In the SMH News Review section today, I’ve done ‘The Essay’ – a shorter version of my McKell Institute speech.
Dumb Luck – Smart Future, Sydney Morning Herald, 9 June 2012
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 has a cooling effect, making them an ideal breeding ground.
The islands are volcanic – so all animal life on the Galapagos Islands 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. But I think it’s still worth talking about the role that fortune 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.
The 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. Samuel Terry, who was transported to Australia for stealing stockings, ended his life as the richest man 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. The Royal Exhibition Building in Melbourne, 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, cars and airplanes, telephones and radios, fridges and washing machines, 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.
Fourth came plentiful migrants. Prior to World War II, Australia took too few migrants. 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, and many were sent to work on the Snowy Mountains scheme, which employed 10,000 men at its peak.
The fifth form of low-hanging fruit that Australia plucked was education. Even in 1946, less than 1 in 15 young Australians completed secondary school. Today, around 80 percent of young people complete secondary school, and 35 percent get a university degree. Rising education represents low-hanging fruit because education has such a large payoff. On average, another year of education boosts earnings by 10 percent.
The sixth form of low-hanging fruit is the twenty-first century mining boom. For reasons outside the control of our miners, world commodity prices have tripled over the past decade. 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.
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 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.
To raise living standards in the future, we need to boost productivity. When I say this to my non-economist friends, many feel the hackles rise on the back of their necks. Perhaps this is because they’ve been scarred by a bad boss who said ‘you should work smarter’ when he meant ‘you should work harder’. Yet productivity simply means being able to do tasks more effectively. In this sense, we’ve all become more productive over our lives. If you’ve worked for some time, I’ll bet you make fewer mistakes now than you did in your first year.
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. Australia benefits when new migrants bring their ideas; and when people born in Australia spend time overseas and then return. 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. We also need to be honest with Australians about foreign investment. 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. Chris Ryan and I 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 fallen by about 10 percent.
I noted 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, since 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. More money creates the potential for improvement, but the relationship is far from automatic. Among the reforms that the Australian Government has been pursuing are principal autonomy, 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 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. Most of us simply 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. 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.