Andrew Leigh

In the latest issue of the Journal of Economic Literature, I review Ian McLean's terrific book on Australian economic history.

Review of Ian McLean, Why Australia Prospered: The Shifting Sources of Economic Growth
Journal of Economic Literature, 2013

In the 1990s, Polish journalist Ryszard Kapuściński was asked by his fellow citizens: ‘You’ve been all over the world. Isn’t there a country somewhere that has found a middle way – where market forces rule, but where the government looks after the kids and the old and the sick and the poor? Somewhere where the bosses give the workers a reasonable deal? Somewhere where people help each other instead of just looking after themselves?’ And Kapuściński told them: ‘Yes, it’s called Australia.’ (quoted in Knightley, 2001, 31)

In the scheme of things, Australia has fared pretty well. In the late-nineteenth century, it had the highest per-capita incomes in the world. In the early-twentieth century, it was the first country to allow women to both stand for office and vote (and can on this basis lay claim to have been the world’s first democracy). In recent years, it has defied the global slump, keeping unemployment below 6 percent and growing 14 percent since the end of 2007. In 2013, the OECD’s Better Life Index gave Australia top spot for the third year in a row.

Part of this success was luck. As Ian McLean points out, Australian convicts had similar education levels to the average Briton. Nineteenth century Australia benefited from two commodities – wool and gold – that required little processing and had high value for their weight. From the settlers’ viewpoint, land was free (Indigenous Australians saw the situation differently). Sheep were a self-replicating capital stock, requiring few additional inputs. Although a 13,000 mile ocean voyage separated the two countries, Australia’s economy was almost perfectly complementary to that of Britain, its colonial power.

Nineteenth century Australia also benefited from its openness to migration, which saw thousands of men travel to the antipodes to make their fortune. Because men have higher labour force participation rates than women, one driver of Australia’s affluence was surely its gender ratio. In 1890s Australia, there were 115 men for every 100 women (by contrast, China today has 106 men for every 100 women).

Then came the slump. The 1890s saw Australia hit by a severe drought. In the gold mining colony of Victoria, the housing bubble popped. As tax receipts fell, colonial governments were obliged to engage in Hooverite economics – cutting back spending in order to keep up with their debt repayments. (Painful as this was, McLean argues that it had a key advantage over the Argentinian approach of devaluation and debt restructuring, which was to maintain Australia’s creditworthiness in the eyes of the global financial markets.)

The two wars had markedly different impacts on Australia. World War I killed nearly one in 40 Australian men, and real GDP slumped by one-tenth. A nation dependent on loans and capital imports was badly damaged by the shipping restrictions of World War I. Indeed, McLean even goes so far as to speculate that the costs of World War I might have outweighed the benefits that colonial Australia had enjoyed from being part of the British empire.

By contrast, World War II delivered a positive shock to the Australian economy. Because more of the fighting took place in the Pacific theatre, there was a demand for Australian-made equipment such as aircraft and ammunition, boots and boats. This spurred industrialisation, with the manufacturing share of GDP rising from 19 percent in 1939 to 26 percent in 1949. Thanks to strong growth and the Lend Lease program, the government after World War II could start bringing down its debt load (which exceeded 100 percent of GDP for most of the first half of the twentieth century).

Although Australia slipped down the relative GDP ranking from the 1950s to the 1970s, McLean takes a benign view of this period. While others have suggested that underinvestment in human capital hampered growth in the post-war era, he prefers the view that other developed countries in this period were merely engaged in ‘catch-up’ growth. This strikes me as reasonable enough, yet it still leaves open the question as to why Australia fell off the international production possibility frontier. One answer to this must surely be that the ‘education revolution’ reached Australia a generation after it came to the United States.

Australia’s fortune is illustrated by the counterfactual histories that McLean briefly sketches. One is if the pastoral landowners (known as squatters) had dominated politics, entrenching a highly unequal distribution of land and restricting the franchise. A Latin American-style ‘squattocracy’ was only averted because of the influence of the British government in the Australian political system. By resisting the domination of the squatters, the colonial power effectively gave the upper hand to the liberal and democratic forces in nineteenth century Australia.

Another counterfactual history is elite domination of the mining sector. Perhaps for reasons of administrative simplicity, the colonial authorities initially chose to prescribe an extremely small claim size for goldminers: eight feet by eight feet. This spread the ‘lottery’ of gold mining across a large group of self-employed miners, who then helped spur the transition towards democracy. The alternative would have been much larger claim sizes, with mining carried out by wage labour. (In a similar vein, Acemoglu and Robinson 2013 recently contrasted Australia’s experience with that of Sierra Leone, where an elite monopoly over diamond mining set the stage for authoritarian rule after independence).

A third counterfactual is if the northern part of Queensland (Australia’s Texas) had been successful in creating another colony in the 1880s. McLean suggests that such a colony might have consisted of an aristocracy of white planters relying on indentured labour from the nearby Pacific islands. Such an experiment would have looked more like the Caribbean, or the antebellum south, and might well have produced similarly poor long-run growth outcomes. The decision by British colonial authorities to veto such a colony was regarded as a minor one at the time, but turned out to be an important turning point in Australian economic history.

McLean’s telling of Australian economic history is not only fascinating, it is also fresh. McLean dates the book’s genesis to time spent visiting the University of California Berkeley, and his analysis is thoroughly grounded in the US economic history literature. At times McLean is let down by the available data, as when he notes that estimates of the Indigenous population at the time of British settlement 1788 range from 300,000 to 1 million. And I occasionally felt that he might have pushed the available data a little further – for example, by comparing the cost advantages of Australian convict labour with estimates of the cost advantages of slave labour in the US during the same period (Fogel and Engerman 1974). But these are minor quibbles on a book that better integrates Australia’s story into mainstream economic history than any before it.

McLean also relishes critiquing some of the established historical theories about Australia’s development. He finds little evidence that the federation of the six Australian colonies in 1901 boosted economic growth, and questions the widely held view that high tariffs impeded post-war growth. Rejecting Blainey (1966), McLean argues that ‘distance was never a tyrant’ (p.250). Contrary to Kelly (1992), he contends that the economic liberalisation of the 1980s was not a dismissal of the ‘Australian settlement’ policies adopted at the start of that century, but merely an inflexion point in the arc of reform.

This is a book that should be read by any economic historian looking at Australia as a case study or a counterpoint. If it has a fault, it is that it is perhaps too kind to Australia and its policymakers. Indeed, McLean’s generosity even extends to policymakers of the late-1970s, though his argument here seems to boil down to saying that Australian economic decision-makers of that era were no more inept than others around the world.

For a policymaker like me, the subtitle to McLean’s book (‘The Shifting Sources of Economic Growth’) points to a key challenge of economic policy. For all modern economies, the sources of prosperity are in continual flux. Collier (2010, 98) likens this process to ‘running across ice floes’ – an analogy that vividly explains the economic concept, while pointing to why the politics are so difficult. When my voters ask me ‘where will the jobs of the future come from?’, I’m keenly aware that they’re unlikely to appreciate a lecture on the inaccuracy of employment forecasting models. The truth is that many of today’s school leavers will probably end their careers in jobs that do not exist today. Yet that’s probably not the reassurance most parents are looking for from their politicians.

A careful reading of economic history points to the role that chance plays in determining nations’ economic futures. Indeed, looking at the role that good luck and sound economic management have played in Australia over the past two centuries, I would be inclined to give a modicum more credit to luck than McLean does. From good political institutions to plentiful natural resources, Australians have, in the memorable phrasing of Cowen (2011), eaten our share of low-hanging fruit. But it’s possible I’m being unfair to past generations of policymakers. After all, as any cricket fan knows, separating skill from luck in a long-running game can be frightfully difficult.

Andrew Leigh is former economics professor and a member of the House of Representatives in the Australian Parliament. His latest book is Battlers and Billionaires: The Story of Inequality in Australia (Black Inc, 2013).

References

Daron Acemoglu and James Robinson, 2013, ‘Economics versus Politics: Pitfalls of Policy Advice’, Journal of Economic Perspectives, 27(2): 173–192

Geoffrey Blainey, 1966, The Tyranny of Distance: How Distance Shaped Australia’s History, Sun Books, Melbourne.

Paul Collier, 2010, The Plundered Planet: Why We Must – and How We Can – Manage Nature for Global Prosperity, Oxford University Press, Oxford.

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.

Robert W. Fogel and Stanley L. Engerman, 1974, Time on the Cross: The Economics of American Negro Slavery, Little, Brown and Company, Boston.

Paul Kelly, 1992, The End of Certainty: The Story of the 1980s, Allen and Unwin, Sydney.

Phillip Knightley, 2001, Australia: A Biography of a Nation, Vintage, Sydney.