Movers and shakers of Australia's economic miracle

Evan Jones, The University of Sydney

David Love Straw Polls, Paper Money, Viking/Penguin, 2001 (400 pp). ISBN 0-670-91092-9 (paperback) RRP $32.00.

For readers of the financial press, David Love was once a familiar name. He was a journalist for Fairfax, and then ran the much-reported ‘dry’ economic consultancy Syntec. Love has re-appeared from temporary obscurity with a polemic built around interviews with some famous Australian names in economic policy since the 1970s.

Love terms the last 30 years a revolutionary period in Australian finance and politics. His central theme is the pivotal importance of financial deregulation, which (he claims) ushered in a cascade of reform elsewhere in the economy. ‘[P]rogressively the whole Australian financial and capital structure became tied together in a web of economic rationality and financial competitiveness undreamed of before the 1970s’ (p.27). The supra-rationality of the banking system has ensured that capital finds its best advantage.

There are two other dimensions to Love’s claim of an Australian economic miracle in the 1990s. Labour productivity increased to unprecedented levels, put down to a new ‘cooperativeness’ on the part of labour to work flexibly and ditch old habits. Moreover, a massive rise in household wealth, centred on housing valuations, gave a ‘huge one-off lift to the national psyche’, materially reflected in a spending boom (the contribution of a massive rise in household indebtedness is not mentioned).

It is a matter of pride to Love that Australia survived the Asian crisis intact, in spite of Australian export dependence on the region. The book acknowledges that national success or failure does not depend crudely on what economists call ‘the fundamentals’ — low inflation, budget balance and external balance. The countries that succumbed to the Asian crisis had better ‘fundamentals’ than did Australia, so Love explores behind the usual indicators. To do so, Love interviews thirteen men, movers and shakers in the corridors of power, in search of how the miracle was built and how to prevent its early demise.

Love picks out John Hewson and Paul Keating as the key forces in the revolution. Love infers that economic reform depends upon individuals of vision and energy. However, they need to be in a position to influence events. Hewson and Keating had those qualities, were in the right place at the right time, and so the story of Australian reform takes on a bipartisan character.

Love credits Hewson, just back in Australia in 1974 from IMF employment, with the view that ‘once you had a banking system fully competitive, the freeing up of the rest of the economy would follow’ (p.55). Says Love, ‘there is something Napoleonic about this vision’.

While adviser in Treasurer Philip Lynch’s office in 1976-77, Hewson recommended the tender system for selling government bonds. This structure was intended to avoid the potential instability arising from the authorities setting a bond rate that defied market expectations. Hewson also enhanced the power of Reserve Bank spokespeople to offer advice to Ministers directly, instead of being subordinate to Treasury directives. Finally, Hewson pushed for a thorough-going inquiry into the Australian financial system, against much opposition, successfully embodied in the Campbell Inquiry and Report.

Keating takes undue credit for industrial revitalization during his reign.

Predictably, Paul Keating denies any contribution from Hewson and the Fraser years. He claims that, upon coming to office in 1983, he found the Campbell Report yellowing on the shelves! Keating had to get the whole thing going single-handedly, with some help from the Reserve Bank. Keating has no need of adulation, but Love estimates that ‘he has claim to being the central figure in Australian politico-economics in the past quarter of a century’ (p.110).

The Keating interview reflects a man who believes whole-heartedly in that estimate. It’s unfortunate that the flaws in the man don’t get more attention, and they aren’t canvassed here. The power of Keating’s personality oozes from the words on the page, and there can be no doubt about the man’s special qualities. Keating presided over the hard work of five years of expenditure restraint, while retaining a modicum of equity to the process.

But Keating’s verbal talents can make even rubbish sound convincing. He still believes in the crowding out hypothesis and the twin deficits thesis. And he is still taking credit, perversely, for the early 1990s recession, which destroyed thousands of businesses. But then the infamous Brown/Hatton piggery into which Keating bought in 1991 was treated quite favourably by the Commonwealth Bank, highlighting that recessions treat some pigs more equally than others.

Keating also takes undue credit for industrial revitalization during his reign. Yet the automobile plan and the textile/clothing/footwear plan were inherited from Fraser, and the steel and heavy engineering plans were foisted on the Government by the companies and unions involved. Later industry plans in information technology, pharmaceuticals, and telecommunications were administered within other despised and under-resourced departments. The venture capital initiative was a debacle; similarly vocational education. Keating boasts of introducing ‘contestability’ to airlines and electricity without acknowledging the accompanying mess.

One mentions these details because the failures as well as the successes of the Hawke/Keating years deserve a hearing, and the jury is still out on which particular policies are responsible for the good economic indicators of the 1990s.

Love is not well versed in the details, and often doesn’t use his interviews to best effect. Love’s reading appears to be centred on financial journalists and Reserve Bank research papers. It would have been desirable to have had Love leverage his subjects into divulging more ‘inside dope’ as to how some key decisions were achieved (like the privatisation of the iconic Commonwealth Bank).

Love never fails to interpret trade unions and their leaders as troglodytes.

There is a marked lack of historical perspective in the book, so that both interviewer and interviewee can get away with crude generalisations on the past. Love appears to be of the school that believes that concerns for innovation or efficiency were wholly absent in Australia before John Hewson and Paul Keating came along. So when Barry Hughes mentions, in a throwaway line, the ‘design genius’ behind the Brabham Repco racing car (p.246), there is no context for Love to ground the claim or pick up on its lessons. Keating thinks that 1960s Australian automobiles were worthless, and the Chief Executive of Repco (Charles McGrath) is a key figure in the free-traders’ pantheon of McEwen era villains. Jack Brabham won Formula One Grand Prix races in 1966 (including the Championship) and 1967 in a ‘home-made’ car built on a Repco engine, but we can’t let the facts get in the way of perpetuation of the myths of the period.

Surprisingly, Love is not well informed on the financial sector, the sector that is seen as the lynchpin of the economic transformation. His understanding of the trading banks’ excesses in the 1980s relies on the glib claim that the banks were staffed by ill-tutored sons of the petty bourgeoisie who hailed from Moree or Gooniwindi (p.71, 146). The problem with bank culture was solved when they started hiring people with university degrees to match those employed by the foreign intruders. This is ignorant and offensive stuff. Many loan officers from country areas were rural specialists, and they were both competent and cautious. All the pressures for extravagant lending came from the top. Love’s loose generalisations need to be compared with the informed account from a bank insider, in Naked Among Cannibals, of the State Bank of New South Wales during this period.

Love interviews John Phillips, Deputy-Governor of the Reserve Bank during the 1980s. Phillips does admit fault regarding maintaining liquidity after the sharemarket crash of October 1987, but then immediately rushes on to blame the bankers for the whole fiasco — ‘we overrated the skills of the bankers’ (p.78). Deregulation was not at fault; the banks were cosseted too long, etc. This scapegoating neatly sidesteps the culpability of the authorities and the advisers in not confronting the special character of banking, and indeed Australia’s volatile banking history, before the post-war regulatory system was comprehensively dismantled.

Fortunately, Love interviews David Clarke, one of the creators of the Macquarie Bank. MacBank, formed by a couple of principals in the Hill Samuel merchant bank in 1971, is undoubtedly a homegrown success story, and is now exporting financial services overseas. Clarke claims credit for two innovations with a significant impact in retail banking — the cash management trust in 1980, and home mortgage securitisation in 1993. Both these developments linked the retail sector to professional instruments, improving access and rates to the household customer.

MacBank provides tangible evidence for Love’s argument for the finance sector as the fulcrum of economic rationality. Unfortunately, other dimensions mar the record. The small business sector has faced increasing marginalisation in the last decade, including malpractice from the major banks, as yet unchecked by any regulatory authorities. Bank lending continues to be dictated partly by patronage. The story is thus mixed, but the complexities are absent from this optimistic account.

Is unfettered globalisation good or dangerous? Love can’t make up his mind.

Love’s book has one other failing. Love never fails to interpret trade unions and their leaders as troglodytes, holding back reform and the prospects of the necessary productivity advances. His interviewees — Paul Keating, Bob Hawke, Barry Hughes — consistently tell a different story, but it doesn’t sink in. However, one of his interviewees is in agreement — Des Moore, who left the federal Treasury in 1987 to join the ‘dry’ Institute of Public Affairs and then start his own ‘free-market’ think tank. Moore is credited with ‘relentless intellectual honesty’ (p.318), but still can’t confront that the Accord was a vehicle for wage (and inflation) restraint in the 1980s. The interview with the ideologically rigid Moore highlights that Labor exercised sound judgment in choosing the homespun Bernie Fraser over Moore as Secretary of the Treasury on John Stone’s departure.

Bernie Fraser is interviewed here in his capacity as Governor of the Reserve Bank (from 1989 to 1996). Fraser has been painted by the ‘independent central bank’ aficionados as a Keating functionary, but he comes across here as a man with several memorable successes to his name. The first was the announcement of an interest rate reduction in January 1990. This was a break with English central bank tradition of secrecy, and was later apparently copied in the UK and the USA. The second was a successful defense of the Australian dollar against currency speculators in December 1991/January 1992, and again in September 1993. Reserve Bank Bulletins mention another important intervention in August 1992 (in reaction to a deficit Labor budget), surprisingly not mentioned in the interview. Fraser also recommended a better Asian focus from the Western-centred Bank for International Settlements. The 1997 Asian crisis legitimised Fraser’s concern but also stalled any institutional progress.

Love has used this book as a learning vehicle for himself, confronting that the economists’ conventional bag of indicators might not provide sufficient lessons for the robustness of a national economy in the face of threatening global forces. He delves into ‘geo-politics’ at his peril, preoccupied with the stability of the Asian region. Love is especially preoccupied with a looming conflict between the US and China, not least over Taiwan. Whose side will an Australian government take?

Regional stability depends on Australia siding with China rather than the US. That prospect is imperiled by American pressure on Australia and by the Howard Government’s seeming acquiescence to its powerful friend. Malcolm Fraser is in the pro-China camp, having discovered belatedly that the Americans can’t be trusted, upon discovering in Robert MacNamara’s Vietnam memoir that the American presidency was behind the assassination of its ally, South Vietnam Premier Ngo Dinh Diem in 1963 (p.35). This is what the Americans do to their friends!

There is much criticism of the Howard Government in the book, perceived in Asia (and Australia) as playing the ‘deputy sheriff’ role to the US. There is particular criticism of Howard’s presumed role in the deterioration of relations with Indonesia — linked to its triumphalism over East Timor (the ANU’s doyen of Indonesia watchers, Heinz Arndt, claims undue influence of the ‘East Timor lobby’); and the Government’s acquiescence in US/IMF compounding of Indonesia’s plight after the Asian crisis.

A philosophical tension pervades the book. Love is supportive of open economies and open financial systems, but is pathological about the destructive capacity of ‘hedge funds’ (a synonym for currency speculators) to generate radical instability of national economies. He has also confronted the venality of great power politics, insofar as the US can act to save South Korea by pressuring allies for concerted intervention to save its currency and banking system, while tolerating the destruction of Indonesia and Thailand.

Is unfettered globalisation good or dangerous? Love can’t make up his mind. Behind the open market dream lurks demons. Love’s conclusion involves a reversion to purely economic nostrums — the only way to keep the global bogies at bay (currency speculators, invasion of the northern hordes, etc.) is to ensure the perpetuation of the 1990s economic miracle of above-average growth rates. Love is not, however, optimistic that the forces necessary to achieve the further productivity gains underpinning such growth can be collectively organised for the battle ahead.


Graham Hand, Naked Among Cannibals: What really happens inside Australian banks, Crows Nest, Allen & Unwin, 2001.

Evan Jones is Associate Professor of Political Economy in the School of Economics and Political Science, The University of Sydney.

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