Published in The National Review; Jul 8, 1991; 43

In the 1980s and early 1990s modern Australia grew up. The maturing process has yet to run its full course. However, it is now inconceivable that Australia will revert to the economic insularity which it widely embraced after achieving independence in 1901, even though Paul Keating, the main architect of economic reform Down Under, has resigned as deputy prime minister and treasurer (i.e., finance minister).

Keating resigned when his attempt to challenge Prime Minister Bob Hawke for the leadership of the Australian Labor Party failed, by 66 votes to 44. Keating explained his tactics to a packed media conference with traditional frankness – declaring that he “wanted” Hawke’s job and “tried to take” it and rationalizing his tactics by claiming that there is something “very healthy” and “legitimate” in public life about “snatching” leadership.

Right now Paul Keating is sitting on the parliamentary backbench contemplating his political future. It is still possible that, in time, he will “snatch” the prime ministership. Alternatively he may resign from Parliament. But whatever the future holds, Keating will go down as a leader in the effort to make Australia outward looking and internationally competitive, moving away from its protectionist and highly regulated past.

Visitors to Australia sometimes express surprise that a country so endowed with abundant natural resources and possessed of an intelligent and educated population could have ended up near the bottom of the pile of Western economies after having enjoyed the world’s highest living standard at the turn of the century. Increasingly Australians – conservative and liberal alike – are asking much the same question. It is not before time.

If I had to nominate a date when Australia commenced getting it wrong, I would go back to 1905, when the internecine struggle within the conservative political movement was resolved. In that year Alfred Deakin’s Melbourne-based Protectionist Party finally prevailed over George Reid’s Sydney-based Free Trade Party. Soon after, Mr. Deakin – with backing of the growing trade-union movement and of the nascent Labor Party – set about implementing a policy of centralized industrial relations, tariff protection, and White Australia. It was stated at the time that this policy trio required Australia to turn its back on what was dismissively termed “the higgling of the markets.”

For a country that was primarily an exporter of rural and mining commodities (and consequently dependent on fluctuating world prices) this was little short of economic insanity. The conservative and liberal regulators conceded this to some extent – but then opted for precisely the wrong remedy. They decided to ward off the economic consequences of their anti-market ideology by a policy of what was termed “protection all round.”

Protection is to industry as drink is to an alcoholic – you can never get enough of it. So it was not surprising that in 1911, 1914, 1921, and 1926 there were further increases in protection under conservative and labor governments alike – and that was only for starters. The ideals of free trade and economic rationalism, which had underpinned the remarkable performance of the Australian economy prior to federation in 1901, were destined to die the death of a thousand tariffs, subsidies, quotas, and embargoes. Eventually protection was even extended to some rural industries under the agrarian socialism practiced by successive governments (many of them conservative) before and after the Second World War.

Even White Australia, which was not formally abandoned until 1966, was part of the “protection all round” mentality. Its essential rationale was to keep hard-working Chinese, Japanese, Kanaks, and others out of the Australian labor market. As Alfred Deakin said in the early 1900s, the Japanese had “to be excluded because of their high abilities.”

Australia muddled through most of the twentieth century on the back of its enormous natural wealth. Predominantly a British and Irish society, it benefited substantially from the postWorld War II immigration program which saw many hard-working Europeans and, later, Asians arrive on its shores. But by then the policy decisions enacted at the turn of the century were well set in place.

Finally, reality asserted itself – as it invariably does. Australia was hit hard indeed by the international recessions of 1974-75 and 1982-83, and especially so by the current economic downturn, which Paul Keating described as the recession Australia “had to have.” Since the early 1980s, there has been a growing recognition on both sides of the political fence that “protection all round” had to be junked – and soon.

The first deregulatory moves were made by John Howard, who was treasurer for most of 1976-1983 when the Liberal government of Malcolm Fraser held office. The pace of change was increased by the Hawke Labor government and, in particular, by Paul Keating. Following its election in March 1983, the Labor government pursued economic rationalism with a vengeance. It deregulated the excessively controlled financial system, allowed overseas banks to operate freely, and floated the Australian dollar. In March of this year Hawke announced the virtual dismantling of protection. However, the Labor government, which has long-standing historical and organizational links with the trade-union movement, has been reluctant to abandon Australia’s unique centralized industrial-relations system.

The opposition Liberal Party (in American terms, the conservative party) is busy calling for faster and more substantial reforms of shipping, ports, railways, etc. But the Liberals have something of a credibility problem, because in their past periods in office they have done little or nothing to revamp the industrial-relations system or to deregulate the economy. The current Liberal leader, John Hewson, and the Liberal industrial-relations spokesman, John Howard, now promise to make up for the conservative policy malaise of the past.

These days there is considerable pessimism Down Under, as would be expected in a country experiencing a severe recession along with rising unemployment and excessive foreign debt. Furthermore, unlike the United States and most of Western Europe, Australia did not contain inflation in the 1980s. However, there is some good news on the horizon. Inflation has recently dropped to under 5 per cent and could go lower by the end of 1991. This now makes it at least theoretically possible for Australia to enjoy low inflation and economic growth at the same time – something which had not seemed possible for over two decades.

A competitive, low-inflation Australian economy possessed of natural wealth and a vibrant tourist industry is capable of a top-level economic performance once again. It will, however, take time and continued political courage. Australians are hoping that the resignation of Paul Keating – and the fact that Prime Minister Hawke now depends on Labor’s left wing for his political survival – does not result in the junking of the reform agenda and a hankering for the economic insularity that Keating led his country out of. So far the new treasurer, John Kerin, has indicated that he will hold the line.