QUARTERLY ESSAY 61 Balancing Act



Tom Bentley & Jonathan West

“Will we have to wait for another crash before we find the model that restores stability to our twenty-first century?” In the last line of his Quarterly Essay, George Megalogenis asks exactly the right question for the situation Australia now faces. Our economy is out of kilter with global conditions and public expectations. Since the financial crisis of 2008, our political system has been spinning its wheels trying to gain traction on the big challenges – how to maintain prosperity, meet the needs of a changing, growing population and respond to destabilising global risks. 

The central proposition of Balancing Act – that Australia should debate “a permanent change in the relationship between the state and the market” – is right. But to succeed, that debate needs to question the deeper assumptions and relationships underpinning the dominant policy consensus. Only then will we unlock the ideas that can shape another generation of inclusive growth. In Time for a New Consensus, an essay published concurrently with Balancing Act, we argue that Australia’s policy elites are trapped within the narrow bounds of a consensus that has outlived its usefulness. That consensus, described in Balancing Act as the “open model,” was constructed in the 1980s through collaborative, experimental leadership and dialogue across politics, the public service, the media, business and civil society. It was driven by the need to ensure all citizens would benefit from economic modernisation, when global stagnation forced a reconsideration of Australia’s “federation” model, which itself had prevailed through most of the twentieth century. 

The 1980s consensus fused neoliberal economic reforms with social insurance – Medicare, superannuation, HECS and now the National Disability Insurance Scheme. It underpinned economic growth for a quarter of a century and became globally influential. But its most productive and fruitful reforms were enacted twenty years ago. Now, the rising financial and political cost of extending economic deregulation and social insurance helps to explain the recent turbulence and rancour of federal politics. Since 2008, both sides of politics have struggled to reconcile conflicting expectations of economic growth, social investment and a balanced budget, amid increasingly shrill and antagonistic public debate. In a world where interest rates are at their lowest for five centuries, nation-states are going bankrupt, and climate change and inequality threaten global stability, the policy repertoire of the 1980s simply does not achieve traction. 

Like any other nation, Australia cannot expect to maintain inclusive growth by default, or assume that a policy mix it helped to invent three decades ago will remain relevant or superior. So Megalogenis is right that a re-scoped economic policy agenda should include a much more active role for government in improving education and infrastructure, because the open model has not and cannot generate adequate solutions. He is also correct to point to low interest rates and public borrowing power as an opportunity to do this. But the issues he highlights – gridlocked cities, too-hot housing markets and growing educational inequality – are not the causes of our current situation, but symptoms of a deeper problem that must also be addressed.

In fact, the workings of the “open model” have transformed the structure of Australia’s economy in ways that are now impeding adaptation and renewal. Amazingly, Australians emerged from a once-in-a-century resources boom more indebted than when we entered it. Bank lending increased between 1985 and 2015 from just above 20 per cent of GDP to almost 130 per cent. The main focus of this ballooning debt is housing. Australia has the world’s highest ratio of housing debt to total lending (54 per cent compared to, for example, 16 per cent in the United States, 20 per cent in France, 40 per cent in the UK and 14 per cent in Hong Kong), and the world’s second-highest ratio of mortgage debt to GDP (at 99 per cent, behind only Switzerland). As Megalogenis points out, housing is one of the least productive ways to invest. Lopsided lending for private housing has diverted finance away from business investment, which should be developing new products, services, infrastructure and jobs in non-mining sectors. Housing finance increased from less than 25 per cent of credit outstanding in 1990 to more than 60 per cent today; business lending declined from almost 65 per cent to less than 35 per cent over the same period. (Finance for new houses declined from 35 per cent of new commitments to 15 per cent today.) As a proportion of the economy, finance and real estate have soared from 7 per cent in 1975 to 12  per cent in 2015, while mining grew from 6 to 9 per cent, and manufacturing declined from almost 20 per cent to 7 per cent. Finance-sector profits increased from less than 1 per cent of GDP in 1985 to more than 5 per cent in 2015. The finance sector now makes up almost half (47.5 per cent) of the ASX200’s total market value.

Australia’s productive base beyond mining has actually narrowed or declined over this period. Minerals alone accounted for 59 per cent of merchandise exports in 2015. Rising wages and a high dollar have hollowed out domestic industry. For two decades, the impact has been masked by mining investment, rising house prices and escalating government expenditure.

In an economy that was adapting well to changing conditions, capital and knowledge would be invested in a wide range of activities and infrastructure, creating new products, services, technology applications and business processes. But this is not what the spectacular growth of private debt and financial transactions has been used for over the last generation. 

In fact, the emphasis placed by the 1980s consensus on the importance of markets in allocating resources has helped to blind us to the risks of an economy over-concentrated in specific sectors and over-dependent on private debt and consumption. While market liberalisation created real gains, aided by an aggressive privatisation program, they were essentially one-offs. So too with free trade: despite the rapid growth of new markets in the Asia-Pacific region, the World Bank estimates that recently signed free-trade agreements will produce no GDP growth for Australia.

Deeper thought about the sources of productive growth is needed. As we discuss in detail in Time for a New Consensus, it is not markets that take decisions or invest resources – it is groups of people operating through institutions and networks. Global markets are a permanent feature of our landscape, but building the capabilities to thrive amid such competition is a matter of human effort – by businesses, communities, governments and civil society.

Building these dynamic capabilities should be the task of the next consensus. Focusing on comparative advantage – on those sectors capable of punching above their weight in global markets – will guide allocation of the nation’s resources. It will also defend against the tendency within government towards administrative centralisation.

To do this successfully we must move beyond the static conception of the 1980s consensus, in which comparative advantage is assumed to arise simply from applying the discipline of market competition. This snapshot view fits neatly with a relentless emphasis on free trade and domestic competition. Not surprisingly, it ends up favouring those forms of advantage that are natural, geographically fixed and inherited – such as mineral resources. Over time, it ignores three crucial dimensions of economic development: differential industry growth, technological improvement and the divergent social impacts of different industries. 

First, industries grow at very different rates as societies mature and develop. As nations emerge from poverty, demand for meat grows faster than for rice; it then tapers off once citizens can afford to eat their fill. Similarly, demand for automobiles at first grows faster than for bicycles, then tapers off, before (in the richest countries) reversing, as citizens place a premium on fitness. These differentials can create big problems for nations that specialise only in their field of natural comparative advantage. The East Asian nations that have improved so dramatically in recent decades have chosen to specialise in fast-growing manufacturing sectors, not slow-growing traditional parts of the economy.

Second, industries show very different technological potentials over time. England’s textile producers spectacularly increased their output during the Industrial Revolution by introducing new machines and new techniques, driving productivity to unimagined heights; Portugal’s winemakers, by contrast, were forced to continue growing grapes and pressing juice from them, with only marginal increases in output over time. This effect is even more marked today, with huge disparities in technology-driven productivity growth among industries, especially those close to the twin revolutions of information technology and biotechnology.

Third, and perhaps most importantly, different industries bring about divergent social consequences. Some generate more equality and greater opportunity for workers by relying far more on labour than machines or software. These usually drive higher skills and learning and allow wages to capture a much greater share output. In precision engineering and specialty chemicals, wages account for two-thirds output, and the operating surplus (from which equity holders draw their return) accounts for a mere 6 per cent. Others bifurcate into a small number of high-wage employees and a great amount of technology. In computers and life sciences, wages account for only 11 per cent and 7 per cent respectively of output.

These three characteristics make any policy effort to create comparative advantage a complex challenge. They demand a shift from one-off static advantage to cumulative, dynamic advantage, and they help to explain why the “open model” cannot cope with the transition to a post-mining-boom economy.

Market forces alone will not maintain both economic vitality and high social investment. And while governments should be more willing to use public borrowing and investment to counteract market failures, this is not enough. The new consensus must focus on how private enterprise and public policy can combine to create economic capability through investment, innovation and learning.

This will not be easy, but the three factors outlined above give an important clue about how it can be done. Comparative advantage in the twenty-first century demands geographic and sectoral decentralisation. Where past reformers sought to create seamless national and international markets, the next generation must focus on specialised sectors of the economy, which cluster differently from region to region. 

This is a big shift, away from remote federal rule-making institutions and towards more dynamic, partnership-based efforts in city-regions. Because the old consensus sees the role of government as limited to neutral rule-maker and enforcer, diligently hunting down and eliminating sources of “rent-seeking,” Australian political institutions and policy-makers have largely shed the ability to design and implement strategies at this level. But there are signs that the change is beginning, as state and city governments, universities and industry groups pursue a new agenda. 

The 1980s consensus was not a set of timeless truths uncovered by Milton Friedman and Bob Hawke, but a specific set of propositions developed through persistent, collaborative effort. An equivalent process is needed today. It will not be easy, but Australia has succeeded before. Balancing Act is helping to open up the conversation we need to have.


Tom Bentley is a writer and policy adviser. He was the director of Demos, a London-based think-tank, and deputy chief of staff to Prime Minister Julia Gillard. He is the co-author, with Jonathan West, of the Griffith REVIEW ebook Time for a New Consensus.

Jonathan West founded and directed Harvard’s Life Sciences Project and the Australian Innovation Research Centre. He is the co-author, with Tom Bentley, of the Griffith REVIEW ebook Time for a New Consensus.


This correspondence discusses Quarterly Essay 61, Balancing Act. To read the full essay, subscribe or buy the book.

This correspondence featured in Quarterly Essay 62, Firing Line.


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