Unlike most of its region, Australia was left unscathed by the Asian crash of 1997. Unlike most of the developed world, it shrugged off the global financial crisis and unlike most commodity-exporting countries, it weathered the resources bust too. No other rich country has ever managed to grow so steadily for so long. By that measure, at least, Australia boasts the world’s most successful economy.

The Economist, October 2018

As the delegates gathered for the constitutional conventions that determined how the colonies would come together as a country, they were buoyed by the knowledge that a united Australia would be the richest country in the world, measured by wealth per person. Convicts had given way to a wave of free immigrants in the middle of the nineteenth century and foreign investment streamed into the colonies. At the same time, the repeal of the Corn Laws in Britain launched half a century of unprecedented free trade and world peace. Australia, replete with sheep and gold and possessing a liberal trading ethic, took full advantage of the opportunity.

By the time Donald Horne wrote The Lucky Country in the 1960s, though, Australia was three-quarters of the way through a slump in the relative economic success that took the country down from first to fourteenth in the world. It was a slow and almost imperceptible decline over 80 years as a result of several well-meaning but flawed decisions made in the early years of the twentieth century that Paul Kelly has collectively dubbed “the Australian Settlement”. As he articulated in his book The End of Certainty, the newly federated states adopted a consensus to protect Australian companies from global competition, by applying tariffs on imports, and protect Australian workers from competition, through the White Australia policy and a centralised wage-fixing conciliation and arbitration process.

Horne conveys the impact of this world in which “to many Australian businessmen the way to make money is to grab some ideas from overseas, rush them into operation, however inefficiently, and then rely on the Tariff Board for protection. The central occupation of manufacturing is often to kill overseas competition with high tariffs.” Australians have forgotten the impact of that approach, but it is timely to recall it at a time when protectionism is making a comeback in most developed countries and many others too. A retreat from globalisation could again drive the negative impacts on living standards of that not-so-long-ago time in Australia when “there was no particular need to be efficient or to worry about world standards. . . but with making profits by putting pressure on the Tariff Board or by collusive practices with their competitors”.

There is much of Horne’s criticism of Australian business culture that still rings true (a lack of interest in R&D, board conservatism and parochialism, too many businesses coasting on government contracts), but it would be too harsh to still say, as he did in the 1960s, that “there is still talk of free enterprise in Australia but to many manufacturers, this is just a lesson they have learned off by heart without understanding. . . Often what it means is that the business man (sic) demands from the government a special protection that will help him continue to survive”. Far fewer Australian businesses now lean solely on government largesse to survive, and most now compete confidently and profitably in global markets, including some of the world’s leaders in areas from shopping centre development to infrastructure finance and medical technologies. Technology companies are now the fastest growing sector and the subsidies provided to these companies (in the form of R&D credits) don’t rely on protection from competition or governments trying to pick individual ‘winners’ for their effect.

Though the weaning of Australia from the sins of the early twentieth century happened in stages throughout the second half of the century, the conventional wisdom is correct when we say that Australia turned the corner in the 1980s. The reforms of that period and the further gains made in the 1990s are well documented and have put Australia back on top as the wealthiest country in the world, measured by the median wealth of its people.

Indeed, out of the 193 countries recognised by the United Nations, Australia is only the 55th largest in population but ranks thirteenth for the size of the economy and tenth for GDP per person (the average wealth is below the median wealth because wealth in Australia is more evenly distributed than in the nine countries that have higher averages but who have more concentration at the top). There was an inflection point when Australia lost its way at the start of the 20^th century and a time when it was rediscovered in the 80s and 90s.

Australians are often complacent about this economic success, thinking that it will continue regardless and even sometimes undervaluing the whole idea of growth. It’s easy to disparage material comforts as unexciting and boring, and true that many other things (family or sports and culture) underpin the well-lived life. But it’s equally true that a strong economy underpins the investments we make in everything else we value. The security of the country, a family’s standard of living and resilience, and the healthcare and social welfare system; all those things require a strong economy. Australia has only been able to lead the world in making an unprecedented level of investment in things like disability care and mental health because the country generates enough economic growth to fund it.

When economic success does get acknowledged it’s usually put down to a temporary dose of blind luck (iron ore being the usual example). The assumption is that you can still say today, as Horne did fifty years ago, that the Australian economy is underpinned by being resource rich and able to surf off the back of offshore innovation. Not true. The last 30 years have certainly seen a long China-driven boom in commodity prices, but it’s been a rollercoaster along the way. Resource exports were 11% of GDP in 2011 and then 5% in 2015 and yet economic growth held steady, while other major countries with big resources exports, such as Brazil, South Africa, and even Canada, went into recession.

The ‘coasting on the coattails of resources’ thesis doesn’t adequately explain 30 years without a recession. It also stands in contrast to the evidence in numerous international studies that, counter-intuitively, those countries with more resources usually have lower economic growth than those that are less well-endowed. This has been dubbed the ‘resources curse’ and compared with the difficulties that commonly affect lottery winners struggling to manage the side effects of sudden and unpredictable wealth. Resource wealth is typically either captured by a small group of people or appropriated by the government for the benefit of wasteful rent seekers. Norway, with its sovereign wealth fund, is one of the only other examples of not wasting commodity-driven income. Australians aren’t rich just (or even mainly) because of the bounty of resource wealth in the ground.

The true reason for sustaining economic growth through the cycles is the longstanding but underestimated Australian flexibility, discipline and adaptability - plus the newfound resilience built in through the eighties and nineties. The reforms of the 1980s (and to a lesser extent since then) fundamentally transformed what Horne recognised in the 1960s was holding back the country and, even where it may have had some benefits, had outlived its relevance. In the characteristically blunt words of Paul Keating at Bob Hawke’s memorial service, “Australia’s creativity had been locked down by a stultifying paternal policy regime – the idea that government knew best and that Australia was best protected and nurtured as a closed economy.” In the same way, as it did for China after 1979 and more recently for Vietnam and increasingly also India, an opening to the world and to freeing of markets allowed a once rigid Australia to become adaptive and capable of sustainably higher growth rates than before.

Australians will need to be careful not to squander this from geopolitical fears or fading memories of the reasons for reform. Surveys show a lot of younger people don’t trust the market economy and find socialism more appealing. One reason for this is that anyone under forty has no memory of the sclerosis that existed in our societies before the liberal economic reforms of the eighties – the Winter of Discontent in the United Kingdom and the pre-reform rigidity and deficiencies of Australia in the seventies – and economic history is not well taught in schools and universities. Another reason is that there have been some appalling abuses that have given business a bad name, from the crony capitalism of firms using money and lobbyists to rig markets and create anti-competitive monopolies (especially in the United States) to multinational tax avoidance and the bad behaviour outlined in Australia’s Banking Royal Commission. If business does not act in a way that’s worthy of people’s trust, isn’t ethical or undermines fair and transparent markets, then it’s no surprise that people turn against capitalism. The consequences for prosperity are serious.

I had an early lesson in this when I travelled through the old Soviet Union in the first few months after the fall of the Berlin Wall. The Communists were still in control, but it was becoming more and more clear that the system had not worked and most people in the Eastern Bloc were desperate to enjoy the things we took for granted in the West. I had lots of offers for Levi’s, and everywhere I went there were long queues for a limited range of things to buy, often quirky because the central planners had decided to produce more of something than people wanted to buy and less of something else. That year, cucumbers were in over-supply but milk and eggs were scarce. The longest queue was outside the newly opened first McDonald’s in Moscow, where I queued for half an hour while being offered a chance to avoid the queue by buying ‘black market’ McDonald’s that was being passed out the back of the restaurant for sale to foreigners at ten times the price. That’s how it works without clear and transparent competitive markets to match what people want to buy with what they want to sell.

When I got to Warsaw the people were a bit happier and there was more food in the shops. As control from Moscow receded, people eagerly started to trade with each other. Finally, I crossed into West Berlin from the eastern side and it was like going from a black-and-white movie into a Technicolor one. From a bleak land of scarcity to a rich and modern city, from tinny Trabants to new Mercedes. As with North and South Korea (another border I later had the chance to visit), the gap between East and West Germany provided the perfect natural experiment to test a market-driven economy against a socialist economy in the same land and culture. My experiences drove home the importance of teaching about Germany and Korea and about the different phases of our history, including the time Australia embraced protectionism and cronyism, leading to stagnation, and when the country opened itself up.

More than 20 years later when I was studying how China had grown from poverty to being many times the size of Australia (while having my on-the-ground tutorial through hundreds of trips to a dozen Chinese Provinces), it became clear that the same thing drove China’s ‘economic miracle’. First, the government allowed a few farmers in the collective to sell any extra food they produced. Those farms suddenly produced much more and the programme was extended further. Then the government allowed small privately owned businesses to be created in a special economic zone in Shenzhen which also led to dramatic growth. Most of China’s leaders were engineers by training in those days, so they set up more pilot projects to test the use of markets in different parts of the economy and extended the ones that worked until the whole country had markets working to some degree or another.

As one China scholar has put it: the Communist Party likes to credit itself with ‘lifting millions out of poverty’ but it is more accurate to say that the millions lifted the Party. Entrepreneurial, hard-working and smart Chinese people built amazing businesses and created wealth on a scale never seen before. Key technocrats and leaders like Premier Zhu Rongji deserve credit for the way they allowed this to happen in the 40 years from 1979 but their main accomplishment was to improve education and infrastructure, open China to international trade and investment and then get out of the way of the ordinary Chinese people whose energy fuelled China’s growth (assisted by the globalisation trend where the other countries of the world opened up to Chinese exports and foreign investment flowed into China).

In the last few years, there has unfortunately been a relapse into trying to ‘manage’ markets more tightly by the State (with negative consequences that will continue to play out over time) but in the meantime, China has achieved a velocity of growth and innovation that have become at least partially self-sustaining. Ironically, many people around the world have imagined China’s growth to show that there is some new growth recipe of ‘State-driven capitalism’ when the truth is actually that the growth of China for about 30 years was a perfect example of Adam Smith’s “invisible hand” – of markets allocating resources more productively than a central authority could. China’s growth has not been qualitatively different in its drivers to other Asian ‘tiger markets’, it’s just happened on a remarkably larger scale in a country with 10 to 500 times as many people.

Using markets when they work should not be regarded as a right-wing agenda. It’s true that flexible labour markets and a floating dollar are important as shock absorbers that allow us to adapt. Keeping public debt low, having an attractive regime for foreign investment and encouraging skilled immigration have been crucial for Australian success. But so also have universal healthcare through Medicare, compulsory superannuation savings to redress the previous ‘savings gap’ in Australia and allowing university students to pay for their education only much later when they earn enough to do so. Having the OECD’s highest minimum wage has not prevented the Australian unemployment rate from getting down to 3%. People who are more easily able to change jobs, move house and keep educating themselves and their children are going to be much better able to move rapidly from areas of the economy that are slumping to those that are growing.

There was much gnashing of teeth in 2019 when a Harvard study group ranked Australia’s index of Economic Complexity behind those of Botswana and Uganda. The Harvard Atlas of Economic Complexity ranks Australia very poorly for the diversity and complexity of our exports. They claim that countries that make more products and compete in more areas in their exports are more sophisticated and will grow more. Australia does badly in this measure because resources (and tourism and education, pre-pandemic) represent such a large proportion of our exports, and manufactured products are less prevalent. The Australian lack of confidence was quickly on display when the ranking was published; Australia is ‘rich but dumb and getting dumber’ screamed the headlines in fear.

It is the Harvard Atlas that is simplistic, rather than the Australian economy. Firstly, the notion of ‘resources’ as a ‘dumb’ export does not recognise the high-tech automation and world-leading efficiencies and safety of the modern mining industry, from autonomous train loading to automated underground mining systems. It also doesn’t pick up the sheer range of minerals (from lithium to rare earths to uranium and platinum) that Australia produces and how flexibly and efficiently investment can toggle between each new mineral and efficiently finance their development. Australia sells resources, tourism and education (not properly picked up in the Harvard Atlas) because the country is particularly competitive at doing so and the biggest consumers of these things are proximate. That’s what Ricardo called “comparative advantage”, and Australia remains a great example of its power to fuel prosperity.

The Harvard Atlas definition of ‘productive knowledge’ also doesn’t account for the workforce. McKinsey has estimated that almost half of Australian jobs are ‘interaction jobs’ that require high-order reasoning, judgement and the ability to manage non-routine tasks. Australia’s skilled labour is above global averages and performs even more strongly than Japan (which ranks first in Harvard Atlas’ economic complexity measure) when it comes to ‘complex problem solving’. More than two-thirds of people in the Australian mining sector have advanced-level degrees or diplomas.

There is nothing wrong with an Australian Government highlighting emerging industries where they think Australia has potential, as they’ve done with health & life sciences, cyber & defence, space, clean energy and food & agricultural technologies. But it will take discipline to promote these only with the policies that we know do work (like creating ‘precincts’ and ‘centres of excellence’ that link into educational institutions to create critical mass and giving visas liberally to talented people from around the world who have those skills) and not with policies that don’t work (like subsidies for the more articulate lobbyists among what government or bureaucrats deem to be ‘future industries’).

Australians often don’t even recognise their comparative economic efficiencies as they aren’t things that manufacturing-centric economists naturally think about. The dividend imputation system stops the double-taxation of dividends paid by companies in the hands of their investors and, in so doing, encourages companies not only to pay their taxes but to distribute any cash for which they don’t have a compelling investment need. The allocation of capital among companies is more efficient as a result and the higher overall returns (including those dividends) to shareholders in Australia than in other markets shows it. Entry to Australian Universities has been meritocratic like in China or Singapore: State-wide exams anonymously marked and scaled to reflect the relative difficulties of courses with places allocated ‘blind’ based on the resulting score. They therefore better train the people most capable of benefiting from higher education, rather than losing good students to those with well-connected parents, particular racial background (as in Malaysia who leaks talent to Australian Universities) or the ability to smooth-talk their way through an interview.

Australian capital markets raise new equity for half the cost of the United States and recapitalise companies through innovative structures like accelerated rights offerings that reconcile equal treatment for shareholders with speed and transparency. Almost all houses in Australia are sold by auction and detailed house-by-house valuation comparisons and online search are available, whereas, in most parts of the world, there is an opaque and less market-based approach to pricing. These aren’t the things that jump to the mind of economists, let alone others, when we think about efficiency, but they underpin long-term productivity just as much as the more talked-about labour market and other efficiencies.

Australia also has one of the few AAA credit ratings in the world (recently confirmed after Covid, while many other countries were down-graded) and a unique set of free trade agreements with the United States, China, Japan, the United Kingdom and India – to which the European Union is likely to be soon added - giving Australian businesses preferential access to 90% of the world. Australian attitudes to free trade have more in common with the dynamic economies of Asia than with other more fearful and protectionist countries in what is identified as ‘the West’. The more robust Australian anti-monopoly regime has preserved competition more than the United States system despite (or because) a smaller market more naturally tends towards oligopoly and a succession of strong competition regulators have pushed back on excessive concentration and dilution of competition. Australian venture capital funding for start-up companies tripled in the last 5 years and that doesn’t include the increasing amount of attention from Silicon Valley on Australian companies.

The story of Australia’s revival in the 80s and 90s has been told before. But if it is drowned out by the demand for reshoring and ‘clever’ funds to create ‘future industry’ then Australia no longer has the right national narrative that can keep the success going. The successful return to growth and high employment within a year of Covid added a fourth story of superior economic resilience to the three cited in the quote from The Economist at the start of this chapter. But many Australians, companies and individuals, did get used to ‘free money’ during a year and a half of unprecedented and somewhat undiscriminating financial support. Lobbyists for a pre-1980s industrial policy have been emboldened to re-emerge in sexier packaging. Australians will need to be very vigilant not to give away hard-won gains. Saul Eslake has also pointed out that even the long-term closing of Australia’s borders for multiple years was a form of protection in the same way as tariffs were in Donald Horne’s time. Like tariffs, locking out people and investment provides a temporary sugar hit as local companies and people looking for work don’t have foreign competition, but as time goes on Australia becomes less and less competitive, new ideas go elsewhere and new industries that require skills not available locally just never get built or get set up at much higher cost.

As well as resisting a slide back to the Sixties and Seventies, Australia needs continuous improvement – what the Japanese call kaizen – to keep tweaking the settings and stay adaptable as the world changes. We have demonstrated within my lifetime that we are capable of doing it. At different times in our history, both major political parties have shown the ability to drive this sort of incremental change that encourages resilience. It is not a matter of having grand plans for the government to ‘solve’ everything from Climate Change to Poverty. Perhaps the only truly successful ‘moonshot’ was the eponymous American mission to put a man on the moon in the Sixties (where the technologies existed but just needed funding and political will to be harnessed). Most attempts at ‘moonshots’ just end up costing a lot of money for indifferent results; think of the centralised ‘War’ declared on cancer, then drugs, then ‘terror’, even before you get to government’s putting in big new IT systems, building submarines or the Great Leap Forward. Success far more often comes from the accumulation of smaller innovations from multiple parties that compete against each other (think of Covid vaccines and Silicon Valley) and in government policy from the accumulation of many well-thought-through policies, often copied from what’s worked overseas.

Several lessons stand out in reviewing the periods in Australia’s history where a ‘miracle economy’ has been achieved and the periods where the country has stalled or gone backwards. The first is that the good periods have seen stability of leadership and some degree of bipartisanship in the national interest. This does not mean that policy debates stop. On the contrary, the contestability of ideas is an absolute strength and it is almost unique that even in wartime Australia continued to have an opposition to challenge the government (unlike in the United Kingdom for example). But it does mean ‘playing the ball and not the person’, and that once a policy emerges as superior to the alternative it should be supported on principle and not blocked for personal advantage. There will always be a temptation to block things and the media wants fisticuffs, but those politicians who truly care about and represent the Australian national interest will ‘give credit where credit is due’, or at least fight on the high moral ground rather than the ‘easy kill’.

The Prime Minister’s party has only controlled the Senate for three of the last 39 years. For much of the time, this ability to veto and block government legislation has been used constructively to amend and selectively challenge in a way that creates better legislation. But there are periods where it’s been used in an almost knee-jerk fashion to stalemate. The impact of instinctively negative opposition goes well beyond the specific reforms that don’t get through parliament. The greater impact is to discourage any further attempts at reform, to coarsen the public debate, polarise the media and to make voters more cynical about the whole democratic process. It’s no exaggeration to say that oppositions have as much power as governments to do good or harm to the country – either to engage constructively and improve legislation or to drive the country away from even attempting improvement.

The successful tax reforms of the eighties and nineties also show the importance of a second principle: balanced reform. The 1985 tax reforms brought new taxes on capital gains and fringe benefits but also a substantial cut in the top marginal tax rate. Even the sceptics could see it was a reform to make things work better rather than just a grab for money. Keating has rightly noted that the reaction to the Labour Party’s 2019 policy to eliminate franking credit cash payments and ‘negative gearing’ tax deductions for property investors might have been quite different if the money saved had been used differently and not given the sense that it was simply designed to slug a particular constituency rather than reform.

The eighties brought successive waves of deregulation, from the float of the dollar and new banks to removing tariffs and then finally abolishing centralised wage-fixing. But in parallel with these critical opening-up reforms to make the economy more competitive there came universal healthcare in the form of Medicare, interest-free HECS loans to ensure affordable university education and setting up the superannuation system. The government made changes that promoted efficiency and economic growth, supported by those on the opposite side of politics, but balanced them carefully with well-chosen policies that would comfort people that their security wasn’t being left behind in the deregulatory push. We don’t see so much of this approach in recent times, and both parties would benefit from looking at balanced reform proposals across a year and a term of government to offset microeconomic reform (making Australia more competitive and open) with social reform (that protects the potential losers, short or long term, in a more competitive world).

The third lesson is that the extent of advocacy and ‘education’ is very important. Enduring change came when Hawke, Keating or Howard talked clearly to people, long and hard, about why change was required, and also when bodies like the Productivity Commission and Royal Commissions were able to independently assess changes and give a considered imprimatur. Changes have failed when reforms got rushed without adequate socialising of people affected or where they too narrowly reflected the interest of one part of society (be it Work Choices for the Coalition or the punitive carbon tax that the Greens forced on Labour when a consensus for more market-based carbon pricing existed at the time).

The shaping of institutions is important. You can trace the evolution of the old protectionist Tariff Board to the Industry Assistance Commission in 1974, becoming the Industry Commission in 1989 and then the Productivity Commission in 1998. At each stage, the mandate shifted further away from how to avoid, and compensate people for, competition towards how to be prepared for it and to make sure that both investors in businesses and employees of businesses can maximise the benefits of their respective capital.

It is often argued that its ‘too hard’ to promote worthwhile reform in Australia today. This comes both from protest movements, who take to the streets in frustration that the machinery of democracy doesn’t appear to be delivering racial equality or effectively countering climate change, and also from business who see a stalling of reform and an unwillingness to make worthwhile changes to make Australia more prosperous and competitive. Both would say that social media and the 24-hour media cycle have made it impossible to sustain a mature argument about what’s required and that the tendency for the Senate to include minority parties makes it hard to pass legislation. Reform may be hard, but it’s certainly not impossible.

Australians are cautious and sceptical and bringing in changes without a lot of explanation and a compelling rationale is therefore always going to fail. You can blame the Senate for not getting corporate tax cuts or you can recognise that a sufficiently compelling case was never made as to why (especially with a dividend imputation system and no shortage of foreign investment) cutting corporate taxes was a better use of government money than alternatives. Contrast that example with how Hawke and Keating developed the case for tax reform in the 1980s via a Summit of all the key stakeholders and years of jawboning. Introducing a GST failed twice, in 1984 and 1991, but the arguments for its necessity had been well made and enough had sunk in for Howard and Costello to make it happen, finally, in 1999. Political boldness is sometimes required, but it needs to build and surf the wave of public understanding rather than try to swim against it. A fair-minded and objective assessment of our history and the Australian character and values does not support the fashionable pessimism of the current consensus that says reform is ‘no longer possible’.

In recent decades, mostly sound economic management has made the average Australian richer than the average citizen of every other country in the world. Australia shouldn’t throw this away or imagine that some revolutionary change is required. Instead, a methodical and well-articulated programme for continuous improvement will make sure that Australians continue to lead the world in median wealth and prosperity.

Andrew Low is a Company Director and former Head of Macquarie Capital in Asia and Global Head of Investment Banking for CLSA. This essay is extracted from his forthcoming book “We Should be so Lucky: Why the Australian Way Works”.