McLean - Why Australia prospered: the shifting sources of economic growth

Why Australia Prospered

THE PRINCETON ECONOMIC HISTORY OF THE WESTERN WORLD

Joel Mokyr, Series Editor

A list of titles in this series appears at the back of the book

Why Australia Prospered

THE SHIFTING SOURCES OF ECONOMIC GROWTH

Ian W. McLean

PRINCETON UNIVERSITY PRESS

PRINCETON AND OXFORD

Copyright 2013 by Princeton University Press

Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540

In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW

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Library of Congress Cataloging-in-Publication Data

McLean, Ian W.

Why Australia prospered : the shifting sources of economic growth / Ian W. McLean.

p. cm. (The Princeton economic history of the Western world)

Includes bibliographical references and index.

ISBN 978-0-691-15467-1 (hardcover)

1. Economic developmentAustralia. 2. AustraliaEconomic policy21st century. I. Title.

HD82.M3345 2013

338.994dc23 2012008056

British Library Cataloging-in-Publication Data is available

This book has been composed in Minion Pro

Printed on acid-free paper.

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

THIS BOOK HAD ITS origins in the spring of 2006 in an office affording a breathtaking view across San Francisco Bay and through the Golden Gate to the Pacific beyond. This was an especially appropriate vantage point for the task. If California were a national rather than a regional economy, it would receive more frequent comparison with Australia, for it shares with its fellow settler economy on the far side of the Pacific many initial conditions relevant to its early prosperity, in addition to having a similarly enviable record of subsequent growth. More generally, observing Australian experience from outside the country heightens ones perception both of what seems noteworthy or unusualthereby warranting greater consideration than it might otherwise attractand of what seems unexceptional.

I wanted to reflect on what is surely one of the most striking features of Australias history: its early attainment, then retention over a century and a half, of a very high level of economic prosperity. My aim was to view this achievement not only within the context of the ever-changing international economy, which has exerted such a pervasive influence on the countrys economic history, but also in a comparative perspective, drawing especially on the experience of other settler economiesin particular Argentina, Canada, New Zealand, and the United States.

Another objective in writing this book has been to help fill a lacuna in discussions of the remarkable period of prosperity Australians have experienced since the last (technical) recession in the economy in 1991. Most attention in the media understandably focuses on short-run movements in key economic or financial indices, or on political aspects of whichever economic policy issue has fleetingly caught the attention of the public. It is less common to observe space devoted to providing contexthistorical and comparativeas to why Australia, virtually alone among the advanced economies, has enjoyed this extended period of uninterrupted growth. To gain more than a superficial understanding of the economys performance during this recent period, I argue that it is necessary to adopt a perspective encompassing much of the countrys history.

Many debts have been accumulated in the course of writing. Conversations at the design stage with Barry Eichengreen, Rui Esteves, and Kris Mitchener were especially helpful. Subsequent development of the ideas and material benefited from the comments of Raj Arunachalam, Brad DeLong, Bob Gregory, Tim Hatton, Douglas Irwin, Suresh Naidu, James Robinson, Gavin Wright, and conference and seminar participants at the University of Adelaide, the University of California, Berkeley, and the University of Melbourne. Kelly Wyett of the Reserve Bank of Australia assisted with data sources. Daniel Mabarrack provided superb research assistance in the final preparation of the manuscript. I am especially indebted to Jeff Borland, Robert Dare, and Richard Pomfret, who made invaluable and detailed comments on an earlier draft. Joel Mokyrs many contributions greatly improved the final product. Finally, I am grateful to Seth Ditchik at Princeton University Press for his editorial support, and to Karen Carter and Marsha Kunin for their production and copy-editing skills, respectively.

My greatest debt is to Barry Eichengreen and the Department of Economics at Berkeley, who, across the last decade and a half, have generously facilitated my recurrent membership in the group of economic historians among the faculty and graduate students there. These colleagues have helped shape much of my research during this period, some of which is reflected in the following pages.

Adelaide, December 2011

Why Australia Prospered

Australian history is almost always picturesque; indeed, it is so curious and strange, that it is itself the chiefest novelty the country has to offer, and so it pushes the other novelties into second and third place. And it does not read like history, but the most beautiful lies. And all of a fresh new sort, no mouldy old stale ones.

Mark Twain

AUSTRALIANS ATTAINED the highest incomes in the world by the mid-nineteenth century, only a few decades after European settlement. Despite losing that remarkable position around 1900, they have retained to the present a standard of living that is not appreciably exceeded elsewhere. Few economies have been as successful over so long a period. Some have achieved comparable levels of income only since the Second World War (think of Japan or Italy). Many are currently making good progress in catching up to these levels, though still have some distance to travel (think of South Korea). One has experienced long-term relative decline after having achieved membership into the rich club of nations in the early twentieth century (Argentina). Tragically, many less-developed economies have managed only low or intermittent growth such that they have not even begun to close the gap between their living standards and those of the richest countries. What explains Australias enviable record of prosperity?

This inquiry into why Australia is rich adopts a historical approach because the roots of prosperity are embedded in the past: the levels of income observed in the currently rich economies are in every case the result of very long-run processes. Economies do not move rapidly from poverty and backwardness to advanced industrial status and concomitant prosperity despite the achievements of

There is an added reason to look to history to account for Australias economic prosperity. Unlike Japan and much of Europe, membership in the rich club of nations is not a recent phenomenon. Hence the task set by posing the question Why is Australia rich? may be better posed as two questions to be addressed sequentially: Why was Australia so rich by the second half of the nineteenth century? And how has Australia managed to retain its position among the richest group of countries over the subsequent 150 years? Whether the answer to the first question differs from the answer to the second can be established only by historical inquiry.