7 September 2001

The Third Way: Pygmy or global ambitions for social democracy?

The Hon. Duncan Kerr M.P.

Abridged version of an address to the conference “The Third Way: a Policy Framework for Australia?” Centre for Applied Economic Research, University of New South Wales, 13 July 2001.

The Third Way project has been the subject of heated debate since the British Labour Party adopted it under the banner heading of “New Labour”. The jury is still assessing the pros and cons of this application of the project. That assessment is taking place within Britain itself, and in Western democratic nations like Australia facing similar theoretical and practical challenges in taking social democracy forwards.

Mark Latham gave an address at this conference with a succinct and explicit statement of the governing paradigm of the Third Way. Observing that currently “social democratic parties are experiencing a certain emptiness,” he asserts: “For Labour parties around the world the biggest question is how we can reform the welfare state so that it can deliver social justice within the budget restraints imposed by membership of the global economy.”

Here Mark and I part company. Before I explain how and why we part ways, it is important to note the large areas of agreement we (and most other Third Way advocates) share. Each of us recognises that globalisation has fundamentally transformed the task of government, so that many questions that were once decided within the exclusive domain of national governments can no longer be decided there. Each of us acknowledges that open markets have been a key to post-war strong global economic growth, and that this growth has been unequally and unfairly distributed. We agree that these transformations demand new thinking.

Wrapping an uncritical acceptance of gloablisation with the rhetoric of the Third Way offers only self-deception.

But Mark’s way of defining the “biggest task” facing labour parties assumes that our agendas must be forever squeezed into the existing “constraints imposed by membership of the global economy”. Do social democrats have no economic agenda of our own, or are we consigned to fiddling with a social agenda itself limited by implicit or explicit acceptance of neo-liberalism?

In my view wrapping up an uncritical acceptance of globalisation with the rhetoric of the Third Way offers social democrats only self-deception. Even if the public sector is privatised to fund recurrent expenditure, or ‘restructured’ to make it more efficient, or reduced to a residual role in support of privileging the individual, the structural squeeze imposed by the “constraints imposed by membership of the global economy” will remain. And unless we do something to alter its operations, its embrace will be ever tighter. Passive long term acceptance of globalisation in its current form risks seeing labour parties forced to offer electors only soothing words, while emptying the social democratic project of most or all real content. It risks labour parties losing their deep-rooted support among electors increasingly cynical and vulnerable to populism. I do not believe it will be possible for the social democratic tradition to survive that experience.

The Golden Straitjacket

The idea that there is no alternative, and that citizens and nation states are powerless, underpins much of current Third Way thinking. This idea is best captured in New York Times correspondent Tom Friedman’s phrase the “Golden Straitjacket”. He used this term to describe the elements of policy now required of national governments by global capital markets, to sustain the value of their currencies and to remain able to attract or even retain foreign investment:

To fit into the Golden Straitjacket a country must either adopt, or be seen as moving toward, the following golden rules: making the private sector the primary engine of its economic growth, maintaining a low rate of inflation and price stability, shrinking the size of its state bureaucracy, maintaining as close to a balanced budget as possible, if not a surplus, eliminating and lowering tariffs on imported goods, removing restrictions on foreign investment, getting rid of quotas and domestic monopolies, increasing exports, privatizing state-owned industries and utilities, deregulating capital markets and making its currency convertible, opening its industries, stock, and bond markets to direct foreign ownership and investment, deregulating its economy to promote as much domestic competition as possible… When you stitch all of these pieces together you have the Golden Straitjacket (Friedman 1999: 86-7).

Yet is it all that clear-cut? Close analysis suggests we are dangerously close to throwing the baby out with the bathwater. If we run down the elements of our common citizenship and make bare the social safety net, what will be left for the dispossessed? What will hold together societies that are increasingly being polarised between the rich and the poor?

Dani Rodrik, author of Has Globalization Gone Too Far? (1997), points out that until the recent past there has been an unmistakable positive correlation between a nation’s openness to trade and the amount it spends on social programmes. In his view the social welfare state has been the flip side of the open economy. Its unravelling may undermine the whole edifice.

Further trade liberalisation will not be possible unless labour and environment standards are taken into account

This is rapidly becoming a much more broadly accepted view. In essays published since the influential The Lexus and the Olive Tree in which he described the Golden Straitjacket, Tom Friedman himself gives greater importance to the legacy of the social welfare state, arguing that attention to the issues of social safety nets may be a precondition to the health of the global economy.

This opinion is shared by the OECD (see its landmark publication Open Markets Matter, 1998), the Secretary General of the United Nations, and the head of the World Bank. Most importantly, it is increasingly the demand of huge numbers of strongly outspoken citizens and protest groups—some violent and counterproductive, but most simply demanding an end to increasing inequality and attention to the needs of those who have borne the costs of, not gained from, overall economic growth.

It is also becoming increasingly clear that further moves towards global trade liberalisation will not be possible unless, at a minimum, issues of labour and environment standards are taken into account. Even the Business Roundtable, the association of chief executives of the United States’ 150 biggest companies, now accepts and advocates this.

The Squeeze of the Golden Straitjacket: The Australian Example

When I entered the Australian parliament in 1987, it was possible to imagine that Australia would resist the seductive claims of globalisation. Australia had high levels of public ownership, including a national bank. Its telecommunications system was state-owned. It had high (albeit falling) tariffs to protect local manufacturing. The government had put sectoral plans in place for the car and steel industries. Australia had the best system of public health-care in the world. State education was free, and there were no fees for entry to university. There were no private universities. The government had the power to regulate the money supply. Most revenue was raised through (steeply) progressive income taxes.

Just fourteen years later, Australia has been transformed utterly. Many changes were wrought by the Hawke and Keating Labor governments, in which I served. The conservative Howard government that came to power in 1996 has contributed regressive social reform to the mix.

Australia now has low levels of public ownership. Successive governments have sold the national bank and the national airline, opened the telecommunications market to competition and partly privatised the national telecommunications carrier. Tariffs have been reduced to negligible levels. Industry plans have not been renewed. Private health insurance has been subsidised and the public system allowed to run down. The federal government now provides more funds to support private education than it provides to assist state schools. Fees or charges have been introduced for public universities. Private universities have been established. Governments have forgone the power to regulate the money supply. Income tax rates have been repeatedly reduced and a new, regressive system of indirect taxation, the goods and services tax (GST), has been introduced.

I highlight this social transformation in my book Elect the Ambassador! Building Democracy in a Globalised World (Kerr 2001) because it was so illustrative of the policy constraints that flow from an acceptance of the disciplines of the “golden straitjacket.” My observations are neither a mea culpa nor a ‘look back in anger’.

Whatever the merit of judgments made by governments during those turbulent years, Australia is now comprehensively enmeshed in the global economy. Australia’s leaders accepted the need for these policies because, like Friedman, they believed they were necessary to remain internationally competitive, to attract and retain investment and to shift resources to areas of new opportunity. As a result many of the levers that were formerly central to Keynesian national economic policy-setting—the exchange rate, tariffs and control over the money supply—are no longer available. These key decisions are now left, unregulated, to “the market” or granted to remote and unaccountable international institutions. This pattern has been repeated, with minor variants, in country after country across the globe.

Infiltration of the public sector by the values and attitudes of the market corrupts the value-base of the public service.

I see it as destructive to identify social democracy’s future main task as working within these constraints. Mark Latham advocates that we rely more on private and local community strengthening, and on public and private partnerships—but already we are running down the reservoirs of common citizenship we once took for granted. Access to health, education, a clean environment and a range of social and cultural provisions is a public matter, based on well-grounded rights of citizenship in a democratic society. So too is accountability. For this reason, infiltration of the public sector by the values and attitudes of the market corrupts the value-base of the public service.

Communities can survive the occasional failure of privatised (or public) energy or water supplies, but can real democracy survive the shrinkage of quality public education? Can we hold together as a society if the rich separate themselves physically from the rest of us and retreat to live in enclaves patrolled by private security firms—leaving even law and order and the provision of policing as a poorly funded public residue?

Why should policies to address these looming issues and good economics be thought incompatible? If neo-liberal economic policies are followed at the cost of social expenditure, a national economy can only function at the cost of growing inequality. We need to think about not only ‘economic efficiency’ but also ‘social (or human) inefficiency’. Idle human resources are even more costly than idle material resources.

Building Democracy in a Globalised World

In the short term, the first order challenge for any incoming social democratic government must be to restore what it can of the social safety net within the existing constraints of the global economy. That is in itself a crucial task.

Today, to achieve its wider objectives, social democracy needs global, not merely national, ambitions. Social democracy can only be built on the willingness to address the twin issues of growth and fairness. That is why we must now give priority to developing international approaches that seek to tame the anarchy of financial markets, to establish multilateral agreements on minimum social and labour standards, to set global environmental benchmarks and to curb transnational tax avoidance.

Only by shifting the focus of democratic debates to the international sphere can solutions for these, and similar issues be imagined. It means that the current undemocratic way in which these issues are decided must be challenged. How to achieve this—rather than seeking to squeeze the social democratic project into an ever-tighter straitjacket of what the existing order of the global economy allows—is in my view the biggest question facing Labour parties around the world.

These ideas, developed in more detail in Elect the Ambassador!, are intended to open a conversation that social democrats need to have, rather than to lay down a fixed plan.

It is now commonplace to recognise that globalisation has shifted power from local and national government to transnational institutions. Globalisation has unleashed a ‘revolution’ that is smashing the underpinning of purely national politics. The way we trade, the way we communicate and the way we govern our lives—all are affected by this revolution.

No national government acting alone can call a halt to these processes; any more than the Luddites could halt the industrial revolution or Canute could turn back the tide. But we are not just powerless passengers along for the ride, whether we like it or not. Globalisation also presents us with opportunities to begin anew: building responsible and democratic institutions of international government.

Today, to achieve its wider objectives, social democracy needs global, not merely national, ambitions.

Globalisation has produced greater productivity and economic growth, but at the cost of greater disparity of wealth and an increasing exclusion of the poor. It has corroded and limited any single national government’s ability to sustain what the welfare state achieved. This is not to deny that defending and reshaping what remains of the welfare state to better accommodate new needs in education, housing, health and aged care is still a worthwhile national objective. Mark Latham and I also agree on that point. But, increasingly, defence of social bargains will not be possible at a national level.

Unless discussion of these issues is shifted into the international arena, the pressure to reduce expenditure on social programs is likely to become irresistible. Democracy will become a hollow shell if we persist in thinking about issues of equity and rights only on a national scale.

Nor is it enough to “think globally but act locally”. Our world has changed. There is nothing unambiguously ‘local’ remaining. Effective democratic participation in our world is now not possible unless we both think and act globally. Some share of our energy and commitment as citizens, therefore, has to be devoted to asserting our rights as members of the global community. As former US Deputy Secretary of State Strobe Talbot correctly points out, the very word ‘foreign’ is becoming obsolete. The fate of social democracy will be determined by how we adapt to that reality.

REFERENCES

Friedman, Thomas (1999) The Lexus and the Olive Tree, HarperCollins, London.

Kerr, Duncan (2001) Elect the Ambassador! Building Democracy in a Globalised World, Pluto Press, Sydney.

Organisation for Economic Cooperation and Development (1998) Open Markets Matter: The Benefits of Trade and Investment Liberalisation, OECD, Paris.

Rodrik, Dani (1997) Has Globalization Gone Too Far? Institute for International Economics, Washington, D.C.

The Hon Duncan Kerr is Member for Denison in the Federal House of Representatives. He is currently the Shadow Minister for Justice and Customs and Shadow Minister for Population.

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The Drawing Board: An Australian Review of Public Affairs
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