Credit where it’s due: 12 years of Paul Keating between 1983 and 1995 set Australia up for a quarter of a century, so far, of recession-free growth.
He was 20-30 years ahead of his time, and now the rest of the world has had to accept that microeconomic reform is the way to go.
The free trade agreements that Andrew Robb has negotiated with Japan and Korea should be seen mainly as concessions by those countries that they have to lower trade barriers to force their industries to become more competitive.
How could they keep ignoring the success of Australia’s unilateral lowering of trade barriers in the ‘80s and ‘90s? They couldn’t -- and have agreed to expose their coddled farmers to more competition in return for a meaningless reduction in Australia’s car tariff that would have happened anyway.
China is also dramatically reforming, as is southern Europe, and America has got its debt under control.
As a result, and notwithstanding the IMF’s slight lowering of its global forecasts last night because of big subtractions in Latin America, the Middle East and Africa, the world stands on the threshold of something only Australia and China have achieved over the past few decades: a long period of genuine, sustained productivity-based growth.
Australia’s economic growth is now almost entirely based on exports (90 per cent of it in 2013).
The bilateral trade agreements being negotiated by the Abbott Government, hopefully to be followed soon by the signing of the big Trans-Pacific Partnership, will confirm Australia’s status as a trading nation.
These trade deals will result in big increases in food exports, adding to the massive LNG exports that will soon overtake iron ore and coal.
Asia’s crony capitalism has meant that these countries have been far more willing to reform their labour markets than their financial systems or trade barriers.
All of Japan’s growth occurred up to 1990 because of the lowering of labour costs followed by a property and stockmarket bubble.
Since then, zero growth has accompanied zero reform until the election of Shinzo Abe in 2012. He seems to understand that Japan must now improve its capital productivity through financial sector reforms and the lowering of trade barriers.
China took over from Japan around 1990 at the forefront of labour productivity improvement by moving millions of people from farms to city factories, thereby multiplying each individual’s output at least fivefold.
So while Australia’s economy was growing in the 90s and 2000s on the back of Paul Keating’s capital and labour productivity reforms, China achieved sustained double-digit growth purely from improved labour productivity.
No Asian nation has successfully tackled capital market reforms for the simple reason that the rich corporate and communist elites running those countries wanted to protect their rents. Even the 1997 Asian financial crisis didn’t really change things, beyond some opening up of foreign exchange markets.
China has now come to the end of what it can achieve through labour productivity gains. Like Japan in the 1990s, it’s now having a debt-fuelled property bubble. But unlike Japan, most of the debt is being spent on infrastructure that will help prolong labour productivity gains, with some debt also inflating real estate prices.
But President Xi Jinping is now focusing on capital productivity by deregulating financial markets in similar ways to Australia during the 1980s, although he’s proceeding rather more slowly than Keating did.
The Shanghai free-trade zone is the key to China’s reform plan: it will be the experimental test tube for capital market deregulation and removing trade barriers. Under Paul Keating, of course, Australia as a whole was the experiment. He was able to do this because he didn’t represent rich vested interests.
Even though the Doha Round of GATT in the World Trade Organisation has been a dismal failure, trade liberalisation is now spreading like bushfire through a multitude of FTAs and multilateral deals like the TPP.
Meanwhile, the OECD reported this week that European countries are starting to turn the corner because public finance reforms and other structural are bearing fruit.
They’re been helped by a collapse in bond yields, and are a long way from implementing the sort of competition reforms that Paul Keating kicked off in 1995, but a lot of progress has been made.
And more will come: persistently high unemployment is leading to labour market reforms as well as simply bringing down real wages.
And now the United States has got its debt under control.
The household debt service ratio has been cut to 10 per cent -- back to where it was in 2002 -- and the government deficit has been cut from 13 to 4 per cent of GDP -- about the same as nominal GDP growth. It’s possible that President Obama will even record a surplus before his second term ends.
In addition to that, America’s unit labour costs have been consistently falling for years. Along with lower energy costs due to oil and gas fracking, that is underpinning the restoration of US manufacturing.
Australia now has work to do on its own labour productivity, as well as its own structural budget deficit. The next decade or two will be a very good time to be the mercantile nation that Australia has become, thanks in part to those 12 years of Paul Keating.