I spoke today at the McKell Institute in Sydney on Australian economic history, with some ideas for the future. The speech is below.
What Do We Eat After the Low-Hanging Fruit? A Brief Economic History of Australia, With Some Lessons for the Future*
18 May 2012
McKell Institute, Sydney
In the Pacific Ocean, off the west coast of South America, sit the Galapagos Islands. Although they straddle the equator, the pattern of ocean currents have a cooling effect, making them an ideal breeding ground for tortoises, iguanas, penguins, finches, albatrosses, gulls, and pelicans.
Because the islands are volcanic, what’s striking about animal life on the Galapagos Islands is that all of it came originally by flying or floating nearly 1000 kilometres from Ecuador. And yet for the species that survived, life on the Galapagos Islands was perfect. Migrating birds lucky enough to be blown off course found an environment with few natural predators. Tortoises that floated here found beaches perfectly suited to their breeding environments. Life flourished.
Looking back across Australian economic history, I am often struck by the extent to which luck has similarly played a part in our success. Politicians are sometimes reluctant to talk about luck – preferring to focus on the things we can control than those we can’t. It is true that ‘chance favours the prepared mind’. But I think it’s still worth talking about the role that luck has played, if only to help understand what preparations we should be making. If we don’t do that, we’re like the Galapagos tortoise, which must have thought itself the luckiest species on earth, until British sailors discovered the islands in the late-eighteenth century, and ate them in their thousands.
Over the 2¼ centuries since European settlement, there have been half a dozen strokes of luck, each of which has tangibly boosted average living standards. Let me take a moment to talk about them in turn.
Six Pieces of Low-Hanging Fruit
The first was plentiful land. By stealing land from Indigenous Australians, white settlers were able to be generous in handing out land to convicts and settlers alike. To them, land was so abundant that it was virtually free. Abundant land became particularly productive with Macarthur’s introduction of Merino wool: a high-value product that could be shipped back to Britain. While Europe was land-scarce in the early-1800s, Australia was labour-scarce. That meant wages were comparatively high, and created huge economic opportunities. For example, Samuel Terry, who was transported to Australia for stealing stockings, ended his life as the richest man in Australia, owning a fifth of all NSW mortgages. Free land (stolen from Indigenous Australians) provided social mobility that would have been undreamed of in nineteenth-century Europe.
Land also provided geographic mobility. Historian John Hirst points out that early Australia was characterised by squatters who journeyed inland, and bushmen who moved readily between country and city. He contrasts this with the more static world of Europe by quoting the scene in Thomas Hardy’s The Mayor of Casterbridge. A young English couple are parting:
‘I’m sorry to leave ye, Nelly,’ said the young man with emotion. ‘But, you see, I can’t starve father, and he’s out o’ work at Lady-day. ’Tis only thirty-five mile.’ The girl’s lips quivered. ‘Thirty-five mile?’, she murmured. ‘Ah! ’tis enough! I shall never see ’ee again!’
Such a scene could never have been set in Australia.
Second came plentiful gold. When Edward Hargraves announced in 1851 that he had found gold in Bathurst, it started an avalanche. Over the next decade, the population nearly tripled and our national income almost quadrupled, as people flooded in to take advantage of Australia’s mineral wealth. The changes were felt most keenly in Victoria, whose population increased by a factor of seven in a single decade.
In 1852, Victorian Lieutenant-Governor Charles Latrobe wrote:
At this time the town and its suburbs, and the villages for several miles around Melbourne, notwithstanding the steady stream setting through it upon the road to the Gold Fields, are absolutely choked with the teeming population. The most extravagant rent is paid for the most indifferent accommodation, temporary or otherwise.
And yet it isn’t much of an exaggeration to say that central Melbourne is largely a product of the Gold Rushes, which continued until the late-1800s. The Royal Exhibition Building, opened in 1880, was modelled on the Duomo in Florence. By the end of the nineteenth century, Australians enjoyed the highest standard of living in the world.
Third came plentiful inventions. As US economist Tyler Cowen has argued, the first half of the twentieth century saw a massive upsurge in inventions. This era saw powerful motors and mass production; in transport, there were cars and airplanes; in communications, there were telephones and radios. In homes, domestic inventions included fridges, washing machines, while in offices there were typewriters and tape recorders. The combine harvester, invented in the late-nineteenth century and widely used in the early-twentieth century, caused Australian grain production to soar.
If it strikes you as odd to say that there was more global innovation in the first half of the twentieth century than today, then consider this thought experiment. Which would you give up first: your iPad, or your indoor toilet? Would you prefer to live in a world without Facebook, or one without Penicillin? In the United States, where most leading-edge inventions are registered, the number of patents per researcher has been falling for most of the twentieth century. Physicist Jonathan Huebner estimates that global innovation per person plummeted after the 1955. But for the first half of the twentieth century, Australia surfed the wave of global innovation to increase our standard of living.
Fourth came plentiful migrants. Prior to World War II, Australia took too few migrants. Our migration program excluded those of ‘yellow’ skin, and to our shame, we accepted just 5000 Jewish refugees. But after the war ended, the floodgates opened. At its peak, in 1949, Australia accepted 185,000 migrants into a population of 7.9 million. On today’s population, that would be equivalent to a migrant inflow of more than half a million people. Well over half of these migrants were from non-English speaking countries.
This was an extraordinary program. Relative to population, Australia’s post-war migration program was the largest sustained migration in the world – bigger than the US peak immigration era at the turn of the twentieth century. Many were sent to work on the Snowy Mountains scheme, which employed 10,000 men at its peak.
Political games were played. Visiting the European displaced persons camps in 1947, Immigration Minister Arthur Calwell reported that ‘Australia would be interested in the more youthful types of Baltic peoples who were capable of doing hard work… We preferred the horny hand of the sons of toil’. He was particularly keen that those on the first ship were blonde and blue-eyed, and so instructions were given to the Department of Immigration to select people from Latvia, Estonia and Lithuania.
For all the racial games that were played with public opinion, the simple fact remains that Australia benefited hugely from post-war migration. For once, the ‘tyranny of distance’ worked in our favour, as people who would never have otherwise moved thousands of kilometres from the country of their birth now wanted to flee as far as possible from the horror that had engulfed Europe.
In other cases, coming to Australia was accidental. The father of a friend of mine was born in a refugee camp in Germany in 1946, the son of Polish and Russian refugees. He was a few years old when his family hoped to emigrate to the United States. The Red Cross moved them by train down to Naples, and he was so excited that he constantly stuck his head out the window. A piece of soot got stuck in his eye, and when they got to Naples, the US immigration officials were worried that he had an eye infection that could be contagious, so they refused to take the family. ‘You might try the Australians’, he said, gesturing to officials in the other corner of the room. And that’s why my friend – some thirty years later – was born in Queensland rather than New Jersey. Like her, half of all Australians either have a parent who was born overseas or were born overseas themselves.
The fifth form of low-hanging fruit that Australia plucked was education. In 1900, education was not taken particularly seriously. The bulk of schools were one-teacher schools. Compulsory attendance laws had only just been enacted in some jurisdictions, and were poorly applied. On an average day, 3 out of every 10 children who were supposed to be at school were absent. Some states charged secondary school fees at the turn of the century, and in an appalling policy mistake, most states increased or reintroduced school fees in the 1930s. Even in 1946, less than 1 in 15 young Australians completed secondary school. Hardly anyone went to university. Today, around 4 in 5 young people complete secondary school. Among Australians aged 25-34, 35 percent have a university degree.
One way that labour economists like to summarise educational attainment is in terms of years of education. For example, someone who has finished primary school has 6 years; someone who has finished high school has 12 years, someone with a diploma has 13 years, and someone who has attended university has 15 years. On this measure, the average number of years of education among the working age population rose from 7 years in 1900 to 9 in 1950 to 13 in 1990. Since then, it’s increased modestly.
Rising education represents low-hanging fruit because education has such a large payoff. On average, another year of education boosts earnings by 10 percent, and there’s no evidence that the economic returns to education have declined as the level of education has risen. We also have good evidence that education pays off in non-economic ways, such as through better health, more happiness, less crime, and more civic activity.
The sixth form of low-hanging fruit is the twenty-first century mining boom. So much ink has been spilled on this topic that I won’t say much today. For reasons entirely outside the control of our miners, world commodity prices have tripled over the past decade. The terms of trade recently reached a 140-year high. Urbanising China and India need steel to make their skyscrapers, and Australia happens to be the world’s biggest producer of iron ore, and a major producer of coking coal. At present, we export iron ore at the rate of 4 tonnes a second.
Treasury official David Gruen recently noted:
The mining and mining-related sectors, which together account for around 20 per cent of the economy currently, were expected to contribute more than two-thirds of this real GDP growth in 2011-12, while the 70 per cent of the economy not directly benefitting from the resources boom was expected to contribute less than a third. … Therefore, while the 2011-12 Budget forecasts imply quite good aggregate real GDP growth, around 70 per cent of the economy is expected to grow at around 1 per cent.
And yet compared with the 1970s terms of trade shock, the benefits of this mining boom are flowing more broadly through the economy. Inflation is low, unemployment has dropped during the mining boom, and even the dispersion of unemployment has fallen. Moving from the old royalty regime to a profits-based mining tax means that when prices rise, tax revenue goes up too. In an environment where parts of the non-mining sector are suffering from ‘Dutch Disease’, this seems a reasonable approach.
The New Productivity Agenda
So Australia picked six pieces of low-hanging fruit: plentiful land, the Gold Rush, abundant inventions, post-war migration, mass education, and the current mining boom. These weren’t all dumb luck; we also made some good policy decisions along the way. In the post-war era, Australia benefited greatly from far-sighted economic reforms such as the scrapping of White Australia, the HECS-funded expansion of universities, floating the dollar, tearing down the tariff wall, enterprise bargaining, and replacing a patchwork of sales taxes with a GST.
The question now is: what next? How do we make sure that our nation continues to prosper economically?
In my view, the only way of ensuring that Australia continues to enjoy rising living standards, is to find ways of raising our productivity. To most economists, the relationship between productivity and growth is as natural as the link between clouds and rainfall. We regard productivity – producing more output with the same inputs – as the main driver of long-run growth.
But from my experience, that’s not the way some of my non-economist friends regard productivity. Scarred by a bad boss who said ‘you should work smarter’ when he meant ‘you should work harder’, some of my friends hear the word ‘productivity’, and immediately feel the hackles rise on the back of their necks.
Yet there’s nothing perverse in the idea of productivity. Productivity simply means being able to do tasks more effectively. In this sense, we’ve all become more productive over our lives. As children, we learn to become better readers – absorbing more information in the same amount of time. When we move into our own homes for the first time, we quickly become better at doing household chores. And after a decade in the workforce, most of us make fewer mistakes in our jobs than we did in the first year.
Productivity growth was lousy in the 2000s, but we can learn something from the previous decade. During the 1990s, Australia managed to double our rate of productivity growth. According to the Productivity Commission’s Dean Parham, there were three main drivers of this increase: 50 percent was due to us having a more open economy, 30 percent to more research and development, and 20 percent to the information technology revolution.
Today, two major productivity challenges for Australia are to keep our economy open to the world, and to boost the quality of our education system.
Australia must pursue openness because our future lies in economic engagement with the world. In terms of migration, Australia benefits when new migrants bring their ideas. But we also benefit when people born in Australia spend time overseas and then return. For the brief period when I headed the economics program at the Research School of Social Sciences, I remember noticing that only one of the approximately 30 researchers was born and had studied in Australia. Everyone else was either foreign-born, or had completed their PhD overseas.
In terms of trade, Australia needs to continue to pursue open markets internationally. Just as we benefited by taking the rocks out of our harbours, we need to encourage others to do likewise. In the 1980s, we established the Cairns Group of agricultural free-trading nations, and in the 1990s, we set up the APEC leaders’ meetings. Now, because momentum has stalled in the consensus-based World Trade Organisation, Prime Minister Julia Gillard and Trade Minister Craig Emerson are working on a new pathway to progress the Doha Round: a Trans-Pacific Partnership. A stepping stone to the APEC goal of a Free Trade Area of the Asia Pacific, the Trans-Pacific Partnership allows other countries to ‘bolt on’ at a later date.
We also need to be honest with Australians about foreign investment. While at least one National Party Senator has claimed that there has been ‘an exponential increase’ in agricultural foreign investment, the facts show otherwise. Between 1984 and 2010, the area of farmland that is foreign-owned rose from 5.9 percent to 6 percent. Rural Australians enjoy more jobs and better pay as a result of foreign investment – just as they have done since CSR helped establish our sugar industry in 1855.
The other challenge is to boost the performance of Australia’s educational institutions, particularly our schools. In research with Chris Ryan, we found that Australian numeracy scores had failed to improve from 1964 to 2003. Since then, Australia’s scores on the international PISA test have fallen. At the same time, the academic aptitude of new teachers – relative to their classmates – has declined. One possible reason for this is that Australia chose to focus on reducing class sizes rather than attracting the best teachers. Over the past quarter-century, class sizes have been cut by about 10 percent, while teacher salaries relative to other professional salaries have also been cut by about 10 percent.
I said earlier that increasing the quantity of education was low-hanging fruit. By contrast, increasing the quality of education is fruit that’s on a higher branch. But it’s a particularly attractive goal, because it doesn’t involve the same sacrifice. More time in school means less time doing other things. But raising the quality of schooling means packing more learning into every year.
If we’re learned anything from the economics of education over the past few decades, it’s that the relationship between spending and outcomes is extremely weak. You can see this over time in Australia (where spending has risen but scores have flatlined), and you can also observe it by using the MySchool data to compare spending and results. More money creates the potential for improvement, but the relationship is far from automatic.
So the most interesting questions in education are about how money is spent. Among the reforms that Education Minister Peter Garrett has been pursuing in this area are principal autonomy (through the Empowering Local Schools program), Trade Training Centres to teach new skills and boost retention rates, and performance pay to reward the best teachers. I have a particular interest in performance pay, having given a keynote address at an economics of education conference in Munich, in which I summarised what we know about the economics and politics of merit pay. From that, I concluded that anyone who says that merit pay ‘always works’ or ‘never works’ hasn’t spent enough time engaging with the literature. There are clearly merit pay models that are successful, and those that are unsuccessful. The challenge is to build the evidence base to the point where we can confidently tell the difference.
Writer George Megalogenis describes populist politicians who oppose economic reform as ‘playing with the kryptonite’. Both sides of Australian politics must take our share of blame for populist policies. In the 1980s and 1990s, there were those (including the current Leader of the Opposition) who opposed the float of the dollar. And yet without a floating dollar acting as a shock absorber to international events, it’s easy to imagine that the Asian Financial Crisis, the US tech wreck or the mining boom could have had a disastrous impact on the domestic economy.
The same can be said of Labor’s flirtation with populism in the 1990s. In the 1998 election campaign, we promised to abolish the Productivity Commission – the very same body that has now done the essential groundwork for a National Disability Insurance Scheme. In 1999, we also opposed the Goods and Services Tax, a reform that Paul Keating had supported the previous decade. I can’t imagine Labor now promising to go to an election to untax services and reinstate the patchwork of sales taxes that existed in that era.
We can also see more than a hint of populism in Tony Abbott’s campaign against market-based mechanisms such as water buybacks in the Murray-Darling Basin and a price on carbon pollution. And yet we shouldn’t be surprised that these campaigns are finding some receptive ears. In public life, it has always been easier to scare people than honestly inform them. It’s just that most of us choose not to walk the fear road.
Today, animal life on the Galapagos Islands is thriving again. Three decades after receiving World Heritage Listing, the World Heritage Committee has removed the Galapagos Islands from its list of precious sites endangered by environmental threats or overuse. This didn’t happen by chance: it has been due to the hard work of the park service, the Charles Darwin Foundation and the Ecuadorian Government. There are still invasive species, but there are good programs in place to manage them.
After a lucky start, nature on the Galapagos Islands now thrives because of good management, and planning with an eye to the future. Perhaps there’s a lesson in that for the Lucky Country too.
* I am grateful to Peter Bentley for inviting me to give this talk, to the Parliamentary Library for valuable research assistance, and to Macgregor Duncan, John Edwards, Rick Kalowski, John Quiggin and others for insightful comments on an earlier draft. Naturally, they should not be assumed to agree with all its conclusions. The notion of ‘low-hanging fruit’ draws on Tyler Cowen’s excellent book The Great Stagnation.
 This section draws on Tyler Cowen (2011), The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Kindle Edition.
 John Hirst, 2009, Sense and Nonsense in Australian History, Black Inc, Melbourne, p.27
 Angus Maddison, The world economy, Organisation for Economic Co-operation and Development. Development Centre, Vol 1, pp.449 and 462
 C.M.H Clark (ed). 1962, Select Documents in Australian History 1851-1900, Angus and Robertson, Sydney, pp.89-90. Another interesting document in this volume is a letter by Tasmanian Lieutenant Governor William Denison, expressing his concerns that the Gold Rush would result in the mass emigration of Tasmanian agricultural labourers. It goes to show that all mining booms create multi-speed economies.
 Angus Maddison, 2010, Statistics on World Population, GDP and Per Capita GDP, 1-2008 AD (Horizontal file), University of Groningen
 Tyler Cowen (2011), The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Kindle Edition.
 Tyler Cowen (2011), The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, Kindle Edition, Location 200.
 Jonathan Huebner, 2005, ‘A Possible Declining Trend for Worldwide Innovation’, Technological Forecasting and Social Change, 72, p.982 (quoted by Tyler Cowen).
 Andrew Leigh, 2010, Australian Social Capital Database (Excel file), available at www.andrewleigh.org.
 Andrew Leigh, 2010, Australian Social Capital Database (Excel file), available at www.andrewleigh.org.
 Brad Collis, Snowy, the Making of Modern Australia, 1990, Hodder & Stoughton, Sydney, p.195
 Quoted in ABC, 2001, ‘100 Years: The Australian Story’, Episode 2: Rise And Fall Of White Australia, http://www.abc.net.au/100years/EP2_4.htm
 Statistics in this paragraph are drawn from Gerald Burke and Andrew Spaull, 2001, ‘Australian Schools: Participation and Funding 1901 to 2000’, Year Book Australia, 2001, ABS, Canberra (available at http://www.abs.gov.au/Ausstats/abs@.nsf/0/A75909A2108CECAACA2569DE002539FB?Open). Estimate for 1946 is based on an ACER survey, which found that 7 percent of youth aged 16-17 were enrolled in school. This suggests a year 12 graduation rate of less than 1 in 14.
 ABS, 2011, ‘Year 12 Attainment’, Australian Social Trends, Mar 2011, Cat No 4102.0, ABS, Canberra.
 ABS, 2011, Education and Work, Australia, Cat No 6227.0, ABS, Canberra, Supplementary Table 8.
 Christian Morrisson and Fabrice Murtin, 2009, ‘The Century of Education’, Journal of Human Capital 3(1): 1-42
 Andrew Leigh, 2008, ‘Returns to Education in Australia’, Economic Papers: A journal of applied economics and policy, 27: 233–249; Mick Coelli and Roger Wilkins, 2009, ‘Credential Changes and Education Earnings Premia in Australia’, Economic Record, 85(270): 239-259.
 See for example Philip Oreopoulos, 2007, ‘Do dropouts drop out too soon? Wealth, health and happiness from compulsory schooling’, Journal of Public Economics, 91(11–12): 2213–29.
 David Gruen, 2011, ‘The macroeconomic and structural implications of a once-in-a-lifetime boom in the terms of trade’, Australian Business Economists, 24 November 2011. Eagle-eyed readers will notice that 20 and 70 do not add to 100 percent. This is because Gruen is discussing the 90 percent of the economy that is non-agricultural.
 For statistics on Australian productivity growth since the 1960s, see House of Representatives Standing Committee on Economics, 2010, Inquiry into raising the productivity growth rate in the Australian economy, House of Representatives, Canberra, Figure 5.1. Over a longer period, see Broadberry, S. N. and Irwin, Douglas A., 1962- (2007) ‘Lost exceptionalism? : comparative income and productivity in Australia and the United Kingdom, 1861-1948’. Economic Record, Vol.83 (No.262). pp. 262-274.
 One economist who shares this view is John Quiggin, who contends that the 1990s were a productivity ‘mirage’, on the basis that output rose only through an increase in effort (see Quiggin, ‘The Lost Golden Age of Productivity Growth?’). The difficulty with this argument is that shifting the denominator from hours to effort introduces significant new measurement problems.
 Dean Parham, 2004, ‘Sources of Australia’s Productivity Revival’, Economic Record, 80(249): 239-257.
 Craig Emerson, 2012, ‘Australia China Business Council 2012 Report Launch - Benefits to Australian Households of Trade with China’, National Press Club, 3 April 2012.
 Leigh, A. and Ryan, C. (2011) 'Long-run trends in school productivity: Evidence from Australia', Education Finance and Policy. 6(1): 105-135. For example, one question asked of year 8 students was ‘In the division 24.56/0.04, the correct answer is: (a)0.614 (b)6.14 (c)61.4 (d)614 (e)6140’. The share of students who correctly answered (d) was 39% in 1964, 38% in 1978 and 23% in 1995.
 Leigh, A. and Ryan, C. 2008, 'How and why has teacher quality changed in Australia?', Australian Economic Review, June 2008, vol. 41, no. 2, pp. 141–59.
 Andrew Leigh. 2012. ‘The Economics and Politics of Teacher Merit Pay’ CESifo Economic Studies, forthcoming http://cesifo.oxfordjournals.org/content/early/2012/03/07/cesifo.ifs007.abstract