Beating the Bush Blues

Reflections on Globalisation

Ray Evans

Introduction

The primary purpose of this conference is to illustrate, through various examples, the basic processes which drive the growth of some cities and regions, and which cause the decline of other cities and regions. Given the Society's aims, there will be a labour-market focus in our discussion.

In Australia it is obvious that some cities, and the regions surrounding them, are growing strongly, and that others are in decline. Some cities have been stagnant or declining for extended periods of time. Melbourne and Sydney are currently doing very well. Brisbane and Queensland, generally, have been doing very well since the Joh Bjelke-Petersen--Leo Hilscher Government transformed the State: in particular, by repealing the immunity from tort which the trade unions enjoyed in that State.

Perth and Western Australia have had dramatic growth since Sir Charles Court encouraged and promoted the mining boom which transformed that State. Western Australia is now Australia's major exporting State and would enjoy a higher standard of living if it seceded from the Commonwealth.

Tasmania, on the other hand, has been in decline since federation, and South Australia is now poised to follow a similar path of stagnation and decline.

Within States, we find a pattern of stagnation or decline in most provincial cities. In Victoria, for example, Bendigo and Ballarat, the cities built on the momentous gold discoveries which turned Victoria from a pastoral backwater into the most populous and richest colony in Australia, have barely changed in size over the last 50 years, whereas Melbourne has nearly quadrupled its population in that period.

In the current political debate about rural and regional Australia, a wedge has been driven between the city and the country. The country, which used to be politically powerful, has lost ground because of population drift to the cities, while the city has grown disdainful of rural interests and, much more significantly, of rural values.

The divide between city and country reminds me of the Marxian wedge between capitalist and worker. It is an entirely false reading of the situation. The competition for success in a market economy is between capitalist and capitalist, or between corporation and corporation, not between corporation and employee. Similarly, the competition for investment and growth is between city and city, not between city and country. Every country region is attached to a city, and vice versa. Sometimes, because of geography, a region may have connections between two cities and can pick and choose between them. Economically, the southern parts of the Riverina are connected to Melbourne, although politically they are connected to Sydney. Broken Hill was connected economically to Adelaide, and politically to Sydney. But these are exceptions. The basic economic fact is that when a city is doing well, the rural hinterland connected to that city is much better off than if the city is doing badly. Likewise, a city which services a hinterland which is prosperous from agriculture or from mining is much better off than if its hinterland is in decline. The most obvious example of such a city is Perth. The value of every house in Perth is, in large measure, determined by the fortunes of the mining, resource and rural industries of Western Australia.

 

The Primacy of the City

But the primacy of the city cannot be contested. The word 'politics' comes from the Greek word for 'city' which is 'polis'. Representatives of the country come to the city to engage in politics and to participate in the decision-making which affects both city and country. Trade, commerce, religion, and cultural, professional and intellectual life are concentrated in the city. One of the most interesting books to have been written in the last 50 years is The Death and Life of Great American Cities by Jane Jacobs, a woman who grew up in the 1940s in Scranton, Pennsylvania, a city which was in decline when she was a girl, and which has continued to decline since then.

Jane Jacobs asked the simple question: 'Why have some cities in the US grown in population and become rich, and why have others, which were once important, stagnated or declined?' The answer to her question was given more than two-and-a-half-thousand years ago. Alcaeus, the Greek poet of 600 BC, wrote

Not houses finely roofed, nor the stones of walls well built, nor canals, nor dockyards, make the city, but men able to use their opportunity.

Jane Jacobs set out to describe what it is that enables men 'to use their opportunity', how some cities achieved it and others did not.

The city is the basic political unit. In Australia, within every State except for Queensland, the State capital contains more than half the population of the State. And so we can readily identify the interests of Victoria with those of Melbourne, Western Australia with Perth, New South Wales with Sydney, and so on. A city cannot ignore the state of its hinterland, and the clash between city and country, one which is deliberately exacerbated by politicians who seek to benefit from it, is a clash of culture and values, not a clash of economic interests. A federal political system which is working effectively brings together the political representatives of the cities which comprise the federation and allows them to negotiate political arrangements which are acceptable to every city involved.

 

Mixed State Fortunes under Australian Federalism

The Australian federation is deeply flawed. The Westminster system, which we inherited from Nineteenth-century Britain, has led to a party structure which is superimposed on the parliament, and the party structure means that ideology---which defines the party boundaries---trumps real interests. As a result of this deformed federal structure, we have the Higgins legacy of uniform minimum wage rates which are highly detrimental to the interests of every city except Melbourne and Sydney. Our States, and here we really mean cities, cannot compete on the most important political decision of all---namely, the level of taxation which is to be imposed on the citizenry. And we can all think of federal politicians who have come to regard themselves as representatives of Canberra, whose task it is to explain to their stupid constituents why Canberra knows best.

The US has a federal system in which even individual Congressmen and Senators, and certainly small coalitions of Congressmen and Senators, can effectively veto proposed legislation. And they see it as their duty to do so if such legislation is detrimental to the interests of the cities and towns they represent. This political fact means that competition between American cities is a political as well as an economic fact. This competition has helped to sustain and promote the dynamism of the US economy.

Within Australia we have the 150-year-old competition between Melbourne and Sydney. Last Monday the IRC handed down a $15 per week increase in minimum federal awards. This decision will have very little, if any, impact in Melbourne, Sydney or Perth. But it will make it harder for Adelaide, Hobart, Launceston, and the provincial cities of Victoria, New South Wales and Queensland to compete. In other words, the IRC acts as a protector for Melbourne and Sydney interests.

What is both sad and amusing in this is that politicians, such as De-Anne Kelly, who represents the sugar electorate of Dawson, don't understand what is going on here. Before Christmas last year, she attacked the Federal Treasurer who had suggested that the capacity to compete in the wage market would be good for regions in economic difficulties, and she jumped to the defence of institutions which are designed to make it more difficult for the people she represents to survive. De-Anne Kelly is loud in her defence of rural values and rural interests as she perceives them. I find it extraordinary that she should demand that minimum wages in her electorate (if we must have minimum wages) should continue to be set in Melbourne, rather than in Mackay.

Tasmania is a State that has been in decline since federation. Cabotage and protectionism destroyed its opportunities for growth, and our vice-president (Mr Purvis) is one of many thousands of Tasmanian-born people who have emigrated to the mainland in search of economic opportunity. Rent-seeking now seems to be the major occupation in Tasmania. Tasmania has a population of 400,000, an emigration rate of 50 people per day, and a constitutionally guaranteed five lower house members and twelve Senators in Canberra. When Senator Brian Harradine held the balance of power, it was said that Tasmania would sink if any more money from Canberra were dropped on it. Rent-seeking, however, impoverishes those that engage in it as well as those who pay the rents, and Tasmania continues to decline. The Greens have wreaked economic havoc there, blocking the Wesley Vale project, the Franklin--Gordon Dam, and casting an on-going pall over existing forest industries.

It is my understanding that we are moving into a situation of a global shortage of wood pulp. A Tasmanian Government which was determined to change the century-old trajectory of economic decline would be seeking to use the twelve Tasmanian Senators in Canberra to force the issue of Canberra's veto on Tasmanian resource development. It would take a Liberal--Labor Coalition Government in Hobart to bring this about.

South Australia and Adelaide are now facing a Tasmanian future. Last Saturday, the Adelaide Advertiser carried a front-page story with the headline 'Please come back home'. It is a plaintive story about the Premier, John Olsen, writing to expatriate South Australians, offering them long-term loans and relocation expenses to come back to Adelaide. The story concluded with population flow numbers, with emigration exceeding immigration for the past 20 years.

The Advertiser ran an accompanying story about a typical South Australian expatriate, Ricky Lee, a 22-year-old law graduate from the University of Adelaide, of Chinese descent (manifest in a photo), who said:

The jobs on offer in the eastern states presented opportunities and career prospects not available in Adelaide. As an example there are virtually no international law firms in Adelaide and if you want to work for a big national firm in quality work you really have to move.

I love Adelaide, the lifestyle is great, I still call myself a South Australian and I support the Crows, but financial incentives wouldn't be enough to bring me back because, at the end of the day, I moved because Adelaide didn't provide the opportunities I wanted.

A crucial soon-to-be-made decision for Adelaide, is the GM decision about where to locate a new $1 billion engine plant. Premier John Olsen would give his right arm to be able to tell GM that minimum wages in Adelaide were, say, 15 per cent lower than wages in Melbourne. He cannot say that, because minimum wages are set in Melbourne for the whole of Australia. (There are some exceptions but federal awards are ubiquitous, particularly for major industries.)

If GM goes for Melbourne, then Adelaide will continue on its economic downward path (unless some major new mineral discoveries are made in South Australia). People from Adelaide who move to Melbourne in order to obtain work in the new GM plant will have to sell their houses in a falling market and then buy houses on a high and rising market in Melbourne. For many, this will mean buying housing in far-away suburbs which will involve them in commuter trips of an hour or more each way. Such a scenario tells us that this is an insane way to run the Australian economy. It is driven by a labour market regime which protects Melbourne and Sydney from competition out of Adelaide, Brisbane and every other provincial city in Australia.

 

The Impact of Globalisation

It is now time to bring in globalisation, and the car industry is a useful way to introduce this topic.

The economies of scale in the auto manufacturing industry are such; the investment required to bring out a new model is so great; and the risk implicit in a new model is so high; that only a few, very large companies can survive and sometimes prosper. Auto-manufacture is a very high-risk industry. We have seen and continue to see mergers, partnerships and crossholdings in the auto industry, so that in a few years' time we will be left with perhaps only five or six global car companies in the world. It has to be said that the great beneficiary of this is the consumer, who can now buy a motor car which is immeasurably superior to the models of even ten years ago, for a price which is far less, in real terms, than applied 15 or 20 years ago.

Tariffs are coming down all over the world on manufactured goods. The Prime Minister passed up an opportunity to adhere to a tariff phase-out on motor cars in July 1997 when he overturned a cabinet and party-room decision to cut tariffs by 1 per cent per year after 2000. He unilaterally announced no tariff cuts until 2005. The story goes that, after the cabinet and party-room meetings which had agreed on the 1 per cent per annum tariff reduction, the PM turned to his then adviser, Graham Morris, and asked what the Sydney Telegraph's page one, lead headline would be if he stuck with the cabinet policy. Morris replied: 'Howard kills car industry'. 'And if we reverse it?' asked Mr Howard. Morris said: 'PM saves car industry'. The PM reversed the policy and the Telegraph headline the next day was: 'Taylor out for seven as Australia collapses'.

Within weeks of this decision the auto unions had secured an across-the-board 15 per cent increase in wages; an increase which back-of-an-envelope calculations indicate meant an additional $45 million, plus on-costs, for Mitsubishi's wages bill. As is well known, Mitsubishi, a major employer in Adelaide, suffered a $100 million loss last year and rumours of impending closures abound. If Mitsubishi does go to the wall, then the Prime Minister should shoulder some of the blame. His decision in July 1997 will be seen as a signal to the world that Australia cannot compete and is, therefore, not a place to invest.

In May 1999, the Government announced a $2 billion handout to the car manufacturers as an encouragement, or a bribe, to stay in Australia---particularly in Adelaide. This bribe will run into WTO problems as soon as we start to export cars or car parts. And because an auto-manufacturing industry in Australia which is not exporting simply does not make sense, we are tying a noose around the neck of this very important industry.

Australian manufacturing has become far more competitive since protection was abandoned by the Hawke Government and tariffs have been phasing out. This increasing international competitiveness is evident in the year-on-year increases in exports of 'ETMs', elaborately transformed manufactures, now comprising nearly 30 per cent of all exports. Australia supplies, for example, half of the leather upholstery used in BMWs worldwide, the wheel hubs on Harley Davidsons and new tramcars for Kuala Lumpur. The cost of transport around the globe, as a percentage of the value transported, has been dropping, particularly for high-value cargoes such as auto parts. Australia could become a world supplier in energy intensive components such as engines and transmissions, as well as in assembled autos, provided we were able to compete without the constraints imposed by insane labour market regulations, tariffs, uncompetitive tax regimes and regulatory burdens generally.

Adelaide and Melbourne are competing for the new GM engine plant. But GM has the world at its feet. Auckland, Taipeh, Seoul, for example, are cities in this part of the world which would be keen to get this new plant. Globalisation means that the competition between cities for investment and growth is increasingly international, not intranational. GM needs to locate its new engine plant in a city which will enable it to compete with its rivals---Ford, BMW, Chrysler, Toyota, Honda. It is driven in its decision-making by competitive pressures, just like everyone else.

 

A Tale of Two Cities

The prizes that go with success in the global marketplace are immense. To illustrate such success I have a tale to tell of two cities, my home town Melbourne, and San Francisco, a town which I have visited many times and which now contains arguably the highest real estate values in the world. The two cities have much in common, at least historically.

The story of San Francisco really begins with the Californian gold rushes of 1848. Two years previously, the US had seized California from Mexico, and the tiny Mexican fort and missionary outpost, at the entrance to San Francisco Bay, became the port through which gold seekers from all over the world flocked to the goldfields. One such prospector was David Syme, a poor Scots youth, who had no luck in California, but who then found a leaky boat in San Francisco Bay which, after many perilous adventures, eventually brought him to Melbourne. Regrettably for the future of Victoria, he found enough gold at Daylesford to buy, in partnership with his brother, the Melbourne Age. They paid £2000 for what was at that point an ailing enterprise and when his brother, Ebenezer, a free-trader, died prematurely, he bought out his sister-in-law's interest and turned the Age into a powerful political weapon. He used his political influence to turn Victoria into a protectionist colony, and then, after the crash of 1893 revealed the extent of the impoverishment which protectionism had brought to Victoria, his disciple and protégé, Alfred Deakin, turned Australia into a protectionist nation, thus sharing the pain 'all-round'.

But let me return to the story of San Francisco. The gold discoveries of 1848 made San Francisco world famous and turned a tiny outpost into a major city. In 1869, the Central Pacific Railway, which crossed the Sierras and the Rockies to meet up with the Union Pacific at Omaha, Nebraska, reached the east side of San Francisco Bay and so the journey around Cape Horn was no longer necessary. This railway was the first American transcontinental railway and it gave San Francisco a huge boost as the major city on the west coast.

One of the promoters of the Central Pacific was Leland Stanford, Governor of California from 1861 to 1863, who became very rich from the profits of the Central Pacific. He bought a farm at the southern end of San Francisco Bay at Palo Alto and later established on it, as a memorial to his only son who died young, a university which has become famous as a training ground for scientists, particularly physicists and electronic engineers. Bill Hewlett and Dave Packard, for example, were Stanford electrical engineering graduates, and they launched their company out of their garages in Palo Alto in 1938.

It was the children of this generation of Stanford graduates that built Silicon Valley, which runs south of Palo Alto down to San Jose.

The Bay Area is home to more than 10 million people. When I was in Palo Alto last year, a nice but not palatial home, in a nice suburb, in the Palo Alto to San Jose region, cost between US$3 million and $8 million---a price determined by the selling price of the share options with which the high-tech companies of Silicon Valley pay their staff. I presume that within the last few weeks those house prices have fallen quite significantly.

The climate and the geography of the San Francisco Bay Area are not unlike the climate and geography of the Port Phillip Bay Area; with this one very important difference. San Francisco is located very close to the San Andreas fault, and has suffered two severe earthquakes as a consequence---one in 1906 and one in 1989. That fact has not stopped dramatic growth and immense prosperity coming to the Bay Area.

Back to Melbourne. The gold discoveries of 1851, first at Bendigo and soon after at Ballarat and at other places in central Victoria, propelled Victoria onto the world stage. Victoria's population increased from 77,000 in 1851, to 540,000 in 1861, a seven-fold increase in a decade. But this great population growth, based on gold, was accompanied by extreme volatility in economic conditions. In 1858, there were no new alluvial gold discoveries and the population began to decline as gold diggers left for more alluring prospects, particularly in New Zealand.

At that point, David Syme persuaded Victorians to adopt the poisonous brew of protectionism. There was, of course, considerable rivalry and competition between New South Wales and Victoria. Victoria had overtaken the mother colony in population and wealth by as early as 1860. This was the consequence of the gold rushes. But, thereafter, New South Wales clawed back her earlier ascendancy and by 1890, New South Wales was back in front. The reason for Victoria's fall from leadership in population and wealth is simple enough. The gold ran out at Ballarat and Bendigo, and the highly protectionist policies which David Syme had persuaded his fellow Victorians to adopt, began to bleed the colony into anaemia and exhaustion.

New South Wales, contrariwise, had adopted a vigorous free trade policy and the following indicators of economic success are revealing. In 1860, Victoria's population was 64 per cent greater than New South Wales' and per capita imports, the best indicator we have of prosperity at the time, were 34 per cent greater in Victoria than in New South Wales. Thirty years later, in 1890, and this is before the crash of 1893, New South Wales was 1 per cent ahead in population and 17 per cent ahead in per capita imports. By 1900, the year before federation, the differences in population and wealth were much greater, and Sydney has maintained its lead ever since.

Does the size of a city matter? There are very important benefits from having a large population; most important is the wide range of skills which can be found in a large city. Large concentrations of people can, however, have their drawbacks, notably congestion. London is a city of more than ten million people. It is a very rich city indeed, but it is horribly congested.

If we consider the Port Phillip Bay Area, we see a region which can support a population of more than ten million, without congestion, and which can become one of the world's great cities. There will be a bridge over the Heads to rival the Golden Gate Bridge of San Francisco. We will see millions of people living and working in a great sweep from Torquay round through Bacchus Marsh, Kilmore, Healesville, Warragul, and round to the eastern side of Western Port. But to do this it has to be able to compete---not only with Sydney, its main Australian rival, but with San Francisco, with Auckland, with Singapore and Shanghai.

There are many people who would find such a vision deeply offensive. I think it is an exciting vision. But if we are to be capable of achieving it, we have to break the dead hand of Canberra and the destructive influence of centralism on our politics.

Such an ambition seems today to be bordering on the lunatic. Canberra is full of centralists. 'Divide and rule' has been the successful Canberra formula for 60 years. But the gulf between political elites and mainstream Australia continues to grow. The gulf is fundamentally a cultural one. It was manifest in the referendum results of November 6 last year---the glorious 6th November---and was particularly manifest in the result concerning the preamble. At some point, a political entrepreneur will see an opportunity in this situation. In the meantime, it is our job to prepare the ground.

Why HR Nicholls?

More...