4 September 2007, Perth, Western Australia, Australia
Ken Henry was Secretary to the Department of Treasury 2001-11. The speech is entitled 'Challenges Confronting Economic Policy Advisers' and this is only the concluding excerpt. The full speech is here.
I have argued that economic policy advisors must provide ministers with advice which is analytically-sound, strategically-focused and compelling. When advisors do this, they contribute to the development of broader economic narratives. They furnish ministers with a set of themes, priorities and strategies which can be woven into compelling economic stories – stories, which, if told well, can powerfully shape policy debate in the community.
Narratives are stories, in whatever form they take – oral, written or visual. Conventional narratives in literature or the cinema have a beginning, middle and end. Good ones provide drama, arising from a predicament that ensnares the principal character; they have plenty of action, the steps the character takes to escape the predicament, with unexpected plot twists and complications thrown in; and there is a resolution, culminating in the achievement of a visionary aspiration or objective.
Economic narratives can be viewed in a similar way. They are stories about our economic development: they describe a context of economic opportunities and risks we face as a society; they detail the policy actions we should take to respond to these; and they talk about the goals and aspirations we can realise, if we are successful.
Economic narratives have played a significant role in Australian public life. Each phase of Australia’s economic development – the Federation of the Australian colonies in 1901, the Great Depression, post-World War II reconstruction, the period of stagflation in the 1970s and early 1980s, and the subsequent internationalisation of the Australian economy, continuing to this day – has been accompanied by its own economic narrative. These narratives drew on deeply-held community values and fears; they were invoked in support of policy reform and institutional change; and they gave meaning and coherence to events as they unfolded.
Narratives are a powerful, and perhaps poorly understood, leadership tool. They provide depth, focus and context for policy debate, furnishing advocates with persuasive arguments in favour of, and sometimes against, policy reform. They can be a force for good or ill. Good narratives are grounded in sound economic thinking and policy analysis. They foster support for reforms which strengthen market frameworks, improve the allocation of resources and, over time, increase the wellbeing of the Australian people. Dysfunctional narratives, on the other hand, are often associated with narrow interests and misguided policies – they can be invoked to resist necessary reforms, to the detriment of the community; they can stimulate fears and anxieties, without offering solutions.
Public debate inevitably involves a contest between alternative, overlapping and conflicting narratives. One of the enduring benefits of an open society is the opportunity it provides for this contest to be played out. It is quite significant that the contest is not always played out between the major political parties. On many issues, the government and opposition of the day find themselves in broad agreement. Yet there is still a contest. In a pragmatic, somewhat sceptical, and empirically-motivated society like Australia, narrative contests often turn on practical results and commonsense. But they also turn on values – the capacity of a narrative to ‘speak to’, or ‘connect with’, the average person’s experiences and aspirations. I’ll return to this point.
While good narratives can be very powerful motivators, it’s worth bearing in mind that they can also become dysfunctional. A good story isn’t necessarily based on assumptions and propositions of enduring relevance, and it can take one down paths of unintended, perhaps even perverse, consequences.
I’ve been speaking at a rather abstract level. Let me make things more concrete by referring to the most important, and arguably enduring, Australian economic narrative in the past quarter century – the proposition that Australia had to open its economy to the world to achieve sustainable growth and rising living standards. Or, to put it slightly differently, the imperative of developing an economy in which international engagement and economic security were in harmony.
I am talking about the broad sweep of economic reforms that started in the early 1980s, were deepened and broadened in the 1990s and added to in this decade. The same economic narrative continues to drive policy development today. You are all familiar with the main elements of the story, but the bits I’d highlight include: the floating of the currency in 1983 and the liberalisation of the capital account, the liberalisation of the domestic financial sector, the progressive dismantling of industry protection, competition-enhancing product market reforms and greater labour market flexibility.
Market liberalising measures exposed sheltered parts of the economy to competitive forces, both external and internal, making the economy more flexible, and ultimately more resilient and productive. They drove access to cheaper, better and a wider range of inputs and final goods and services; a more efficient allocation of labour and capital, supporting specialisation in areas of comparative advantage; access to international financial markets, enabling the financing of investment, smoothing of consumption, and management of risk; transfer of technology and skills; and enhanced competition in domestic markets, promoting innovation and competitive pricing. And they were complemented by a wider range of reforms designed to enhance the efficiency of resource allocation and support macroeconomic stability, including: tax reform; strong medium-term frameworks for monetary and fiscal policy; a clearer articulation of the operational independence of the Reserve Bank of Australia; and measures to boost national savings, including through superannuation, and reduce public sector debt.
Taken together, these reforms fundamentally changed Australia’s system of economic governance. They took us from a highly-protected and over-regulated economy with a short-term and reactive macroeconomic policy focus, to an open, flexible and dynamic economy, with expectations anchored by credible macroeconomic policy frameworks.
The results of the economic transformation have been well documented. Australia is experiencing its 16th consecutive year of growth; our living standards, measured by real GDP per capita, are now well above the OECD average; unemployment is at 32 year lows; workforce participation is at [ ] year highs; and inflation is well contained, the headline rate having averaged just [ ] per cent a year since the economy emerged from the recession of the early 1990s. Just as importantly, our more flexible economy has proven extraordinarily resilient in the face of major shocks, including the Asian financial crisis of 1997-98; the bursting of the tech-bubble in 2000; the United States recession in 2001; a very severe drought; and, in recent years, the global commodities boom that has given us terms of trade that, at other times in our history, would have sparked damaging inflation breakouts and macroeconomic policy crisis.
The story I have outlined above is well known, but it is important not to lose sight of the powerful narrative which underpinned, gave direction to, and marshalled support for these changes: The proposition that Australia had to open its economy to achieve sustained growth and rising living standards.
The ultimate mark of this narrative’s success is that it is today taken for granted. When it was first articulated, however, it challenged a long-established conventional wisdom – the view, held by many policy-makers and opinion-leaders throughout Australia’s history, that economic security, that is, both prosperity and stability, could be achieved only by insulating the economy from market forces, both international and domestic. The new narrative did not overturn this protectionist belief-system overnight, but in the course of the 1980s it increasingly set the tone for national debate on economic policy. A small number of academics, policy-makers and political figures had always championed its insights, but it was eventually accepted, grudgingly in some cases, by a much wider array of opinion leaders and interest groups, including unions and formerly protected industry sectors. Ultimately, it won the support of a large section of the Australian community. It told them a story about Australia’s place in the world, and the changes we needed to make to secure our economy, that was both credible and compelling.
Some might argue that the market-opening reforms of the past quarter century could have taken place without any supporting narrative. They might point out that by the early 1980s it was obvious to all that Australia’s pre-reform economic model was not working. And they might add that once the initial reforms were in place – those that exposed the economy to the discipline of international markets – the pressure for subsequent measures, especially to increase the flexibility of product and labour markets, was unavoidable. There is something in these observations, but they are overstated. Moreover, it doesn’t follow that the narrative I have been talking about played no role. By the early 1980s it should have been obvious to all that the inward-focussed, heavily regulated, protectionist model was failing. But it was far from obvious to all that the market liberalising initiatives of late 1983 and 1984 were necessary. They were, in fact, quite controversial. One reason for their being so controversial was the fact that, at the time, the compelling narrative I have been talking about had not been clearly articulated. Indeed, it wasn’t until after Treasurer Keating’s famous ‘banana republic’ statement in the middle of 1986 that the narrative started to gain traction.
Further support for the power of the narrative comes from noting that when governments in other countries have introduced ambitious reforms without persuasive narratives that could be understood and accepted by their citizens, the reforms have met with strong resistance; in most cases, reforming governments have lost office. Australia’s dominant, market-opening economic narrative, in contrast, has proved remarkably resilient. Its core promise – to bring international engagement and economic security into harmony – took some time to realise. In the early years, there were some dramatic setbacks. The early steps to open the economy exposed it more directly to the harsh judgements and frequent vagaries of international capital markets. In the course of the 1980s, we experienced dramatic swings in the value of the currency, our current account blew out and our foreign indebtedness escalated. Yet throughout this period of instability and turmoil, mainstream political and community support for the market-opening narrative did not seriously falter. Even in the midst of the recession of the early 1990s, with the unemployment rate climbing to 11.2 per cent, the narrative wasn’t seriously damaged. While there certainly was some vigorous debate, as one would expect in an open society, the reform imperative had developed sufficient momentum to sustain forward progress in those difficult years. Perhaps nothing better makes that point than the fact that in 1992, with unemployment at 10.8 per cent, tariffs were cut.
The dominant economic narrative of the past quarter century has proved remarkably resilient and influential. It’s worth considering why that has been the case. I would highlight three things. First, the narrative articulated clearly an embarrassing failure – our standard of living was falling relative to that of an increasingly integrated developed world. Second, it appealed to deeply-held community values and aspirations – our nation’s enduring quest for economic stability and prosperity, and, at the individual level, the high value we place on opportunity. And third, it provided a clear statement of the reform strategy, grounded in well-reasoned economic principles – setting out what we needed to do, as a society, and why, to respond to the challenge.
Ultimately, as I have said, the particular power of this narrative was its ability to reconcile, to bring into harmony, two seemingly contradictory realities, our desire for economic security, on the one hand, and the necessity of international engagement, on the other.
The dominant narrative of the past 25 years is no less relevant today. The Government’s wide-ranging and ambitious international policy agenda attests to that – our hosting of the G-20 forum of finance ministers and central bankers last year, our hosting of APEC this year, our commitment to institution-building in the Pacific, the effective partnership we are building with Indonesia, our close ties with other key regional powers. Important parts of the domestic reform agenda can also be seen as part of that dominant narrative.
But I wonder whether the very success of the narrative – reflected in the fact that Australia’s economy is now open, flexible and resilient – won’t have some people wondering about a broader narrative that might support the next phase of our economic development.
I don’t have such a narrative in my top drawer; and even if I did, it would be presumptuous of me to start reading from it. But if I were to sit down and write one, I reckon I would start by observing that most of the big policy issues we talk about today concern attempts to reconcile, or bring into harmony, the ideas of opportunity and sustainability. These are broader concepts than international engagement and economic stability – the two key elements of our current narrative – and they have been with us for centuries, not decades.
The concepts of opportunity and sustainability underpin a range of economic, environmental and social policy debates. Some of their economic policy dimensions are well understood. The Government’s two Intergenerational Reports, issued in 2002 and earlier this year, have highlighted a number of these. Those reports have drawn attention to the fiscal, and broader economic, pressures associated with our ageing population and provided a framework for thinking about how best to respond to them. This framework is summed up in the 3Ps – the truism that our ability to satisfy the aspirations of future generations of Australians depends upon our population, the level of labour force participation, and our productivity. The central message of the two IGRs has been that our ability to satisfy those aspirations, and also to secure the long-term sustainability of the budget, depends on the pursuit of further productivity- and participation-enhancing reforms.
Labour force participation relates to a broader notion of economic opportunity. Policies that lift labour force participation – including vocational education and training, tax and welfare changes to reduce disincentives to work, retraining of the long-term unemployed and employment initiatives for Indigenous Australians – also enhance economic opportunities. As does anything that governments might be able to do to ensure, in Noel Pearson’s compelling words, that Indigenous people ‘have the capabilities to choose a life that they have reason to value’.
The enhancement of economic opportunity, based on positive incentives and robust capabilities, remains the most practical thing governments can do to advance the development of their citizens.
But what about sustainability? Many Australians would see development as being unsustainable, almost by definition, and they would view the enhancement of economic opportunity as being antithetical to sustainability. Because so much of our past expression of economic opportunity appears to have been associated with environmental degradation, they might appear to have a strong argument – being able to point to the destruction of about 99 per cent of our temperate native grasslands and the biodiversity they used to contain; extensive weed infestation, soil erosion and salinity; the extermination, in recent times, of 61 species of flora and 54 species of fauna; and the fact that another 1,551 species of flora and fauna are regarded by the Department of Environment and Water Resources as either ‘critically endangered’, ‘endangered’, ‘vulnerable’ or ‘conservation dependent’.
But this view, understandable as it is, is based on a misunderstanding of economic opportunity and, indeed, of development. Economists see opportunity and sustainability as being very closely related concepts: unless I can sustain past achievements am I not denying myself the opportunity of further development?
Indeed, many economists would agree that our improved living standards have not always been consistent with sustainable development, given that, unlike the people from Europe who came to this continent 220 years ago, we do not have the opportunity to appreciate the existence of species like the thylacine and 114 others. Few of us will ever see a yellow-footed rock wallaby or a hairy nosed wombat. Those who went before us have denied us these opportunities. And in that loss of opportunity there has been, in the language of Nobel Laureate Amartya Sen, a loss of freedom – a loss of ‘freedom to have – or safeguard – what (we) value and to which (we) have reason to attach importance’. And that freedom is a constitutive component of development.
A concern with sustainability, then, can be viewed as safeguarding a fundamental component of development.
And Australians have more reasons than most for thinking about opportunity and sustainability. Ours is the driest inhabited continent on earth and, if the climate change science proves right, the inhabited parts of the continent are only going to get a lot dryer. The energy-intensity of Australian production is well above the OECD average, and climate change mitigation efforts will make energy more expensive. We have the most geographically dispersed population among OECD countries and, if the central forecasts of the future freight task are correct, we will witness, over the next 15 years, a doubling of the number of trucks on roads that are already under considerable pressure. While this is true also of a number of other countries, our population is about to start ageing rapidly as a consequence of the collapse in the birth rate that occurred in the late 1960s and 1970s. Several of our neighbours in the Pacific are becoming increasingly fragile, with increasing expectations on us to assist them address deep seated governance and development challenges. Closer to home, the life expectancy of Indigenous males is 17 years less than non-Indigenous, Indigenous imprisonment rates are 17 times the national rate and Indigenous infant mortality rate is nearly three times the non-indigenous rate. And we have our own governance challenges, with three levels of government operating in an increasingly complex environment reflective of a distinct lack of coherence in roles and responsibilities.
In the articulation of these challenges I can discern the raw materials for a powerful narrative to guide future economic development; a narrative that would appeal to strong community values and aspirations, to sustain what we have and to enhance economic opportunity; a narrative that would be both relevant and compelling.