Symposium: The Future of the ALP

Supply side social democracy: Where does Labor’s Knowledge Nation fit?

Shaun Wilson, The University of Sydney

The Federal ALP recently launched Knowledge Nation, the centrepiece of its de facto long-term economic strategy, which explicitly links education spending to the future development of the Australian economy. As this report by the Chifley Research Centre rightly notes, the declining commitment to education, R&D, and industry development by the present Government leaves serious policy challenges unaddressed and the future direction of Australia’s economy more uncertain than at any time since Federation (2001, p. 21). Knowledge Nation aims at using the public sector—particularly the Commonwealth Government—to drive the expansion of education-linked investment actively. It sees Australia’s competitive advantages in the greater Asia-Pacific region in information technology, medicine, on-line education, and other skilled services. Here, I consider aspects of the political and economic context in which Knowledge Nation is trying to find relevance and a broader public appeal. I argue that the success of the Knowledge Nation framework depends on getting the ‘institutional design’ of a high-wage, high-skilled economy right. Australia can learn from elsewhere—especially Scandinavia—but I caution against unrealistic optimism about the chances of producing institutions that will simultaneously support renewed domestic industry and social equality.

High and Low Roads: The Political Choice Facing the Australian Economy Today

To begin, I consider a (crude) distinction between the ‘high’ and ‘low’ road options that policy makers face in accommodating changing domestic and international realities. The high wage, high skill option for most developed countries aims at ensuring both continuity of some kind of dynamic manufacturing core and strong growth in high skilled services. The low wage, low skill route, by contrast, is premised on the argument that global economic realities create fewer options for successful public intervention and that the growth of low paid, low skill work—especially in services—is an unavoidable consequence of adjusting to the market-driven world.

The contrasting strategies of Sweden and the United States illustrate the logic of high and low road options in real economies. In the post-war period, the Swedish labour movement’s policy of ‘solidarity wages’ forced innovation on domestic business by imposing uniform wage costs, thereby reducing the viability of low wage, low skill industries. Although this wages model has been dealt some blows recently, powerful coalitions of interests continue to block the deregulation and retrenchment of Sweden’s employment and welfare systems (see Palan and Abbott, 1999, pp. 103–120). Relative wage compression and extensive decommodification in the labour market place clear limits on any downward adjustment type solutions. Swedish business thus continues to rely on high productivity, value-added industrial development. While commentators are right in stressing the breakdown of classical social democratic adjustment to global markets, at the very time that outside observers were proclaiming the ‘death’ of the Swedish model, domestic industry was remarkably well placed to enter new areas of economic growth, particularly in information technology. I believe that the institutional legacy of the Swedish model has been a decisive factor.

Developments in the American labour market since the end of the long boom stand in contrast to Sweden: the US provides archetype of the ‘low’ road, notwithstanding its high-tech sector. The United States allowed both the wage gap to increase and a huge growth in low skilled, low wage services to soak up the labour supply (see Mishel et al: 1999: 20). At the same time, average working hours have exploded, bucking OECD trends. The growth of low wage, low skilled services must be put in the bigger picture of institutional design: there are fewer macro limits on downward adjustment in the American model. Hence the growth in ‘low road’ industries, divergent productivity trends and a burgeoning current account deficit.

The success of Knowledge Nation depends on getting the 'institutional design' right.

Without public intervention to regulate and manage ‘institutional design’, even strong economies default in part to the ‘low road’. This is clearly the case because the high road—as the Swedish experience demonstrates—is consciously premised on preventing the low wage, low-skill alternative taking hold. I argue that Australia has allowed low wage, low skill adjustment to gain momentum with a virtual political consensus since the early 1980s administering deregulation of the labour, financial, and product markets along with very substantial retrenchment of the public sector.

Three developments underscore the scale of this transformation: Australia’s public sector workforce now accounts for less than 1 in 5 jobs (19.7 percent in March 2001)—a decline of over 11 percent in employment share since July 1983 (ABS, 2001). This is contributing to the hollowing out of middle incomes, and diminished state capacity. Second, the Australian dollar is now valued at less than half is pre-deregulation rate. If we accept that Australia must close its trade deficit by value-added exporting, it needs to renew domestic manufacturing as part of this. But new investment relies on capital imports, which become relatively more expensive under a weak exchange rate. In other words, long-term devaluation punishes capital intensive, value-added industries dependent on technology and component imports. This problem is already apparent for domestic manufacturing: Australian Industry Group research highlights rising costs for domestic manufacturers especially in the electrical industry with consequences for long term manufacturing investment (SMH 2001c). And third, Australia has been experiencing a relative and absolute growth in its low skill industry—against OECD trends (Bell et al, 2000: 182–187). Like the United States, these developments are consistent with a policy framework that has largely mistaken the importance of ‘institutional design’ for costly, inefficient government intervention.

While I stress here that preventing the low road option inevitably involves public intervention, government has also been an active ingredient in the new success stories of Finland and Ireland to which Australia and New Zealand are now turning in search of a way out of economic decline. The priority given to research in Finland, and the education and foreign investment strategies of Ireland are singled out as major factors in recent economic growth in these countries (SMH, 2001a). No doubt Ireland’s successes are attracting attention from policymakers here and elsewhere. But whether the so-called ‘Irish model’ is replicable in Australia (and New Zealand) is unclear. Although Ireland has spent public money in education, research, and industry development, it had the ‘advantage’ of being of an underdeveloped English speaking country in the European Union, which supported its development. Recent Scandinavian successes are probably less related to non-replicable—and thus more relevant—factors.

What would have the ‘high’ road for Australia looked like? My view is that it would have involved a mix of offensive and defensive policies: labour market regulation that promotes innovation and weakens incentives for the low road; greater public investment and a combination of defensive protection for existing industries with intervention in developing new ones. Instead, Australian governments crowed about market reforms as proof of the country’s readiness to embrace an export led economy. The sad reality is that these very reforms have been undermining capacity to sustain this policy shift.

Australia has allowed low wage, low skill adjustment to gain momentum.

International evidence shows why this is so. A number of studies confirm that countries with high levels of social expenditures adjust more successfully to the world economy: those countries with the most ‘open’ economies (measured by the proportion of national product exported) are those with the most comprehensive welfare states (see Hay, 2001, pp. 8–9). Social spending and social protections act as a buffer against the downside of adjustment to increased economic openness. So labour market deregulation, public sector employment decline, and narrowed access to social security merely increase the exposure of the Australian community to the risks of the global economy, while providing fewer resources to cope with change. The risks of global adjustment have been pooled among the losers from economic restructuring and from social dislocation. This is showing up everywhere in the politics of the ‘reform backlash’ that is alienating voters, in resistance to social and cultural modernity, and in the rise of anti-immigration neo-populism.

So where does Knowledge Nation fit? Underinvesting in education and training is consistent with a low wage route to global adjustment in which Australia supplies a cheap tourist venue, raw materials and other low skill services. Manufacturing—where it remains—is disarticulated and increasingly residual to the Australian and world economies. Dominant industries (mining, agriculture, and tourism) and their lobbies in Australia will continue to prefer a low dollar, making the import of capital on which Australian industry relies relatively more expensive. But in the long term, the low currency will reflect and reinforce Australia’s current account deficit. Observers of the global economic scene, who are hardly fussing, regulating Scandinavian social democrats, are sounding clearer and clearer warnings for Australia. Michael Porter, American theorist of ‘competitive advantage’, argues that contrary to the Howard Government’s positive message about the falling dollar, “a reliance on a devaluing currency to boost competitiveness is actually counter-productive” (see SMH, 2001b). The apparent competitive edge derived from a very devalued currency will soon be revealed as a fiction: we may yet experience an Australian life where books are too expensive and an economy dependent on imported capital equipment that is further beyond the reach of local industry.

Knowledge Nation: Linking Education and Investment?

Knowledge Nation accepts that Australia is in the midst of a serious policy failure, stemming from the run-down of the public institutions critical to the development and sustenance of the ‘new economy’. Knowledge Nation argues that biotechnology and information technology industries are only superficially developed in Australia, and that education spending is lagging further and further behind OECD averages. The strategy, therefore, is to increase public sector investment in education to improve research and development in ‘new economy’ industries, which might then generate exports to offset Australia’s current account problems.

However, it is not clear how the proposed public sector investment will be translated into employment and investment in Australia. The public sector has (perhaps understandably) few avenues of influence in Australia where the private sector’s reputation for innovation is very weak, and the industrial base is limited. Moreover, the recent Scandinavian examples show that existing companies have led the IT transformation, often at the centre of industry clusters of small and medium enterprises. The lack of enterprises with a history of innovation thus raises additional problems and risks for government.

The risks of global adjustment have been pooled among the losers from economic restructuring.

The most logical entity to pursue further development in ‘new economy’ areas is Telstra as a publicly owned enterprise. Why? Privatisation, I believe, will only guarantee that Telstra is driven by short-term profits. Telstra is a very large corporate entity in Asia: with foresight, an incoming Labor Government could well use Telstra as a public sector driver for further local industry development. More generally, it is recognised that the local research and education is not readily turned into local industry. Public-sector industry development agencies will have to spend and plan considerably to translate increased investment in skills and knowledge into capital investment and employment. This requires both money and a significant challenge to prevailing bureaucratic and corporate interests.

Supply Side Social Democracy: Why Knowledge Nation Will Depend on a New Institutional Design

Political competition between the mainstream left and right across the OECD is now defined by competing versions of supply side policies. Across the world, money supply is being conducted more independently of politics and there is near consensus across the mainstream left and right about ‘balancing budgets’. Outside Japan, expansionary fiscal policy is off the political agenda. ‘Neo-liberals’ argue for and run public policy to increase dependence on markets (especially dependence on the labour market). At the same time, ‘Third Way’ social democratic parties increasingly accept this policy framework, differentiating themselves with a complementary commitment to investment in workforce skills. As Anthony Giddens says in his own statement about the ‘knowledge economy’: “the key force in human capital development obviously has to be education. It is the main public investment that can foster both economic efficiency and civic cohesion” (2000, p. 73). Commitments to full employment at living wages, or publicly funded job creation, are now out the door as far as policy goes. The revised social compact, if you like, of mainstream social democrats is a commitment to a market economy shaped by education investments but a market economy—in which individuals and families still have to compete—nonetheless. Knowledge Nation operates within this frame of thinking.

By contrast, the Coalition is committed to a market model with little public investment. The Coalition is not committed to improving the education and skills of Australia’s workforce. Its treatment of education and new-found interest in reviving it are cynical. Most of the Government’s policies—with the possible exception of immigration, and then only for domestic political purposes—are driven towards expanding society’s dependence on the labour market, which it wants to deregulate as far as is politically feasible.

The revised social compact is a commitment to a market economy shaped by education investments.

Whether or not a Labor Government would implement the vision set out in Knowledge Nation to put the public sector back in the equation is only one question. The language and rhetoric of Knowledge Nation lacks a certain sincerity and fails to generate deep enthusiasm. But the Report cannot be dismissed as mere window dressing for a policy-free Opposition: at least it recognises the decline in Australia’s public infrastructure is feeding into economic failure and increased inequality.

A renewed industry focus by an incoming ALP government could give scope for the Australian Greens and environmental groups to press for the development of green industries in Australia. Equally, the direction outlined in the Report cannot help but highlight the crisis in public education. In Sydney, from where I write, there are several Federal electorates (including Blaxland, Chifley, Fowler and Reid) where over 60 percent of the workforce possess no post-school qualifications (Australian Electoral Commission, 2001), and where unemployment and social dislocation are profound problems. Public education is vital for combating class-based inequality. Big discrepancies in education, employment, and earnings by suburb and region, are being made worse by public sector retrenchment and industry decline, demanding attention and enhanced planning and co-ordination.

But the larger challenge for a Labor Government is institutional design. If it is serious about the ‘high’ road, domestic policy—wage and working hours regulation, active industry policy, and public investment—must reinforce its supply side ambitions which is tied closely to education spending and research. The government will need to challenge resistance to greater industry planning. The current climate is not encouraging. There are, for example, no strong voices taking the Coalition head-on over its plans for further diminishing the progressivity of the tax system, which complement its ongoing program of public sector retrenchment. Rising working hours and disappearing full-time jobs are symptoms of fragmentation and the failure of current policy. In the old Australia, economic and social policies were always connected by the defensive institutions of tariffs, White Australia, and wage earners’ welfare. If Australia is sustain a strong industrial economy and reverse trends towards inequality and low wages, Australian politics must take up the challenge of a new institutional design. Without this, Knowledge Nation and other policy reforms will fall short of their aspirations.


ABS, Australian Bureau of Statistics (2001) Wage and Salary Earners, Australia, Cat. No. 6248.0.

Australian Electoral Commission. Electoral Atlas, available online at:

Bell, S., R. Green and J. Burgess (2000) ‘Speed Limits to Growth and the Quality of Jobs: Economic Structure and the Current Account,’ in S. Bell. (Ed) The unemployment crisis in Australia: which way out? Cambridge University Press, Cambridge.

Chifley Research Centre (2001) An Agenda for the Knowledge Nation: Report of the Knowledge Nation Taskforce, Canberra, available online at

Giddens, A. (2000) The Third Way and Its Critics, Polity Press, Cambridge.

Hay, C. (2001) ‘Globalisation, Competitiveness and the Future of the Welfare State in Europe,’ Paper prepared for presentation at the European Community Studies Association’s International Conference, Madison, Wisconsin, 31 May—2 June.

Mishel, L., J. Bernstein and J, Schmitt (1999), The State of Working America, 1998–99, Cornell UP, Ithaca, New York.

Palan, R. and J. Abbott (1999) State Strategies in the Global Political Economy, Pinter, London.

SMH (2001a) “The mice that roared”, The Sydney Morning Herald, August 4.

SMH (2001b) “A devalued currency devalues the nation”, The Sydney Morning Herald, August 6.

SMH (2001c) “Spending begins at home as dollar takes a tumble”, The Sydney Morning Herald, August 4.

Shaun Wilson is lecturer in Political Economy at The University of Sydney.

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