Now is an appropriate time to write a history of the Australian economy in the 1980s. The current recession and the departure of Bob Hawke each in its own way signals the close of a chapter in Australian economic development. The 1980s were a decade full of sound and fury, but signifying what? My purpose in this article is twofold. To sketch the main developments in the economy and the policy responses of the government. But also to seek an answer to this question: has the Australian economy become “stronger”, from the point of view of capital, through the decade? Or are the many pessimists that abound amongst academics, economic commentators, and the ruling class, right in believing that the economy has declined further?
Paul Keating once dismissed the Fraser government as “seven years of failure”. This was not just a partisan political comment, but represented a view widely held amongst the ruling class and the leading circles of the public service. The main plank of Fraser’s economic policy was what has been described as “restrictionism”. Its goal was to attack the persistently high rate of inflation which had begun in the early 1970s; its method to accept a low economic growth rate, and to raise unemployment, so as to reduce inflation. A central obsession was government expenditure and reducing the size of each year’s budget deficit. Wages were controlled by an indexation system, which like the Accord, cut wages by passing on only a fraction of the rise in the Consumer Price Index (CPI). The result was a period of stagnant investment and high unemployment in the latter part of the 1970s, which not only made Fraser unpopular with workers, but tended to try the patience of sections of the ruling class, who saw plenty of pain, but no gain.
For a time at the beginning of the 1980s, it appeared the fortunes of Australian capital had changed dramatically. This was the era of the “resources boom”. Oil prices rose sharply in 1979 due to the influence of OPEC, making investment in Australian energy resources, and the resource sector in general, extremely attractive. Private expenditure on plant and equipment, which was only 3 percent higher in 1980 than it had been in 1973, leapt by 13 percent in 1980-1 and a further 11 percent in 1981-2. There were those who saw this as a vindication of government policy. John Stone, Treasury Secretary of the time, and a key ideologist of restrictionism said:
It is fashionable in some quarters to put our current relatively fortunate position down to good luck and to the machinations of the oil sheiks… Inconvenient though the conclusion is to those who still hanker after “big government” programs, the increasingly inescapable truth is that the current attractiveness of business investment in Australia is closely related to the drive against such policies which has been evident since the mid-1970s. I point particularly to the Budgets of 1978-9 and 1979-80, which most importantly involved tight expenditure restraint and also, particularly in 1979-80, a significant reduction in the deficit.
In fact the resources boom was basically a matter of luck and the fluctuations of the oil market and the whole mirage dissipated as quickly as it had formed; swallowed up by world recession, which in turn precipitated a deep recession here. It became clear that renovating Australian capitalism was going to require something more than simplistic ideological slogans, or periodic bouts of good fortune from the world economy. This was highlighted by the damage done to Australian capital by the resources boom hysteria. Talk by the Fraser government of “good times here again” had given workers the confidence to break out of the indexation system. A wages boom in 1981 made it clear that workers had not been cowed by Fraser’s harsh anti-union rhetoric. But as well it must be noted that indexation does not appear to have been successful at controlling wages. The effect of all the partial indexation decisions during the life of the system should have been to reduce the average real award wage by about 8 percent. In fact in the June quarter 1981 (before indexation collapsed), real ordinary earnings were some 5 percent higher than they had been in 1975, just before indexation started.
Another problem, and a sign of things to come, was the effect on the balance of payments. The resources boom was the first step in blowing out the current account deficit and building up foreign debt, since most investment came in the form of loans rather than equity; a significant change from previous post-war experience. Finally, the perspective of building the economy around commodity exports had important implications for other sections of capital. The problem was summarised in the “Gregory Thesis”, the essence of which was that the resources boom would make the 1980s a decade of chronic trade surpluses, which would have to be offset by increasing imports. John Stone publicly canvassed allowing sections of manufacturing to be dismantled: “the more successful in the decade ahead we are at exporting, the more successful we are also going to have to be at importing”. Much of the left viewed this in conspiratorial terms, talking of a plot by the multinationals, aided and abetted by Fraser, to deindustrialise Australia and turn it into a giant quarry. In reality ruling class policy was never so coherent; John Stone represented one end of a spectrum of opinion, not a consensus.
The government made some effort to control the rate of resource development. In the 1981 Budget, Fraser introduced less favourable depreciation allowances for miners, and announced the intention to retain the existing coal levy scheme, both decisions clearly aimed at making new resource investment less attractive. To talk of the resources boom deindustrialising Australia, when so much of it was directed to resource processing and which flowed through to other branches of manufacturing, is just nonsense. After all it is precisely resources-oriented processing that is now seen as a way of expanding the manufacturing base. But the period does stand in stark contrast to today, when the whole thrust of ruling class strategy has shifted to attempting to make manufactured exports central.
The Gregory Thesis perspective also led Fraser to adopt one other very important piece of policy, concerning the exchange rate for the Australian dollar. The government’s belief in salvation through the resources boom meant they could manipulate the exchange rate for other purposes: to make imports cheaper as a way of reducing inflationary cost pressures. Between March 1980 and August 1981 the Trade Weighted Index (TWI), a measure of the value of the dollar against important world currencies, was lifted from 84.4 to 94.7, and thereafter cut only very slowly. The effect of this was to reduce the competitiveness of manufacturing, and this in turn helps explain the depth of the 1982 recession. In the end Fraser’s strategy fell apart very quickly. The resources boom evaporated, along with tens of thousands of jobs as the recession of 1982 cut a swathe through manufacturing. And while the wages boom of the previous year did not cause the recession, and did not in itself make industry uncompetitive, from the point of view of capital it hardly helped matters. Fraser had failed to assist them as he had promised. To make matters worse, Fraser himself began to reverse course in the recession, abandoning half a decade of fiscal restriction to run a sharply stimulatory Budget in 1982 and to shift the focus of inflation control onto a hastily conceived 12-month wage freeze. Such was the end of the Fraser era: seven years of restriction to control inflation, cut wages and get industry moving, which hadn’t controlled inflation or wages, and which had got industry moving – backwards! It was time to see what the Labor Party could do.
The election of the Hawke government represents a decisive change in policy. In place of restrictionism, the ALP program sought to foster rapid economic expansion. Keating’s goal in the initial years was 5 percent annual growth in GDP, well above the OECD average, to be generated in the old Keynesian fashion by using government deficit spending to stimulate the economy. As Keating remarked in 1985, he had “set the sails for growth”. The focus for controlling inflation was shifted to an incomes policy, the Prices and Incomes Accord, similar in some respects to the old wage indexation system, but resting this time on a definite agreement between the government and trade union officialdom and constructed around a more sophisticated ideological framework. The Accord implied that rises in the CPI would be passed on as wage increases. But like its predecessor, it was used to cut real wages and so boost business profitability. It was modified a number of times over the decade to achieve this.
“Accord Mark 1” cut into wages in two ways. First, it prevented any action by unions to make up losses from Fraser’s 12-month wage freeze. Second, it contained an agreement that, while increases in the CPI would be passed on, wage rises based on rising productivity would not be allowed until 1985. Since productivity was increasing by about 2 percent a year, this represented a significant transfer of value to profits. Finally there was the “Medicare fiddle” of 1984. The introduction of Medicare funded by a tax levy, replacing private health insurance, produced a statistical quirk in the CPI, because private health costs are included in consumer prices but increased taxation is not. This caused an apparent 2.5 percent reduction in the CPI, and the government secured a deal with the unions to reduce wage increases under the Accord by this amount.
The goal of the Labor government was to achieve high GDP growth to sharply reduce unemployment. Their campaign promise was to create 500,000 jobs in three years. The whole change of strategy was orchestrated by a National Economic Summit. To a certain extent this was required by the sharpness of the policy changes. After seven years of being told about the evils of government deficit spending, business had to be persuaded that the massive $8.4 billion deficit being proposed for 1983-4 was really in their interests. But Labor’s plans were accepted calmly. Business conditions under Hawke could hardly be worse than those prevailing in the recession. Even if the Accord failed to cut wages, it was not likely to produce yet another wages explosion. Anyway, the strategy soon began to pay dividends. The economy made a sharp recovery from recession, and while investment was still relatively subdued, business activity was not, and employment rose rapidly. Idle production capacity was put to work. The Hawke government began a series of structural reforms to the economy, most notably at this stage floating the dollar and deregulating the financial sector. These reforms were designed to integrate Australian capitalism into the world financial system, so as to tap into new sources of capital and to allow Australian companies to expand overseas.
The growth in employment was uneven. Many of the new jobs were created not in manufacturing or mining, but in services, in particular financial services. Employment in these sectors rose at an average rate of 7 percent between 1983 and 1989, more than double the rest of the economy. Here began the decade-long boom in commercial property and construction, to house the new office workers; it also led to increasing imports of office equipment. Many of the jobs created in industry were due not to an expansion of capital, but to a decrease in the capital:labour ratio. As the Accord cut labour costs, it often made sense for employers to increase the number of workers per machine, so as to increase flexibility and improve quality. These factors become important in understanding the rapid collapse of employment in the post-1989 recession. Many of the jobs created when labour was cheap could easily be dispensed with in time of recession. And the end of the boom has meant the end of the services and construction surge.
Reformist governments which attempt to escape from recession by stimulating the national economy, independently of the rest of the world, often run into two obstacles. Increasing economic activity in only one country, by sucking in imports without any opportunity to raise exports, can create destabilising balance of trade problems. Or, the ruling class can become alarmed at what they see as fiscal irresponsibility, and can exert pressure by failing to invest or by sending their capital overseas. The early 1980s French Socialist Party government of François Mitterrand was a classic case of an expansionist policy stymied by both factors. But the Hawke government was a definite exception to this rule. Its policy clearly won the support of capital, which was sufficiently annoyed by the Fraser debacle to be willing to try something new. And the rising Australian economy coincided with a gathering recovery overseas, especially in the USA. But more importantly, weaknesses in the balance of payments were masked by the retreat from the resources boom. Rising consumer-goods imports were offset by capital imports falling away from the giddy heights of 1981. A worrying blowout in the current account deficit could be put down to increasing interest outflow, due to the debt generated during the 1980-1 investment frenzy.
What got Hawke and Keating into trouble was a trade crisis, it is true, but it was a trade crisis generated by the rest of the world. For the early 1980s were a period of falling commodity prices. Far from the 1979 OPEC oil shock opening a new period of high commodity prices, the recession that followed knocked down prices to a low point around 1986. With them fell Australia’s terms of trade, and export income. The terms of trade decreased by 15 percent during 1985 and 1986, to historic lows. The Hawke government’s response to this shock was essentially to cut back its goal for GDP growth. Keating formulated a complex policy, which will be examined in the next section of this article. But the terms of trade collapse had two other very important effects. One was a considerable depreciation of the dollar. The TWI fell by 40 percent between February 1985 and July 1986 (in US dollar terms, a fall from around 85-90c to about 6Oc). This increased the size of the overseas debt, and the size in Australian dollars of the current account deficit.
But it delivered an important benefit, one which the government was quick to seize on: by making imports more expensive, and exports cheaper in overseas markets, it had the potential to considerably increase the competitiveness of Australian industry. The depreciation meant that the price of an article imported from Japan would have to rise by 110 percent, from Germany by 106 percent, and from the USA by 33 percent, assuming the price rise was fully passed on by importers. Here was a way out of the high dollar policy of the Fraser years, delivered moreover in the approved manner by market forces; a way to put renewed emphasis on the importance of an Australian manufacturing base. The government was determined that these benefits to capital would not be squandered through wage increases to compensate for the higher cost of imported items. Hence “Accord Mark 2”, agreed to by the ACTU in September 1985, which discounted the pay rise due in early 1986 by 2 percent. It was also agreed that there would be no review of wage rises owing due to rising productivity for a further year. The sweetener in the deal was a tax cut.
The terms of trade collapse also focused attention on what has since become an obsession of the Labor government: the balance of payments, and in particular that part of these accounts which summarises the flows of goods, services and payments: the “current account”. To understand what this is all about, we must first distinguish between long-run problems in the balance of payments and the 1980s crisis in particular. For example there is nothing new about Australia having a current account deficit. In the 30 years from 1950 to 1980, the current account was only in surplus four times. Throughout those years, the deficits averaged about 2 percent of GDP. The constraint this places on economic activity has long been recognised. In 1965, the Vernon Committee wrote: “In the long run, the rate of growth that can be sustained by the economy will be governed by, perhaps more than anything else, the extent of good fortune and good management that attends the balance of payments”.
There are two reasons why the balance of payments was a continuing problem. One is the steady decline in the prices of commodities relative to manufactured goods: a long run tendency for Australia’s terms of trade to decline. The response of capital has been to attempt to expand volumes of commodities exported. There has also been an important change in the nature of the commodities exported: from mainly agricultural to agricultural and mineral. In 1953-4, agricultural commodities comprised 85 percent of total exports, minerals and fuels 12 percent. Compare this to 1985-6 where the figures were: agriculture: 38 percent, minerals and fuels: 41 percent. Since the price decline has been faster for primary commodities than for minerals, this shift has slowed the deterioration in the terms of trade.
The second continuing difficulty is the fluctuating nature of Australian economic development. There was a series of balance of payments crises in the 1950s, caused by heavy inflows of capital as secondary industry expanded. The response of the government was to use comprehensive import controls, and on a couple of occasions to induce a general economic slowdown. By the late 1960s the situation had changed considerably as mineral developments improved export earnings, and Bass Strait oil cut imports. The first half of the 1970s saw further improvement, although after 1974 current account deficits began to grow. The resources boom appeared to represent a way to return to the good fortune of the late 1960s and early 1970s. The capital borrowed to fund the new projects worked initially to weaken the balance of payments, as interest and repayments created a large new outflow of money. It was assumed that rising export earnings later that decade would solve the problem. The collapse of the boom put paid to that hope. In fact the experience of the early 1980s simply foreshadowed the real crisis which was to occur later in the decade.
For a start, the form of capital inflow changed dramatically in these years. Throughout the post-war period, foreign investment had been almost entirely in the form of direct investment from an overseas company to its Australian subsidiary, or the ploughing back of profits generated by foreign-owned companies operating here. Foreign investment through the stock market was less common, and investment via the private sector borrowing money overseas almost unknown. Private debt financing was so uncommon that the statistics don’t even record it as a separate category until 1977. That changed overnight. In 1977-8, private sector borrowings overseas were 1 percent of total private sector foreign investment. In 1978-9 they were 12 percent and a year later 29 percent. By 1981-2 they accounted for 51 percent of private capital inflow. This preference for debt-based investment continued through the decade, and so for the first time since the 1930s, foreign investment meant foreign debt. Consequently interest payments placed a major burden on the current account in the 1980s.
There is another reason why the present balance of payments crisis is more significant than previous ones. While current account deficits have been the post-war norm, caused by flows of money out of the country, there has usually been a trade surplus, to reduce the overall size of each year’s deficit. Chart 1 (below) shows this merchandise trade balance. There were trade surpluses in all but seven of the years from 1945 to 1979. The economy tended towards a positive balance of trade even when it was running at full throttle. This is no longer the case. Of the three surpluses since 1980, the first in 1983-4 followed the recession; the other two, in 1987-8 and 1990-1, followed periods of economic slowdown specifically designed to generate such surpluses. Trade deficits are now the norm rather than the exception. When it became clear in 1986 that even the massive devaluation of the dollar was not going to correct the problem, the gravity of the situation finally dawned on Hawke and Keating.
The declining terms of trade and the run-down of the industrial base have both contributed to this problem. But lest those proponents of the “deindustrialisation” thesis feel vindicated by talk of declining manufacturing, it should be noted that their theories have not correctly explained why this happened. The major period in which the manufacturing base declined was in the 1970s, due to low profitability of manufacturing capital and not to the influence of multinationals. When Labor lifted profitability, manufacturing investment rose again. Also it is not true that this decline was unique among industrialised nations. There was a generalised tendency for OECD countries to experience a rise in imports through the 1980s. An increasing world division of manufacturing has seen advanced countries specialising in what they produce, both importing more and exporting more. In each country, certain branches of industry withered. Australia followed the first part of this trend, importing more, but failed to follow the second, exporting more high value manufactured goods. As the Garnaut Report argues: “For our economic size, foreign trade accounts for much less of our production and expenditure than it does in any other advanced country. We are the only advanced country whose ratio of exports to production has not increased through the post-war period.
These then are the elements of the crisis. Higher levels of debt repayments and poorer trade results led to a decade of high current account deficits, averaging 5 percent of GDP, compared to the 1950-1979 average of 2 percent. There is now no tendency for the problem to correct itself, short of engineering a major recession. And the scale of the recession needed to suppress imports has risen because the economy has become more import dependent. In the 1982 recession imports fell by 15 percent; in this recession, which is more severe, imports have only fallen by 7 percent (to September 1991). The current recession has reduced the deficit from 6 percent of GDP in 1989-90 to about 4 percent in 1990-1, at enormous cost. But this is not sufficient to bring about any sustained improvement. The analysis carried out by the government to find a way to stabilise the level of foreign debt suggests that the annual current account deficit needs to be cut to around 2 percent of GDP. The trouble is that the interest outflow component of the deficit alone is now greater than 2 percent of GDP! (In 1990-1, the net income outflow, which includes interest and other overseas payments, was over $17 billion: 4.6 percent of GDP.) Chart 2, which shows the size of the merchandise trade balance plus the net income flow, shows how the two factors compound each other; this chart should be compared with the trade balance alone, shown in Chart 1.
So in order to reduce the overall deficit to 2 percent, all the other components of the current account must be in substantial surplus to offset this outflow. The history of Australia’s external accounts tells us this is difficult to achieve. Should the recession in Europe and the USA worsen, or spread to Japan, this will cut deeper into Australia’s export performance, making the problem still more dangerous. Part of the success in reducing the deficit so far is due to the fact that while the domestic economy has collapsed, cutting imports, exports have held up surprisingly well. In the 1982 recession, exports fell by 8 percent. But to September 1991, exports have risen by nearly 25 percent.
The World’s Greatest Treasurer?
In 1985, when things were going well, Hawke boasted that Australia had “the world’s best treasurer and the world’s fastest growing economy”. Neither of these claims was true. However if he had said something along the lines of “most innovative treasurer” his claim would have deserved closer scrutiny. For just as there was nothing inherently new in a terms of trade crisis, there was a standard solution already available: restrict growth and activity in , the economy. This has been the response of governments around the world to such crises; it was the response of the Australian government in past years. But Keating went out of his way to reject this approach. The essence of Labor policy had been opposition to Fraser’s restrictionism. To avoid simply having to repeat this history, Keating formulated a complex response to the crisis which rested on three planks. The first plank was based on an analysis known as the “twin deficits” theory. The second was an attempt to shift the balance in the economy between production for domestic consumption and production for export, as opposed to just clamping down on productive activity in general. The third: industry restructuring and microeconomic reform.
The twin deficits idea originated in America, which was having similar balance of payments difficulties. It sought to prove a causal link between the current account deficit and the government’s budget deficit. The argument runs like this. High budget deficits consume capital, requiring private industry to borrow overseas. Government deficits are said to “crowd out” private borrowers. As well, high government spending reduces overall business confidence, which in turn causes a decline in manufacturing and a trade deficit. As Keating put it:
It is a very important point to make to those people who fund our current account deficit that the whole of the public sector in Australia is a net saver…that the public sector has not got its hands in the savings cookie jar…therefore if Australia is calling on overseas savings, it is the private sector on the clear proposition that most of those calls will go into productive investment and it is not sovereign debt; it is not debt of the South American variety.
The government was already committed to the so-called “trilogy”, three promises made before the December 1984 election which amounted to a commitment to rein in government spending. But the twin deficits concept gave Keating new determination, and he proceeded with a program of cuts that reduced the overall Public Sector Borrowing Requirement (PSBR) from nearly 7 percent of GDP in 1983 to a surplus in 1989. But this did not have the desired effect. There was no direct link between the two deficits. While it is true that the government was borrowing heavily to fund its deficits, this was not the only, or even the main, reason why the corporate sector had taken so enthusiastically to offshore debt. Just as Keating was reducing the PSBR, other changes in the economy encouraged private industry, especially the banks, to begin a major new round of overseas borrowing, which cancelled out any impact the reduced PSBR might otherwise have had.
The devaluation of the dollar was the gain from the mid-80s crisis. Keating set out to use this gain as a lever to shift the balance of payments. If the increased competitiveness of Australian industry produced by devaluation could be exploited to generate more exports and replace imports, the current account deficit could be reduced, without having to reduce the overall level of economic activity, and without having to put the country through another recession. The mathematics of the strategy look something like this. First the level of economic growth necessary to keep unemployment stable was estimated. This turns out to be about 3 percent GDP growth per year. It was then calculated that cutting domestic demand growth to about 2 percent per year would produce enough of a fall in imports to reduce the current account deficit by 1 percent. By increasing exports by about 1 percent, total economic growth would run at 3 percent: 2 percent domestic activity growth plus 1 percent export growth. The current account deficit would fall steadily by 1 percent each year, from 6 percent of GDP in 1985-6 to 2 percent in 1989-90. At this rate the foreign debt could be stabilised at around 40 percent of GDP by the end of the decade. Keating’s support for this strategy was not some product of his individual politics, nor because he was from the ALP, nor because he had an Accord with the union movement: none of these factors prevented the same Paul Keating from generating a crippling recession at the end of the decade. Instead it represented a recognition, especially by the Treasury bureaucracy, that the country could not go on as it had in past years. Simply inducing recessions was useless; some structural change, some perestroika, was necessary. The perspective of the leading sections of the bureaucracy is set out each year in the Budget documents. The 1986 Budget papers argue:
Economic policy could be framed to produce…[a recession]…by sharply deflating the economy. A combination of severely restrictive fiscal and monetary policy would be one certain way to reduce the current account deficit in the short run. But quite apart from its undesirable consequences in terms of unemployment, such a policy induced recession would not provide a lasting improvement in competitiveness through structural adjustment and the investment that is necessary for it. Once demand began to strengthen, the current account deficit would rise again.
The 1987 Budget papers argue for a gradual approach to resolving the crisis:
The continued implementation of policies which consistently put runs on the board – particularly in terms of downwards trends in inflation and in the current account deficit – without driving the economy through the floor, can be expected. to produce an acceptable rate of adjustment.
The 1988 Budget documents explain the reasoning behind Keating’s concern about unemployment:
ensuring that the burden of adjustment is spread broadly across the community, and that adequate protection is afforded those worse off helps to sustain a necessarily prolonged adjustment effort. Without the broad measure of confidence in the economic strategy which has stemmed from the creation of employment opportunities and the support for those on low incomes, as well as other visible signs of progress, the strategy would have been harder to sustain. Other means of economic adjustment would have been necessary and could well have been far more disruptive and less equitable, with less enduring results.
All of the above was in a sense wishful thinking: we know today that these same bureaucrats are quite capable of “driving the economy through the floor”. Why they did that will be the subject of the next two sections. But the third plank needs to be examined: microeconomic reform, which also flowed from the need to quickly reorient the economy to external markets. Budget statement number two, 1988 sets out what they were worried about:
In Australia’s case, a framework of high protection and heavy regulation had built up over many years in major sectors. Inefficiency and inflexibility in factor and product markets reduced the economy’s capacity to respond to external shocks and secular changes. An inward-looking industry perspective fostered inefficient business practices, excessive wage claims and a narrow export base. Heavy intervention in the operation of markets inhibited the movement of resources into areas that would yield the greatest benefits to the economy.
The original Accord contained a theme of industry planning and adjustment, but it was the 1986 period that put these ideas onto the immediate agenda. Microeconomic reform became central to the construction of “Accord Mark 3” of March 1987. This introduced the concept of the “two-tiered” wages system: a first tier increase for the whole workforce, and a second tier to be established on a case by case basis, granted only when the workers involved made concessions in work practices that increased productivity. There was a dual agenda here. The government was still concerned to cut real wages, which it did by trading off a discount in the CPI for superannuation payments and by banking on a slow and partial spread of second tier payments through the workforce. But the desire for productivity improvements through attacking working conditions was real enough. The Hawke government entered its third term of office in 1987 with the theme of microeconomic reform high on the agenda. The government put together quite a long list of changes:
While this program looked comprehensive on paper, there is little evidence that it has yet had any significant effect on the performance of the economy. There is no evidence from the productivity statistics that the changed work practices of the second tier process made any great contribution to competitiveness, although some individual firms undoubtedly did make large gains. The turn around in manufacturing activity and exports appears to be due mainly to the devaluation. Manufacturing exports rose at a rate of some 8 percent, raising the ratio of manufacturing exports to total manufacturing sales from 13 percent in 1983-4 to 17 percent in 1987-8. The increased profitability of industry, delivered by wage cuts under the Accord, also began to produce an effect at this stage. The declining share of manufacturing in GDP and employment was halted. Real investment in manufacturing rose at an annual rate of 12 percent between 1983-4 and 1989-90. But while the performance of manufacturing improved somewhat, reducing for a time the immediate current account crisis, this has not led to any permanent strengthening of the balance of trade.
Over 70 percent of what are classified as “manufactured” exports are actually semi-processed raw materials like alumina, manufactured metals such as aluminium, or minimally processed agricultural commodities like raw sugar, frozen meat and milk powder. Aluminium alone in 1988-9 made up 25 percent of all “manufactured exports”. This will not solve the problem of declining terms of trade: to offset imports of high-cost capital and consumer items, more high-value manufactured items (what in the economic literature are called “elaborately transformed manufactures”, ETMs) must be exported. There is no sign that Australian capital has solved this problem. Of the $4.5 billion of exports of ETMs in 1988-9, $1.3 billion was exports to New Zealand and Papua New Guinea. Of that $4.5 billion, $1.8 billion was accounted for by just a handful of companies – BHP steel, Simsmetal scrap, and five car and five computer companies that were subject to government intervention to encourage exports.
But as well as failing to solve the structural imbalances in the economy, Keating’s strategy ran into more immediate difficulties. The policy found many critics when it was formulated. Initially they were proved wrong. Until the end of 1987, the economy generally followed the script: overall economic activity ran as expected, the current account deficit declined by about 1 percent each year, and unemployment rose slightly. Then came the worldwide sharemarket crash in October 1987, which further increased the ranks of Keating’s detractors. They all assumed that the crash would derail his plans by producing a recession and a further decline in export performance. In fact the stock market crash did mark the end of the Keating strategy, turning what had been up till then simply a crisis into a genuine disaster, but in a completely unexpected fashion, for it produced what, without a doubt, must be the most extraordinary episode of the whole decade.
In the closing months of 1987, just about everybody believed the economy was going to suffer some sort of slowdown as a result of the crash. A spectrum of opinion existed about what might happen, but it stretched only from pessimists, who expected some rerun of 1929, to optimists, who recognised that there had been some change in the relationship between stock markets and the rest of the economy in half a century, and who therefore hoped the slowdown would be more mild. They were all wrong. The economy did not slow down, which was remarkable in itself. But there was much more: far from slowing down, or even staying the same, it suddenly and unaccountably put on an extra burst of speed. Keating was depending on holding the rate of economic growth to about 2 percent per year. The 1988-89 period destroyed this hope absolutely. Consumer demand, business investment and speculative activity all rose strongly and therefore imports leapt. The Budget forecast for 1988-89 confidently anticipated another 1 percent fall in the current account deficit that year to 3 percent of GDP: about the expected result of Keating’s strategy. By mid-1989 the actual current account deficit was back where it had been in 1985, at 6 percent of GDP. The level of domestic activity grew by something like 9 percent through this period, a greater rate of growth than anything since the early 1970s. Why did this happen? One analysis argues:
The origins of this upsurge in spending are not altogether clear, but it would appear that its genesis goes back as far as 1987. This, the easing of monetary conditions in response to the sharemarket crash, stimulated much stronger growth than expected. Second, buoyant company profits, improved competitiveness and rising household income meant that the boom was broadly based, involving both investment and consumption spending. Last the relatively strong growth in world industrial production led to a large rise in the terms of trade which significantly boosted exporters’ incomes despite the offsetting effect of the $A appreciation.
This does summarise the situation but there are a number of points which need to be further explored. Interest rates were trending down before the stock market crash. The government assumed that the process of reducing the Budget deficit, the outcome of the twin deficits analysis, would be sufficient to hold down domestic demand as called for in Keating’s plan. But the stock market crash, not only here but in most OECD countries, seems to have led Treasury authorities to take a series of steps, varying from country to country, to pump money into the economy, presumably to offset the expected impact of the crash on business and finance. But that impact never arrived; if entrepreneurs like Bond, Elliot and Fairfax were undone by the crash, their losses took a number of years to percolate through the system. There does not appear to have ever been any real danger of 1930s-style financial crashes.
What the injection of liquidity seems to have done is simply add a turbocharge to an active world economy, boosting already high levels of consumer demand and speculative activity, especially in Britain, Japan, the USA and Australia. All areas of economic activity rose strongly in Australia in this period. Business investment in plant and equipment, which had been rising steadily after the devaluation, soared by 20 percent in 1988 alone. Private investment as a percentage of nominal GDP reached record levels. And business still had enough money left over to continue the boom in commercial property and construction. Overall household wealth here had not been all that badly affected by the crash, and there was plenty of consumer demand to support both a spending spree and a new speculative binge in property. There were also powerful factors peculiar to Australia that reinforced both the investment and the speculation boom. The reintroduction of negative gearing made property even more attractive as an investment, compounding the reaction of investors who lost money in the crash and so were turning to property for security. The wage-cutting process of the Accord boosted the underlying profitability of industry. Indeed, by 1988 the level of gross profits was as high as it had been for much of the 1960s. But the full impact of higher profits on investment levels had been delayed, because the 1985-6 devaluation of the dollar pushed up the cost of imported capital items. It was in 1988-9, as the dollar rose again, that business experienced both higher profits and lower prices for plant and machinery.
The combination of a consumption and an investment boom wrecked the balance of payments. The weak manufacturing base made it inevitable that the trade balance would be upset. It has been estimated that a 10 percent increase in the level of domestic demand will, under present conditions, lead to a 30 percent increase in imports. Total imports of goods and services in 1988-9 rose by 25 percent. Still more money was borrowed overseas, particularly by banks, to finance the investment boom and for property speculation. Finally the period changed, once again, the relation between the Australian economy and the rest of the world. Strong world activity, as other countries experienced a similar speed-up, revived commodity prices which in any case were due for some rise; 1986 represented a cyclical low, not a permanent depression. The government once again found itself grappling with a terms of trade “crisis”, this time in the opposite direction! Between March 1987 and June 1989, the terms of trade rose by 27 percent. Yet more spending power was created as exporters experienced rising incomes. And the dollar began to rise in tandem, peaking in January 1989 at 89 cents US . But by now government and business had tasted the fruit of a low dollar and decided they liked it. The Reserve Bank, which had spent years under Fraser keeping the dollar up, was now equally persistent at trying to keep it down.
Eventually the government realised the extent of the damage being done by the boom, and moved to choke it off with a repeat of the 1986-7 process of cutting domestic activity; this time with a much more savage dose of high interest rates. This produced “the recession we had to have”. But before moving on, there are some further points to be made, the first concerning a problem which had been building up through the 1980s, but which came to general prominence in this period: foreign debt. Australia’s net foreign debt now stands at $130 billion. It would be fair to say that this is really quite a lot of money. The question arises: where has it all gone? Unfortunately this is a difficult question to answer, but it is possible to sketch the outlines of the debt explosion.
The net debt is made up of state and federal government debt (10 percent of the total), government business enterprise debt (20 percent), and private sector debt (70 percent). But this underplays the role of government in generating debt, since the federal government has substantial overseas monetary assets which are subtracted from its gross debt, whereas the private sector’s overseas assets are mainly in the form of equity. The composition of the gross debt, which gives a better idea of who actually borrowed the money, is as follows: government 23 percent, public enterprise 19 percent, private enterprise 58 percent.
There are two common explanations of the debt explosion which should be dealt with first. It is said that declining private saving is leading to a capital shortage. This is the easiest one to dismiss. Those people who talk about private savings invariably are referring to the “household savings ratio” which indeed has declined substantially. But this ignores a second source of “savings” for investment purposes: corporate profits. The 1980s saw a rise in business profitability and a rise in the level of funds at their disposal. The most carefully researched paper on this subject suggests that the overall gross private savings level has remained fairly constant for three decades.
But the fact that savings levels have remained constant does not mean that they were high enough to support the demands for capital in the conditions of the 1980s. For a start, total private wealth in Australia increased by 300 percent through these years, in nominal terms, mainly because of the prolonged booms in assets like stocks and property. There was insufficient domestic capital to fund this asset inflation, plus the investment and consumption boom, plus the demands made by government deficits. A number of papers that examine the asset price inflation see it as linked to capital imports. As one paper puts it: “It would not have been possible to have had such a large rise in asset prices entirely as a result of the domestic increase in credit. We could not have pulled ourselves up by our own bootstraps”. But then there would be nothing unusual in this situation; this would hardly be the first time in Australia’s history that speculative bubbles have been financed from overseas!
Keating argued, as part of the twin deficits analysis, that government borrowing “crowded out” private borrowers, forcing them to look overseas. The evidence does not support this. Chart 3 shows the amount borrowed overseas each year by the government Budget sector, and public and private enterprise. A full analysis would require looking at both domestic and foreign capital markets; this chart is meant to illustrate only that, even on the basic figures of overseas borrowing, there does not seem any obvious link between the two sectors. There may well have been some competition for funds, especially in the mid 1980s. But the surge in private overseas debt generation really began in 1981, as government borrowing was falling, and continued long after government borrowing began to fall again in 1987. All sectors of the economy – state governments, the federal government, public enterprises, private trading enterprises, and the banks – altered the volumes they borrowed from year to year as the economic situation changed. This pattern is simply not reducible to one simple explanation.
Emphasis has been placed on the difference between government-generated debt which is assumed to be an unsustainable burden, and privately generated debt, which is assumed to be for productive investment, and therefore capable of generating an income stream which will repay the debt. But things are not that straightforward. Public productive investment – Telecom, Australian Airlines, the various state electricity enterprises – generate profits with which they repay debt. Conversely, only the wilfully blind could believe that all private capital investment has been for productive activity. The Royal Commission investigating Tricontinential, the managements of the State Banks of Victoria. New South Wales and South Australia, the investors in the Pyramid Building Society, the managements of the four big banks which are reported to be carrying, between them, some $15 billion in bad debts, all know perfectly well that a lot of money has been flushed down the toilet. The question then becomes, not whether the debt is public or private, but how much has gone to investments that are likely to generate enough money to support the debt, and how much has been wasted in speculation.
Not all the money was wasted. The manufacturing investment boom that Keating repeatedly claimed was taking place in the late 1980s did indeed happen. It wasn’t nearly enough, nor did it always go into the right sectors of industry, nor did it last nearly long enough, having been choked off by the high interest rate policy, but it did happen. As well, a significant proportion of the debt has been generated by Australian capitalism investing in assets overseas. The 1980s saw the creation of a number of Australian multinational corporations – BHP, TNT, Wormald, Monier and others. This form of investment contributed some $40 billion to net debt, and the profits from overseas activity of Australian companies creates an important inwards income stream which acts to strengthen the balance of payments a little. Much of the debt was taken on by a relatively small number of companies. The spectacular wholesale liquidation of the 1980s entrepreneurs over the past couple of years has tended to obscure the fact that many other Australian companies did not follow the trend of building up debt. The 1990 EPAC paper “Trends in Corporate Debt” reports:
Three-quarters of the sample, representing 70 percent of total assets, had low to moderate debt:equity ratios. But highly geared companies are also well represented. 15% of companies, representing 20% of total assets had debt:equity ratios above 1.5 [high: the average debt:equity ratio in the 1970s was 0.5] . The range of ratios found extended up to 4.5…
Concerns that international finance capital might be reluctant to fund more debt seem misplaced, so far at least. As well there is some indication that private capital inflows may be returning to the more normal pattern where equity investment predominates. The central problem is that the economy is already caught in a debt trap: the level of interest payments prevents a stabilisation of the current account deficit, and therefore forces the borrowing of more money (and/or the inflow of more equity investment) to fund the deficit, thereby raising the amount of interest flowing out the next year, and so on. The government is driven to maintain continued economic restraint, in an attempt to cut the current account deficit by generating the largest possible trade surplus. This dilemma proves that, wherever the borrowed money went, it wasn’t the right place. The only solution, aside from cutting imports, is increasing high value exports of goods and services. Since the industrial capacity to do this does not yet exist on a sufficient scale, Australian capitalism must borrow still more money (or attract more equity investment) to do it in the future, if it is ever to do it. A recent report by industry consulting group BIS-Shrapnell gives some idea of what this involves. They estimate that an investment of some $44 billion in manufacturing is required to build capacity sufficient for exports and import replacement to reduce the current ac count deficit to zero. This is as much a guess as anything else, but it does show the scale of the problem.
Strong activity in the economy forced the government to be more careful in its wage restraint efforts. Accord Mark 4 granted a wage rise of 3 percent in September 1988, with $10 six months later; and while it attempted to seek work practice trade-offs for the wage rises in the style of Accord Mark 3, the stronger position of workers made it difficult. The wage increases tended to be granted quickly, in return for verbal commitments from unions about work practice changes. Accord Mark 5 suffered a similar fate. The original plan had been to trade off wage rises for tax cuts. Again the concern of the government and the ACTU had focused on the potential for some sort of wage breakout in the booming economy. In the end workers got both a 6 percent wage rise (in August 1989), tax cuts from July 1989, and the introduction of 3 percent award superannuation. Despite this, the Accord has done an effective job in cutting wages over the decade. Estimates of the size of the real wage cut vary, but 15 percent seems to be a consensus. Finally, as “Budget Statement Number Two 1991-2” tells us:
Real wage restraint was also a feature of the 1980s in several major OECD economies, but the degree of restraint in Australia since 1982-3 has been unprecedented in the post-war period. It was particularly marked between 1986 and 1989. Given the strong demand pressure in these years, the Accord made a significant contribution to moderating real wage behaviour.
Here they are having a go at those sections of the ruling class who believe that they could have achieved greater wage restraint without an Accord. The Budget document continues:
The effect of real wage restraint on profitability meant that the gross corporate profit share in the 1980s exceeded the levels of the late 1960s; after company tax, the gross operating share was greater than in the 1960s; only after net interest payments are deducted does the gross operating share fall below values in 1966-7.
Driving the economy through the floor
As the scale of the boom became clear, the government reacted in essentially the same way as they had done in 1986, ratcheting up interest rates to slow domestic demand. They hoped to carry out another balancing act to maintain investment and exports, and therefore employment, which would allow the economy to skate through the crisis without a crash. There was also a general view that economic activity in the rest of the OECD would remain relatively strong, which would support commodity prices and exports. This was the basis of Keating’s repeated predictions of a “soft landing”. But the economy was too much out of control, and the interest rate dose required to tame it too strong, for anything other than a recession to be the outcome. Interest rates also proved a very crude tool. However financial deregulation meant that the government had abandoned the means it had used in the past to bring about sharp changes in the speed of the economy.
Traditionally, economic slowdowns had been engineered by restricting the volume of money, in particular credit, with the Reserve Bank using a series of tools to force the banking system to cut lending. This is what the term “credit squeeze” originally meant. The recession of 1974 was precipitated by a credit squeeze; in fact two banks actually ran out of money, in a technical sense. It is true that interest rates rose, as businesses struggled to get cash, but it was more the physical restrictions on the money supply than the high interest rates that did the damage. In this form of credit squeeze, the economy tended to grind to a halt very quickly. In the deregulated economy of the late 1980s, things were very different. Only the price of credit was manipulated; the volume could go on increasing, so long as people could afford to take out loans at the higher interest rate. For much of 1989, the government’s policy was generating contradictory results: interest rates were rising, but the volume of new lending was rising also. It was like somebody driving with one foot on the accelerator, and the other on the brake, and then wondering why it was taking a long time to come to a stop. One group of observers write:
During 1989 high (and in some cases) increasing growth of financial aggregates appeared to contradict the high interest rate signals of a tight monetary policy, and fuelled debate between expansionists and restrictionists about the stance of monetary policy. M3, the old favourite from the 1976-85 decade of monetary targeting, was growing at an annual rate of more than 25% by mid-year, a rate which in earlier years would have caused apoplexy amongst Reserve Bank officials. Credit, a newer favourite, was growing at over 20% a year.
The long time it took for the economy to react to high interest rates reflected other aspects of the 1980s experience: for much of the decade it had made sense for businesses and wealthy individuals to borrow heavily for speculation. High inflation had delivered good capital gains and so the cost of credit was not considered particularly important. Inflation led to high nominal interest rates becoming the norm, which meant companies had become conditioned to paying stiff prices to obtain capital. Interest rates were raised in a series of steps from early 1988, peaking at 18 percent in January 1990, and then falling via 10 cuts through to 8.5 percent in late 1991, as the scale of the recession became clearer. Signs of slowing activity could be seen in 1988, but the whole recessionary process proceeded as if in slow motion. Housing loan levels began to fall from mid-1988, but actual housing construction starts only peaked at the end of 1989. The business investment boom took a while to peak, crashing in 1990. Next to fall was general productive activity in the economy, and last but not least, employment.
In 1991 and 1992, the recession appeared to be the major problem. In a real sense though it isn’t. The underlying weaknesses of Australian capital have not been fixed. The excesses of the 1980s and the failure to restructure the economy place severe limits on economic growth and living standards through the 1990s. One thing that made the government cautious about cutting interest rates, even as the recession began to bite, was the fear that another import boom would follow soon after. That fear was probably misplaced because the bursting of the speculative bubble and the severe shakeout in employment act to depress activity, even though interest rates have fallen. But sooner or later, the economy will revive, assuming that the world economy does not go into deeper recession. It is then that the real crisis will begin again. In the words of one group of economists:
In any event, the prospective size of our current account deficit, and the strong propensity of Australians to import whenever the economy warms up, means that domestic demand will have to be put in cold storage in the early years of the 1990s. Severe speed limits on internal growth were always part of the post-banana republic script; the failure to observe them in 1988 and 1989 means that the speed limits must now appear with a vengeance.
There is one final subject that must be explored in order to make sense of the 1980s. That subject is inflation. Although continuing high inflation, and government concern about it, has been with us for nearly 20 years, attention has been focused on it once again over the last decade. After 1986, inflation rates in the USA and Japan fell to low levels and stayed relatively low, whereas in Australia inflation rose again. A continuing inflation differential between this country and its trading partners can cause problems because costs of production inputs rise faster here than overseas, undermining competitiveness. This difference in costs can be corrected, theoretically, by a further fall in the exchange rate. But as the 1980s have shown, such depreciations are not smooth, nor do they always take place at the right time. And the exchange rate can move in the “wrong” direction at crucial times since it is also determined by relative differences in interest rates, the level of commodity prices and the terms of trade.
This is why there were loud complaints in the late 1980s as the dollar began to appreciate again after hitting its 1986 low. The rising dollar combined with continuing inflation undermined newly achieved competitiveness, and tended to offset somewhat the rising profitability of local capital due to the Accord. The phenomenon of continuing high inflation also contributed to shaping much of the business and speculative activity through the decade, from the stock market and property booms to corporate takeovers and the rise and fall of the entrepreneurs. The name of the game was to invest, not in productive activity to make profits by exploiting labour, but in the purchase of certain physical and financial assets, shares and property being the most important, in the belief that rising inflation would lead those assets to appreciate in value. It made sense to borrow money to buy more assets, as the capital gain more than covered interest costs. This was compounded by the peculiarities of the tax system, where the full nominal interest cost is tax deductible for business, and where only the “real” inflation-adjusted part of the capital gain that is realised when the asset is sold is taxed. A similar combination of inflation and taxation forces is central to understanding why corporations increased the volume of debt. As an EPAC analysis points out:
Corporate deficits at the level of recent years do not account for the increase in corporate debt that has occurred over the period. This reflects some combination of increased reliance on debt to finance corporate deficits, the refinancing of existing corporate assets in such a way as to replace equity liabilities with debt liabilities, takeovers, and debt-financed purchases of existing assets from other sectors.
Most commentators, including most on the left, ascribe the speculative binges to the deregulation of the financial system, which, it is argued, increased the supply of credit. But Ian Macfarlane, a Reserve Bank economist, points out a simple reason why this argument cannot be right. In a market system, increased supply drives increased consumption, because increased supply lowers price. More people might “consume” credit because the banks are competing for business; interest rates fall and it is cheaper to take out a loan. But the price of credit, the interest rate, was consistently higher in the 1980s than before deregulation. Therefore it cannot be a change in supply, but a change in demand, that has driven the process: something made individuals and companies want to take on more debt, even though its cost went up. That “something” is the asset spiral. Certainly deregulation allowed the increased demand to be met; but it didn’t cause it.
The role of inflation should not be overstated. Asset speculation was a phenomenon common to a number of countries: in Britain where inflation has been consistently high and in Japan where it has been low. This is probably related to the relatively good corporate profits enjoyed through much of the 1980s, combined with a reluctance to invest in long term productive activity due to the underlying uncertainty about the future of the world economy. And whatever its cause, once a boom gets going it is self-sustaining, for a while. Profits from stock market and property booms were generated as much by new waves of investors pouring in money, as by inflation-driven capital gain. But inflation remains a live issue because the government and its advisors want to know why so much investment took place in non-productive assets like property, even when profitability of productive investment was boosted by the Accord and by devaluation. Undoubtedly much of the answer does lie in the asset booms of the 1980s which diverted the attention of business away from industry. The fascination of investors with property, even during the 1988-9 investment boom, was noted by a number of commentators.
The real problem with this debate arises from the converse of the argument. High inflation may have led businesses to build skyscrapers instead of re-equipping factories. But would low inflation necessarily ensure the reverse? This question has led to a fascination among economic commentators, and the Treasury and Reserve Bank bureaucracy, with the relative performance of New Zealand. The NZ government and central bank took the question of controlling inflation much more seriously from the mid 1980s, and the bank set itself the task of keeping inflation between 0 and 2 percent. But the level of economic activity was squeezed as well, with much higher levels of unemployment (until the recession here), and much lower levels of business activity and investment. Indeed this is becoming a standard code phrase in economic debates. Witness Bill Kelty’s speech in October 1991 in which he warned of the dangers of “doing a New Zealand” and speeches by Hawke and Kerin, accusing the Liberals of seeing New Zealand as a role model.
There are many differences between the politics and the economics of the two countries; certainly, without knowing the levels of profitability in the New Zealand economy, it is difficult to make any meaningful comparison. But this debate is important, not because of what it tells us about New Zealand, but what it tells us about the fears of those who run this country. It is not difficult to work out what those fears are. One academic economist concluded from a study of the two economies: “The implicit trade-off between employment and inflation suggested by these figures is a loss of 2.5% employment for every 1 % reduction of inflation.” The fear of such an outcome is the reason many in the government and the bureaucracy, including the Reserve Bank governor Bernie Fraser, are extremely wary of setting economic policy to crush inflation. The recession has delivered low inflation at the moment but the real question is what will happen when the economy recovers. As Paul Keating remarked, when challenged by John Hewson to set a goal of zero inflation: “If we’ve got unemployment rising as we have at the moment, and we’ve got the fall in activity we have, for an inflation rate of 3 or 4 percent, what kind of scorched earth would be out there for a zero inflation rate?” Let us hope we never find out.
Results of the 1980s, and some perspectives
The greatest difficulty in making a critique of the 1980s is finding something original to say. Socialists would want to point out how fruitless the Accord has been for workers. This is because wages are not the major factor that determines how industry performs. The productivity of the workforce, for example, is much more important. But Bill Kelty has already made this point for us, welcoming the large number of job losses in this recession because such a shakeout could allow industry to experience “a quantum leap in productivity of 15 to 20 percent”. So much for wage cuts guaranteeing job security. Socialists would then add the point that giving wages back to the bosses does not mean that they will use the extra profits to improve our position. But socialists couldn’t say that more clearly than Paul Keating, who complained that “large sections of the private economy squandered the 7 percent of GDP or $30 billion a year we gave them to invest.”
Socialists want to explain that private enterprise and the market system is not about improving the economy for the benefit of ordinary people; that it is not a system that delivers rational investment and production decisions, but a system run for short-term profits and the greed of the few. But it was John Kerin who said “banks and the private sector are mugs…for what they have done to this country”. It was Keating who greeted the massacre of the entrepreneurs with the remark that the recession was “de-spivving the economy”. It was the Treasury bureaucracy who complained that “the fact is that many private investment decisions have turned out to be sub-optimal in the 1980s”.
It could not be said that the ruling class had a very successful decade. The late 1980s investment boom modernised and expanded some capital stock, the Accord boosted underlying profitability, the devaluation made industry more competitive, and the present phase of industry restructuring will improve their position still more. But the costs have been greater: the enormous foreign debt, the very much weakened balance of payments, the overhang of debt, especially in the state government sector and in the financial system, and – not to be underestimated – the pool of bitterness and despair among workers and unemployed. None of these things are fatal in themselves; their significance is that they reduce the ability of future governments to manoeuvre, both politically and economically, around any internal or external problems that arise. It would also be wrong to think that there is nothing the ruling class can do to rescue their position. But they are leaving it awfully late in the day.
The point is also this: it is not just that Australian capital has squandered opportunities to improve its position through the 1980s; it has squandered all the relatively easy opportunities. However difficult it may have been to cut wages by 15 percent, the next cuts will be more difficult. The 1980s were a period in which the rich got richer and the poor got poorer. But for many, especially many in the middle, it was possible at least to postpone the descent. While wages declined, two-income families became more prevalent as the labour market expanded. More overtime was available; during the 1988-9 period, overtime worked reached historically high levels. Personal credit was used more and the property boom allowed many people to experience a perception of rising wealth, since nearly 50 percent of all households own their own home outright, and anybody who owned a home in the 1980s saw their wealth increase. Attacks on living standards during the 1990s will have to be mounted in conditions where none of these factors are there to blunt the pain.
The current account moved into deficit in a decade when world economic activity was relatively strong. Even in 1991, luck was with the government since the world economy still showed signs of life. But the external accounts will be hard to bring into balance in what may be a more subdued world economy in the years ahead. The 1980s were a decade when capital was there in abundance, both domestically and from overseas. How much more difficult and costly is it going to be to attract capital for industry restructuring and expansion this decade? The reasons for the continued decline of Australian capitalism are complex, but the central dynamic of capitalism – the profit motive – is at the heart of the problem. In the 1970s both Whitlam and Fraser made various attempts to change the direction of industrial development, by means such as tariff reductions. But low profitability meant that industry did not respond with new investment; increased competitive pressure simply magnified the decline. In the 1980s, profit signals were much greater, and industry did respond, but only to end up investing in the wrong areas.
At the moment, it is unclear what world economic conditions are going to be like in the 1990s. But that Australia’s rulers go into the new decade ill-prepared for any new phase of economic crisis is beyond any doubt.
 Here I follow the terminology used in the books on the Australian economy published under the title State of Play. By “restrictionism” is meant the policy settings adopted by the Fraser government on the basis of its interpretation of monetarist theory. It is not right to describe the policy as “monetarism”, because Fraser made no serious attempt to control the money supply. For more detail on the theory involved see Chapter 1 of any of the editions of this book, e.g. the latest edition: INDECS economics, State of Play 6, Allen and Unwin, Sydney, 1990.
 State of Play 2, 1982, p142.
 State of Play 4, 1986, p216.
 State of Play 3, 1984, p180.
 State of Play 2, 1982, p51.
 A full discussion of this phenomenon can be found later in this article.
 Named after Bob Gregory, an academic at the Australian National University. By citing the Gregory Thesis here, I do not mean to imply that it is necessarily an accurate guide to what would have happened if the resources boom had continued; only that the bourgeoisie believed in its predictions. For a critique of the theory see Rick Kuhn, “Whose Boom?”, in International Socialist, 12, IS (Australia), Melbourne 1981.
 Warren Tease, “The Balance of Payments”, in The Australian Macroeconomy in the 1980s, Reserve Bank of Australia, Canberra, 1990, p158.
 State of Play 2, 1982, p73.
 State of Play 4, 1986, p98.
 Measures of competitiveness show that real unit labour costs were higher from 1975 to 1978 than in 1982, and competitiveness lower. See Economic Planning Advisory Council (EPAC) Council Paper 30, Australia’s Medium Term Growth Potential, Australian Government Publishing Service (AGPS), Canberra 1988, p24.
 State of Play 6, 1990, p164.
 For the role of the resources boom in driving the process of integration of Australian and world financial markets see State of Play 3, 1984, pp74-5. The push for financial deregulation had in fact started under Fraser; he removed restrictions on Australian portfolio investment and real estate investment overseas. See Tease, “The Balance of Payments”, p182.
 Commonwealth of Australia Budget Papers, “Budget Statement Number Two, 1990-1”, p11.
 The official assessment is that the fall in the capital:Iabour ratio contributed about 25 percent of total employment growth since 1983. See “Budget Statement Number Two, 1990-1”, p35. EPAC Council Paper 39, Productivity in Australia: Results of Recent Studies, AGPS, Canberra, 1989, pp5-6 discusses productivity trends, as does State of Play 6, 1990, pp88-89, and Bruce Chapman, “The Labour Market” in The Australian Macroeconomy in the 1980s, pp46-49. For a discussion of the expansion of the financial services sector see Australian Business, 17 January 1990, p45.
 Ian BirchalI, Bailing Out the System, Bookmarks, London, 1986, pp187-8.
 State of Play 6, 1990, p37 reviews the history of commodity production and prices in the 1980s.
 State of Play 6, 1990, pp108-9.
 In fact the price rises were not fully passed on; overall prices for imported items rose by about 30 percent. See Bureau of Industry Economics (BIE) Information Paper No 9, The Depreciation of the Australian Dollar, AGPS, Canberra. The percentage figures are from BIE, Devaluation and Australian Industry, AGPS, Canberra, 1986, p28.
 ABS, “Balance of Payments, Long Term Quarterly Series” and “Quarterly Estimates”.
 Tease, “The Balance of Payments”, p159. This committee was set up to review perspectives for economic development and was named after its chair, Sir James Vernon.
 Tease, “The Balance of Payments”, p165.
 V. Fitzgerald and P. Urban, Causes and Consequences of Changes in the Terms of Trade and the Balance of Payments, Centre for Economic Policy Research (ANU), Canberra, 1987, p6.
 Investment statistics are from ABS “Annual Foreign Investment”. See also Tease, “The Balance of Payments”, p179.
 State of Play 6, 1990, pp102-4. Chart 1 is from ABS data. My point about the nature of the 1985-6 and 1990-1 periods will be substantiated later. For more detail on the relative growth of export and import volumes see Fitzgerald and Urban, “Causes and Consequences”, p6.
 “Budget Statement Number Two 1988-9”, p41, graphs the ratio of imports:sales for Australia and the average trend in the OECD. A similar analysis can be found in BIE information Bulletin 15, Trade Performance of Australian Manufacturing Industry, AGPS, Canberra 1989. This data needs to be interpreted carefully because it reflects imports:sales for the whole economy, not just manufacturing. Still it is difficult to see any evidence that Australian manufacturing decline has been much more severe than in the rest of the OECD.
 Cited in The Australian, 3 April 1990, p11.
 David Morgan, speech to BIE Manufacturing Outlook Conference, September 1991. Papers published by the BIE, AGPS, Canberra, 1991.
 All figures here and in the charts are from ABS data. For details on the problem of debt stabilisation, see State of Play 6, 1990, p117, and EPAC Council Paper 30, Australia ‘s Medium Term Growth Potential, AGPS, Canberra, 1988.
 Morgan, speech, p2.
 The Age, 24 Apri1 1985.
 The Weekend Australian, 18 August 1990, p17. State of Play 6, 1990, pp203-5. It should be noted that the presentation of the twin deficits idea in official Budget papers is more circumspect and qualified than the presentation in the media. See for example Budget Statement Number Two, 1988-9, p35. Budget Statement Number Two, 1986-7 starts by telling us “there is no simple relationship between the current account deficit and the PSBR”. Quoted in State of Play 6, 1990, p205.
 The Australian, 19 February 1991, p11.
 Commonwealth of Australia Budget Papers 1990-1; Budget Statement Number Six, p4, details the patterns of public sector outlays and revenues.
 Among the more likely explanations are: lower borrowing costs in offshore markets, the initial need for large-scale project financing for the resources boom, the general swing to debt-based financing through the 1980s, due to distortions introduced by inflation, and certain elements of the taxation system. See State of Play 3,1984, pp75-6.
 This example comes from State of Play 6, 1990, p165. It should be noted that the actual Budget settings varied a little from the figures here.
 “Budget Statement Number Two, 1986-7”, p48.
 State of Play 5, 1988, p166.
 State of Play 6, 1990, p207.
 State of Play 6, 1990, p284.
 This assessment of the lack of effect of various microeconomic changes on productivity comes from Bruce Chapman, “The Labour Market”, in The Australian Macroeconomy in the 1980s, p49. See also: EPAC Council Paper 39. Productivity in Australia: Results of Recent Studies, AGPS, Canberra, 1989.
 Export figures from: Australian Manufacturing Council (AMC), The Global Challenge, AMC, Melbourne, 1990, p3. Investment figures from: The Australian, 12 February 1990, p11.
 State of Play 6, 1990, p154. AMC, The Global Challenge, p5.
 The Australian, 10 April 1990, p11. State of Play 6, 1990, pp26-27.
 State of Play 6, 1990, p170.
 My description of events follows that given in State of Play 6, 1990, pp28-35 and p170, The Australian, 17 April 1990, p11, “Budget Statement Number Two 1989-90”, p13 and “Budget Statement Number Two 1991-2”, p4 and p31. However, there is a separate strand of analysis, alluded to in the same pages of State of Play 6, which explains the relaxation of monetary policy, and the subsequent rises in interest rates, in terms of attempts by the central banks of the G7 to manipulate the exchange rates of, in particular, the US dollar and the yen. From this perspective what matters is the monetary policy settings overseas; the Australian situation is seen largely as driven by these events. Articles in The Australian, 14 March 1990 and 13 June 1990 by the expatriate Australian journalist Max Newton give some of the flavour of this view. Whatever the merits of this curious analysis may be, it has the advantage of focusing our attention on one important fact: the pattern of events we experienced here, of a sudden upsurge of activity followed by a period of high interest rates, was by no means unique to Australia. As Newton proves in detail, while Australian interest rates rose to the highest level, other countries experienced a more dramatic change. In Germany, interest rates doubled (from 3.4 percent in March 1988 to 8.2 percent in October 1989); the increase in Japan was only a little less (4.0 percent in March 1988 to 7.1 percent in March 1990). Interest rates rose here from about 11 percent to 18 percent. Again, though, there are different interpretations of why this happened. “Budget Statement Number Two 1991-2” tells us (on p4): “monetary policy in the major OECD countries was tightened in 1988 and 1989 to stem inflationary pressures emerging during the long period of demand growth…the slowdown in Japan primarily reflects the effects of past monetary policy tightenings intended to curb inflationary pressures and stem rapid rises in equity and land prices”. Nevertheless, as the State of Play authors write (p28 of edition 6): “we hope to avoid simplistic single-country explanations of events. Thus Paul Keating’s longstanding British counterpart, Chancellor of the Exchequer Nigel Lawson, quit late in 1989 after battling a blow-out in both spending and the current account deficit, with sharply increased interest rates. Some perspective on Australian events is gained from a world overview”.
 EPAC Discussion Paper 89/06, External Debt: Trends and Issues, AGPS, Canberra, 1989, p4.
 EPAC Council Paper 34, Trends in Profitability, AGPS, Canberra, 1988, p7 and table 1.
 “Budget Statement Number Two 1990-1”, p41, develops this point.
 State of Play 6, 1990, p171.
 Tease, “The Balance of Payments”, p168, State of Play 6, 1990, p160.
 Percentages are from the introduction to the latest ABS foreign investment figures.
 Malcolm Edey and Mark Britten-Jones, “Savings and Investment”, in The Australian Macroeconomy in the 1980s, Reserve Bank of Australia, 1990.
 Especially property; 60 percent of total private wealth is in the form of property and so the property boom of the late 1980s had an especially dramatic impact. But as well there has been considerable expansion of the real wealth base. Total private wealth increased by 70 percent in after-inflation terms from 1983-1989; that should be compared with a 4 percent real wealth increase from 1975-82! The Australian, 6 March 1990, p11.
 Ian Macfarlane, “Money, Credit and the Demand for Debt”, in Reserve Bank Bulletin, Reserve Bank of Australia, Canberra, May 1989, p30.
 The data here come from ABS foreign investment statistics.
 BIE Research Report 33, Manufacturing Investment, AGPS, Canberra 1990, shows that there was considerable investment in plant and machinery in the late 1980s. It remains to be seen what overall effect this will have on the competitiveness of manufacturing.
 In particular, a lot of the so-called business investment was still property investment. “Budget Statement Number Two 1988-9” complains (on p16): “Almost 60 percent of the strong growth in business investment in 1987-8 was attributable to an 18.4 percent rise in investment in buildings and structures spread across office blocks, hotels, shops and factories. Buoyant hotel construction was associated with a rise in demand for tourist accommodation.”
 Tease, “The Balance of Payments”, pp182-4.
 EPAC Council Paper 41, Trends in Corporate Debt, AGPS, Canberra, 1989, p17. The 1970s debt:equity ratio is from Morgan, “speech”, p5. “Budget Statement Number Two 1991-2” says (on p28): “Although the average gearing ratio more than doubled, this result was heavily influenced by a few firms and sectors – entrepreneurs, media, resource sector…”.
 “Budget Statement Number Two 1991-2”, p23.
 Australian Business, 14 August 1991, p64.
 Stephen Grenville, “Introduction”, in The Australian Macroeconomy in the 1980s, p4.
 State of Play 6, 1990, p135.
 State of Play 6, 1990, p293.
 McFarlane, “Money Credit and the Demand for Debt”, Reserve Bank Bulletin, Part 1 (this article is in the May 1989 Bulletin, Part 2 in May 1990). See also: B Fraser, “Inflation”, in the May 1990 Bulletin. Jeffery Carmichael, “ Inflation: Performance and Policy” in The Australian Macroeconomy in the 1980s.
 Ross Milbourne, “Money and Finance” in The Australian Macroeconomy in the 1980s, p235. B1E Research Report 33, Manufacturing Investment, AGPS, Canberra, 1989, p191, calculates the post-tax real rate of interest from 1959 to 1989. From 1970 to 1983, the real after-tax cost of debt for the corporate sector was negative!
 EPAC, Trends in Corporate Debt, p32.
 Macfarlane, Reserve Bank Bulletin, May 1989, p29.
 For example, “Budget Statement Number Two 1988-9”, p16; The Australian, 20 March 1990, p11 and 9 June 1990; Australian Business, 7 June 1989, p106.
 Carmichael, “Inflation: Performance and Policy”, pp325-388. For the use of the New Zealand example to attack current government policy see, for example, The Australian, 13 August 1991, p11 and 29 October 1991, p11. For an analysis of the New Zealand experience by a supporter of economic rationalist policies in Australia, see the three part series by the economics editor of The Australian, Alan Wood, in that paper: 2 November 1991, p29, 5 and 6 November 1991, p11.
 Kelty’s remarks: The Australian, 10 October 1991, p1, Hawke: The Australian, 2 November 1991, p29, Kerin: The Australian, 5 November 1991, p11. In each case, they are using the New Zealand example to make different points. New Zealand was originally used in arguments about inflation. Now it is being used for other purposes, in particular because it also provides ammunition for the GST debate.
 Carmichael, “Inflation: Performance and Policy”, p326-347.
 Fraser’s position is outlined in “Inflation”; Keating’s remarks are from The Australian, 16 May 1991, p1.
 The Australian, 10 October 1991, p1.
 The Australian, 14 May 1991, p1.
 The Australian, 10 July 1991, p1.
 “Budget Statement Number Two 1991-2”, p36.
 Forty-three percent of households own their home. Judith Yates, “Developments in Housing Debt”, in EPAC Background Paper Number 14, The Surge in Australia ‘s Private Debt, AGPS, Canberra, 1991. See also “Budget Statement Number Two, 1988-9”, p55, which remarks that “central to the sustainability of policy has been the steady employment growth…total household disposable income has risen solidly during the period”.