Australian Fabians Review
The 1918 Spanish flu didn’t originate in Spain. It got its name because Spain was neutral during World War I, so Spanish newspapers weren’t muzzled from reporting on the new epidemic. The disease was also variously called the Bolshevik disease (by the Poles), the German flu (by the Brazilians) and the Brazilian flu (by the Senegalese). In all likelihood, the 1918 flu originated in France, China or the US.
Similar xenophobic conspiracy theories have abounded about COVID-19. That it was created by the CIA. That it was an escaped Chinese bioweapon. That it was stolen from a Canadian lab.
That it was invented by Jewish conspirators seeking to short- sell amidst a global share market collapse. That the virus is spread by 5G telephone towers. That it was part of a global population control scheme, masterminded by Bill Gates.
Pandemics increase our fear of foreigners and lend power to the isolationists. In many countries, the divide between globalists and nativists is more salient than the division between left and right. COVID-19 has empowered those who believe in shutting out the world, and made life tougher for those who believe in the benefits of engaged multilateralism and diverse multiculturalism. Since the twenty-first century began, there’s never been a better year than 2020 to be a racist, xenophobe, protectionist, chauvinist, or jingoist.
Although the charge against internationalism has been led by authoritarians and right-wing populists, progressives aren’t immune from the temptation to slam a door on the world. While reactionaries have led the charge against global institutions and immigrants, the backlash against trade, foreign investment and global supply chains has come from both sides of the political fence.
But just as the cost of coronavirus has been disproportionately borne by the most vulnerable, so too a retreat from global engagement would hit disadvantaged people the hardest. A more closed economy means slower growth, which in turn means that unemployment will stay higher for longer. Less overseas investment will constrain productivity growth, limiting potential wage rises. Weaker international institutions will slow the rate at which vaccines and treatments can flow to the world’s poorest nations.
While developed countries may be able to produce their own pharmaceuticals, developing countries will depend on imports. Nations that depend on remittances and foreign aid are especially vulnerable in the face of a downturn.
The case for openness has traditionally been made in terms of growth. But international engagement can also help alleviate poverty and extend the buying power of low-income families. Moving from a developing country to a developed nation can immediately multiply a migrant’s income. When a foreign firm builds a high-tech facility, its
Australian workers will be more productive than in a low-tech factory. Productivity doesn’t guarantee higher earnings, but it’s essential to sustaining wage gains.
Capturing the benefits of globalisation for the most vulnerable requires more than a laissez faire willingness to let the market rip. It requires a tax system that ensures multinational firms cannot dodge tax, an education system that equips people to thrive in an open economy, a targeted safety net that reduces poverty, and international institutions that focus on the wellbeing of workers, not just shareholders. In short, it requires ‘engaged egalitarianism’
Let’s turn now to see how engaged egalitarianism shapes trade, aid, investment and migration.
Starting with the Whitlam Government’s 25 percent across-the-board tariff cut in 1973, successive Australian governments have recognised the benefits of trade liberalisation. Under the Hawke Government, tariffs were reduced to one-third of their 1960s level, while industry plans for the steel, car, shipbuilding, textile and heavy engineering industries helped these sectors restructure. Today, almost all Australian tariffs are below 10 percent.
Like the Goods and Services Tax, tariffs tend to be regressive taxes, meaning that they eat up a larger share of the incomes of low-income households than high-income households. As a school child in the 1970s and 1980s, I remember the price of children’s school shoes being a significant cost for my middle-class parents. Today, clothing and footwear prices are considerably cheaper.
In Choosing Openness: Why Global Engagement is Best for Australia, I looked back through old newspapers to gauge the impact of trade liberalisation on Australian prices. In 1987, Kmart sold children’s shoes for $10 and men’s work boots for $28. Thirty years later, in 2017, Kmart sold children’s shoes for $9 and men’s work boots for $34. In other words, Kmart could have kept the same prices on their shoe shelves for thirty years, from the age of Dirty Dancing to the era of Ed Sheeran. The shelf tags would be scuffed and yellowed, but the prices would have remained accurate to within a few dollars, despite inflation and real wage growth.
One way to get a sense of this price drop is to ask the question: how long would a typical worker have to toil in order to afford a pair of shoes? From 1987 to 2017, the amount of work required to buy a pair of children’s shoes fell from 44 minutes to 13 minutes. Over the same period, the amount of labour required to buy a pair of work boots dropped from over 2 hours to 48 minutes. According to a study by the Centre for International Economics, the tariff cuts of the 1980s and 1990s benefited the typical household by almost $4000 a year.
Lower tariffs didn’t just mean cheaper products; it meant more choices. As tariffs fell, it became viable for retailers to import a vast range of products that simply weren’t economic to sell in the high-tariff era. Over the past generation, the number of different car models sold in Australia has tripled. Our supermarkets stock more product lines than ever before. If you have a quirky hobby, play an unusual sport, or enjoy a rare cuisine, then you’re likely to have benefited from trade liberalisation. Indeed, one study suggests that the consumer benefit of a wide range of goods might be larger than the consumer benefit of cheaper prices.
The foundation of trade is the principle of comparative advantage. If you pay someone else to cut your hair and fix your car, then you already enjoy the benefits of comparative advantage locally. International trade just represents the same idea on a global scale. Shadow Trade Minister Madeleine King has pointed out that if every nation had to supply all its own medical equipment, ‘healthcare costs would soar’. Try treating your ailments only with medications that were invented and produced in Australia, and you’ll quickly see how the global flow of innovation and products has made us healthier.
Economist Paul Krugman once pointed out that we can think of trade as akin to a magical machine that turns our exports into imports. We fill ships with iron ore, wheat and gold. They return laden with furniture, trucks and smartphones. The magical ‘trade machine’ produces these things more cheaply than would be possible than if we had to build them domestically. That’s comparative advantage in action.
Yet over recent years, the number of harmful trade measures has risen sharply. Since 2009, Global Trade Alert, an initiative of the London-based Centre for Economic Policy Research, has tracked the number of harmful trade restrictions, adjusting for reporting lags. In the early-2010s, there were fewer than 1500 restrictions a year. By 2018, the number of trade-restricting measures had risen to more than 2000 restrictions annually (data for 2019 and 2020 are incomplete, due to reporting lags).
Australia is both a victim and a perpetrator of this trend. From 2009 to 2018, the number of harmful trade restrictions directed towards Australia almost doubled, while the number of harmful Australian trade restrictions increased seven-fold. As the Productivity Commission has noted ‘Australia is one of the most prolific users of anti-dumping measures in the world’. The recent Chinese action against Australia’s barley exporters seems to have little merit. Instead, it appears to be at least partly a retaliation against the fact that Australia presently has 17 anti-dumping measures in force against China.
Protectionism has hampered the world’s ability to respond to COVID-19. In 2018 and 2019, the Trump Administration imposed 25 percent tariffs on Chinese imports of oxygen concentrators, x-ray machines, CT scanners, pulse oximeters and thermometers, and 15 percent tariffs on medical protective gowns, protective goggles and sterile gloves. Although most of these tariffs were quietly dropped when COVID-19 hit, their effect was to make it more expensive to accumulate adequate stockpiles.
As the pandemic unfolded, many have suggested that Australia should expand domestic manufacturing capacity for essential medical equipment. In some cases, it will make sense to produce masks, ventilators and vaccines to top up imports. But that’s quite different from imagining that Australia would benefit from a large-scale shift from a world in which medical supplies are produced cheaply and globally to a world in which each nation made everything locally. Such an autarkic approach would not just drive up costs, it would also create instability: making Australia vulnerable in the event of a single factory stoppage. What holds true for trade in general also holds true for trade with China. As the Australian National University’s Shiro Armstrong notes, ‘free trade that excludes China is not free trade’, since more supply chains run through China than any other nation. Because of this, China has a huge stake in maintaining a rules-based international trading order, and Australia has a strong interest in encouraging the Chinese leadership to maintain the system that has massively benefited their nation since China joined the World Trade Organisation in 2001.
Rather than lambasting ‘negative globalism’, engaged egalitarianism demands that Australia plays a more active role in campaigning globally for trade liberalisation. Within APEC, we could press for agreements that countries will not impose additional trade restrictions on food and essential medical supplies. In the World Trade Organisation, we ought to be encouraging a comprehensive, long-term solution to the breakdown of the dispute resolution process. Regionally, we should encourage the conclusion of the 15-member Regional Comprehensive Economic Partnership, which covers the ten ASEAN states, plus Australia, China, Japan, New Zealand, and South Korea. While India opted out of the negotiations last year, any agreement should leave open a pathway to it entering the deal in the future.
Could you live on two dollars a day? Around the world, vast numbers of people do just that. The threshold – formally $1.90 in 2011 US dollars – is an internationally agreed benchmark for extreme poverty. In Australia, millions of people spend more than two dollars a day on coffee. Globally, around 700 million people – equivalent to the combined population of Indonesia, Nigeria and Brazil – live on less than two dollars a day.
The good news is that, throughout the twenty-first century, this number has been steadily falling. The bad news is, as a result of the pandemic, it is expected to rise. Depending on the impact of the economic shock, between 80 million and 395 million new people could fall into extreme poverty, potentially pushing the extreme poverty count above 1 billion.
Coronavirus could worsen global poverty through a range of channels. With inadequate hospitals and too few health professionals, developing countries struggle to test and treat victims of COVID-19. Although the population tends to be younger, people often live in close proximity to one another. It’s hard to practice social distancing if you’re sharing a Nairobi apartment with a dozen others. In Bangladesh’s Cox’s Bazar, coronavirus is rapidly spreading through the world’s largest refugee camp. As Bill Gates has warned, ‘COVID-19 overwhelmed cities like New York, but the data suggest that even a single Manhattan hospital has more intensive-care beds than most African countries. Millions could die.’
There are other reasons that poor nations are especially vulnerable. Fewer jobs can be done from home, with one study estimating that the share of employees who can telework is around 40 percent in Finland, but just 5 percent in Mozambique. Schooling disruptions can be particularly damaging in developing nations, with researchers demonstrating that Ebola-related schooling shutdowns had permanent adverse impacts on girls. In June 2020, the World Food Program reported that as a result of school closures in developing nations, over 300 million children were missing out on school meals. There is also a risk that supply disruptions in the agricultural sector could cause global food prices to suddenly spike, as occurred when prices for key commodities doubled in 2007-2008. Affluent shoppers might not even notice, but it could mean starvation for the world’s poorest.
The Pacific is among the most vulnerable regions in the world to COVID-19. Shadow Minister for International Development Pat Conroy has argued for a three-pronged approach to assisting the Pacific region: immediate humanitarian assistance (including fuel and protective equipment), economic recovery (including support for rebuilding tourism and boosting labour mobility), and building resilience (including investing in healthcare systems, water and sanitation).
In the past seven years, Australia has slashed development assistance by more than $11 billion. Overseas development assistance has fallen from 0.33 percent of gross national income in 2013-14 to 0.19 percent in 2020-21. As a share of the economy, Australia aid is at its lowest level on record. On the OECD’s league table of generosity, we have slipped back five places, from 13th to 18th. This year, Australia committed a welcome $300 million to Gavi, the Vaccine Alliance. But that money came out of the existing aid envelope, rather than being a new commitment. Right now, our stinginess is starting to show. National security experts have pointed out that aid cuts are damaging Australia’s ability to exert soft power in the Asia-Pacific. And when climate change is an existential threat to some Pacific states, it doesn’t help that Australia is a global laggard, as demonstrated by our last-place ranking on climate change policy in the 2020 Climate Change Performance Index.
The pandemic doesn’t take away the need to act urgently on climate change, and to restore our aid levels to what would be reasonably expected of an activist middle power surrounded by developing nation neighbours. But we also need to be particularly engaged on ensuring that once a vaccine for COVID-19 is developed, it is supplied to the world’s most vulnerable. As a recent United Nations report has warned, ‘even if a vaccine is developed, there is no guarantee everyone would get it for free. Will we end up living in a new COVID-19 apartheid with the vaccinated and non-vaccinated residing in separate areas and working in different labour markets?’
Australia has a strong interest in engaging more closely with global health institutions. Pandemic preparedness exercises (‘germ games’) should become as common as the ‘war games’ that countries regularly conduct with one another. As the only OECD country without an established national authority delivering scientific research and leadership in communicable disease control, Australia should establish our own Centre for Disease Control, as the Australian Medical Association proposed in 2017.
Just as new global economic and security institutions were created in the wake of World War II, so too engaged egalitarianism demands that we consider how to strengthen global health bodiesin the wake of the coronavirus. It is in the interests of all nations – developed and developing alike – for new pathogens to be detected early when they emerge in poor countries. The World Health Organisation hasn’t performed flawlessly in its response to coronavirus, but its expertise and networks remain critical to fighting this pandemic – and those to come.
In recent years, one dollar in nine of domestic investment in Australia has come from overseas. Yet given that the stock of foreign investment is almost $4 trillion, it is striking how few Australians support foreign investment. Four out of ten people oppose foreign investment in manufacturing and finance, while about half the population opposes foreign investment in the resource sector. Six out of ten people oppose foreign investment in ports and airports. Nine out of ten oppose allowing foreign firms to buy farmland.
Australia’s reliance on overseas capital dates to the earliest days of European settlement. Throughout Australia’s history, investment from Britain, the United States, Japan and China has helped fuel economic growth. Foreign investors don’t just bring cash, they also contribute know-how. British pharmaceutical firm AstraZeneca has been operating in Australia since 1957, carrying out research and development with local medical researchers, and currently employing around 900 people. In 2017, they upgraded their North Ryde manufacturing plant with a $100 million investment in smart manufacturing. Each year, they carry out half a dozen clinical trials in Australia. Foreign investment can also provide competitive pressure. For example, Aldi’s entry into the supermarket industry caused Coles and Woolworths to lower their prices.
Often, the choice isn’t foreign or local, it’s foreign or nothing. When Japanese company Toyota and American firm General Motors ceased building cars in Australia in 2017, no local investors stepped in. Instead, the factories shuttered, and thousands of workers lost their jobs. When the owners of Cubbie Station went into voluntary administration in 2009, no local buyers volunteered to purchase the 93,000 hectare cotton property. Had investors from Japan and China not bought the property in 2013, it might not have remained a viable operation. The one in ten Australians who support foreign investment in farmland sometimes quote the late NSW Premier Neville Wran, who quipped ‘they can’t take it with them’.
Investing in Australia provides a welcome source of diversification for overseas pension funds. To mitigate risk for their members, Canadian retirement funds such as the Ontario Teachers’ Pension Plan have invested in Australian piggeries, dairy farms and feedlots. At the same time, Australia’s superannuation funds are increasingly investing overseas, helping ensure that retirees don’t have all their nest eggs in a single basket. The idea here is akin to the reason why workers shouldn’t have all their retirement savings in the company they work for: if the firm goes bust, you lose your job and your investments. But if you have investments in other firms, you diversify your risk. Likewise, investing some of your superannuation overseas helps buffer the risk of a significant slump in the Australian economy.
Foreign investment can also help reduce trade conflict, by giving foreigners a stake in the success of the Australian economy. The Australian National University’s Adam Triggs points to the example of Indonesia, which for years restricted beef exports from Australia. But as Indonesian firms invested in the Australian cattle industry, Indonesia’s incentive to curtail our beef exports has been substantially reduced.
A common myth is that Australia makes it especially easy for foreign investors. In fact, Australia’s foreign investment screening is already more stringent than in most advanced nations. The OECD’s foreign direct investment regulatory restrictiveness index measures openness on a scale of 0 (completely open) to 1 (completely closed). Its most recent analysis placed Australia at 0.15, significantly more restrictive than the OECD average of 0.06. The many advanced countries that are more welcoming to foreign investment than Australia include Britain, Japan, Germany and the United States. Looking in the opposite direction, one of the few nations that has tougher foreign investment screening rules than Australia is New Zealand. According to a recent Productivity Commission study, if Australia tightened our foreign investment rules to match those across the Tasman, the typical Australian household would be hundreds of dollars a year worse off.
Australia’s foreign investment screening may be stricter than average, but it’s not loophole-free. The government needs to do more to ensure that foreign investors don’t dodge their tax obligations. National security screening should be based on clear principles, so critics don’t whip up xenophobia over particular bids, and investors don’t waste their time on fruitless proposals. Where investment is blocked, reasons should be given. Screening thresholds ought to be consistent across countries, rather than the existing jumble of differing thresholds. As the Foreign Investment Review Board evolves from a gatekeeper to a regulator, it may need more independence than its current structure allows. Unfortunately, the Morrison Government’s new rules, announced in June 2020, don’t address any of these issues of consistency, transparency or independence. Instead, the definition of a ‘sensitive national security business’ risks creating a system that is even more vague and arbitrary – raising the cost for legitimate foreign investors of doing business in Australia.
In recent decades, ‘capital deepening’ has been a major source of productivity gains. Simply put, investing in better industrial machines, newer computers, and more efficient offices increases the amount that each worker can produce each hour. In the long-run, productivity gains are the main source of wage growth. So if we want fatter pay packets, foreign investment can help. Scarce factors earn higher returns, so banning foreign investment would raise the rate of return for existing capital owners. Since capital is highly concentrated, this would deliver windfall gains to the most affluent.
Engaged egalitarianism recognises that foreign investment can boost equality. One way to think about foreign investment is that it raises the ratio of capital to labour in an economy. If labour markets work as they should, then more capital per worker ought to lead to higher wages. Just as workers earn less in capital-scarce Uganda than capital-rich Switzerland, so too Australian workers should benefit from an increase in the national capital stock. That’s true whether the investor lives in Sydney, Seattle or Shanghai.
When it comes to migrants, it’s too easy to forget that those who come to Australia bring not just a mouth to feed, but two hands to work and a mind to inspire. Immigrants are overrepresented among start-up entrepreneurs and leading researchers. When I worked in a highly productive research department at the Australian National University, most of my economist colleagues were foreign born, and some were on temporary visas. With one-quarter of Australians born overseas, immigration has been a major driver of productivity growth. One-third of Australia’s Nobel laureates – including Brian Schmidt, J.M. Coetzee, Patrick White, and Bernard Katz – were immigrants.
The greatest beneficiaries of migration are the migrants themselves. Using visa lottery programs as a randomised evaluation, a study of Indians who migrated to the United States found that they increased their earnings sixfold. Facilitating orderly migration is one of the best ways of reducing global poverty levels, particularly if it is accompanied by measures to reduce the costs of sending remittances back. Globally, remittances exceed the total value of all foreign aid. Remittances account for 41 percent of GDP in Tonga, 29 percent in Nepal, and 18 percent in Samoa. For these nations, migrants matter.
Over the past seven years, the composition of immigration has steadily shifted. The Morrison Government has stymied some forms of permanent migration and made it more difficult for permanent residents to gain citizenship. Prior to coronavirus, processing times had blown out, and immigration visa queues had become so long that they would make a Soviet commissar blush.
Meanwhile, temporary migration grew – partly because international students flocked to our universities, but also because temporary skilled work visas have been allocated to unskilled occupations. One of the reasons that Australia’s immigration system has historically enjoyed strong public support is that citizens see it as supplementing labour market shortages, not crowding them out of a job. Low- cost temporary visas for low-skilled occupations risks undermining community support for the migration program.
Temporary workers have also been placed in vulnerable situations. Most employment law imposes requirements on how employers treat workers. Yet when it comes to temporary migrants, the responsibility often falls on the employee. If students work too many hours, they can be deported. If working holidaymakers do not complete sufficient time working for a regional employer, their visa will not be extended. In these cases, immigration rules tip the power balance in favour of employers. In some cases, employers have responded by abusing that newfound power. As Shadow Home Affairs Minister Kristina Keneally notes, ‘stories of people on backpacker visas being exploited in various ways – from underpayment to sexual servitude – are abhorrent’. One report described conditions faced by some temporary migrants as a form of ‘modern slavery’.
When the pandemic recedes and immigration resumes, it will provide the chance to fix some of the problems in the system. Eliminating the exploitation of working holidaymakers – perhaps by drawing on the lessons of the well-regulated Pacific Seasonal Worker Programme – would be an important step to recognise the responsibility Australia bears for young people who come here, while also ensuring that mistreatment of backpackers does not become a way of cutting everyone’s wages and conditions. It may also be worth considering additional protections for temporary migrants who report abuse by employers – akin to the protections available for spousal visa applicants who are the victims of family violence.
As a share of our population, few countries have successfully welcomed as many migrants as Australia. This makes us ideally suited to help lead a global conversation on managing migrant inflows. As economist Jeffrey Sachs points out, ‘There is no international regime that establishes standards and principles for national migration policies, other than in the case of refugees.’ Furthermore, as one of the largest recipients of refugees from camps managed by the United Nations High Commission on Refugees, Australia could even play a role in brokering a better global approach to managing asylum seekers. Yet this will only be possible once the remaining few hundred asylum seekers are resettled from Papua New Guinea and Nauru. This should be an urgent priority for engaged egalitarians.
Globalisation drives prosperity. This isn’t just a theory. Stephen Kirchner, an economist at the University of Sydney, points out that it’s how things worked at the end of the nineteenth century, when wages in Australia were the highest in the world. At that time, the ratio of trade to national income was around 50 percent – considerably higher than the trade share today. Foreign investment funded almost half of all Australian domestic investment in the 1880s.
The share of the population born overseas was higher in the nineteenth century than it is today. Indeed, of all the migrants that left Europe between 1851 and 1914, 7 percent went to Australia, making us the third most popular destination – a remarkable statistic for a country so small and so distant.
When we were highly globalised, Australians were extremely prosperous. Nineteenth century labourers in Sydney earned twice as much as their counterparts in San Francisco and Chicago. As Kirchner observes, ‘Australia did not just occupy the frontier of global living standards, it defined it.’ Our retreat into isolationism, behind the walls of White Australia and tariffs, saw Australia slip backwards in relative terms from other countries’ living standards and productivity. When the economy re-globalised in the 1980s and 1990s, we began climbing the ladder – closing the gap in living standards between us and more internationally engaged nations.
But Australia still has a productivity problem, and our lack of global engagement is part of the challenge. One way to see this is to calculate our trade share – the sum of exports and imports, divided by Gross Domestic Product. On this measure, Australia is at 43 percent. The typical high-income country is at 63 percent. Another metric of globalisation is the MGI Financial Connectedness Ranking, on which we score 17th. On the KOF Globalisation Index, we rank 25th. Australia accepts relatively large numbers of migrants and relatively large amounts of foreign capital, but other measures suggest that we are less open than we might imagine.
Globalisation measures have been directly linked to higher levels of prosperity. For example, a one percent increase in our score on the KOF Globalisation Index – equivalent to moving up to the level of Singapore or Estonia – would increase labour productivity growth by 0.85 percent.
Australia could also benefit from increasing the diversity of our economy. On the Harvard Atlas of Economic Complexity, Australia ranks a shocking 87th, putting us just behind Mali and Uganda. We’re not just too disengaged from the world; we also have too many economic eggs in too few baskets.
In this short essay, I have outlined a few ideas about how Australia could step up our global approach, guided by the philosophy of engaged egalitarianism. On the trade front, we should press for agreements to ensure the free flow of medical equipment, conclude the Regional Comprehensive Economic Partnership, and work to improve the World Trade Organisation’s dispute settlement process. Our aid program needs to be expanded and targeted towards ensuring a rapid global rollout of the COVID-19 vaccine once it arrives. Foreign investment screening requires greater clarity and consistency, and a willingness to publicly advocate the value of overseas capital in creating jobs and raising productivity. Migration laws should better protect temporary migrants. We should swiftly resettle all those still held in offshore detention. And we should work with other nations to develop a more unified approach to people flows, including asylum seekers. There are also other opportunities for leadership – including in the OECD, the G20 and even the G7 – which could provide a chance for Australia to pursue an engaged egalitarian agenda.
As Australia deals with the economic rubble left by coronavirus, it’s vital that we remember the many ways in which globalisation has shaped our nation for the better. With 0.3 percent of the world’s population, Australia stands to benefit from being connected to the world, through trade, aid, investment and migration. If our nation rejects the benefits of openness – either through coded attacks on ‘negative globalism’ or a broader failure to step up to regional leadership – then we may end up poorer and more unequal. Conversely, an engaged egalitarian approach reflects Australia’s values and our history, and offers a bright future for our nation and the globe.
 Most of these conspiracy theories are not worth rebutting. On the theory that COVID-19 was manufactured in a Chinese lab, see Andersen KG, Rambaut A, Lipkin WI, Holmes EC, Garry RF (2020). ‘The proximal origin of SARS-CoV-2’. Nature Medicine. 26 (4): 450–452.
Series: Australian Fabians Review - Issue 1
Author: Andrew Leigh MP