much of the food supply was by then imported from the newly settled continents of America and Australasia. The urban population was creating new centres of science, technology and learning which in turn were creating new products and production processes and further stimulating demand for an increasing range of imported commodities, energy sources and foodstuffs. The new democratic state provided a range of services and the enforced rule of non-arbitrary law within which business could flourish. While Britain was the first industrial society, it did not long remain the only one. The processes of production first used by the British quickly impressed foreign observers, and these innovations travelled abroad. Often this was by the direct method of British companies investing overseas and building productive enterprises like factories or mines or plantations. Sometimes it was by foreign entrepreneurs emulating British practice and then competing with them for markets. In other cases it was by British financiers providing loans or finance for such entrepreneurs in other countries. Australia was a recipient of many of these practices and the colonial governments became major borrowers on the London finance market. Britain was later a large source of industrial technology, especially as industrial enterprises grew in size after the federation of the six colonies. During the nineteenth century the same social and industrial revolution occurred in most of Western Europe, starting in the Low Countries and France. By mid-century it was under way in Germany, as Marx and Engels were to note during the development of their revolutionary ideology. By late century the Germans were successfully using their newly unified state's policies, including tariff protection, to accelerate the process which was to make Germany the most powerful country in Europe by 1914.2 Lenin was to document that after 1890 a similar process of industrialisation was occurring in Tsarist Russia.3 And by the time of the First World War the United States of America had undertaken a similar industrial revolution, initiated by the military needs of the Civil War, continued via the stimulations of mass migration from Europe and the investment of British finance, and protected by tariff barriers. 4 The industrialisation of the major Atlantic economies was thus largely complete by 1914 and intensified by the following war. Asian Industrial Revolutions

A similar process of transition began to get under way in East Asia (outside Japan) after 1945. We may call it the Asian Industrial Revolution. It has produced similar results as in Britain, Europe and the United States. It is not likely that the peculiarities of particular Asian cultures will

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produce unique modern societies: more likely the features of those cultures which derive from a traditional peasant-based, highly stratified production system will disappear with modernity, as they did in Britain and elsewhere. We may instead expect the evolution of high-income urbanised societies with small agricultural work forces and, eventually, liberal-democratic state structures. Asia began the process of modernisation later than the Atlantic littoral, though by most accounts its level of economic and technological achievement was superior to Europe's as recently as AD 1500. The closing of the two most advanced regions, China and Japan, to outside commerce must rate highly as causes of this phenomenon of arrested growth. They were both deprived by state fiat of access to front-line technology and the stimulation of competition to create it. China had until then been active in commerce and maritime exploration as far away as Africa. Japan had a brief experience with the Portuguese then closed its borders. Island and peninsular East Asia maintained the commerce but lacked the technological base to react creatively; instead it was mostly subjugated and colonised. When the process of modernisation started in the region it was stimulated by a coherent state apparatus faced with intense international competition in the 1850s in Japan.5 Subsequent developments in Japan were remarkably similar to the historical processes which occurred in the late-developing countries of Europe, notably Germany. The population moved quickly off the land and into cities dominated by oligopolistic industries, many owned by the old feudal elite. The state intervened strongly to assist the import of technology and institutions, to repress popular revolts and to protect and develop domestic industry. It found foreign markets and the import of commodities essential but difficult to access because of existing imperial economic structures. Wars quickly resulted, in a fashion Lenin's Imperialism would have recognised. In fact Japan was often used in his text as a substitute for Russia to avoid the Tsarist censor. Japan grew rapidly by joining the world market; it lost a war of imperial ambition, developed a democratic state (partly by imposition), and had its growth rate fall back to the average when its level of development achieved industrial world norms. By the 1980s the Japanese social structure differed little from those of Western Europe, with a similar population density and level of income. Its political structure after the US occupation, however, was more rigid until the 1993 election destroyed the LDP regime6 and the seniority system it used to instil discipline into the population. Allowing for the short-term features, including large external surpluses and capital exports - similar to those enjoyed by Britain a hundred years before - and unique cultural characteristics, the Industrial Revolution had produced similar consequences in two civilisations at opposite ends of Euro-Asia. Elsewhere in Asia the process of modernisation was accelerated, but at

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first industrialisation was halted by the political regimes of European colonialism. The empires the Europeans created in East Asia were seen by their colonial masters as adjuncts to their European economies. In keeping with imperial theory and interests, London, Paris and The Hague used their colonies to provide resources not available to them elsewhere, particularly rubber, tin, sugar, tropical foodstuffs and other inputs into a modern industrial society. The metropolitan capitals held the financial accounts and paid for their imports with industrial products. Coastal China was also incorporated into this system on similar terms since the Chinese imperial order was in a state of disintegration and, unlike Japan, in no position to assert its own interests. A series of semicolonial entities was created by 'spheres of interest'. Colonialism generally prevented industrialisation. It is often suggested, however, that the Japanese provide an exception to this rule and actually undertook to industrialise their colonial possessions in Taiwan, Korea and Manchuria. The British permitted industrialisation to take place in parts of their empire also, including Australia. The next wave of industrial revolution in Asia took place in what became known in the 1970s as the Four Tigers of South Korea, Taiwan, Hong Kong and Singapore.7 That the Asian Industrial Revolution, starting in Japan, should spread next to these four territories need not have excited surprise. Taiwan and South Korea had experienced some industrialisation as former Japanese colonies and remained in close contact with Japanese capital, markets and growth. They were also favoured recipients of US aid and military spending during the Cold War period for strategic reasons related to the containment of China. Their authoritarian regimes had every intention of using the state's agencies and policies to promote internationalised industrialisation, specifically by targeting rich markets like North America. In the 1970s they fostered international capital inflow by creating 'free trade zones' where the general tax and labour laws did not apply, and these zones became export platforms. They also became favoured sites for Japanese investment in search of such export platforms, as the yen appreciations made Japanese manufactured exports more costly. These 'development regimes' were strongly mercantilist and produced similar urbanised, high-productivity, world market-oriented societies as elsewhere, when the initial impetus provided by the zones spread more widely throughout these countries. Like Japan earlier, they then began to export capital to other lower-cost centres. But by the late 1980s both these societies were placing pressures on their states to democratise, and by the mid-1990s they had done so. Despite the isolated nature of their societies and real and dangerous strategic threats faced by both, South Korea and Taiwan experienced the same transition to representative democracy as occurred alongside the

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Industrial Revolution elsewhere. In both countries this was accompanied by political agitation, the organisation of labour, the generation of liberal ideas by the middle classes, and the formation of democratic political parties. This would suggest some correlation between the social forces required to drive a modern industrial economy and the impetus to democratic political demands. But the correlation between the growth of a capitalist economy and a democratic state is clearly not immutable. During the process of industrial modernisation in Europe, there were periodic reversions to unrepresentative and indeed barbaric systems of government. The best known example of this occurred in the inter-war period when Germany, Italy and other smaller European countries resorted to various systems of fascism. In the case of Germany this resulted from the social dislocation occasioned by war, defeat, humiliation and economic depression. The Nazi regime was a response to the expulsion of Germany from equal status among the Great Powers and the exclusion of its products from a world market already divided among the victors of the First World War. Eastern Europe also provides numerous examples of Left totalitarian regimes emerging with the process of economic development. A direct link may not exist between the process of economic development and the evolution of the modern liberal-democratic state, but some relationship nonetheless exists, as Korea and Taiwan appear to confirm, which can be encouraged by the international community of democratic states. And a correlation between the level of development and the existence of democratic processes can be statistically demonstrated.8 This correlation does not hold so well in the city-states of Singapore and Hong Kong. Singapore had developed as the regional headquarters of the British Empire in South-east Asia. Its ethnic composition - Chinese migrants in a Malay archipelago - ensured that it achieved independence on its own in 1965, despite the wishes of its political elite. It had joined the Malaysian Federation in 1963 but was evicted when the peninsular Malay political leaders found competition from their Singapore rivals too intense. As an entrepot and financial centre without a hinterland, Singapore was forced into the world market. It too became an authoritarian, development state regime with an unavoidable commitment to world-best practice, since it had no domestic market or resource base to fall back on. Its first generation of leaders propagated self-reliance, international competition and the need for discipline. By the early 1990s the first serious signs of democratisation of the state were emerging after the semi-retirement of Lee Kuan Yew, who had been more responsible than any other for the creation of an authoritarian development state. Hong Kong played a similar role for the British Empire to the South China world: entrepot, trading post, financial centre. History ensured that

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its unrepresentative colonial regime would keep the city-state oriented to the world market. This was facilitated by the closure of communist China to the world market for thirty years, which enabled Hong Kong to play the role of semi-legal access port to the world's largest nation. But the strategic relationship with China and the 1984 Anglo-Chinese deal of succession has kept one of the world's richest and most successful industrialised states undemocratised, the policies of its 1990s governor notwithstanding. It is unlikely that the communist rulers of the mainland will allow their richest province to be their only democratic one after 1997 and thereby pose a threat to their own authority. But the waves of political liberalism which the colony will create will resonate throughout China. Hong Kong and Singapore may be viewed in development terms as the regional city centres of an industrial revolution taking place in South China and South-east Asia respectively. In some ways they are the contemporary Asian equivalents of New York or London, with the political boundaries drawn across their hinterlands. It should hardly be surprising then that the same features of those cities are to be found in theirs: financial districts, cultural centres, corporate headquarters and high income and consumption levels. But the colonial period imposed discordant political boundaries on a development pattern dictated by economic, social and technological forces. By the 1980s these deeper processes were crossing the political boundaries and creating industrial revolutions in peninsular Malaysia and southern China. The third tier of development has arisen where the Industrial Revolution has spread to Malaysia, Thailand and the Philippines, the new Tigers of industrialising Asia in the 1990s.9 In all three a similar process of development is occurring at similar rates of advancement from different base levels. Exports of industrial products are fuelled by relatively cheap, disciplined labour and imported capital and technology. Much of the investment for export platforms comes from Japan but also increasingly from Taiwan, South Korea and Singapore as they face similar cost pressures. Hong Kong devotes much of its capital export to South China, of which it has become the virtual commercial capital. And as this process gathers pace so production for the domestic markets of these societies becomes more important. These three new tigers are urbanising and, particularly when population growth is kept in check as in Thailand, their people are growing wealthier. Malaysia was able to take advantage of an extensive infrastructure built by the British in pursuit of trade based on rubber and tin. Its oil industry was also able to provide a useful supplement to industrialisation. But Malaysia's growth acceleration into the 1980s was driven by a determined government set on rapid industrialisation and pursuing a 'look east' policy which specifically sought to emulate Japan. It developed an

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automobile industry by attracting capital and technology from Mitsubishi to build the Proton. By the early 1990s Malaysia had overtaken Australia in the value of its exports. Uncolonised Thailand entered the world market later but has boomed from the 1980s, with tourism, Japanese corporations and a processed food industry, particularly seafood, providing additional impetus. Thailand had, of course, been close to Japan since they had been allies in the Second World War. It had also enjoyed some modest economic stimulation as a result of American military expenditure in the region during the Vietnam War. But its development to a per capita income half that of Malaysia, twice that of the Philippines and ten times that of Vietnam came with the world market-oriented economic policies of the 1980s. At one stage Thai manufactured exports were growing at 40 per cent per annum, a figure not quite matched by its international tourist figures. The Philippines has until recently been a laggard state despite considerable post-war advantages. These were squandered by a Marcos dictatorship (1966-85) less interested in development than political power and financial corruption. The Americans had left the Philippines with one of the higher income levels in East Asia, a very well developed educational system and infrastructure, an internationally oriented economy, a free press and a democratic if somewhat corrupt political system. During the 1950s some government-sponsored industrial development was also achieved within a protected domestic market. These advantages were lost during the Marcos regime when corruption, administrative disruption and social turmoil combined with increased militarisation to drive away capital investment. The Marcos family also looted the national treasury and hoarded gold in Swiss banks on such a scale as seriously to jeopardise national fiscal policy. The country lost nearly two decades of development. By the 1990s, with democracy restored, it was starting to produce healthy growth figures but at a place at the rear of the East Asian pack, with annual increments of about 5 per cent. The Industrial Revolution has also spread to Indonesia.10 The internal diversity and political difficulties faced by Indonesia after its people took independence from the Dutch were to prevent the evolution of a development regime until the late 1960s. Internal order and repression absorbed much of the regime's energy after the 1965 military coup, and extensive corruption, government controls on international trade, some spectacular crashes, notably in the oil sector, and lack of infrastructure obstructed the impulses from the world economy from penetrating Indonesia. By the late 1970s, however, internal stability and selfsufficiency in food enabled Jakarta to embark on a strategy to industrialise the country. After the collapse of oil prices and the end of the windfall earnings in the mid-1980s, controls on trade and finance were

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liberalised in a series of measures; foreign industrial investment was warmly and successfully courted; manufactured exports grew steadily in value; and industrial production increased. By 1995 Indonesia had perhaps 2 million people at a Western consumption level out of nearly 200 million but anticipated settling up to 60 million more people in its cities in the next twenty-five years. Indonesia has been slower to industrialise than its East Asian neighbours, but it has made progress in difficult circumstances. A nation of 3000 islands and hundreds of languages and ethnic groups, its government has been extremely sensitive to concerns about regional secession. During the independence war the Dutch sponsored republics in the outer islands and retained possession of West Irian until the 1960s. The Americans also encouraged secessionists during the Sukarno period and in 1958 the CIA assisted at least two rebellions. Portuguese Timor was regarded as a colonial anomaly and potential source of encouragement for secessionist movements and was invaded and its independence movement suppressed in 1975. Yet Indonesia's annual national economic growth has been about 6 per cent for a quarter-century, it is self-sufficient in basic food, and oil has been replaced by manufacturing industry as the major source of foreign exchange. Indonesia has built and exported its own aeroplanes. The life expectancy of its population has grown steadily from 46 in 1960 to 59 in 1990. Between 1972 and 1982 the number of people described as poor fell from 67 to 30 million and those living in poverty from 58 to 17 million.11 Indonesia remains not well known in Australia.12 The media gives it scant coverage and it has rated as low priority in the national education curriculum. It mostly receives attention for bad reasons: the killings of 1965, the suppression of East Timor, the poor record on human rights and the business involvement of the President's family. But this is a country whose friendly regime has enabled Australian defence expenditure to be low for two generations and whose economic prospects present a rich opportunity for Australia. It has a government well disposed towards Australia which is making slow steps towards democracy as the postSuharto succession is worked out. Its neighbouring eastern provinces require development assistance and the Timor Strait resource extraction agreement is a model of co-operation.13 Those East Asian societies which have not entered or have only partly entered the process of industrial revolution are those which have refused to participate in the world market. After undertaking a process of industrialisation during the Kuomintang period, China attempted socialist development during the 1950s and 1960s but failed to create a modern industrial society. True enough, decent growth rates were achieved during the period of recovery from civil war and assistance from the Soviet Union, 1949-60, but in the decade or so of autarky which followed, China

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almost stagnated. After the death of Mao there was a progressive dismanding of socialist planning. As a result China is now undergoing one of the most rapid industrial revolutions ever seen, with whole regions linking to the world market via historic regional centres - Hong Kong, Taiwan, Shanghai - and South China growing at over 20 per cent annually. It is also progressively liberalising its state regime, although the degree of democratisation has not been nearly as rapid. In 1993 international comparisons based on the domestic purchasing power of incomes suggested that China had the world's second largest national economy and one which would overtake the United States early in the twenty-first century. Similar observations may be made about the economic policies of the smaller states that have pursued some variety of socialist autarky. Under the military socialist regimes of the last fifty years, Burma has enjoyed a repressed society, stagnant economy and civil war. The socialist oriental despotism of North Korea has achieved stagnation, isolation and even limited nuclear power status while its ruling dynasty worked out a satisfactory theoretical explanation for hereditary communist leadership succession. The excesses of the Khmer Rouge regime in Cambodia determined to eradicate all vestiges of the world market and re-create a poor peasant medieval universe have coined a new terminology of terror - the Killing Fields. In none of these states have any significant achievements been made in improving living standards at a rate commensurate with neighbouring states in the world market. Perhaps most instructive here has been Vietnam.14 The huge social mobilisation by the communists required to defeat the Americans created a post-war regime gready distorted by militarism and anti-market sentiments. The bankruptcy of the Soviet empire and war with Cambodia and China only drained its treasury further. The badly policed but nonetheless pardy effective blockade of the Americans made matters worse. For two decades Vietnam was barely allowed to join the world market, and its social structure atrophied. The market reforms of Moi Doi in the 1990s, however, have already produced some movement and improved economic growth. American economic relations after 1994 will now help. Other states, including Malaysia, Australia, Taiwan and Japan, have helped open it to the international market. Its industrial revolution is already under way, and to judge by the gaoling of the first Vietnamese communist minister for corruption in early 1994, the liberalisation of its state may not be far behind. An Asian Miracle?

It is difficult to conclude that there is anything unique about the Industrial Revolution taking place in East Asia. It is of course true that growth rates in part of East Asia have been exceptionally rapid and that the

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10 per cent annual growth figures recorded by many of the development regimes far exceed those of Britain or European countries during a similar period over a century ago. But there are good reasons for this. Above all there is the advantage of coming after and knowing where to go. The British Industrial Revolution was created by a people who had litde idea what they were creating: a democratic state; mass production; a world market; an urbanised society; and the joint stock company funded through the stock market. Most subsequent industrial revolutions were achieved with more rapid growth rates than the British, who probably did not exceed 2 per cent annually throughout the nineteenth century. The later industrialisers in Europe and North America at the turn of the last century were mostly doubling British growth rates. And indeed at that time it became something of a national British obsession to work out why Germany and the United States grew more quickly and what could be done about it. One factor at work was of course that those countries were catching up to a known, achievable level of development. When they had stabilised at that level their growth rates also levelled off. During the last generation a similar common rate of growth has emerged among the major North Atlantic economies as they have achieved similar income levels. In making this judgment, of course, allowance needs to be made for post-war recovery phases, the absorption of East Germany, the reorganisation of post-imperial Britain and other such short-term factors. Another way of putting this is to say that mature, industrial democratic societies seem to achieve a common growth rate of 3 to 4 per cent annually. As the East Asian development regimes become mature capitalist democracies, their growth rates may also slow to that level. East Asia has been playing catch-up growth for two generations. The real question is whether these economies will exhibit the same rapid growth trajectory and absence of a strong business cycle when they mature. Japan has already provided the answer to this. During the world recession of the early 1990s Japan experienced its first serious recession since the war (excepting the OPEC-induced downturn of 1974-75). It was preceded by a classic over-investment period, a speculative boom and a crisis of overproduction. The 'exceptional' Japanese growth rates now look more like a developed world average. And the development regime's mercantilist government, led by the LDP, was ousted in the 1993 elections. The chief reason was the dissatisfaction of the population with the huge external surpluses not producing appropriate improvements in their everyday lives. As Japan devotes more resources to domestic consumption, as its trade deficit diminishes with other producers 'catching up', as its political system matures to match its production level and as its market is opened by the reduction of barrier and other protection, its economic performance will look more like that of the OECD average.

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The issue of automobiles is very instructive here. During the 1970s the Japanese automobile industry produced a superior product with lean production in techniques and quality control. Japanese automobile exports accounted for about 35 per cent of its trade surplus and have been a vital contribution to the economic 'miracle'. At each successive appreciation of the yen - from 360 to the US dollar in 1970 to less than 100 in 1995 - the Japanese car-makers have been able to hold market share. The Plaza Agreement of 1985 to appreciate the yen by effectively 30 per cent also had little consequence on Japanese auto industry performance. This was achieved by Japanese producers selling into a domestic market of almost uninterrupted growth for forty years. By the 1990s this market was saturated. As the yen edged up they moved plant to markets in the United States, Europe, Australia and elsewhere. They also invested in lower-cost countries of East Asia to re-export to developed markets. To a much lesser extent they also started to import components from lower-cost countries. Finally, they also kept in front of the yen pressures by improving product quality and design. In 1991 Japan's bubble economy burst in a recession which was to last over three years. The effect in the automobile industry was dramatic. Just as the domestic market contracted, the rise in the yen of 1993 pushed Japanese automobile export prices up quicker than they could compensate for. In addition some producers had invested heavily in new models in the early 1990s and stood very exposed. One car plant was closed by Nissan and a large number of component manufacturers went out of business. To make matters worse, other car-producing countries were improving their products rapidly, sometimes by using Japanese techniques. The story was repeated for other sectors as Japan has become a mature democratic industrial society. The result has been lower growth and a clear business cycle in Japan. In their early Industrial Revolution and high-growth phase, the other East Asian countries will face other advantages that Japan is now losing. Capital will not necessarily have to be generated by domestic savings or imperial plunder but can be borrowed from other developed societies. For much of the 1970s and 1980s South Korea was borrowing heavily from overseas, but while this enabled the construction of capital-based enterprises that could generate sufficient export earnings to service incurred debt, the policy was appropriate. Indeed it contributed strongly to the construction of an internationally competitive economy, although periodic downturns in the world economy did create occasional balance of payments problems. Taiwan undertook to generate large external surpluses and by 1994 probably had the largest national foreign exchange reserve in the world. The other Tigers were maintaining rapid and seemingly non-cyclical growth. Investment in these economies, particularly

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in their infrastructure and provision for basic requirements will be a long-term financial opportunity with high rewards. As well as this, these economies do not have to invent new technology and product ranges. These are already known and must be merely transplanted, a much simpler process. One of the contributing factors to Britain's industrialisation was an impressive string of innovations in agriculture, industry and services which were applied to production to lift national output and wealth. They ranged from energy generation to health technology, and they changed the face of the world. For newly industrialising societies these technologies already exist, are being continually augmented and can be imported and/or modified. Indeed in some cases, fashion sports shoes for instance, corporations actively pursue cheap labour and low-tax locations in which to produce; they provide promotion and marketing. In others like the hospitality industry, capital can be permanently deposited in the form of hotels or resorts and financially serviced from its own revenue. In others again like automobile production, companies from developed countries can be lured by the promise of a captive protected market to provide start-up technology and capital, as has occurred in South Korea, Malaysia and Indonesia. In personal computers Taiwanese ingenuity followed IBM product development so closely as almost to drive it to bankruptcy. Further, the markets for these newly industrialising states are not confined to the domestic economy but have a world economy at a higher stage of development to penetrate. Unlike the British they do not need to be the workshop of the world but a provider to a very rich and fastgrowing world economy in which the transport and distribution systems and energy and raw-commodity production already exist. Indeed the North American market has been of vital importance in the development of all the export-oriented industrialisers of East Asia. The importance of these extra-regional markets has tended to decline in relative importance, however, as the economies of East Asia trade increasingly with one another. From these external phenomena derive the essential elements of the East Asian economic 'miracles': import capital, finance and technique; the provision of disciplined labour and efficient management; export product to service the national debt; and finally export capital to offset rising cost structures. Central to this process, nonetheless, is the ability of these societies to capitalise on the opportunities offered by the world market, an ability not so much in evidence in other nonindustrialised regions like Africa or South Asia. A society well enough organised and disciplined for production and governments like those of the Four Tigers in the 1970s determined to pursue growth are clearly contributing factors. Much has been made, therefore, of the importance of the role of the

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state in forcing industrial revolutions in East Asia.15 The British state itself had been minimally involved in the process of industrialisation during its heyday. It was, however, very active in enforcing the enclosures of agricultural land which drove the population into cities; it was also very active in creating the imperial trading system from which much economic surplus was to derive. Industrial revolutions elsewhere in Europe saw much more active state economic policies. The Germans, for example, were famous for using state policies to enforce industrial development before the First World War, and the Nazi period witnessed an even more determined state apparatus which for a few years tried to reorganise the productive base of the whole of Europe. Clearly, the Japanese took some lessons from this experience and scoured the developed world for best practice in various spheres while developing an economy capable of defending their national independence against the challenges of the colonial intruders. The Soviets took the process a step further and had the state own, direct and run almost all economic institutions. The Chinese did the same. State-directed industrialisation using state-owned enterprises was eventually a failure in the Soviet Union and China, in as much as it did not produce economies capable of surviving in the world market.16 For a while in the 1950s it seemed that they might have created a system of faster industrialisation. But their products were not of world market quality, their efficiency was questionable, their statistics were most certainly adjusted to give a favourable impression, and they lacked the capacity to innovate effectively throughout the economy. The Soviets tried to offset this problem by importing technology in exchange for the only products in which they were internationally competitive: raw commodities and weapons. The People's Democracies of Eastern Europe, especially Poland, also tried to break the vice by importing technology and paying for it by Western loans. They in fact worsened the situation because they could not service the debt incurred. In state-run economies, it is difficult to transform foreign loans into a capital stock capable of generating the cash flow to service them. Even in a transforming capitalist economy like Australia this proved to be a problem. The Chinese did even worse by importing Soviet technology in the 1950s. It would now appear that just as open economies can grow quickly to a level commensurate with other developed economies then slow to growth rates at a developed world average, so state-owned economies can grow to a level commensurate to state-owned near-monopoly enterprises elsewhere then slow to their growth rates. This is in fact often zero, and can sometimes become negative, as has been the case in many OECD government business enterprises. This is not to say that state-owned enterprises cannot ever provide goods or services efficiently, but that an

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economy run by them or dominated by them has not in practice been able to match world market standards. The communist command economies demonstrate this. Between the broadly liberal British state experience and the command Soviet-style apparatus is the experience of most of East Asia. In general the lower the level of development, the more successfully can the state intervene to force development, by borrowing finance, providing infrastructure, enforcing discipline, maintaining high savings and investment ratios, favouring sectors and setting indicative output targets. But if it strays far outside these parameters it is usually counter-productive. The state must ensure access for its economy to the world market in products, capital, finance, consumers and ideas. It is primarily the world market and not state policies which has produced rapid industrialisation in East Asia and elsewhere. It has also been suggested that a repressive state with authoritarian government is necessary to produce the East Asian style of industrialisation. It is generally true that during the period of rapid industrialisation liberal democracy has not been the state norm in East Asia. But nor was it in Europe during its early phases of industrialisation. Undeniably some repression has accompanied rapid economic development. The process of driving people out of traditional agrarian communities, herding them into the modern factory system, collecting them into huge crowded urban regions where disparities of wealth and income are only too apparent generates tensions. In Britain it produced Luddites among the farm labourers/peasants who wanted to stay, and socialists, communists and Chartists among those who had already moved. The state was widely used to repress, disperse, subdue and sometimes kill these people. The process of industrial revolution is disturbing for a traditional society and some opposition will often be encountered. In many cases - France, Russia, China - it has contributed to a revolution. What makes it arguably easier in East Asia is that the process is shorter and its end may be known, described and aspired to. Nonetheless repression may occasionally accompany its pursuit and commonly this involves state activity against recalcitrant peasants and unionising workers. But in the long run it is the very process of industrialisation and economic development that enables, perhaps dictates, the creation of the modern liberal-democratic state of the kind dominant in Europe and emerging in the richer East Asian societies.17 It is not possible to create a developed society capable of making the market work efficiently without the same people demanding a similar role in the functioning of the state. That level of development which enables the creative provision of a myriad goods and services in response to consumption needs generates similar creative demands for input to the political process and the services it provides. These two developments occur in tandem as a

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response to the same processes in education, co-operative production, communications technology and human behaviour. This process took two centuries in Britain, from regicide to women's suffrage. In Japan it took defeat in war and seventy years. In Taiwan and South Korea it took one generation. As this democratisation process occurs, it appears that the development regime loses some of its determination. In the marketplace for political ideas consumption starts to win over saving; imports start to look as attractive as exports; and liberal dissidence may win adherents against social conformity. A society once dedicated to productivity begins to find other national goals to achieve. And in any case as they fully enter the community of nations, the development regimes find their actions circumscribed by the GATT, the United Nations, APEC and other commitments. The Japanese political transformation which started in mid-1993 appeared to mark the end of unbridled competitive mercantilism as this receded under electoral and international pressure. In short, what is occurring in East Asia is much the same as happened in Europe earlier. Different states have reacted in different ways, but the essential process is the same. The world market in capital, products, technology and finance makes available to a society the possibility of rapid growth and development. If its elite has the capacity to seize this opportunity it can quickly take a backward society to a powerful modern state in one or two generations depending on the peculiarities of its situation. Some states have been endowed with other good fortunes, such as energy resources like Malaysia or a huge hinterland like Singapore or Hong Kong, which have accelerated the process. Others have made bad policy decisions like China or inherited a backward colonial and post-colonial situation like Indonesia, which has retarded them. The same points could be made about fortunate European states like Norway or Switzerland or unfortunate ones like fascist Spain or the Soviet Union. The Industrial Revolution presently occurring in East Asia is neither particularly miraculous nor uniquely Asian. It is the universal process of creating the modern world. That this great transformation is taking place adjacent to Australia offers a huge opportunity for a country seeking a new role in the world.18 The broad openings in trade are clear. Australia has the space to grow clean food, to uncover energy resources or to train pilots for countries lacking airspace. Australia has built the infrastructure of an industrialised society and has the output capacity to export infrastructure to Asia. Australian firms are already building bridges, providing guidance systems for airports, installing telecommunications services, and running newspapers throughout Asia. The service sector in Australia is internationally competitive and probably the best in its time zone. Australians are actively supplying health services, educational products, and could be delivering

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aged-care services throughout Asia. Australia's mining industry is among the most efficient in the world and BHP, for example, is developing oil and gas fields in Vietnam. There are also investment opportunities. The Australian national saving rate has recovered somewhat from the depths it reached in the early 1980s, partly as a result of the imposition of what amounts to compulsory superannuation for all workers. These pension funds are administered by private companies, most of which will now be investing some of their portfolio in Asia to benefit from realistically anticipated high growth rates. This is not bad for Australians because trade will follow investment. As Australian firms become part of the growth in Asia associated with the Industrial Revolution, so will they be more inclined than, say, European firms to keep product, design and service provision in Australia, thereby augmenting national exports. The Asian Industrial Revolution is being driven by growth in world markets, predominantly in private industry. If Australia is to benefit from this process it needs to become involved in it by trading, investing and combining with Asian enterprise. In order to do this Australia must develop enterprises and management which are aware of the opportunities and capable of meeting them, a work force with the skills and flexibility to compete, and a national economy with an appropriate cost structure to support such enterprises. Adjacent to Australia an equivalent of four European Unions are being created as 2 billion people industrialise. There is nothing inscrutable about the process and their demands will be similar to Europe's. Australia's challenge is to meet them. Napoleon warned of the dangers of waking the sleeping Chinese giant. The whole of Asia is now awake, and the balance of economic power is shifting with it. In the post-Cold War world competition among states will continue, but with a greater economic and lesser ideological and probably military dimension. States who fail in this competition will probably not be politically colonised as in the past. But they will be poorer, indebted, less sovereign and culturally subordinated to their stronger rivals. Adjustment to this new systemic structure involves internal dislocation and change, even for those that succeed. This has been clearly demonstrated in East Asia where rapid growth has been accompanied by the rapid reallocation of resources. Where states have successfully resisted this process they have stagnated; and when they have decided subsequently to enter the world market the adjustment has been greater. Like its neighbours in East Asia, Australia too must adjust to processes imposed on it by the international system or stagnate. And like them also, it does not face that challenge as a tabula rasa but with existing economic structures and political processes. Its task is to make them work better.

CHAPTER 3

The Australian State and Economic Development

Modern Australia was created by the British Empire and it developed its basic national characteristics during the period of British hegemony in the international system. Like the other societies of the Asia-Pacific region which entered the world market during the epoch of European dominance, Australia has had to adapt to the post-colonial era and the emergence of an Asia-Pacific economic community which has displaced those centred on European imperial systems. Each of these societies entered the world economy and made use of its developmental opportunities and responded to its technological challenges in different ways. Japan was able to use its developed feudal social structure and strong state apparatus to create a developed core economy in record time. More commonly these societies were annexed to imperial systems and became the satellite providers of raw materials and cheap labour. Australia became a semi-peripheral settler-democracy, wealthy in a poor colonial region. Settlement The British government established a penal colony in Sydney in 1788 as a self-supporting convict settlement and source of naval supplies.1 During the next sixty years about 160000 convicts arrived who effectively provided slave labour for the integrated colonial and private economies. Free immigrants followed to seize land from the indigenous hunter-gatherer population whose right to occupancy was, with few exceptions, ignored. At first the settlement was run much as a military dictatorship. But as more convicts were freed and more smallholding and labouring free immigrants settled, demands for self-rule emerged. By the end of the Napoleonic wars in 1815 the state had built a substantial infrastructure of transport and commerce, and private entrepreneurs had developed 43

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considerable pastoral, fishing, whaling and food-producing industries. There was growing trade with Britain and elsewhere in the Asia-Pacific region. During the 1820s settlers expanded over the east coast mountain range into the Murray-Darling river system and began the 'squatting age'. Aboriginal people were driven off or killed and huge sheep runs were opened for the production of wool, which for most of the next century provided one of Australia's export staples to the British textile industry. By 1840 wool was the biggest export and the population had reached 200 000 people, 16 million sheep and 2 million cattle. This expansion had also produced five new colonies, including those of Queensland and Tasmania as offshoots of New South Wales, which remained nonetheless the dominant colony during the period of conquest. In 1831 one new settlement was made on the Swan River in Western Australia, and in 1836 another of non-convict origin, following the Wakefield system, in South Australia. By the 1850s all of these colonies were constructing nascent democratic governments with male suffrage and two chambers, one dominated by a property franchise. They also introduced the British system of local governments, varying in size and authority from region to region. This steady development was transformed by the discovery of gold in Victoria in 1851.2 A huge migration in pursuit of wealth took place, increasing the population from just over 400000 to around 1 million in a decade. Although the easily worked alluvial fields were largely exhausted by that time, population continued to grow during a long economic boom that transformed the Australian colonies by 1890. They had by then achieved a population of over 3 million, trading agricultural and mining products onto the international and particularly the British market, and enjoying probably the highest standard of living in the world. During that long boom a number of features of Australian social life were firmly established. The colonies became very democratic by the standards of the time, establishing male suffrage and shortly after, beginning in 1894 in South Australia, extending the vote to women, although the property franchise continued in the upper houses. The colonies also became important development agencies importing capital for the construction of infrastructure, particularly to aid the exporting of agricultural output. Roads and railways sprang up between the newly fenced and watered sheep runs which were developed with private capital. Similarly, colonial government became important in the burgeoning colonial cities, of which 'marvellous' Melbourne became the largest and richest. In the cities small-scale manufacturing developed in building materials, metal and machinery, clothing and textiles, printing and the like. In order to encourage these industries Victoria introduced a protective tariff on imported goods in 1860. The cities of Australia were substantially

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transformed during this period by a building boom which reached its height during the 1880s and left a legacy of fine Victorian colonial architecture and boulevards. During this Long Boom from 1860 to 1890, GDP grew at about 5 per cent annually, which was just in front of the strong population growth rate. Productivity growth was not very rapid, but labour-intensive secondary and construction industry kept the urban population busy. The rural sector was dominated by wool production and mining, as new mineral discoveries were made and exploited in different parts of the expansive country. The provision of public capital and infrastructure made the colonial governments important agencies in this process. Their early democratic nature also assured their greater tolerance towards the organisation of unionised labour than was the case in contemporary and more authoritarian European countries and their other colonies. Early organisation of craft unions on English lines in the 1830s and 1840s was followed by the legal recognition and registration of broader unions in the later nineteenth century. By 1865 there were about 150000 organised workers. This large growth of the Australian population took place at a time when democratic, liberal and socialist ideas were growing strongly in Europe. The rapid influx of migrants, many from Britain, brought these conceptions with them into a society where ancient, established privileges had not taken firm hold. The colonies were quickly democratised and their parliaments dominated by politicians notable for their liberal ideas. They did not, however, quickly form organised political parties to express them. And finally, unlike that great setder-democracy in North America, the United States, the Australian colonies grew in an age of less suspicion of government, and with greater demands on its activities. Unlike Americans, the Australian settlers expected the state to help develop the economy. This was to become clearer at the end of the Long Boom. In 1888 the land and building boom in Melbourne collapsed and Victoria slid into depression, quickly followed by the other colonies.3 The depression was partly caused by a slump in Britain, producing a 25 per cent cut in export prices and a drying up of capital inflow. The import of goods fell, government revenues shrank by a quarter, capital imports nearly totally stopped and per capita incomes shrank on average about 10 per cent, worsened by rising unemployment. It was exacerbated by a problem of overproduction within the Australian economy as the speculative boom, particularly in agriculture and city-building, came to an end. The colonial governments may have worsened the problem by reducing their activities and expenditures as foreign loans became more difficult to obtain. This served only to deflate economic activity further.

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In one sense the depression of the early 1890s was an ordinary downturn in a capitalist economy. It was followed by an economic restructuring to accommodate the overproduction experienced in some sectors and rising demand emerging elsewhere. The rural sector diversified away from its heavy reliance on wool. This was facilitated by the development of refrigeration, which enabled the growth of exports of meat and dairy products. After the international economic recovery gained strength in the late 1890s, income levels revived until by the early 1900s they had reentered pre-depression levels. In addition the economic system recovered from the failures of financial institutions in the early 1890s and credit once more started to circulate around the business community. As well, the infrastructure of cities, ports, railways, factories, roads, fences and water provision, which had been built in the boom, remained to provide the basis for reconstruction. The most important impact of the 1890s depression was in the political sphere. It probably speeded the creation of an Australian national state and it certainly influenced its composition. The federation movement had begun in earnest in the 1880s and received some fillip in the 1890s as a result of rising nationalist sentiments associated with the depression. Some unions, notably the shearers and the seamen, had struck against reduced wage rates in 1890-91 and been defeated. At about that time the unions resolved to seek representation in Parliament and in 1891, at different places in Australia, union members met to create a Labor Party. At first they lobbied and worked with the most liberal of elected politicians, including Charles Kingston, prominent South Australian colonial politician and later federal member for Adelaide, and Alfred Deakin, Victorian liberal and later Australian prime minister. They then formed parties and governments of their own, the first government being in Queensland in 1899. But there were also Commonwealth Labor governments in 1904, 1908-9 and 1910-13. In response non-Labor politicians organised into the Fusion Party, consisting of Protectionists and Free Traders, in 1909. The non-Labor parties were known under various guises - Liberal, Nationalist, Country, United Australia Party - before Robert Menzies formed the Liberal Party in 1944.4 A National State The six colonies federated to form the Commonwealth of Australia in 1901. This had been preceded by heated public debate on the subject and popular referendums. The character of the new state was determined by that process and by the first decade of national government, a period dominated by liberal (Deakinites) and Labor politicians. Six features of that national foundation deserve description since they were to survive until the last decades of the twentieth century.

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In the first place, the structure of the Australian state was determined by the agreement which created it. This agreement was a treaty between the six British colonies to form a single domestic market and nation-state. That treaty, which became the Australian Constitution, made this clear by proclaiming that there should be free trade between the six colonies, now called States. It gave power over external relations to the new Commonwealth government, but it also reserved certain powers, including over taxation, education, business regulation, and law enforcement, to the State governments. This legal fact ensures that the power of the national government will always be limited by the power of the States. This is enshrined by their representation in the States' House, the Senate, which possesses the power to curtail the activities of the national government created by the majority of politicians in the House of Representatives. It also ensures that the States will continue to exist since it was by their agreement that the central government exists and not vice versa. Second, this agreement to form a nation had then to be legislated by the British Parliament since it was not an agreement between sovereign states but between colonies of the British Crown.5 The Act itself was given to and deposited in the Australian Parliament by the British government only in 1991. In other words, the Australian nation-state did not achieve full sovereignty in 1901. In the Constitution certain powers were reserved to the Crown through its representative, the Governor-General. At that stage, therefore, Australia remained a peripheral and colonial state subordinate to the British imperial power. This is clear from a number of external policy examples. The Australian colonies had often separately contributed to British imperial military expeditions, in the Maori Wars, in the Sudan and South Africa and against the Boxer Rebellion. While the new Australian state did establish new national forces and indeed founded an Australian navy in 1911, these were also used for imperial defence.6 At the outbreak of the First World War Australia regarded itself at war as part of the British Empire. It conducted military campaigns with the British in the Middle East, Turkey and Europe, and, within imperial strategy, independendy against German forces in the Asia-Pacific theatre. At that time most Australians, with the notable exception of some of the Irish, thought this a sound idea in the name of imperial unity. Revisionist historians have questioned the wisdom of the commitment, particularly since it produced 250 000 casualties and 60 000 dead. In fact Australia was a part of the British imperial system and had benefited from its capital, labour, markets and defence forces during the critical period of conquest, settlement and development. In 1914 this connection was still of considerable importance to Australia's interests. After the War, Australian defence policy continued to centre on imperial defence and, particularly as relations with Japan deteriorated, Australia became a major

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advocate of enhancing the British military presence in Asia, especially at the pivotal Singapore military base. In the event this proved to be of litde avail as British military incompetence developed an indefensible bastion quickly overrun by Japanese imperial forces in 1942. Third, the restrictionist White Australia principle was applied to immigration policy. This was certainly not a foregone conclusion in as much as there was support for non-European immigrants, particularly among sugar-producing industrialists in Queensland who had been importing Pacific Islanders to harvest the cane. The emerging and organised labour movement opposed the import of cheap non-European labour and got this adopted as a national policy. This was to last for seventy years and served to sustain the European, and in fact British, character of Australian culture during that period. The limited migration of the first half of the twentieth century, and that concentrated among Europeans, ensured that by 1945 Australia was an unusually homogeneous society for a settler community. It was still relatively rich, certainly militarily successful, and culturally isolated from much of the world except Britain. Only its geography put it in the Asia-Pacific region. Fourth, the Melbourne-led protectionists won the argument against the Sydney based free-traders. New South Wales industry was rewarded with a larger, national free market, while Queensland politicians were compensated by protection for the sugar industry,7 which also served to offset the abolition of imported cheap labour from the Pacific islands. By 1908 the protectionist consensus, which emerged from the Labor-Liberal political alliance and competition, which dominated the first decade of federation, had established long-term tariffs and some production bounties. To a degree this was envisaged as a trade-off for employers providing fair and reasonable wages to white workers in protected industries. But it should also be borne in mind that other nationstates during the same period used government-enforced protection to induce domestic industrialisation, including Germany, the United States and Japan. Australia was not unique in using protection to foster infant industries. What was novel about Australia's use of the tariff to achieve industrialisation was that it did so within an imperial system.8 Typically the form of trade exchange within imperial economic structures was between core states which provided manufactures, capital goods and finance, and colonies or satellites which produced raw materials. Normally the colonies were also areas of cheap labour, but in settler colonies, as in North America, parts of South America and Australasia, labour rates could actually be higher than in the metropolitan core society as a result of a more favourable ratio of resources to labour. At federation, Australia exhibited features of both a colony, being dominated in its exports by

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unprocessed or semi-processed commodities and its imports being manufactures, capital goods and finance, and a core state, with its domestic production system featuring high wages, a secondary industry system and substantial domestically owned corporations. It was able to achieve this status in large part as a result of the mobilisations of state power by a democratically involved citizenry, drawing their support from organised labour and sectors of capital. Fifth, the state had become active in the regulation of wage rates. Colonial governments had been more compliant in their acceptance of organised labour than perhaps any other authorities in the world. This is not to say that the claims of organised labour were always conceded. The early 1890s were marked indeed by severe industrial disputation when organised workers sought unsuccessfully to resist the imposition of reduced wage rates during the economic depression. As a result of this experience, a decade later the new Australian national government moved, under the domination of ALP and liberal politicians during the early years of federation, to establish a unique system of industrial arbitration and conciliation using the basic model established by colonial authorities. This unique system served the purposes of the union-backed Labor members by recognising the legitimate interests of unions in organising the work force. It also acceded to the philosophy of the progressive liberal politicians of the time who subscribed to the idea of a decent wage rate. The Arbitration Commission ruled in 1907, acting through Chief Justice Henry Higgins, that there should be a minimum wage for white male workers. This established that minimum was a wage sufficient 'for the normal needs of an average employee, regarded as a human being in a civilised country' with a wife and children to support. This was a recognition of the norm for a family with one working parent at that time.9 This 'Harvester Judgment' set the system for regulated wage determination in Australia until the 1990s. In a craft-based union system, derived from British practice, each occupation received a margin in addition to the minimum (later basic) wage in recognition of skills acquired by experience or training. Unions were accorded privileges of recruitment and coverage in different occupations as a result of their being registered with the Arbitration Commission. Above-award wage rates might prevail where labour shortages existed or when industrial action procured a larger wage from employers. This unique system was a trade-off against tariff protection which compelled employers in protected industries to pay an administered wage rate to white male workers. It was a component part of the process of redistributing the externally generated economic surplus more widely among the population of the new federation. It also severely modified the market in wage labour and reduced the incentive

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of labour to be mobile and of capital to seek greater efficiencies. It would clearly be incompatible with an Australian economy open to the world market, but in the new federation it worked well. It was widely regarded as a mechanism for trading economic efficiency and growth for greater equity. Finally, the new Australian federal state was interventionist in social and economic activity to a degree unusual for the early twentieth century. This resulted from the early years of alliance and competition between the liberals and the Labor Party, building on the traditions established in the colonies, notably Victoria and South Australia. They were intensified when the ALP became strong enough to periodically rule on its own, as became the case after 1910. But in any case, state regulation and provision of services were not resisted with the intensity that occurred in most of Europe, including Britain. One example of this was the formation, in 1911, of the Commonwealth Bank, which was designed to be a central and branch trading bank in competition with the private banks. Somewhat later the long-serving Labor government in Queensland extended government-owned enterprises under the State Enterprise Act of 1918 to include such diverse activities as butcher shops, sawmills and an insurance company. Other State Labor governments worked with the national Labor Party to extend traditional public enterprises through railways, water and electricity supply, posts and telegraphs, to various food and housing provisions. Some aimed to provide services more cheaply to government; some were designed to provide cheap necessities like food and health; and others were intended to keep the private sector more efficient by competition. 10 By the First World War Australia had developed into a nation of 6 million people with an interventionist but federal and fractured state apparatus. It remained dependent on primary products for its wealth and fought to preserve the imperial system which maintained it. It had created a national market protected to some degree from imports, and the War witnessed some acceleration in the process of semi-peripheral industrialisation encouraged by state intervention. After the War Australia experienced generally prosperous conditions until the 1930s depression. Despite a short recession early in the decade, the 1920s were marked mostly by growth and industrial development. The State governments again began borrowing overseas, particularly in London, to finance the house-building and road-paving programs which marked the onset of the motor car age and suburbanisation. This was accelerated by a renewed migration program but one on a scale not comparable to the pre-1890s boom or the post-1945 system. This growth in the 1920s produced a quickening of industrialisation as the cities grew in numbers, wealth and geographic spread. 11 Combined

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with the extended system of protection, this served not only to encourage the growth of domestic manufacturers, such as BHP which had expanded steel production during the War, but also to encourage foreign firms to enter the protected Australian market. They were, after all, thereby guaranteed access to the region's richest consumer market. These multinationals came mostly but not exclusively from Britain and the United States, the two victorious and dominant economic powers of the day. They included General Motors, Ford, Dorman Long, ICI, Nestle, Cadbury, Kelloggs, Philips, GE, HMV, Bryant & May, Shell, and AngloPersian Oil (BP). They were concentrated in areas related to rising living standards and consumption and were designed to service a wealthy, protected domestic economy, not to produce for export onto the larger world market. These local production facilities therefore had litde incentive to be internationally competitive and they were not, given the higher wage rates and cost structure which then prevailed in Australia. Productivity growth during this period was not high, and as a result per capita consumption was perhaps only 20 per cent higher in 1929 than in 1890. It also seems that consumption levels rose by only about 10 per cent during the 1920s. This process marked a decline in Australian relative income levels such that by 1929 Australia was no longer enjoying the highest per capita incomes in the world, being already overtaken by North America and the Western European countries. This relative decline was to continue with interruptions for the next six decades for the same reasons. The staple primary products industries found it harder to increase productivity as they moved into more marginal lands, and in any case both wool and wheat experienced steadily falling returns. An increasing proportion of the population lived in the cities where they depended for employment on secondary and tertiary (service) industries which were not internationally competitive. As the population grew, therefore, a larger number of people depended on cross-subsidy from the falling external surplus generated by primary products. And the regulated and protected domestic economy provided little incentive for the urbanbased industries to export. This semi-peripheral society with a commodity-dependent economy, a largely sovereign state and an unevenly developed industry sector fell easy prey to the world depression of 1930.12 The world market collapsed after the Wall Street Crash diminished the provision of American finance to Europe. The economic crisis quickly spread to Australia, as the export markets for its commodities sharply declined, and foreign earnings fell from £150 million to £80 million during 1929-32. At the same time the availability of foreign loans, chiefly from London, to finance government activity, fell sharply. The combined effect was to plunge economic activity into a severe depression. During the same three-year period of

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1929 to 1932, GDP fell from £800 million to £550 million, imports from £150 million to £50 million and unemployment rose from about 10 per cent to 29 per cent. To compensate for this disaster, employers successfully acted through the industrial relations system to reduce real wages by over 10 per cent, and the British money market encouraged colonial belt-tightening and reductions in government expenditure to enable the repayment of debt. There was an acute political conflict over Australia's appropriate response to these events: governments were dismissed; they were divided and at loggerheads with each other and with London. The ALP was divided across the nation and its incumbent national and State governments divided and fell. Most Australian administrations eventually complied with demands for deflationary fiscal policies desired by their chief creditor, Britain. The Australian economy slowly recovered from the depression during the later 1930s. This was not caused by a substantial recovery in the export performance of Australian commodities: the prices for wool, meat, wheat and dairy products remained generally depressed. Indeed in 1934 a royal commission found that much of the production of these staples was undertaken at costs above world market prices and their export was only made possible by government subvention, or by dumping exports at lower prices than those charged in Australia. This system of cross-subsidisation did serve, however, to keep these industries producing, and they staged modest recoveries. In addition, at the prompting of the Country Party,13 which had been formed in the 1920s to pursue the interests of the rural population in general and primary producers in particular, new systems of price stabilisation, pooling arrangements and marketing boards spread throughout the farming sector under both State and Commonwealth government jurisdiction. Being based on geography rather than class, the Country Party was ideologically indiscriminate in its pursuit of rural subsidisation. But the manufacturing sector performed even more strongly during the phase of modest recovery which settled in by the mid-1930s. The exchange rate crisis encouraged the government to raise protection levels after 1932. In addition, and with the encouragement of London, the Australian currency was devalued by 25 per cent. As a result of higher protection and devaluation, domestic industry was able to increase output in 1933-34 but without any substantial increase in investment or productivity or any advance in technology. Nonetheless, the increases in output enabled wage rates to be restored to their previous levels after 1934 by the Arbitration Commission. Some capital was then imported by local branches of multinational companies and recovery did gather pace. By 1938 GNP was 13 per cent higher than in 1929 and 25 per cent larger than the depression trough of 1932. Primary production had been

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increased but not enough to offset price falls, and it was lower in aggregate value than in 1929. Manufacturing industry on the other hand had increased its work force by 25 per cent and output by 40 per cent. Much of this growth had been directed into the major growth sectors of the time: automobiles, new consumer products, particularly in electronics, and the whole process of suburbanisation. But in very few instances were these industries internationally competitive. Australia had witnessed a further erosion of its relative per capita income level in order to achieve some economic recovery in a heavily protected environment. The Second World War accelerated industrialisation in Australia, partly to offset the strategic risk of being isolated from its major allies. Under the wartime policy dictates of geography, these industries were concentrated in the south-eastern States, which were in any case the main centres of the then protected industry sector. For a time Australia also served as the principal springboard for the Allied counter-offensive against Japan in the Pacific theatre, which accelerated economic output growth. This combined with extensive military mobilisation to create labour shortages. The Australian government also began asserting its independence from British imperial strategy. And finally, the Labor movement recovered from the defeats and divisions of the early 1930s. After the collapse of the UAP government led by Robert Menzies in 1941, the ALP regained national office under Prime Minister John Curtin (1941-45) and retained it in the 1943 election with a more assertive policy on independent economic development and nationalist external policy. Military victory only increased its resolve to continue the pursuit of industrial development by state intervention.14 Protected Industrialisation after 1945

After the successful conclusion of the Second World War, Australia experienced a slowing of its growth rate as readjustment to a peacetime economy took place, the labour force was reorganised and consumer items began to replace armaments production as a national priority. This was derisively termed a 'milkbar economy'. The Labor government determined to modify this process to produce higher levels of industrialisation, employment and population growth, and pursued these objectives partly by maintaining the greater government controls over the development of the economy that had been established during the War. This was facilitated by the rapid growth of Keynesian thinking about economic management which spread quickly from Britain. In Canberra it was given some impetus by the staff of the newly created Department of Post-war Reconstruction. A White Paper on Full Employment in Australia proclaimed the policy objective in the labour market. In the same year, 1945,

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the Banking Act introduced sterner controls in the private banks in the belief that they had stifled credit expansion and worsened the 1930s depression. In 1948 the government decided to nationalise the private banks in order to gain more direct control over the provision of development capital. In pursuit of stronger growth and higher employment rates, the Chifley Labor Government (1945-49) maintained aspects of wartime rationing into the late 1940s, notably on petrol and house construction. It also continued to use the tariff to encourage overseas companies to invest in Australia's secondary industry in much the same manner as had been pursued in the 1920s. As well, the government undertook an expansion of public infrastructure works, most famously the Snowy Mountains Hydro-electric scheme. But these stimulatory policies did not lead to a great expansion of the state sector of GDP, which only expanded from 13 per cent to 14.9 per cent during 1941-49. The purpose was not to construct a state socialist economy, but to maintain a high level of employment, to assist private capital investment, to extend public sector activity in support of private companies, and to create a larger, more modern and independent industrialised economy. These activities would also ease the transition from a wartime to a peacetime economy. In other words, the post-war Labor government pursued the further development of a state-protected and state-regulated system of capitalism in Australia designed to lift its status in the international system. The Labor government was defeated in 1949 by the successor to the UAP, the Liberal Party, which had been formed by its new prime minister, the resurrected Robert Menzies, in 1944. The Liberals were able to take advantage of a number of circumstances. The post-war rationing system was becoming increasingly unpopular with a people wanting to share the fruits of post-war economic growth. The Liberals were also able to take advantage of the government's politically ill-judged efforts to nationalise the private banks. They mobilised their numerous bank employees, who were much frightened by the prospect. Further, in 1949 a wave of strikes took place, notably in the coal industry, led by the Communist Party of Australia (CPA), which produced acute conflict within and between the industrial and political wings of the labour movement. This became a particularly sensitive matter at a time when the Cold War was starting and Australia was anxious to join the American-led alliance system. More deceptively, Menzies was able to portray the Labor Party as pursuing socialism and the Liberals as aiming to establish a freemarket economy. Neither claim was true. Both parties favoured a regulated capitalist economic structure although they disagreed over the precise manner of its pursuit. By 1949 Australia had entered the period of its Second Long Boom,

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over much of which Menzies was to preside in his second term as prime minister (1949-66).15 As in the earlier boom from 1860 to 1890, Australia experienced strong population growth fuelled by immigration, decent returns on commodity exports, the inflow of foreign capital, and an active state developing the infrastructure on which private capital growth depended. But during this period industrialisation was somewhat stronger. Menzies ruled in coalition with the Country Party until 1966 when he was succeeded by Harold Holt (1966-67), John Gorton (1968-71) and William McMahon (1971-72) as Liberal prime ministers. It was a period of strong economic growth, weaker productivity development, international Cold War conflict and great national prosperity. It coincided with strong and unprecedented international growth in the world capitalist economy that took place under American leadership in a fashion that, unlike the 1920s, oudived the immediate period of post-war reconstruction. Australia's per capita income growth was not quite so impressive. It survived the war virtually physically untouched, aside from its bombarded northern reaches, and near the top of the world per capita income league. It slipped steadily down the league table during the Long Boom but maintained an enviable absolute level of wealth. When the global boom ended in the mid-1970s, and then changed its character into the 1980s, Australia took too long to adjust its strategy and suffered considerable lost opportunities as a result. The Menzies period consolidated the transition Australia had made during the Second World War to being a sovereign state and transferring its allegiances from the old imperium of Britain to the new Western hegemony of the United States, as is described in Chapter 9. The Labor government had established its independence during the war by symbolically separately declaring war on Japan in December 1941, and later by insisting on redeploying its troops from the Middle East to the direct defence of Australia against Japan. Immediately after the War, under its Labor External Affairs minister, Dr H. V. Evatt, it flirted with the United Nations system as its primary focus of security activities, but soon reverted to more realpolitik reasoning and pursued alliance systems with both Britain and the United States. By 1951 the Liberal government was able to conclude the pivotal ANZUS Treaty with Washington and henceforth, during the remaining four decades of the Cold War, only rarely parted company with Washington's geopolitical strategy. The principal features of this relationship were frequent Australian support for American antiSoviet wars, especially in Korea and Vietnam, and its hosting of American geostrategic intelligence-gathering and communications facilities on Australian soil. This direction was pursued notwithstanding the ferociously Anglophile rhetoric of Menzies when prime minister, and periodic support for British global objectives, as in the Suez War of 1956

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and the defence of Malaysia 1963-66. But as British power declined and then withdrew from east of Suez, so the Australian government switched to the American sphere in most important diplomatic, strategic and military aspects. Australia also moved closer to the American sphere in international economic relations. The Chifley government had joined the World Bank, the IMF and the GATT, and was a party to the Bretton Woods system of fixed exchange rates. Both it and the Menzies government undertook international loans for public sector development raised with World Bank support. 16 In some sense this was similar to the colonies' borrowings of the First Long Boom from the 1860s to 1890,17 but both governments also encouraged direct investment flows into the industrial private sector as had begun to occur in the 1920s. During the Menzies period British and then increasingly American companies stepped up their investment in Australia, particularly in the secondary industry sector. The incentives for this process were fairly straightforward. After the Second World War Australia was one of the richest per capita domestic consumer markets in the world. Its government had announced its intention to industrialise the economy and to protect its market against imports by imposing a barrier protection tariff. While this was contrary to the expressed economic strategic intention of the US government, which was free trade, it was acceptable to the GATT system, at that time still evolving. Against that framework, the Menzies government relaxed the system of immediate post-war rationing, which had the result of accelerating the demand for and consumption of consumer goods. But it did not relax other aspects of government regulation; in particular, it continued to maintain a high rate of tariff protection. It also used the centrally controlled wage determination system to redistribute a 10 per cent share of GDP from wages to capital in the early 1950s and to maintain that new proportion for twenty years.18 Further, it encouraged the direct investment of corporate capital in Australia and encouraged State governments to compete for foreign investment by multinational companies. The Liberal State governments of Victoria and South Australia proved to be among the more successful in this respect. And, finally, it developed public infrastructure to provide services, often at subsidised rates, for the use of private capital. This absorption of foreign direct capital investment was matched by a substantial immigration program. Nineteenth-century settlement had been derived chiefly from Britain, with disproportionate components from the Celtic fringes, determined by their relative poverty and, particularly from Ireland, political prisoners. Convicts were more in evidence in the eastern colonies, less so in Victoria, and non-existent in South Australia. Some Chinese and Americans joined in the gold rush, and

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Melanesians were conscripted to the sugar cane fields. The immigrants for the early years of the twentieth century had been almost wholly white. After 1945, the Commonwealth government determined to reinvigorate the immigration program, which had languished for fifteen years of depression and war. It pursued a larger population partly for strategic reasons, being conscious of how exposed the just over 7 million Australians had been to the ambitions of the Japanese Empire. It was also eager to augment the Australian domestic market and make it more attractive for the development of modern industry by enabling economies of large-scale production. In the first instance the post-war immigrants were British. But it soon became clear to Immigration Minister Arthur Calwell that a large potential source of immigrants was to be found among the displaced persons of Europe. Most of these had been uprooted by the invasions of Nazi or Soviet armies or, in some unfortunate cases, both. They were recruited to Australia by the lure of a safe and prosperous life, settled in Australia as cheap, unskilled labour, and sold to Australians by government propaganda as racially compatible Europeans. As these sources dwindled with the restoration of society in northern Europe, Australia cast wider for its immigrants to the poorer countries of southern and south-eastern Europe, particularly southern Italy, Greece and Yugoslavia. These immigrants settled in those parts of the country that grew most rapidly under the process of industrialisation encouraged by the War, and then forced by government action: New South Wales, Victoria and South Australia. They were also to be found employed, again disproportionately, in unskilled activities in the construction and industrial sectors. These immigrants from the late 1940s to early 1970s were more mobile than the existing work force and flowed into those regions made buoyant by regulated, subsidised and protected industrialisation. In particular Melbourne's protected industries flourished and attracted southern Europeans. South Australia attracted the British and Italians. Sydney, and its nearby industrial steel centres of Newcastle and the Illawarra, was a magnet to everyone. During the twenty-five years which followed the War these immigrants were selected for aggregate numbers to augment national growth; their level of skill was a secondary consideration to their youth and ethnicity. One result was the growth of industrial communities around Australia of diverse ethnic origin, producing for a protected domestic market, with low-skilled and cheap labour, using uncompetitive capital and technology. These centres varied from the steel cities of coastal New South Wales to the clothing towns of rural Victoria, the South Australian motor town of Elizabeth and the steel and shipbuilding centre ofWhyalla.

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Most of the capital that entered Australia during this process of rapid post-war industrialisation entered as direct investment,19 often coming as machinery shipped from the overseas parents of multinational industrial companies. During the post-war period this derived mainly from companies in Britain and America - the former and rising hegemons of the international system - since the other core powers of Europe and Asia were reconstituting their economies after wartime devastation. This machinery was, in addition, often not front-line technology in as much as it did not have to compete with world-best production practices in either the Australian or other markets. The former was protected and others could be served by the same firms from other source countries with lower costs. As a result, for example, General Motors in 1948 began production of the Holden (a rejected Chevrolet design) with government subsidy, at higher cost but substantial protection from imports. This combination of tariff protection, cheap immigrant labour and government subvention produced a level of industrial production that employed a quarter of the work force by the late 1960s. As such, a statistical profile of Australia appeared to show it as a typical advanced industrial country with a low and falling agricultural work force, rising service sector, and an average mid-20 per cent employment level in manufacturing. This evaded some critical features of Australian industry, as the Jackson Report (1975) was later to reveal.20 It was unusually concentrated into large firms, as 200 out of 30 000 produced half the output. It was also more foreign-owned than in other OECD countries, with eighty-seven of the biggest 200 being overseas-controlled. It was not internationally competitive and exported almost none of its output. And its rate of reinvestment was low and in many sectors negative because it did not have to improve product or productivity to compete on the world market. But perhaps most alarmingly, this sector was a major supplier of inputs to the economy as a whole, which thereby suffered from higher costs and poorer products. The Menzies Liberal Coalition government continued this unbalanced industrial structure by intervention, and also further regulated the finance market. Having been elected on a platform of keeping the banks free, in 1960 the Menzies government imposed a new regulatory system on the private banks which included a process of rationing for borrowed money, the direction of a proportion of assurance companies' investment into defined public sector bonds, and some severe criticisms of the banks for assisting development companies to create a speculative boom. Finance was not permitted to flow around the economy in pursuit of greatest gain, and thereby promote efficiency and punish poor returns on investments. Housing construction and purchase were heavily underwritten by subsidised loans from many state-owned banks, and taxation

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write-offs of interest payments by the national government. Interest rates were regulated by government. Access to the international money markets for Australian companies and individuals was controlled by regulation and by refusing foreign banks operating licences in Australia. The role of the Country Party in creating, and in some ways extending, the system of the dirigiste state in coalition with the Liberals was clearly important. The private rural sector had always been underpinned by the state construction of infrastructure since the convict settlements, the Wakefield scheme and the building of the railway grid which chased the farmers all over Australia. During die 1930s one response to the depression in the rural sector had been the creation of a system of regulatory and price-maintaining boards. These agencies were formed by governments and they regulated output levels, licensed different producers, bought and sold product, and stored and released reserves in policies designed to stabilise price levels. They also often marketed product as a sole supplier to domestic and overseas markets. The Country Party supported these projects during the 1930s and the extension of the system in the post-war period. The then leader of the Country Party, deputy prime minister and minister for Trade during much of the Menzies period and shortly after, was John McEwen. The Country Party as an umbrella organisation of mass membership was in fact an alliance of two groups. Efficient rural producers in either the farming or mining sectors, and this typically meant large companies, wanted a cheap cost platform on which to produce and from which to export. This group favoured a market mechanism for Australia as a whole, which would keep more of the externally generated surplus in their hands, but would pursue subsidies when it suited their special interests. The broad base of the party, including small producers and workers in the rural sector, pursued a wide range of subsidies for regional Australia in taxation, production and service provision. They were the chief beneficiaries of the innovations of the 1930s. By the 1950s McEwen was active in pursuing wider subsidies for country industries including a taxpayer-guaranteed floor price for wool and the Wheat Board as the main marketing arm for that product in communist China. He also championed a uniform national price structure for producers, ranging from petrol to phone charges. In exchange, McEwen supported a similar outcome for other sectors including protected secondary industry and regulated finance. The whole system came to be known as McEwenism and represented a myriad cross-sectoral subsidies so complex they could not be easily identified, let alone quantified. It should be further noted that this system had a hugely deleterious effect on the system of managing enterprises in Australia. Organised

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workers were not competing on the world market, either overseas or in Australia, and as a result had only each other as a benchmark. Their wages were then regulated by the same industrial relations system, and competition between them and their enterprises minimised. For management the effect of the system was, if anything, worse.21 As a British-derived economy in which much of the industrial capital had been imported from Britain, it is hardly surprising that much management practice was derived from the same source. At the place of production it was conflict-based, and as so much British experience has revealed, this was one reason British capital had experienced relative decline through the twentieth century. In addition much of management, particularly in the Australian-owned sector, was recruited from the elite private colleges and then at best given a British-style university degree and rarely exposed to management training. Finally, of course, like the workers, managers did not have to compete with anyone except themselves. Wage rises were achieved by industrial action, which was correspondingly high in Australia, and they could be passed on by price rises which would be protected by tariffs. Government would usually provide subventions by tax holidays, input subsidies or outright bounties. It appeared that no one had the incentive to be efficient outside the export-oriented sectors of farming and mining. And even there, government policies were minimising incentive by extensive regulation in the agricultural sector, which effectively ensured that direct producers did not have to follow their market. Nonetheless, the natural wealth of the continent was such that even as the industrial and farming sectors began to experience growth difficulties in the late 1960s, the mining sector expanded. 22 The first post-war mining boom was enjoyed during that period as the initial wave of rapid Asian industrial growth took off in Japan. Since Japan was a resource-poor country its rising production levels increased demand for energy, industrial raw materials and foodstuffs. In the late 1960s new mining developments sprang up, particularly across northern Australia, to provide iron ore, coal and other minerals to Japanese industry. Later they were to be extended to include natural gas, alumina and uranium and to provide materials to other industrialising countries to Australia's north. By the late 1960s Japan was taking about a quarter of Australia's exports and many Australians had enjoyed substantial gains by speculating on mining shares or moving to areas of new mining development, concentrated particularly in Western Australia or central Queensland. This process was to continue. The Menzies period was one of the most prosperous in Australian history. GDP grew at between 3 and 4 per cent annually and per capita income at about half this rate in view of substantial population growth. During this period the character of Australian life changed and, materially at least, very much for the better. In common with the rest of the

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developed world the mass availability of cars, many produced in Australia, contributed to the suburbanisation of Australian cities, where the bulk of the additional population settled. In those suburbs people increasingly owned their own homes via government subsidies or directed loans through state banks. They also consumed more electrical goods, furniture, televisions, books and processed food than ever before. It is not then surprising that Australians did not fundamentally question the system of economic regulation they had created. Menzies left office at the time of his choosing in 1966 and amid continued acclaim. His Liberal successors by and large maintained the same system into the early 1970s until they were defeated by the ALP at the federal election in December 1972. Arrested Reform: the Whitlam Government

A major reason for the victory of the Labor Party in 1972 was the character of its leader, Gough Whitlam. He had welded a party split by the Cold War in 1955,23 which branded them with an unacceptable Left face, into a moderate, vote-winning operation. He also stood in contrast to the nonmedia-friendly William McMahon. The Liberal regime certainly stumbled economically in the early 1970s as a mild cyclical downturn, an increase in inflation, and a burst mining boom cast doubt over its management credentials. But the trough was the first serious one in twenty years and incomes were again rising strongly by late 1972. Its credibility was most seriously damaged indeed by the external crisis of the Vietnam War, against the defeat in which the 'It's Time [for a change]' slogan struck a certain popular resonance. The Whitlam government was the first opportunity at which the system of economic management in Australia, and therefore the system of economic production itself, should have been changed. It wasn't. The ALP ministers who served during 1972-75 were exposed to the ideas and policy settings which were to provide the basis for developing Labor government strategy after 1983. Indeed, very few policy objectives after 1983 were entirely new, although the manner of their pursuit sometimes was. The difference was that the ministers who swept impatiendy into office in 1972 had waited twenty-three years to see their ideas implemented. In 1983 their successors were, conversely, very conscious of the short life of the Whitlam government and determined to survive long enough to entrench policy reforms. The initial, strategic objective of the Whitlam government was to make Australian capitalism work more efficiently and to integrate it more closely with the world market and particularly with Asia.24 In 1972-74 it pursued this objective with some vigour. It announced in July 1973 a

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25 per cent cut across the board in the tariff rate and signalled further measures designed to shake out Australian industry and make it more efficient. It started to transform the labour market by cutting unskilled immigration and increasing the training and education system for Australian workers. The government also acted to dismande the Hydraheaded system of regulation and subsidy and to enforce competition through, for example, Trades Practices and Prices Justification legislation. 25 It tried to attract foreign multinational companies and to develop Australian multinational companies to export capital and product onto the world market. It determined to make Australia a springboard into Asia. And finally, it extensively deregulated the financial sector and Whitlam repeatedly told banking audiences his was the first free-market government they had seen. This reform program came to an end in late 1974 when Australia was hit by the (then) worst world economic downturn since the war. The 1974-75 recession put the reform program of the Whitlam government into reverse. It had attempted to shake out the Australian economy and make it more internationalised and competitive. This necessarily involved higher levels of unemployment and firm failures as both labour and capital moved from sectors of low return and poor efficiency to sectors of high return and greater efficiency. It was intended to retrain the workers in their transition. But while such a cleansing might have been acceptable during a growth phase in the cycle, in 1974 it was locked into a world and national downturn which served to add cyclical to structural unemployment. The situation was made more complicated by the fact that the world recession had been in some measure created by the 1973-74 OPEC-induced increase in energy prices. While this had deflated some of Australia's major markets in Europe and Japan, it also greatly strengthened the Australian trading position since it was a net energy exporter. The result was, at first in 1973-74, a boom in Australia's energy-related sector, a rise in the currency and a government pursuing deregulation in the domestic economy. It was quickly followed in 1974-75 by an extensive recession, rising unemployment to then post-war record levels of over 5 per cent, and a prolonged confusion in government policy, producing eventually a return to regulatory and protectionist activities. The government stabilised its fiscal policies by August 1975 when the newly installed treasurer, Bill Hayden, introduced a mildly stimulatory budget under the rubric of 'economic rationalism'. Its validity was not truly tested since the Senate obstructed its passage. Then Governor-General Sir John Kerr, using the reserve powers of the Crown, dismissed the Whitlam government on 11 November 1975 and reinstalled the Liberals under their new leader, Victorian grazier Malcolm Fraser.

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Opportunity Lost: the Fraser Government

The Fraser government (1975-83) won the next three elections, handsomely in December 1975 and 1977, and closely in 1980. During its period in Opposition the Liberal Party had sought to re-evaluate its policy platform to take account of the changes of 1973-75. It realised that the turmoil of the world energy crisis, currency realignment and subsequent recession had been a primary cause of the economic recession in Australia. It also, however, attributed considerable blame to the Whitlam government for exacerbating the dislocation by embarking on a reform program designed to reduce protection and deregulate Australian industry, increase the wages share of national income by supporting union campaigns for higher wages, and augment the size of government programs. It also adopted a modified monetarist version for the explanation of increased inflation during that period. The result of this analysis was that much of government policy during those seven years was inappropriate and designed to re-create the system which existed before Whitlam and which, even if restored, would not have again delivered competitive growth. This was a fundamental misreading of the strategic environment. The world system had changed. The Fraser government spent much of its rhetoric seeking to restore the factor shares in the economy to their pre-Whitlam ratios. At every quarterly national wage case it presented evidence of a 'real wage overhang' and argued for a reduction in real wages. It managed only a modest reduction in the wages share of GDP up to 1981 when it produced the collapse of the national wage fixation system by trying to enforce a wage freeze. This led to a wages breakout and wages share being restored to 1975 levels by 1983. It also made much of its intention to restore the government expenditure share to levels obtaining before the Whitlam government but, after some modest cuts in the late 1970s, reverted to fiscal Keynesianism in the early 1980s and left the government share actually larger than when it assumed office. It made little effort to resume the opening of the Australian economy to the world economy and actually increased the rate of tariff protection, particularly for the most inefficient industries like textiles, clothing and footwear. Its most imaginative macro-economic strategy was to proclaim a new minerals and energy boom in 1980 and to pin its electoral and economic development hopes on it. The prospects for this boom ended in 1981 with the world downturn. Contrary to its previous seven years' rhetoric, the Fraser government then spent 1982 trying to engineer a boom by government spending and left a projected and record budget deficit of $10 billion on the books when it was defeated in March 1983.

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The Labor Party which won the March 1983 election and formed the new government under Prime Minister Bob Hawke (1983-91) had spent some years reorganising itself, its policies and its personnel. 26 Hawke, the former ACTU president, only became leader on the day Fraser called the election, but he inherited a leadership group and broad policy structure. At the policy level there was the stimulation of the economy to produce economic growth and reduce unemployment, but this would be accompanied by wage restraint to contain any resultant inflation. This was an idea developed by Treasury spokesman Ralph Willis, and was appropriate for dealing with the wages breakout Fraser had created. To this Hawke added the proposal for national reconciliation and reconstruction to be pursued through a national economic summit to produce a consensusbased economic strategy to deal with the recession. This too was a decent anti-cyclical policy proposal appropriate to assist the growth phase. But neither dealt with the most pressing long-term issue of Australia's declining economic performance. By the early 1980s Australia faced an acute problem. The state-induced post-war industrialisation program had created a diversified economy, but one heavily reliant on commodities in its external sector. The problem had been widely discussed since the late 1960s: Australia was growing too slowly because it was too protected and regulated; and it was very vulnerable to international oscillations because it was too reliant on commodity exports. The Whitlam government had tried to make the necessary adjustment but had been weakened by internal dissension, reversed by a world recession and defeated by the representative of the British Crown. Its successor made little effort to continue the process. This was a huge lost opportunity. Throughout the world, and in Asia in particular, other states were moving away from inward-looking industrial development to embrace the world market, partly to take advantage of developing new technologies, partly to emulate the success of Japan. But as other industrial states took advantage of world growth to extend their production, Australia maintained a relatively closed system. And as each year passed it moved further behind and ensured that its restructuring would take that much longer. Nonetheless the new Labor government determined to undertake the globalisation of the Australian economy with all the consequences that would eventually entail.

CHAPTER 4

Economic Rationalism Changes Australian Politics

In 1983 the new Labor government took its first steps towards internationalising the Australian economy by deregulating the financial sector and floating the Australian dollar. This globalisation of the economy imposed a profound refocusing of political debate in Australia. During the following decade the issue at the centre of Australia's politics ceased to be: how can government intervene in economic life to create desirable social outcomes? By the 1990s it had been reformulated as: how can government create competitive market situations to ensure world-best practice is pursued and international standards are achieved? Not all parties embraced this view with equal enthusiasm or with equal speed, but the trend was evident across the political spectrum. It has also attracted considerable attention from commentators, who spent much of the 1980s complaining that Labor had abandoned its traditional policy under Hawke. Old-style politicians from each of the parties, like former prime minister Malcolm Fraser or former Whitlam minister Jim McClelland, criticised their successors for having lost touch with the party's basic principles. In fact each political party grappled to create an appropriate response within its own broad philosophy to the changes consequential on Australia's unavoidable decision to open itself further to the world market. As it became progressively clearer that these changes would be extremely wide ranging, and as the phased removal of barrier protection imposed greater urgency on the tasks and took that pressure into wider areas of political, economic and social policy, the debates within each party became more urgent. During this process it remained possible to discern a Left-Right axis of the kind classical to developed capitalist democracies. But the whole axis moved broadly to the Right and came to resemble more the American political spectrum than that of a European social democracy. To put it another way, most of the far Left parties were 65

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dissolved and the centre of the political structure adopted a more marketoriented complexion. The Labor Party Adopts the Market Since the Labor Party was in federal government for the entire decade or so under consideration, it is appropriate to begin an appraisal of political change with its reorientation. 1 Political Labor, the Australian Labor Party, was formed almost simultaneously in 1891 at a number of locations such that its foundations are claimed by various sites. The shearers of Queensland at Barcaldine usually get the credit, but Balmain in Sydney still has claims, The party was not a European social democrat party and was innocent of almost any theoretical considerations for a generation. This is not to say it was not influenced by imported European socialist ideas, however, since many of its early leaders were migrants themselves, especially from Britain. It was formed by organised labour unions, with the Irish ethnic community in strong evidence, who wanted political representation in Parliament. The ALP soon formed a shortlived minority government in Queensland and later at the national level. Like any political movement seeking national office in its own right, it embraced a wide range of views, but from the outset its leadership was more committed to gaining office and wielding power than with the disputes about socialist strategy which consumed the energies of its European counterparts. Early Labor politicians impressed foreign observers both for their practical achievements and their casual collaborations with class enemies. 2 The dominant tradition of the ALP was always pragmatic, nationalist and state-interventionist. Certainly it had its internal disputes. During the First World War it split, when its strong Irish-influenced Catholic group would not support conscription at a time when the British were suppressing Irish nationalism. After the First World War it split again when the Communist Party of Australia was formed to support the Sovietdirected international revolutionary movement. In the 1930s depression there were many divisions over appropriate policy, particularly towards the Premiers' Plan, and minority parties were formed, especially in New South Wales. In the 1950s it split again when the Catholic-based Democratic Labor Party (DLP) was created in protest against the ALP's too soft position against communism at the height of the Cold War. But it survived its first century as a uniquely labourist party - the oldest and arguably most successful of its kind in the world. The ALP's least successful period was during the height of the Cold War when for twenty-three years, 1949 to 1972, it was in federal Opposition. At that time it was little more successful in the States, particularly in Victoria, where the DLP had an effective independent existence.

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In part this was because of the influence of communists. After challenging the interventionist and reformist Labor government with a wave of strikes during post-war reconstruction in the late 1940s, the CPA collaborated with Labor in Opposition and often achieved its objective of pulling the party to the Left, especially on international issues. This was rarely a vote-winner among the broader electorate during the Cold War, particularly with the DLP actively competing for working-class votes. The ALP was able to achieve federal office only in 1972 when detente permitted a relaxation of these ideological tensions. The failure of the Whitlam government (1972-75) was a political failure.3 True enough, in the developed capitalist world, many elected governments were defeated in 1974-75 because of their unpopularity created by rising unemployment during the world recession. The Labor government may not have been able to withstand such an economic event anyway. What made the situation worse was the lack of political discipline and direction exhibited by the government during the then most serious cyclical downturn since the Second World War. It went through three treasurers and at least three fiscal strategies in one year in an effort to formulate an appropriate anti-recessionary policy. Government policies were frequently overturned by Caucus and ministers shuffled like playing cards by the Prime Minister. When the government was sacked by Governor-General Sir John Kerr in November 1975, it received its first burst of popularity since the previous year, and then only briefly. It was soundly thrashed at the December election and again in 1977 with Gough Whidam still leader. Whidam's last treasurer, Bill Hayden, had refused the leadership in 1976, and the necessary regrouping and reformation of policy did not begin until 1978, under his new leadership. During its seven years in Opposition the ALP did reform its economic platforms and political structure. Its economic policy was reworked to give formal effect to a strategy of achieving more rapid economic growth without inflationary consequences, by means of an Accord with the trade unions to limit wage increases. In exchange, the ACTU was offered job creation and a social reform program. In the political sphere the problem was to exert greater discipline on the federal Caucus in order to avoid a repeat of the events of 1975. In resolving this problem some attention was paid to the two most successful State ALP branches at that time. In South Australia the moderate reforming branch had been run by 'the Machine', as it was known, led by the State leader, Premier Don Dunstan. The major trade unions, operating through a 'card ballot' of delegates, dominated the party's policy and preselection processes at State Conference and thereby enforced discipline.4 In New South Wales the State branch contained two organised factions and was dominated by the Right,

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organised through Party Office (the 'Officials') and the Labor Council. The smaller Left faction gained some spoils, but had lesser representation and very few policy victories.5 In the early 1980s some factional discipline began in the federal Caucus as Bill Hayden fought to maintain his leadership against the challenge of popular former ACTU president Bob Hawke. Indeed the Byzantine manoeuvring of 1982 when Hawke launched his first challenge to Hayden was often described in terms of blocs of votes being influenced by leading personalities. After Hawke's Victorian supporters had made an arrangement with the New South Wales Right, led by the young frontbencher Paul Keating, it seemed only a matter of time before the leadership changed. In February 1983 the Victorian senator John Button took his Victorian Independents group into the alliance and the change became a reality as Bill Hayden resigned the leadership. At that stage, however, the Caucus was not formally factionalised and the ministry ballot following the election victory was certainly not a foregone conclusion. This was to change by the next election in December 1984. During its first two years the government became formally factionalised into Right, Left and Centre Left factions plus a small group of Independents. The factions were known as the Mates, the Comrades and the Chardonnay Set. The reasons for this formal arrangement emerging were twofold. On the one side, the Cabinet quickly realised the need to know whether its decisions would be upheld in the party room: if they could not rely on this they could not govern effectively. On the other, a number of key politicians became powerful in Canberra who were used to leading State-based factions and managing their relations in the interest of Labor governing: Senator Richardson of the New South Wales Right; Senator Ray of the Victorian Right; Mick Young, leader of the South Australian Machine; and former deputy leader Tom Uren of the New South Wales Left. During the ensuing decade each of these factions would organise nationally and meet regularly to formulate policy strategy and negotiate power-sharing deals. Without this disciplined political structure the economic reform program could not have been delivered. The Right was the largest faction from the outset and, while it at no time had a clear majority of votes in Caucus on its own, it could always achieve a majority except in one defence-related case concerning MX missile testing. Its core was in free-trade New South Wales which was at first in alliance with the large Right bloc from protectionist Victoria. In 1990, however, the Victorian Labor vote collapsed with the badly managed State Bank of Victoria (SBV) and nine Victorian seats were lost, many of them right-wing. Offsetting this, however, was the increase in right-wingers from free-trade Queensland, who served only to make the faction more open to internationalising pressures. But the core of the

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faction was New South Wales, which organised separately and tightly, distributed the spoils and enforced a collective culture of supporting Cabinet decisions with little question. During the decade, therefore, the Right got stronger and more market-oriented as the Cabinet moved that way. A key ingredient in both these processes was the role of the leader of the New South Wales Right and treasurer, 1983-91, Paul Keating.e In this process they were supported by the Centre Left. This faction was formed by aggrieved Hayden supporters from chiefly Queensland, South Australia and Western Australia, who had opposed Hawke but could not ideologically accept the Left. In fact it soon became clear that the faction was ill named. In the federal Caucus they came to represent 'economic rationalism' to a degree greater than the Right. This was for two reasons. The leader of the group, Bill Hayden, had made his mark as Whitlam's last treasurer in 1975 who had finally put together a responsible budget strategy that was economically rational. From that perspective he had been instrumental in redrafting the economic platform in 1978-83. Although he became Foreign minister, his group was active in pursuit of responsible, market- and efficiency-oriented policies from the start of the government. Further, the faction lacked a trade union base of any consequence, and as a result could approach strategy issues intellectually and need not worry about offending sections of the work force. Centre Left ministers tended to be the most right-wing on economic policy, to approach issues rationally rather than politically, and to see themselves, as a result, as the quality faction. But during the decade as their illustrious founding members retired the faction declined, dissolving in Queensland, shrinking in Western Australia and surviving only in South Australia where a Centre Left State government of heroic incompetence was beaten by record proportions in 1993. The Centre Left disintegrated there shortly after in 1995. The Left maintained about a third of Caucus members during the years of Labor government and was centred in New South Wales and Victoria. In both States its power base was public sector unions and those in protected industries, coupled to sections of the intelligentsia. From the outset, the Left's orientation was regulatory and protectionist, and it saw itself as the guardian of Labor's traditional values. But it was not given economic portfolios, except later in government when Brian Howe, a Victorian moderate, joined the Expenditure Review Committee as Social Security minister. The result was that the Left could never get sufficient numbers to overturn Cabinet strategy of globalising the Australian economy. Indeed, not all its members wished to, and by 1990 the opportunity had beenfinallylost. The Left split over ministerial vacancies in 1990 and the leadership struggle in 1991, such that by 1993 it had accepted the logic of an open Australian economy and its consequences for policy. The

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domestication of the Left was completed in 1993 when its new faction members owed loyalty to Paul Keating, who had done so much to keep them in government. The last occasion on which the Left challenged policy direction was in fact at the 1986 National Labor Party Conference in Hobart. 7 A minor world economic downturn had depressed commodity prices and, therefore, the Australian dollar. Treasurer Keating sparked an intense political debate about an appropriate response by warning about Australia becoming a 'banana republic'. Cabinet proposed to cut public expenditure and borrowings to support the currency and reduce the external deficit. The Left took the issue to National Conference and called for an increase in spending to stimulate the economy and offset job losses. In a highly publicised and televised debate the Left lost the argument by hanging out old shibboleths and was then beaten on the numbers. Even then, however, most of its campaigners had been non-parliamentarians. From that time on it was rearguard actions only, over the Commonwealth Bank's partial privatisation, introduction of competition to the telecommunications industry, or the eviction of Iraqi forces from occupying oil fields in the Gulf War, as the Left accepted the logic of the market. In fact, in 1986 the Left was proposing a classic Keynesian-style countercyclical policy to deal with a structural problem. Australia required more productive capital and competitive enterprises, not an increase in aggregate demand. The world market had rendered national fiscal policies unable to operate in isolation. The test case of this had been the French socialist government in 1981, which had undertaken huge stimulation of domestic demand. The effect had been a surge in imports and a rise in national debt with only limited increases in industrial output and investment. 8 Keynesian policy prescriptions in fact presupposed a relatively enclosed national economy with a limited trade sector. By the 1980s no advanced industrial economy faced this situation, least of all Australia with its insulated productive base just being exposed to international competition. Domestic financial stimulation without increased productive capacity was a recipe for further increases in the external deficit, a greater plunge in the dollar's value and, eventually, a stronger contraction to rectify the crisis. The financial disasters which followed the efforts of State governments in Victoria and South Australia to stimulate economic activity by monetary profligacy did nothing to improve their cause. The Victorian government's financial mismanagement did much to discredit traditional Left strategy in this respect. The venture capital wing of the publicly owned State Bank of Victoria, Tricontinental, lost nearly $3 billion in bad loans, mostly to businesses with unsecured assets. During 1990 the Victorian government approached the federal government for a financial

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bail-out, in the form, it hoped, of the Commonwealth Bank buying the SBV. The Prime Minister and Keating agreed to this, and pushed the agreement through the factions, the Caucus and the Parliament. The offset was that the Commonwealth Bank should be part-privatised in order to raise the cash to effect the purchase. The Left, who had created the problem, then passed motions in Victoria and South Australia condemning the part-privatisation of a public bank. The South Australian government lost even more money through the State Bank of South Australia (SBSA) but was similarly unwilling to sell off the State Bank until offered financial inducements by Canberra in 1993. Both these financial disasters served to buttress the Right's financial strategies politically. The Non-Labor Left

The extra-parliamentary and communist Left collapsed during this period and effectively disbanded by 1990.9 There were two reasons for this. Political movements advocating Soviet-style states were by then irrelevant to the overwhelming majority of people in developed societies and would have been dead in Australia by the 1970s had not the Vietnam War intervened. A generation of then young idealists opposed that foolish war and gulped in some socialist thinking.10 And when the Soviet system began its collapse in the 1980s, support for socialism in Australia declined sharply. One may only speculate on the effect an alienated generation of young Australians had on the formulating of the nation's economy and institutions. Instead of contributing to the functioning and strengthening of the nation's economic structure, this cohort rejected its profit-making purpose. But the disbanding of the traditional Left parties did not mean that the social base of the Australian Left disappeared overnight. There remained a significant proportion of the Australian population who supported leftwing positions on particular issues, although they would not have voted for Left parties. During the 1980s other groups emerged to fill these electoral needs on the major issues of peace, the environment, and continued economic regulation. The American policy of confronting the Soviet empire led to widespread fears in the West about the possibility of nuclear war, sentiments fanned but not created by Moscow propaganda. As in Europe, many Australians responded to these fears in large demonstrations in the mid-1980s and by electing peace or disarmament candidates to the Senate. In the later parts of the decade the environment also blossomed as an issue and Green candidates also successfully sought election to the Senate. But in political terms the main beneficiary of these processes was the Australian Democrats. The Australian Democrats had been formed in 1977 when a Fraser

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government minister, Don Chipp, resigned from the Liberal Party in protest at what he viewed as Fraser's toadying to big business and excessive conservatism. Chipp tried to set up the Democrats as a Centre party, using the proportional representation system to have members elected to the Senate. He became a senator shordy thereafter. But as the Labor Party moved to the Right and into the Centre in the 1980s there was no room for the Democrats to survive there. They became a moderate leftwing party under Chipp's successor, Janine Haines. Their electoral strategy was to put together a coalition of small voting blocs on single issues to construct a half-Senate quota of about 15 per cent in each State. This involved preference exchanges with disarmament, environment, communist Left and Labor candidates. It also involved having a total platform of fiscal irresponsibility wherein tax reductions did not match expenditure increases. From this ensued the charge in the early 1990s that they were the 'fairies at the bottom of the garden'. In the late 1980s the Democrats became akin to the fourth faction of the ALP, providing it with numbers to negotiate a majority in the Senate and preferences to win seats in the House of Representatives. This was formally planned by Senator Richardson, Minister for the Environment in 1988-90 and right-wing factional organiser. In the boom years of the late 1980s the environment emerged as a major issue globally and in Australia, as Greens replaced disarmers on the Left. Richardson promoted their cause in government and provided valuable public funding for Green organisations to employ officers. The Democrats were courted by suitable policy initiatives and preference exchanges to their advantage in the Senate and Labor's in the House. Richardson also successfully promoted Green issues and ran campaigns on greenhouse and pollution consequences. By the 1990 election campaign both the Environment Minister and the Prime Minister were actually urging voters who were dissatisfied with Labor to vote Democrat or Green, in the hope that their preference votes would come back to the government. It is claimed that the 1990 election was narrowly won by Labor because of its Green second-preference strategy.11 It is difficult to prove this issue one way or the other. True, many Labor Representatives won their seats on Democrat or Green preferences which enabled the government to form a majority. But it is not clear they would have voted against Labor, if it were not itself urging them to vote Green anyway. Perhaps more important was that the government had deliberately chosen to take a weaker development position at a time when the country needed to pursue rapid and efficient economic growth and restructuring. It also encouraged some alarmist and irrational posturing on sea levels, Asian consumption rates and forest depletion effects as a strategy for garnering the benefits of the collapse of the organised Australian Left. In the pre-

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election competition for the endorsement of special-interest groups, and faced with the prospect of defeat, the short-term political agenda took precedence over the task of economic restructuring. Non-Labor Moves Right

Paradoxically, the non-Labor right-wing parties who had fought the Left for so long, and ultimately successfully, were in no position to take advantage of its demise; indeed they struggled to define their line. The colonial politicians who concluded the agreement to form Australia in 1901 had not been anti-statist and classic liberals like the American founding fathers. The state had always played a firm role in the economic development of Australia and the decade after federation further elevated its status: wage regulation, a national capital, a Commonwealth Bank and tariff protection came into existence. During the inter-war years these regulatory mechanisms were extended, particularly after the onset of the depression when a large number of work-creating schemes were launched with government support. The most successful and recent of the non-Labor parties has been the Liberal Party, which was formed in 1944 by (later Sir) Robert Menzies.12 He won the 1949 election by opposing communism and promising to abolish post-war rationing. He did both. But the regime installed by Menzies was not that of classic liberals. It continued barrier protection for Australian industry, and during this period both Victoria and South Australia saw rapid growth in secondary industry under avid pro-development Liberal governments. The Liberal Party was dominated during this period by its most successful division, the Victorian branch. Labor had not been very successful in Victoria in any case, then in 1955 it split and the remaining ALP was dominated by the Left. In this context the Liberal Party held office easily, getting the preference votes of workingclass DLP supporters. Since Victoria had long been a protectionist bastion it is hardly surprising that it took the federal party in that direction, under the Victorians Menzies and then Harold Holt and subsequendy John Gorton. This position was to be reaffirmed by the Victorian grazier Malcolm Fraser, when prime minister in 1975-83. During this heyday, the Liberal Party also extended the reaches of the welfare state. It greatly expanded the university system, took the Commonwealth government further into the funding of nursing homes for the aged, and it provided Commonwealth money for the private school system. In these and other respects the Menzies/Fraser Liberal Party was modern liberal. It accepted that classic liberal laissez-faire economic policies had produced hugely unequal societies in the United States and Europe, and that these were unacceptable to modern

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Australian voters. It was therefore committed to economic policy intervention and to government initiatives in social issues. Indeed, in Victoria the Liberal government used tariff protection and State government incentives to pursue a policy of industry decentralisation that left country towns dependent on one or two industries that would find the reduction of barrier protection hard to survive. In this regulatory mode the Liberal Party found common cause with its Coalition partner, the Country (National) Party. The Country Party was formed after the First World War to increase the bargaining power of rural residents against those of the city.13 To achieve this it tended to populist positions and state intervention with the intention of generating subsidies for distant, regional and country dwellers. It was always strongest in Queensland, the most decentralised of the States, but also numerically large in New South Wales and Victoria. During the 1930s the depression hit agriculture quite severely, and the Country Party successfully agitated for an expansion of marketing agencies and for government subsidies to assist rural producers, and for irrigation and dam projects to generate work. It was an alliance between wealthy conservatives and agrarian 'socialists'. As Menzies' Coalition partner after 1949, it held the important Trade portfolio most of the time and used this and the Agriculture ministry to promote rural subsidies in matters as diverse as uniform petrol pricing, charges for installing phone lines, and the promotion of transport infrastructure. Against the argument in Cabinet and the party room that this was pork-barrelling, the Country Party promoted or supported similar state intervention in other sectors and, as deputy prime minister, John McEwen gave this philosophy a free rein. After the Labor/DLP split in Queensland, the Country Party led the succeeding Coalition government from 1957 onwards, which gave it a direct voice in national politics and premiers' conferences. This was so assured by zonal and weighted voting patterns that in the 1980s the Country Party, now renamed the National Party, formed a government in its own right under Premier Joh Bjelke-Petersen. With less regard for propriety than elsewhere, this government promoted government subsidies for industry in Queensland in a way the subsequent Fitzgerald Commission on Corruption found exceeded probity by some margin; a number of former ministers were arrested, charged and gaoled. But until 1988 the Queensland Nationals were a powerful force, and under their rule Queensland experienced the most rapid growth of any State in the Commonwealth. This accelerated as the Australian economy was opened to the world market. Indeed, in some respects the capital investment made in the mining and tourism industries during that period, which formed the basis for Queensland's rapid development, may have been

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made possible by the undemocratic nature of the National Party regime, where less regard was paid to environmental, resident and Aboriginal claims on the development process than was increasingly to be the case elsewhere in Australia. It might even be concluded that Queensland's exceptional growth was made possible by the limitations on democracy in that State. The coalition of interventionist Liberals and regulatory Nationals was little changed by three years in Opposition to Whitiam. The Fraser period was one dominated by political conservatives. The two most powerful figures, Malcolm Fraser and Nationals leader Doug Anthony, were wealthy graziers. The first treasurer, Phillip Lynch, was from an employer and service organisation background and not an entrepreneur or strategic thinker. Among the likely heirs Andrew Peacock was from a Victorian manufacturing background in the Menzies mould. There was certainly agitation for deregulation, but it came mainly from the financial bureaucracy, the backbench and occasionally from commissioned inquiries. The only senior Liberal to seriously pursue deregulation was the later treasurer, John Howard, one of the very few influential Liberal economic ministers from New South Wales of this period. By the 1980s Sydney had clearly displaced Melbourne as the major money market and corporate capital of Australia. It had less protected industries - such as TCF, automobiles, shipbuilding - and a greater assessed world market potential for regional multinational corporate headquarters. It was astride the finance, communications and transport networks of the burgeoning Asia-Pacific region, and its culture was that of a major international city. It should perhaps not occasion great surprise that Sydney was to throw up the three major internationalising politicians of the last decade: John Howard, Paul Keating and John Hewson (Liberal leader 1990-94). What is more remarkable is the complete failure of the New South Wales Liberal Party to achieve national dominance during the same period. Indeed, this period corresponds with its almost total eclipse, culminating in its electoral rout in 1993, and then Hewson's replacement by Alexander Downer, a provincial nominee of the Melbourne Establishment.14 Sydney replaced Melbourne as the centre of national political power, but through the New South Wales Labor Right, not the Liberal Party. When the Coalition lost the election in 1983, Fraser immediately retired. Peacock beat Howard comfortably in the election to replace him, while Ian Sinclair, a New South Wales farmer, replaced Anthony as leader of the National Party. Peacock was a professional politician first and a representative of Victorian industry second. His chief complaint against the government's opening the financial system to international competition and lowering barrier protection was that it was not matched by a cor-

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responding deregulation of the labour market and reduction in business costs. If the Australian economy were to become a part of the world market then each of its sectors and institutions would need to operate as such. Regulated markets controlled by fiat presupposed a national economy protected from international price mechanisms. Indeed the process would need to extend much further than the market for labour, as became progressively clearer as the decade wore on. But the 1984 election was not fought on that issue because Peacock used his political experience and personal charm to good effect, to criticise other government policies. Election Battlefields

By December 1984 Hawke was merely a popular leader and not the messiah of 1983, despite the economic recovery and considerable job creation. He was personally distressed over family matters and had given the public plenty of time to see his weakness during a seven-week campaign. Peacock dug in and fought a classic conservative's battle centred on means-testing public benefits, particularly the aged pension. Since he was not expected to win, his credibility was not seriously tested as he courted a protest vote. Labor won a narrow victory and it became clear that its big margin of 1983 was never to be repeated. If it were to retain government Labor had to look beyond its reform program, cohesive factional system and fading charismatic leader. Elections would henceforth be hard-fought affairs in which every seat and every issue would count. All politics in the end are local. Ironically this situation was assured by government legislation which, in the interests of assuring fair elections, imposed regular and independently conducted electoral redistributions. The effect was to progressively increase the number of marginal seats. Regular redistributions of electoral boundaries to ensure roughly equal-sized electorates drawn in such a way as to achieve fair party representation are of course essential to decent democratic government. Labor legislation put this in the hands of an independent electoral commissioner. It also insisted that political donations be declared and that candidates for office report on their campaign costs. It then provided public funds to political parties on a basis proportional to their vote at the last election. By 1990 the commission had acquired a new software computing package that enabled it to make redistributions very easily, and to assess their input on the two-party voting result. This did not change the commissioner's powers but did enable them to be exercised more easily and more purposefully. There also emerged during this decade a tendency for the number of swinging voters to increase, probably as a result of a reduction in the bluecollar work force and a rising level of education.15 During the 1950s and

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1960s it was believed that most voters were permanently committed to one party or the other. The importance of the DLP had been to permit working-class Labor voters, by going through the DLP preference system, to vote Liberal without being traitorous. During the 1980s, as both major parties became committed to opening Australia and economic rationalism, the ideological and to some extent the class basis for committed voters declined. Swings in seats and booths became larger and more frequent. As a result politicians had to use more effective means of campaigning on issues and personalities rather than traditional allegiances. Until 1993 Labor was always a step in front in this technical war and by that stage the Liberals reopened the ideological gulf at great cost to themselves (see below). Labor government policy on re-election strategy was to ensure fair election boundaries, provide public election funding for parties on the basis of votes won last time, and then to introduce advanced computer technology to give incumbency an advantage. The public funding would benefit the two major parties, while the allocated expenses in the form of an electorate allowance, office equipment and staff for incumbents would benefit the Government against the Opposition, whose unfunded candidates had to win seats. The technology deployed by incumbents was imported by ALP national secretary Bob McMullan from America, where election campaigning is taken from commodity marketing strategies. Marginal electorates were phone-polled to determine political issues and then direct-mailed to canvass votes. These techniques could not guarantee victories, but in a close contest they could produce an edge. In addition, other campaigning techniques were codified into manuals, and candidates were increasingly preselected by the power-brokers for their capacity to fit into and use these approaches. When other issues like State government financial mismanagement overrode technique, as in Queensland 1987, Victoria 1990 or South Australia 1993, Labor won or lost seats nonetheless. But in an increasingly non-ideological era technique became more important. In the 1993 election the Liberal Party caught up to the ALP in election technology. Although much of manufacturing industry turned away from the Liberals over their zero tariff proposal, enough mining, service, construction and brewing corporations contributed to keep the party's funds healthy.16 The Liberals then took two major decisions: they would seriously fight only those targeted seats they needed to win to form government; and they would use front-line technologies. They adopted similar technology to the Government and commissioned phone canvassing and group discussions to identify issues. They also then used electoral rolls to produce direct-mail letters the text of which was written by public relations experts in conjunction with the results of polling.

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In order to form government in 1993, the Opposition needed to win six seats net from Labor. Opinion polling suggested it was likely to win those six seats in Western Australia, where the discredited Labor government had just been ousted, in South Australia, where the incumbent Labor government had lost over $3 billion in the State Bank, and in northern Queensland, where the National Party vote was recovering from the corruption nadir of 1987. The Liberals determined to concentrate in these areas. They also agreed with a financially well-endowed backer, the Housing Industry Association, to mount a $2 million special campaign in a dozen seats on top of Liberal campaigning. They were later to claim effective results. However, their leadership had also reopened the ideological war, which had been closed since 1983, by lurching off to the extreme Right in their policy manifesto Fightback! The result was that while the Liberals won the six seats in the regions they had designated, they lost heavily elsewhere, including being routed in New South Wales. By depriving the Liberal Party of a coherent base, equivalent to Labor's New South Wales Right, this result ensured continuing divisions in the post-election period. In order to understand this Liberal Party behaviour, it is necessary to examine its policy history during the 1980s. In 1984 Andrew Peacock waged a classic non-ideological campaign against an incumbent government on the issues where it was unpopular. He was able to accept the opening of the Australian economy but criticise some of the consequences because he was in Opposition. In the main he represented modern liberalism accepting the need to gradually adapt to the impinging world market. He looked vaguely caring and compassionate. In 1985 when he was unable to secure a party vote of confidence he stepped down in favour ofJohn Howard. Howard constructed a different coalition of interests and images. Politically he was a conservative wedded to many of the values of 1950s Australia and propagated this with an election poster of a two-child nuclear family prospering behind an apparently 1950s picket fence. His perceived opposition to Asian immigration hardened this image, and turned much of the media and political elite against him. But economically he was a free-market radical, perhaps reflecting his New South Wales origin or his years as treasurer exposed to the same briefs Paul Keating was later to see. He fought the 1987 election on this combination of issues and lost narrowly, a result he attributed to the bizarre campaign of the ageing Queensland Premier to become prime minister. He believed he deserved a second try. But although he was the Liberal Party's best performer in Parliament throughout the period in Opposition, John Howard was never able to resolve the tension between his social values of conservatism and stability and his radical economic agenda designed to produce more rapid change. This unresolved contradiction remained a problem when he resumed Liberal leadership in 1995.

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The Liberal Party now had two failed leaders on its hands with little appreciable difference in their attitudes towards economic strategy but some considerable perceived differences in political philosophy. In 1989 as Howard's opinion poll rating reached new lows a party room coup reinstalled Peacock as leader. He faced an election against a government presiding over an economy booming so rapidly that it was steadily pushing up interest rates to slow it down. In late 1989 interest rates hit record high levels. At the same time the Victorian State Bank collapsed from over-extension and bad debts. Peacock girded up to assault the government for economic mismanagement. He once more put in a professional performance but had to live with a leadership credibility gap caused by previous defeat. Labor scraped home, losing nine seats in Victoria but winning sufficient elsewhere to compensate. In the race to the line Labor's direct-mailing campaign had concentrated on Peacock's personal leadership credibility. This, coupled with the Green preferences, seemed to get it home. In 1990 the Opposition faced an acute dilemma. The government had not been greatly popular since shortly after it was elected. Its restructuring policy was respected by the markets and political elite but not fully understood by the people at large, who resented many of its consequences in economic dislocation. The Liberal Party leadership accepted the need for this policy and so to a large degree could not fully take advantage of Labor's unpopularity by, say, opting for reregulation, tariffs, or an end to Asian migration. Indeed, even the National Party had been drawn into this vortex. Heavily influenced by the National Farmers Federation, whose chief, the rich South Australian grazier Ian McLachlan, had agreed with the government to the pursuit of free trade in 1985, the Nationals dropped their objective of a regulated agrarian sector. They even accepted Fightback! as the 1993 election manifesto despite its likely adverse effect on poorer rural residents in the form of a consumption tax. After the 1990 election defeat the Opposition was faced with two sorts of difficulties.17 On the one hand there were policy issues. A right-wing push had replaced Liberal moderates in preselection battles in Victoria and New South Wales, thereby evicting former Fraser minister and leading wet Ian Macphee and former environment spokesman Chris Puplick from Parliament to the benefit of David Kemp and Bronwyn Bishop. Moderates from the then weak South Australian branch led by former premier Steele Hall complained to no avail. The other difficulty involved the bitter personal antagonism between the two major party powerbrokers. Peacock accepted that he had had two chances and lost. Howard believed he also deserved a second try, which Peacock was determined to deny him. Exhausted, the party turned to a neophyte, John Hewson, a former professor of economics and recently Treasury spokesperson.

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Hewson proved to be the most market-oriented politician in the Parliament, but one without a political strategy. As Opposition leader he displayed a capacity for insulting those interest groups on which his political survival would depend at the forthcoming election: renters, single mothers, welfare agencies, Greens and ethnic communities, to name a few. But he survived this behaviour in part because of the government's unpopularity, beset by recession and leadership problems, and in part because his party room believed that they had just lost two elections because of leadership problems. John Hewson basked in successful opinion polls from almost the time of his election as Liberal leader until his election defeat in March 1993. For over two and a half years almost no poll had Labor in front, save during the Gulf War, yet it won the subsequent election. Two points should be made here. Public opinion polls play a huge role in Australian political life and are taken by three major organisations at regular intervals and others periodically. They deeply influence party policy formulation and were instrumental in the defeat of Peacock by Howard in 1985, Howard by Peacock in 1989, Hayden by Hawke in 1983 and Hawke by Keating in 1991. They drove the defeat of Hewson for Liberal leadership in 1994 and of Downer in 1995. In the past, Australian political parties were more ideological, and therefore more principled and sentimental. By the 1980s they were political machines seeking power, and if a leader seemed unable to deliver on that objective a new one would be found. With so many more marginal seat holders on the backbench vulnerable to modest swings in popularity, opinion polls were scrutinised even more carefully. The polls are also deceptive, which is not to say they are inaccurate. The major published polls usually correspond to private and more extensive polling conducted by the political parties, but they do tend to allocate voting preferences to electors who have not made up their minds or who have not thought about the matter at all, presumably in order to get an opinion poll that makes some sense for newspaper readers. As a result, for the 1987, 1990 and 1993 federal polls the public opinion polls have underestimated the number of 'undecideds' who have returned the government by deciding during the last week or so. Unlike the parties' polling they have also not seriously tried to identify what issues will influence these electors late in the campaign through direct mailing or other techniques. In other words, the published public opinion polls are not necessarily reliable indicators of popularity, as far as coming elections are concerned. They always overstated Hewson's potential standing with the public at an election. Both political parties were aware of this and did not believe that the 1993 election was a foregone conclusion. It was a different story in the economic sphere, where Hewson was

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master of his craft. After eighteen months' work in November 1991 he produced his election manifesto, Fightback! There is little evidence of any extensive consultation with his party room colleagues in the formulation of this policy. They accepted it when delivered in the name of party unity and election victory. It delivered defeat. Fightback!'was the political manifesto of the mining industry,18 written into 500 pages by the theoreticians at Access Economics and delivered to the Liberal Party by John Hewson. It would have imposed a heavy new $27 billion consumption tax on all Australian voters, relieved large companies of $9 billion of payroll tax, cut income tax on higher earners, reduced welfare programs and totally abolished all barrier protection. Alongside this the Industrial Relations spokesperson, John Howard, promised to effectively abolish award wage rates. In terms of Australia's aspiring globalised capitalist economy this was just what the business sector wanted and needed. In terms of the Australian population this was another more extreme dose of what Keating had been giving them for ten years. The more conservative Melbourne-based division of the Liberal Party was to use this point against Hewson to some effect after the election. The Press Gallery thought it was wonderful! Reporting on national politics in Australia is dominated by 'the Gallery'. An area of Parliament House is reserved for them and they work there together most days. They also attend daily Question Time in a designated gallery from which they derive their collective name. They tend to form a collective opinion by talking with one another and to politicians and their staff. Both sides operate under Press Gallery rules, which means that no one reveals their sources. One result is that the Gallery often has better information on the distribution of numbers in the party rooms than do the politicians or, during leadership contests, even the party leaders. In addition to reporting they also comment, usually in different stories but in fact in barely distinguishable ways. The Gallery is partly a collective observer, pardy a participant. Certainly media owners and editors can change the slant of stories, but generally the Gallery speaks with one voice. In 1991 it said Hewson had a winner on his hands and Hawke was finally finished. The Labor government had its own leadership problems. Keating had wanted Hawke's job since 1987 and believed he had rights to it in 1990 as a result of an agreement reached between them to that effect and concluded in 1988 at Kirribilli House. Hawke told him in 1990 that he wasn't going. Keating's supporters started to 'put the drip' on Hawke at lunch, at tea, at drinks, in committees, in Caucus and in the party at large. Keating made his intentions clear at various times, notably in a speech to the National Press Club in December 1990, then launched his campaign by leaking the Kirribilli agreement to the media in May 1991. Hawke submitted to a leadership ballot in June and won by 66 votes to 44. Hawke

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got the votes of the Left, the Victorian and Queensland Right and others. Keating got the New South Wales Right and most of the Centre Left, who hadn't liked Hawke since he beat Hayden. Such a split vote could not finally resolve the issue. Keating went to the backbench and Hawke re-jigged the government. It became clear fairly quickly that Hawke was unlikely to survive. He now had to face a confident Opposition way in front in the polls and a third of his own Caucus sniping at him and briefing the Gallery on every issue that arose. Keating took a sabbatical and made some judicious, strategic interventions on issues of substance: the arts, urban planning and State-federal relations. It was a period of intense strain as personal relationships within the Government were tested to the core. There were, however, no strategic policy questions of any substance. When Fightback! was released into the favourable climate created by the Press Gallery, Hawke's capacity to deal with it was carefully scrutinised. Some poor performances by himself and his newly appointed senior ministers including Deputy Prime Minister Brian Howe, and Treasurer John Kerin, ensured that a new leadership vote would be required. When it was taken on 19 December 1991, Hawke lost 51 to 56, with defectors moving from all factions. Hawke was the first Labor leader to be defeated in Caucus while prime minister. He was also the most successful Labor leader ever, with four election wins. He was not opposed for policy reasons, since his policies were little different from Keating's; while his popularity had slipped, Keating's was even lower. Hawke was opposed because the Labor Party had finally and fully abandoned sentimentality and ideology. He could not defeat Fightback! and a third of his own Caucus simultaneously. Keating might be able to defeat Fightback! Hawke retired from Parliament. In the subsequent by-election in his Victorian seat of Wills, with its concentration of TCF industry hurt by tariff reduction, the voters replaced him by a Victorian independent left-winger, Phil Cleary, who supported higher tariffs. When Cleary was removed from office in 1992 by the High Court on a technicality, the voters put him back in again at the 1993 election. Keating's narrow win took much of the public by surprise. He was never popular with the public and had lagged behind Hawke even in December 1991. His Caucus support derived from a different logic. The House of Representatives is often described as the clearing house of policy ideas, where policies are proposed, opposed, debated and rejected or adopted. Politicians commonly believe that these processes and their results take some time to impinge on the general public through the media and party memberships. This process has probably been accelerated recendy by the televising of Parliament and the television news

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coverage of the daily Question Time. This was a two-edged sword for Keating, who was the dominant parliamentary performer of his generation. On the one side, his probing tongue and forensic intellect had enabled him to win many policy debates and partly explains the ascendancy of the Treasury line after 1983. On the other, the more sensitive public often resented his tactics of theatrical abuse and scored him down in the ratings war. Keating had to win votes without being popular. He would be a policy prime minister. Because Fightback! took the Liberals even further to the Right, Keating was able to reopen an ideological front for the first time since 1983. Without significantly changing policy direction, Keating sought to portray himself as the leader of a traditional Labor government defending its heartland constituency against the threats posed by an ideologically driven and heartless right-wing Hewson. He drew up an alternative economic strategy and issued it in March 1992 as One Nation.1^ At first, and despite the success of the One Nation document, it seemed unlikely that his strategy would succeed. One Nation, by proposing $2 billion spending over perhaps two years to stimulate the economy as well as matching Fightbackl's income tax cuts, enabled the government to present itself as more Left or progressive than the Opposition. But by the end of 1992 the Liberal leadership was worried enough to seriously modify Fightback! by exempting some goods from the GST and proposing more public infrastructure spending in line with One Nation. One Nation was the first sign that Prime Minister Keating would not maintain the discipline of Treasurer Keating. In March 1993 the public was faced with a choice between an unpopular government and an unacceptable program. As in 1990, with two weeks to go a large percentage of the population had not decided their vote. During the last two weeks they split more than two to one for the government. The result was that it was returned with an increased majority in the Lower House but without control of the Senate. Once again regional voting patterns were diverse and many seats were left in the marginal category of less than 5 per cent. The Democrat and Green votes had been reduced, though they continued to hold the balance of power in the Senate. Both major parties had stood on platforms of continuing to integrate Australia into the world market, of making its economy more efficient and pursuing a policy of micro-economic reform, but Labor at the slower pace. In the event, in most of Australia, people viewed the Liberal platform as too extreme and stuck with the devil they knew - what they usually did, after all. In this case they did so purposefully as the government campaigned for votes not preferences. The Democrat vote slumped. In 1990 it had replaced the retired Janine Haines with Janet Powell and then Senator John Coulter, a dedicated environmentalist, and

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became more a Green than a Left party. In the recession election of 1993 the issues were taxes, award wages and jobs. The election had been held at that point in the business cycle trough when governments can expect to be evicted from office, as had Whitlam and Fraser during previous cycles. In fact Labor survived and each party reassessed its future. The Labor government had held to its commitment to open the economy and make it competitive in the face of deep temptation to back off its reform program. True, it had adopted an expanded program, centred on One Nation, of public expenditure on infrastructure during 1992 in an effort to stimulate economic activity. Most of these projects, however, were quite responsible additions to economic assets and indeed as a result had too long a lead time to lift the economy in time for the election. It had also held the line on its tariff reduction program and resisted the temptation to try buying a few South Australian seats by a tariff freeze. It assaulted the Liberals' award wages proposals without closing the door on more flexible wage-fixing procedures. It rallied its forces with some financially cheap offers for Aborigines, women, regional development and the arts. But it also blew out the projected budget deficit by some more expensive promises of income tax cuts and tax concessions for corporations. After the election Labor regrouped behind its micro-economic reform program and under more assertive leadership. It quickly offered a new, more flexible wage fixation and enterprise bargaining regime, an unpopular budget which expected to abolish the deficit by 1997, and a regional development strategy. The ministry was restructured by the Prime Minister personally, to introduce a new generation of reformminded, market-oriented right-wingers loyal to Keating and committed to his program. The ascendancy of the New South Wales Right was complete. Key numbers man Laurie Brereton and young leadership hopeful Michael Lee were promoted. The Queensland Right was penalised for backing Hawke to the end, and Keating supporter Michael Lavarch was made attorney-general. For the Opposition life got tougher. Hewson was talked into not retiring by Peacock, who would do almost anything to block Howard. Hewson defeated Howard in the leadership contest by leading a coalition of Peacock supporters, the moderates or wets from recently strengthened Victoria and South Australia, and the Western Australian members. Without a power base in New South Wales, where Liberals returned only eight from fifty federal politicians, Hewson had become the moderate candidate and set about remaking his political position. Victorian wet Michael Wooldridge became his deputy. The Fightback! package was progressively abandoned as what the new Treasury spokesman, factionally non-aligned but right-wing South Australian Alexander Downer,

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described as 'the longest suicide note in history'. But modern Liberals do not easily forgive defeat, particularly in an election they thought was won. During the ensuing year Hewson faced a number of potential challenges. The conservative senator from New South Wales, Bronwyn Bishop, secured a safe House seat in Sydney's North Shore and used a public relations firm to pursue a high-profile populist public image. John Howard continued to display his leadership qualities to his best ability. Younger men like Downer and Victorian right-winger Peter Costello pressed their cases but with some apparent reserve. All these options were clearly to the right of Hewson in 1994, who was the strong favourite of the moderates who made up perhaps 20 per cent of the parliamentary Liberal Party. None of them seriously challenged the government's economic program. All felt that at the next election their best strategy was to avoid a detailed policy plan of the Fightback! variety and stick to criticising the government. In May 1994 this came to a head when a series of opinion polls suggested that not only was Hewson falling behind Keating, but he could not win a future election against an improving economy. This situation became critical when internal Liberal Party polling was leaked which also concluded that Hewson was not acceptable to the Australian electorate one Friday in May 1994. Hewson unwisely decided to initiate a party room ballot when a number of Melbourne Establishment Liberals withdrew their support for him, including Victorian Premier Jeff Kennett, Malcolm Fraser, and national president Tony Staley. Andrew Peacock moved behind them. An alternative team of Alexander Downer and Peter Costello was put together in Melbourne within three hours and duly beat Hewson in the party room the following Monday by 45 to 37. There were no significant policy issues involved, although since the wets had mostly supported Hewson it may reasonably be supposed that the new team was more right-wing than Hewson of mid-1994. But since both Downer and Costello had also been softening their images since the 1993 defeat, they represented a more bipartisan position on economic policy than hitherto. The Coalition would very likely try to fight the next election on other issues, and Downer quickly ran up the flag and the Constitution as major areas of dispute. Alexander Downer did not last long. By Christmas 1994 it was clear that his manner and inexperience made him unacceptable to the Australian electorate. Peter Costello was probably waiting for a later start and allowed John Howard to be recycled in March 1995 and become the sixth new Liberal leader since the 1983 defeat. Howard remained the best parliamentary Liberal performer of his generation; he had acquired more skills since 1989 and had a more populist image. The new support of Consolidated Press, the large Sydney-based, Packer-owned media

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corporation, would also help his cause. His was the most serious threat to Labor for fourteen years, but one that nonetheless posed no challenge to globalisation.20 The Democrats moved closer to the political centre. After their relative failure in 1993 they elected a new leader, Cheryl Kernot from Queensland. She moved away from the Green-oriented policies of John Coulter and deliberately pursued a 'commonsense' responsible approach. During the 1993 budget negotiations she was influential in having proposed taxes watered down and in 1994 deliberated closely with government on appropriate budget policy. In February 1994 the Democrats presented a budget strategy to government involving some tax increases to fund spending on a job creation program. Notwithstanding occasional references to the need to freeze tariffs and introduce a jobs levy on the better paid, the Democrats had come to accept the dictates of government strategy. They had become economic rationalists.21 This decade then had witnessed a substantial shift in the character of political debate in Australia. Following the 1983 election the Labor, Liberal and National Party leaderships accepted the need for an international free-trade regime and the requirement that the Australian economy be reformed in order to benefit from it. Traditional opponents of this position were defeated in the political marketplace. Within the governing party the Right defeated these opponents and by 1993 had asserted its own hegemony, led by Keating. Among the Liberals, and despite their five election maulings, there was little support for a return to Fraser-style regulation. The National Party accepted the dismantling of the rural subsidy system partly because this became worldwide practice and partly because of the promise held by international free trade. The political Left collapsed for other reasons and the industrial Left was stranded. By 1993 the Democrats saw the advantage of being a major and responsible participant in strategic negotiations. By this process Australia had modernised its political system to one that could deal with the most important issue facing the country: how to survive and prosper in a highly competitive international market. It was not government that could ensure that outcome but the economic system. Under the new regime it was essential that Australia's economy restructure in such a way that it was able to take advantage of the opportunities offered by globalisation.

CHAPTER 5

Government and Business in Australia

As a result of its decision to open its economy to the world market, Australia entered a new era as far as public policy towards private companies and business in general was concerned. In the past, private companies often looked to government to provide concrete support for profitable enterprise. This evolved into a complex but widespread system of interface between government and business, involving taxpayer subsidies by discounted inputs of land or energy, tariff protection from import competition, price support schemes, licensing arrangements, a heavily subsidised transport system, and wage regulation, to mention just a few mechanisms for intervention. As of 1983, it would have been difficult to assess the real level of efficiency of any particular sector or enterprise because the extent of cross-subsidisation was so extensive. It could only be posited, with some certainty, that domestic industry as a whole was not internationally competitive. In order to make it so it was necessary to disentangle the cross-subsidy system by a public policy agenda of dismantling it and simultaneously reporting on those sectors where subsidies were transparent enough to analyse. What was the cost of tariff protection of TCF to the consumer and hence to the economy as a whole? Did overstaffing at Telecom affect business communication costs? What was the real cost of road as against rail transportation of goods and how could both be improved? These issues touched at the heart of the relationship between government and business in Australia. This relationship has attracted considerable attention in Australia during the period of deregulation,1 an interest deriving from a number of sources. On the one hand, there have been a number of often spectacular revelations concerning unusual and sometimes illegal relations between individual politicians and particular businesses that have produced large bodies of media information which have served to fuel 87

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public and academic interest in the area. During what is now euphemistically called the 'excesses of the eighties', relations were built between public and private sector managers that did not withstand tests of probity during the recession of the early 1990s, leaving reputations sullied and sometimes people gaoled. In the most spectacular of these revelations, in Queensland in the 1980s and Western Australia in the 1990s, close associations between governing political parties and leading corporate financiers led to prosecutions and gaolings for corruption. But while these relations were important, they are not typical of the daily interface between public and private sector economic institutions in Australia which make the national economy work. At an academic level, two other processes have been under way to stimulate interest in this area. In the economists' profession there has been a stronger and more determined pursuit of market solutions to not only economic but also apparently political and welfare policy options. Economists have been more strident in their advocacy of economic rationalism. This has left litde room for the quietly done and widely accepted ad /we government subvention of business interests so characteristic of past Australian practice. As the star of the economists has waxed in national policy-making, they have been able to criticise subsidies or any other cosy relationship established between the public and private sectors, notably where it may be demonstrated to contravene their efficiency criteria. Most visible here has been the use by government of the Industry Commission2 to report on these practices in different sectors. In a sense this revival of Adam Smith and his invisible hand has been a reassertion of the old debate among political liberals and their theorists about the appropriate role of the state in a market economy. Classic liberals of the nineteenth-century British variety, like John Stuart Mill, saw a very limited role for the state and broadly accepted a laissez-faire approach to economic policy-making. During the twentieth century most liberals, and most Liberals in Australia, accepted the argument that the market, left to itself, will produce a very unequal society and not necessarily achieve non-economic, nation-building objectives concerning, for example, the appropriate geographic distribution of national population. The public provision of many welfare services was also accepted as necessary. As a result, during the heyday of state interventionism in the Western world, which broadly coincided with Menzies' long period as prime minister, the Australian Liberal Party became a hybrid liberalsocial democratic party. It increasingly accepted the need for an 'initiatory state' to pursue social objectives in areas as diverse as finance regulation, tertiary education, consumer rights and public health. During the Fraser government, which was dominated by conservatives

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rather than liberals, this came under increasing scrutiny, particularly from within the state intelligentsia centred in Canberra. The most persuasive of these technocrats were the economists. Ultimately their force derived from the expansion of the world market, a process made irresistible by technological change and capital accumulation, but in the short term their strength lay in their coherent and shared intellectual methodology and world view. Their impact was much greater on the professional politicians and other opinion leaders than on the public as a whole, who treated economic rationalism with great disdain. It was its application to public policy that made it a problem, requiring as it did a combination of determined and skilful politicians and a keen appreciation of the need to dismande the state subsidy system. With the continuing and further democratisation of the Australian political process, these skills became decisive. Against this rising ascendancy of the market-oriented, rational economists the academic Left (and some of the Old Right) has spent the last two decades resisting the onset of market solutions.3 Since to some degree the ideas of politicians are generated, as Keynes would have it, by uncredited and half-forgotten scribblers, some reference to these ideas should be made. The Marxist Left was stimulated by the opposition to the Vietnam War but diverted much of its energies to developing a theory of the capitalist state,4 concluding that the central purpose of the latter was to preserve the privilege and wealth of those who own and manage private business enterprises. Within that context there emerged a heated and complex debate on how that was achieved. The corollary of the Left's position was that the state was not benign in capital-labour relations even when a labour party was in office. Nonetheless Marxists were also influenced by concepts of the position of a state within the international system and the need for it to assist economic development. Though the collapse of the Soviet empire led few of them to advocate the pursuit of a stateowned command economy in Australia, they were nonetheless drawn to the advocacy of active state intervention in economic affairs through industry policy and through theories of strategic trade and new growth.5 The moderate Left was influenced by those ideas, and throughout the Labor government argued for interventionist policies. They derived support for this position from two sources. On the one hand, they argued that the successful states of East Asia were highly interventionist, a leading factor in explaining the region's successful growth record. This was only partly true and ignored the more deregulatory positions taken by the governments of Japan and elsewhere when a significant level of development had been achieved; it also ignored the impediments to growth which had been constructed by state intervention in Australia. On the other hand, they took the view that state agencies could produce better

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economic outcomes than private sector managers in Australia. This had been an influential position for two centuries of national development, but one more difficult to sustain into the 1990s. While it is not in dispute that the state does assist the economic development process dominated by private capital, there is considerable and reasonable controversy over how this is to be achieved.6 Before seeking to resolve this issue, some simple points need to be made about the role of government in the provision of services. Notwithstanding the theories of market-driven economics, in a liberaldemocratic state like Australia government will probably always be held responsible for ensuring the provision of some essential services. These presently include defence of the realm, protection of life and property, the rule of law, stability of currency, and a minimum provision of health, education and transport infrastructure. There are also some related services, which may vary from time to time, that government is expected to regulate to some degree to ensure their satisfactory provision by other agencies: a safe environment, housing, gender equity, essential commodities like water and sanitation and even, to some degree, jobs. The extent to which government should be responsible for the provision of these is the proper subject of debate on public policy. Short of the creation of a Soviet-style society or a devolution to market-driven near anarchy - both positions have advocates in the academy - it may be assumed that such debates within those parameters will continue. Their resolution will be determined by political conflict. The central question then is not whether but how government does and should relate to business. Local State Apparatuses In Australia there are three levels of government: local, State and Commonwealth. Local government authorities (LGAs) vary as a result of the process of setdement and differ hugely in size, function and composition.7 In the major cities lord mayors preside over quite wealthy and powerful local authorities whose decisions can be important for business development, since they can change zoning and development regulations in central business districts. CBDs are of course the brain centres of regional and national economies and require careful cultivation. Such authorities have at different times been corrupted by very close relations with business and made ineffectual by hostility to business aspirations. Their heads have been driven from office by both these excesses, usually by the electors for the former and often by development-oriented State governments for the latter. Such local governments in the longer term

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have a functional relationship with property developers but must keep the aspirations of smaller trade associations in mind. In general it is probably wise to dissociate the governance of a CBD from the surrounding inner suburban residents and their social and environmental concerns. This can be done by either direct State government rule of the CBD or by drawing its boundaries carefully. State governments are more likely than a business-dominated LGA to give consideration to the built environment. Other metropolitan local authorities tend to be consumed with the day-to-day struggle to maintain services of a local kind: parks and other recreational facilities, local roads, garbage collection and, increasingly, welfare services like child care, community centres and some arts. They must also deal with local traders' associations and, in some regions, offer support for industry. It is at this level that political struggles erupt over business development in the form of zoning regulations, building requirements, environmental controls or even business, as opposed to private rates. In general, wealthy authorities tend to be residentialoriented, with their ratepayers politically active and tending to prefer to drive to pro-development areas for work. In those areas development restrictions are less as the authorities themselves seek a larger budget revenue base to generate growth and gain general support from their ratepayers anxious to generate work. It has usually been the case that country authorities have been pro-business and pro-development, an understandable legacy of their pioneering past. This has been tempered of late in some regions by general environmental concerns and in some times by an influx of retirees who have reinforced that tendency. Most local authorities have optional voting patterns which produce low voter turnouts, typically about 10 per cent of the roll even when a position is contested. The Council positions are then usually unpaid or gain an honorarium which ensures a part-time elected authority. This often produces a friendly disposition towards business development by the appointed officials, some of the more serious of whom will have a remuneration related to the rateable base. This is not to say that periodic political struggles will not break out against business, particularly when the issues concern the environment or property values, but acquiescence is the norm. In some of the larger and wealthier inner-city local authorities, particularly in Melbourne, Sydney and Brisbane, voting is often compulsory and politics takes on a definite party-political and partisan edge. In such instances LGA positions may be stepping stones for political careers, and track records on business developments, service provision and environmental protection may be more carefully weighed. The Lord Mayor of Brisbane commands a budget of sufficient size to ensure

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national prominence to the incumbent, who will often seek higher political office. Indeed, State and national parliaments are full of exmayors of all political persuasions. For small businesses, local authority activities can be of vital significance, and their money, networks and influence can be important in determining the result of a local election. Shopkeepers, real estate agents, builders and small factory managers are well represented on such councils, which are in general well disposed to business development and the additional revenue it creates for that authority. Local government authorities provide many of the amenities that go to make a city's character. With the exception of the CBDs, which require specialised treatment, urban LGAs have done a good job in Australia. The test of this is that in every survey on the subject during the last two decades of international comparisons of the liveability of different cities, Australian cities rank highly. They combine public transport and amenities with private space in a way that is almost unique. But their record on business development is less impressive. There is huge diversity across LGAs in the costs of business start-up and licensing. There is also considerable variation in the planning process to which business is subjected. And, in a related area, LGA attitudes towards urban consolidation or permitting an increase in the density of settlement vary enormously. In many wealthier and established inner-city areas, patterns of density established a hundred years ago, when Australia's population was a quarter of today's, are allowed to set the norm. This contributes to the tendency for cities to sprawl by precluding medium-density residential options for new or lower-income families. Three general tendencies may offset these difficulties: amalgamation, compulsory voting and best-practice standards. The size of LGAs varies between the bulk of the City of Brisbane to the town of Walkerville, Adelaide. In the smallest it is hard to create a revenue base sufficient to develop an adequate library or child-care centre or similar amenity; the largest undertake functions more properly dealt with by State governments. Whitlam planned to reorganise LGAs into regional authorities of about 100000 persons, depending on the geography involved, which would give about 200 for the whole of Australia.8 This would provide a sound revenue base for provision of social amenities while enabling a specialised qualified staff for regional business development. Since the budgets handled by authorities of this kind would be substantial, voting for the senior councillors should be compulsory. The objection to this was that it would probably introduce party politics into LGA elections - a likely result since party politics has usually come in where voting has been made compulsory. At present, the quality, interest and dedication of local officials is very haphazard, with an

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overepresentation of people with time available, or those in professions thought likely to benefit directly from LGA policies - real estate agents, architects, local traders. It would be better to provide the disciplined debate with open declaration of interest which a party-influenced system would provide. In any case party dominance of many LGAs is an existing fact of life without its benefits. Larger, more disciplined LGAs enable the pursuit of best-practice standards in administrative procedures, particularly where they involve business development. The micro-economic reform program being pursued by the Commonwealth government and its instrumentalities has not touched much of the local government sector with a rationalisation of its service provision and the costs to business. This is probably of greatest importance in non-metropolitan regional Australia where larger, better funded authorities can provide the basis for regional development strategies professionally formulated along business plan lines and energetically pursued. They could also be service providers for the range of commercial information which a one-stop or first-stop shop network could offer established or start-up business. Such a network would serve in part to compensate for the disadvantages which distance and geography have long held for the Australian market. Presently these may be provided by Commonwealth outlets, but LGA providers would be preferable by offering local knowledge and a competitive relationship. In their present configuration, however, LGAs are too easy a target for highly localised and special-interest groups. At a time of rapid economic change, during which environmental problems have been raised to considerable importance, in some measure by the federal Labor government, many development proposals will be resisted by the more conservative elements of a local community. These may amount to little more than 'Not In My Backyard' (NIMBY) organisations. During the last decade such political struggles have been waged across the country and over different issues. In South Australia in the 1980s it proved difficult to construct any infrastructure for the tourism industry because of the combined resistance of local groups and an entrenched anti-development ethos encouraged by a paralysed State Labor government. Victoria faced local community opposition to hosting the international motor-racing Grand Prix: the extension of Sydney's airport was held up for years by local hostility. LGA representatives elected by a poor turnout of a small electorate are extremely vulnerable to such pressures. They should be enlarged to defend themselves against this process and ensure that economic development gets the airing in public debate that it deserves, although even then the anti-development attitudes may be so widespread in some parts of Australia as to make even this unlikely, short of a cataclysm such as South Australia experienced in the early 1990s.

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State governments are a more complex matter, particularly when judged by their short-term performance. In the long term, however, the six State governments may best be viewed as elected regional development authorities. This is also true of the Northern Territory government, which is heavily subsidised by the Commonwealth. The ACT government does not have to fulfil that role while the Commonwealth government annually augments the size of Canberra with its own budget; as a result it can afford the luxury of continuing development accompanied by antic politics. State governments are usually