THE CASE FOR OPENNESSPosted September 07, 2016
Across the developed world, a new front has emerged in the war of ideas.
Open versus closed.
In the United States, Europe and recently in Australia, simple solutions are being proposed to solve complex problems.
And the simple solution is to put up more barriers, whether it be to trade or immigration, to goods and services or people and to let us run our own race.
When it doubt, pull up the drawbridge and stop things we don’t like coming in to our country, letting us return to a previous golden age, when all was good.
Of course, protectionism versus free trade is an old argument.
Immigration versus closed borders is an old argument.
But these arguments are being brought together in a new nativist populist crusade, an argument to build walls, literally and figuratively, against immigration and trade.
A populist crusade has been launched to capitalise on valid concerns, and the disappointment of millions rooted in the real issue of rising inequality and falling real incomes for many.
In the United States, Mexicans, Chinese and Muslims are blamed for contemporary US challenges.
In Britain, people were promised that isolation from the EU would result in more spending on health and more jobs for locals.
In continental Europe, Marine Le Pen circles the French presidency.
In Austria, the mainstream parties of both the centre-left and centre-right were excluded from the recent presidential ballot, beaten by an isolationist party of the right, and the Greens on the Left.
In Germany just days ago the right wing anti-immigration party received more than 20 per cent of the vote in Chancellor Merkel’s home state, outpolling even her own governing party.
Similar stories are playing out in Scandinavia, once the unquestioned home of social democracy.
And in Australia, we are living with the return of Pauline Hanson, her current attacks on Islam replacing her prejudices against Asians and Aborigines in the 1990s.
Others blame trade more than immigration.
The minor party space is crowded with adherents to the isolationist school of politics.
Today I want to make the case for openness.
The case for trade and for immigration.
For an outward looking, modern nation, at peace with itself and comfortable with the world around us.
But I also want to do more today.
I want to talk about how we, the believers in a connected world can win this debate and what we need to do to meet the concerns of those who are hurting, and who are understandably, but mistakenly, interested in the chimera of a solution proposed by those who are speedily trying to raise the national drawbridge, right around the world.
Firstly, let’s, in an Australian context take on the arguments of those who seek to turn our vast, outward looking island into a medieval fortress.
Australia is now in the 26th year of uninterrupted economic growth.
The longest in our history by far, and a remarkable achievement for any developed country.
We may quibble about what particular reforms were responsible for this growth and how much was the result of being fortunate enough have been blessed by geology and geography, domiciling a range of rocks and minerals in demand to fuel China’s industrialisation.
But one thing is certain. None of that growth was due to putting up barriers.
The Hawke-Keating reforms of floating the dollar, allowing foreign banks to compete in Australia, liberalising trade tariffs and overhauling competition policy; all of these were focussed on opening up our economy, and all have played a vital role in the success we have all enjoyed as a nation.
If ridding our economy of these barriers was a big part of the reason for our economic success, how could restoring or even worse going beyond them possibly be part of the solution?
This is especially the case given that now, more than ever before, our open economy is well placed to capitalise on its openness in one of the fastest growing region of the world.
Prior to 1980s, Australia exported around 13 per cent of its GDP. Today we export around 20 per cent.
The 50 per cent increase in our trade intensity over a generation has been intrinsically linked to our growth and prosperity.
And with Australia’s service exports to China growing at around 20 per cent in 2015, we have much to look forward to, if we get our policy settings right.
But it is not just about dry growth statistics.
This economic growth, more than a quarter of century in duration, has improved our lives.
Living standards – as measured by national income per person – have grown by 60 per cent over the last 25 years.
The real net worth of Australians has risen more than three-fold from around $2½ trillion in the early 1990s to around $8½ trillion today.
And it’s not just about the surge in wealth and incomes – it’s about how far a dollar can take you.
Since the market opening policies of the 1980s, the costs of some household goods have tumbled, in part due to the cheap imports we get from countries which can produce them more affordably.
A quick glance of the consumer price index shows that average prices in Australia have grown at around 2½ per cent each year over the last 25 years.
Compare this to the average annual price increases of 7 per cent prior to the 1990s.
Goods once seen as luxury items are now commonplace in most households around Australia.
Ask someone if they would like a 90 per cent discount on purchasing a new computer or a new TV.
The answer is likely to be a resounding yes.
The cost of goods like computers, TVs and stereos has declined by 90 per cent over the last 25 years, putting them in the reach of lower income families for the first time.
Australians now pay less now for big ticket items like cars than they did in the early 1990s.
It is estimated that the tariff cuts put in place by the Hawke/Keating Government have put nearly $4000 into the pockets of average Australian households.
But it’s not just here at home where the benefits of globalisation have been felt.
A recent 2015 World Bank report shows that for the first time ever, global poverty is set to fall below 10 per cent.
The number of people living in poverty fell to 702 million people in 2015, or 9.6 per cent of the global population.
Despite the weak global economy, 200 million people have been lifted out of poverty since 2012.
This should be celebrated.
But this continuing success is under threat.
Economies around the world ravaged by the worst recession since the Great Depression are still struggling to recover from a crisis 8 years prior.
And some of these countries have already reverted inwards.
As a recent Lowy article points out that in the decades before the global financial crisis, international trade grew at roughly twice the rate of economic growth.
Since then it has barely kept pace.
Australia is also experiencing this phenomenon. It has been common in Australia’s economic history for trade to grow faster than the economic growth rate.
This has not been the case in recent years. Lately, two-way trade volumes have been growing at or below the growth rate of our GDP.
This is not a good sign for Australia. Our 26 years of uninterrupted economic growth are not guaranteed to continue.
As McKinsey has pointed out, Australia is the world’s 12th largest economy but it’s only the 21st largest trader.
We are one of just three of the world’s largest 15 economies who are not also in the top rank of traders.
If we are going to maintain our position as a top 20 world economy, we need to be looking at ways of trading more, not less.
Protectionism is a key driver of this international decline in trade intensity.
As of June 2016, less than a quarter of the 1583 trade-restrictive measures introduced by G20 countries since 2009 have been eliminated.
We are losing a key driver of economic growth at a time when we can least afford it.
But it’s not just open trade that has been critical to our success; immigration has also played an important role.
Now, we all know how simple it is for populists to blame immigration for any nation’s problems.
They take our jobs, they bring crime, good but scared citizens are told.
In the US election campaign, crimes sometimes committed by illegal immigrants have been referred to as “one more child to sacrifice on the altar of open borders”, ignoring of course the fact that immigrants, illegal or otherwise, in Australia or the US are neither more or less likely to commit crimes than any other resident.
But in the Australian context, immigration has been a vital part of the success of the post war years.
Migrants come here and work hard.
As a 2015 Crawford School report pointed out “on average, migrants have been more productive than non-migrants – as measured by earnings. They have also increased their productivity more rapidly than non-migrants”.
And Bob Gregory of the ANU posited recently in a presentation that “our extra ordinary economic success since the GFC owes a great deal to the increased level of national income produced by the unforeseen population expansions generated by our new immigration program”.
He also suggests that “it is possible that the economic magnitude of the immigrant policy change over the last decade has been as large as the mining boom impact”.
And as the baby boomers increasingly move into retirement, the benefits of migration are likely to be even greater than the previous few decades.
The Migration Council estimates that over the next 35 years, migration will lead to a 5.9 per cent gain in GDP per capita, which will flow through to an even larger gain in living standards.
Migrants tend to be younger than the existing population which means they have a greater capacity to work and participate in the economy.
Younger workers are also better equipped to help Australia lift itself out of the last decade’s productivity slump.
As the incoming Governor of the RBA has pointed out, on average, new immigrants to Australia are almost 10 years younger than the average Australian and that individuals in their 30s and 40s have a higher probability of being entrepreneurial.
To directly quote Philip Lowe:
“the increasing diversity of our population means that we have a constant influx of people coming to our shores, bringing with them new perspectives, new skills and new ideas”
Notwithstanding the economic contribution Australia’s migration program has played following the post war years and will continue to play, it would be naïve to think migration isn’t a hot button issue at times.
Perhaps not surprisingly concerns about migration issues tend to ebb and flow with the prevailing economic circumstances.
A 2015 Scanlon Foundation Survey found that since the early 1970s the proportion of people that think the immigration intake is ‘too high’ has moved broadly in line with movements in the national unemployment rate.
This might explain the first rise of Pauline Hanson back in 1996 when unemployment was close to 10 per cent in Queensland.
It might also explain her second coming as Queensland struggles with the end of the mining construction boom with jobs being shed and the unemployment rate sitting well above the national average and on the rise.
Ongoing economic success not only delivers real and tangible increases in living standards, but helps to preserve the foundations – openness, free trade, immigration – which have underpinned this success.
And at a time when we need to improve both our understanding of the great economies of Asia, and our literacy in Asian languages, most of our improved understanding and literacy is actually coming from immigration –not education.
So let’s say now that we, in this room, agree on the benefits of resisting the forces of isolation. How do we win the argument?
Today I want to suggest three essential elements to this discussion:
1) Winning the evidence war
2) Winning the passion war
3) Winning the fairness and inclusivity war.
Firstly, the evidence war.
I’ve described the battle in this speech as being between being open and closed.
In my view, it could just as easily be described as a battle between evidence and emotion.
Between fact and passion.
As a precursor, as an essential element, we need to calmly and clearly outline all the evidence in favour of a modern, open approach.
When advocates of closing borders to goods and people start engaging in rhetorical flights, with little grounding in fact or evidence, we need to point out clearly the holes in their arguments.
This is partly about setting out the clear benefits of openness that have been delivered to the Australian economy over the past quarter of a century.
But it’s also about pointing out what is creating pressures in our economy which are causing real and valid concerns for many hundreds of thousands.
Take manufacturing jobs and trade for example. The nations of the developed world are shedding manufacturing jobs, and have been for many years.
In Australia, the share of manufacturing activity as a proportion of the economy has roughly halved since the 1980s.
But the story is much more complicated than simply blaming trade for this.
Trade is arguably not the main culprit when it comes to the loss of manufacturing jobs.
Economic theory tells us that while countries benefit greatly from freer trade, some inevitably lose as people, businesses and regions are forced to move through difficult and sharp economic adjustments.
But the rise of automation and technology, which have of course improved efficiency and productivity, have played their role in making thousands of manufacturing jobs obsolete, whether here in Australia or abroad.
Trade is confined to threatening businesses and industries which have become uncompetitive.
Automation threatens the jobs of all working people.
The new wave of globalisation comes with faster and more instantaneous dissemination of information and services, services which can be traded at light speed with the tap of a keyboard.
New technologies are being diffused and adopted at a far more rapid rate than during previous periods.
Stephen Roach points out it took only five years for 50 million US households to begin surfing the Internet, whereas it took 38 years for a similar number to gain access to radios.
The rapid absorption of automation and new technological knowhow is likely to make it even more difficult to identify the people and industries that are, and will be, inevitably disrupted and displaced by these developments.
The technology revolution is under our own eyes changing the nature and stability of employment.
Take recent analysis from the Department of Industry which shows that young companies less than two years old created nearly all of the 1.6 million net new jobs in Australia from 2003 to 2014, with large companies making little contribution to total employment over the 11-year period.
Now middle income earners and blue collar workers are facing real pressures, I will say more about that shortly, but if we are to correctly identify the prognosis, we have to be accurate about the malady.
How can erecting trade barriers be the right response to the inexorable and rapid rise of technology?
Surely the conversation should be about keeping up with change, and better identifying the cohort of people and industries struggling with the changes.
As the Economist magazine has argued “The case for free trade is overwhelming. But the losers need more help”
More investment in relevant education, training and industry plans has to be the conversation instead of returning to the old days of hoping that protection can prop us up, when it actually drags us down.
Likewise, pretending that we should leave people adversely affected by technology or trade to fend for themselves in a rapidly changing economy is also a recipe for disaster.
Identifying how our economy benefits from trade is crucial for securing community acceptance, particularly those living in regions where the benefits of trade may not be apparent.
We will not win the evidence war without the evidence.
In a recent G20 Monitor article David Gruen made a strong case for “showing reliable, transparent evidence that describes how such reform will support businesses and communities at a local level”.
I concur with David on this point.
In fact, I think there is a case for commissioning the Productivity Commission or similar body to report regularly on how trade reforms, together with new developments in technology and automation benefit people, businesses and communities around Australia.
This could be an adjunct to the existing Trade and Assistance review – which focuses more on existing industry assistance – or a new standalone report.
This should not just be about dry economic statistics, but also other indicators which are easily digestible to the Australian community.
This work would importantly also allow us to gain a deeper understanding of the people, industries and regions that are adversely affected or displaced from the increasingly rapid change from the new wave of globalisation.
This would put us in a better position to ensure existing support mechanisms like good quality education and retraining and relocation programs are fit for purpose in a rapidly changing world.
With a land mass three quarters the size of the United States, but with a population less than a tenth the size, it’s arguably even more important to understand these trends in Australia given the higher constraints around labour mobility.
This initiative would help us win the evidence war.
Now, to the passion war.
Facts are essential, but they are not enough.
Proponents of nativist populism, whether they be British, American or Australian, have access to and use effectively powerful emotions of returning to the nostalgic past.
Where all was good (“Make America Great Again”), patriotism and traditional values.
Facts and figures alone aren’t enough to counter these emotions.
We need to passionately expound the cause of openness as a virtue.
The opening of the Chinese economy to more market and international forces has driven the biggest lift of people out of poverty in human history.
Liberalisation of trade through the General Agreement on Tariff and Trade and then the World Trade Organisation saw trade increase four-fold between 1970 and 2008, an increase of historic proportions which has seen hundreds of millions of people lifted out of poverty in China, India and many other countries.
Let us celebrate this achievement.
For Australia, the opening of our economy has turned aspirations into reality, lifting living standards for many who previously would have been consigned to jobs with a limited future.
The facts are not just on the side of openness, but virtue is as well. We should tell the story loudly and proudly.
And thirdly, the fairness war.
I think have made it clear in my speech today that I am a supporter of an open economy and an outward looking nation.
But let’s not kid ourselves that the current arrangements are working well for everyone.
In the Australian context, not only facing the global forces of rapid technological disruption and a subdued world economy, there is a separate and more unique transition well under way as mining investment continues to fall dramatically.
This transition is hurting a lot of people.
National income per person, in other words our living standards, is almost 2 per cent less than where it was three years ago.
For two years, many Australians have grown progressively worse off, not better off.
We’ve seen this crystalize in the lowest wages growth on record in Australia.
We can’t expect people to be upset about the attacks on a globalised economy when they don’t feel they are benefitting from it personally, here at home – quite the contrary.
In the UK, those who voted to leave Europe were overwhelmingly those for whom the economy is no longer working.
The median income for those aged between 31 and 59 in Britain is less than it was in 2007.
Around the world, 65 to 70 per cent of households in rich countries saw their real incomes decline or stagnate between 2005 and 2014.
This compares with less than 2 per cent of households between 1993 and 2005.
The Economist magazine recently asked the question what proponents of openness should do in the face of this inequality.
The Economist is no journal of the radical left, and quickly answered its own question: “the most important thing to do is devise policies that spread the benefits of globalisation more widely” it said.
Or as another of my favourite magazines, the New Statesman recently put it “The truth is that, for a while now, growth has failed to deliver its moral dividend alongside its economic one because the increased prosperity has not been shared fairly.”
As a pro-growth progressive, I think there are lot of good reasons to care about income inequality, social mobility and inclusiveness.
But even if I didn’t care about these things from a moral or progressive point of view, I would care about them from the vantage point of making it easier to defend globalisation and an open economy.
The more people feel they benefit from our economy, the more they will embrace the system which allows it to grow.
There is a place here for a discussion about trade unionism.
Trade union bashing is the favourite sport of some in the political debate.
But at least in part, I would argue that we are seeing a result of generations of a concerted effort to reduce the impact of trade unions on our economy.
The recent election results here were, in many senses, a cry in the wilderness from many who feel the economy and the country isn’t working for them: voters in Tasmania voted Labor because they felt we had a better grasp of the very real challenges for them as they grapple with low economic growth and stubbornly high unemployment that remains above the country average.
South Australians who voted for Xenophon because he presented simple solutions for our most troubled mainland economy.
And in Queensland, half a million people voted for Pauline Hanson because she was talking of returning to values for their country and their economy that they are comfortable with.
So my message today is this: winning the war for openness is not just a battle of communications.
Of good arguments, much less spin and one-liners.
We need to argue the facts, with passion, but we need to do more.
We need to listen and to act.
Too many Australians, just like their American and European counterparts feel they have no hope and their government has no plan.
For them, lectures about a rising ride lifting all boats and the theory of comparative advantage or Schumpeter’s creative destruction are not going to win their hearts or minds.
I’ll be saying more in other forums about how and why we should make our nation more inclusive.
Including the importance of expanding opportunity and participation through investments in human capital and other productivity enhancing pursuits.
But clearly we can’t win the argument for openness if we are not tackling the issue of inclusiveness.
The last thing our economy needs is a retreat to protectionist isolationism.
We can and we must win that argument.
But let’s listen as we do so, and make sure that Australians who currently feel excluded are included.
Let’s make sure that our growth is more inclusive and our nation fairer.
When we do that, we will be better able and better deserve to defeat nativist populism which we are seeing emerge around us.
In many ways, these populists are arguing for a return to the past, back to the old days, pre-1983. When our economy was rigid and unresponsive, but protected.
There is much at stake here. We can’t afford to go backwards. We have come too far to risk retreating to a comforting, but unsatisfying past.
The future for Australia is bright, if we remain open, outward looking, sophisticated and brave.
 G20 monitor, August 2016
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