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‘Choosing Openness’: Andrew Leigh responds

Published 23 Oct 2017 09:21    0 Comments

It’s been a month since Choosing Openness was published. In that time, Nazi sympathisers have entered the German parliament for the first time since 1945. An anti-immigrant millennial has been elected Austrian chancellor. And President Trump continues to fulfil has campaign pledge to bring more unpredictability to foreign policy. The world is changing fast, and the populists aren’t disappearing anytime soon.

One of the great pleasures of working with the Lowy Institute has been the chance to connect with people who know more than me about foreign policy and economics. Since Choosing Openness appeared, I have enjoyed engaging with roundtables and policy forums in Sydney, Melbourne, Brisbane and Canberra. I’m still troubled by the challenges we face from the globophobes, but heartened by the fact that a plethora of thoughtful Australians are carefully considering how to manage these political and economic challenges.


Indeed, it would be remiss of me not to mention that the past few weeks have also seen the release of my party’s FutureAsia policy. As Chris Bowen has noted, this includes initiatives to boost the number of Australians studying an Asian language, to better use the Australian diaspora, to improve Asian literacy among business leaders, and to step up our engagement with regional leaders. As Penny Wong points out, this has particular implications for our engagement with China. It is the polar opposite of a policy of ‘greed and fear’ which a former Australian prime minister once apparently advocated.

The seven contributors to my Lowy paper all bring different analytical lenses to the problem. Like Grant Wardell-Johnson, I suspect that each is a ‘xenophile’: personally valuing ethnic, racial and cultural diversity. I’d bet that all of them holds a valid passport, and enjoys travelling to new places. It’s a perspective I share, which is why I remain curious to hear from commentators who are hostile to outsiders and diversity. It would also have been helpful to have some women commenting on the paper, since the issues of immigration, trade and investment all have gendered implications for society.

One criticism of the paper, raised by Richard Holden, is that its proposals to address populism must be wary of tinkering on the edges while the centre burns. As Professor Holden puts it, ‘There is a battle of ideas raging that arguably requires a bold call to arms, not a series of technocratic innovations. Leigh leaves me wondering if, while we rewrite Australia’s foreign investment review process, a Le Pen type will capture a chunk of the Australian public by appealing to its gut rather than its mind.’

A similar critique was expressed in a review in the Westpac Wire by Macgregor Duncan, who argues that technocratic leadership has lost the trust of Australians: ‘We have established a new Brahmin class, which is disconnected from, and often patronising toward, fellow citizens. Mr Trump’s supporters were not the poorest in the US, but they nearly all shared an intense loathing for the “establishment” which they viewed as entitled and conceited. Mr Trump’s incendiary leadership was balm to this group. Responding to this challenge requires good policy, to be sure. But it will require much more than a few hosannas for openness.’

Professor Holden and Mr Duncan rightly challenge policymakers to win hearts as well as heads. It’s a task made more difficult by the fact that, as Grant Wardell-Johnson point out, hating the haters is ineffective. But the success of Trudeau and Macron does suggest that there is a way through the centre, which combines optimism, humour and energy to craft a positive vision of the gains from engagement.

Other commentators engaged with specific aspects of the paper. As Stephen Grenville notes, there are no simple answers to the issues of national security screening of foreign investment. Economists tend to support the free movement of goods, yet few favour free movement of people. What Grenville calls ‘doctrinal appeal to laissez-faire openness’ just won’t cut it. Policy responses need to recognise that rising inequality isn’t unfair; it threatens to undermine the support for open markets.

Michael Heazle and John Kane focus on what drove the resurgence of populism in the past decade. They argue that the global financial crisis represented a profound ethical failure, including by economists, and that this has been the central driver of rising populism. I have no quibble with their contention that many on Wall Street behaved badly in this period. But it’s worth recalling that the 2008 crisis wasn’t unique. One study which looked at hundreds of national elections found that over the period 1870 to 2014, extreme right-wing parties boosted their vote share by about one-third in the wake of a financial crisis. It’s a reminder that timely monetary and fiscal policy doesn’t just stabilise the macroeconomy – it can help stabilise politics too.

Was I too optimistic about the challenges, or too pessimistic? When he looks at the Lowy polling, Roland Rajah sees ‘A reasonable majority of Australians (who) think globalisation is mostly good, are in favour of free trade, think immigration is about right or if anything too low, and see China mostly as an economic partner rather than a military threat. Attitudes to foreign investment are the least positive, but still doesn’t rank as a top concern.’ I admire his optimism, but I’m not sure we learn much from polling questions about globalisation (a term that means many things to different audiences). Nor do I think we can be sanguine about the fact that concerns over foreign investment don’t outrank climate change and terrorism. When the conversation turns to foreign investment, most Australians take a negative view. Unless policymakers are honest about the fact that one-ninth of all investment comes from foreigners, this debate risks going off the rails.

Conversely, John Edwards worries about the risks to Australia of getting migration policy wrong. As he notes, ‘The want of low paying jobs combined with reasonably high welfare payments would be a poisonous combination for any considerable low-skill, non-English speaking migration.’ When Edwards writes warmly of his experience at the Malek Fahd Islamic School, it reminded me of the kind reception I received earlier this month when speaking at the opening of the Gungahlin Mosque. But not everyone feels the same way, and perhaps Edwards is right to worry that a future Australian demagogue might copy the slogans used by the European far-right, like the ‘Bikinis not Burqas’ posters that I saw on the streets of Berlin ahead of the recent German election.

Finally, Sam Roggeveen contends that the central driver of rising populism is the decline in mainstream centrist parties. I mentioned this in Choosing Openness, but Roggeveen mounts a strong argument that it is the central development in modern politics. As he puts it, ‘traditional political parties, formed in the era of large-scale unionism and widespread religious observance, are declining because they no longer represent a definable social and economic base’.

That’s a big challenge to a party guy like myself. It’s certainly correct to say that the Australian Labor Party was forged from the union movement, and that our opponents’ chief raison d’etre is to oppose us. But the modern Labor Party today does much more than represent industrial interests. We campaign for gender equity, environmental sustainability, better schools and accessible health care. Labor’s founders would never have imagined their party’s strong support for marriage equality, a non-discriminatory immigration policy, Closing the Gap and family violence leave. Declining union membership is a significant problem for Australia – accounting for perhaps one-third of the increase in inequality - but its implications are more economic than political.

In a world of Netflix, Twitter and YouTube, writers owe more gratitude to their readers than ever before. To paraphrase what some airlines say upon landing, I know that you have a choice in what to read. Thanks again to all those who have chosen to open Choosing Openness, and thoughtfully engaged with its contents.

Populism, globalisation and the failure of elites

Published 18 Oct 2017 10:10    0 Comments

Sam Roggeveen argues that the real challenge to globalisation and openness and immigration is not cultural (popular prejudice and so on) but political. Similarly, Edward Luce argues that the central problem is the political failure of elites to implement openness in a way that is politically acceptable for most people, in most circumstances, most of the time. We agree and wish to emphasise the ethical dimension this raises and which drives the political phenomenon of contemporary populism.

Populism is always premised on ethical outrage. Its most salient feature is the revolt of a disempowered majority (the 'people') against a usurping minority (the 'elite'), sometimes but not always mediated by a powerful leader (the 'demagogue'). There are famously both left and right varieties, the latter generally promoting fear of some significant 'other' as cause of the people’s sorrows. But we should not be unduly distracted by surging ultra-right cultural-racial intolerance. Rather, the focus should be on a perception common to left- and right-wing populisms: that inequity and disenfranchisement are the result of the inability, or unwillingness, of major political parties to ensure that the common people are protected from, and compensated for, the costs of globalisation.

The case for open trade, investment, and immigration has always been argued primarily on grounds of economic benefit, obscuring important political questions about concomitant social costs. Neglect of these questions eventually produced previously unthinkable outcomes in our established liberal democracies, such as Brexit and the election of Donald Trump. But what explains this failure? Indifference and neglect from those doing well from globalisation is no doubt part of the story, but insufficient in a democracy where politicians must inevitably pay attention to voter sentiment.

The more robust explanation is that political elites simply did not appreciate the enormous complexity of implementing openness on the scale and at the rapid pace that globalisation demanded. Managing who gets what, when, and how - the core business of politics, as Harold Lasswell told us – has always been a fraught one for governments. But permitting the accelerated movement of various peoples, forms of investment, and goods and services across borders, while simultaneously relinquishing degrees of sovereign control over how such movements occur, hugely amplified the already daunting challenges of liberal-democratic government.

Why did elites not plan for the increased uncertainty and risk that rapid escalation and greater policy complexity was bound to produce?

The answer is, in another time of crisis decades previously, and under the compelling influence of plausible economists with a political agenda, they placed almost unbounded faith in the power of global economic liberalism to bring home the bacon on such a scale that distributional questions would take care of themselves. But they did not, and the long-term consequence is a political world in upheaval, with long-standing verities up-ended, long-established parties in disarray or decline, and democracy itself seemingly in retreat. The more proximate origins lie in the 2007-8 Global Financial Crisis and its considerable aftershocks, which – interacting with resurgent Russian nationalism, terrorism, Middle Eastern chaos, a more assertive China, an uncontrollable flood of refugees, and now a nuclear-armed North Korea –  has thrown the whole post-war liberal international order into crisis.

The pressing issue post-GFC was how to re-establish order, stability and growth. Reasonable argument on this was confused by, in part, a heightened level of resistance to ‘experts’ telling ‘us’ (the public) what to think or do. Indeed, suspicion of expertise grew so great as to usher in a baffling ‘post-truth’ era in which ‘alternate facts’ gained political currency.

Experts must carry some of the blame for this, especially economic experts who stressed the rigorous ‘scientific’ nature of their discipline and were both cheerleaders and architects of modern globalisation. Economists provided ideological, technical and mathematically-modelled support for financial structures and instruments that ultimately proved grounded in quicksand. The consequent disaster presented governments with an acute problem. Economists had assured them that the problem of economic management had been solved, largely through monetary controls (‘the Great Moderation’). When these assurances proved false and recovery elusive, to whom were political leaders to turn for advice but to the very economists who had led them astray?

There was advice aplenty but no true political consensus on correct analysis, prognosis and policy, with the result that few affected governments responded creatively to the crisis. There was a great deal of confusion as proponents of economic stimulus vied with defenders of austerity, arguments often proceeding in moralist terms. It was startling to see the long-running European dream dissolve into old-fashioned nationalistic acrimony as obstinate and ‘frugal’ Germany imposed austerity policies on its ‘profligate’ and weak Mediterranean partners.

But this shallow moralism failed to address the colossal ethical failure the GFC represented. A sense of injustice was generated as governments poured billions of taxpayer dollars into the very institutions that had caused the crisis while ordinary people lost jobs and homes under regimes of enforced austerity, and cases of blatant fraud and manipulation among financiers went unprosecuted or received negligible fines. As crisis turned to economic stagnation, the gaping ethical hole at the heart of modern political economy caused a general loss of public trust in established parties, their leaders and their usual experts.

Alternative leaders and parties arose presenting unorthodox (though hardly original) diagnoses of what was needed to correct things. Opportunities opened for leaders like Donald Trump and Bernie Sanders in America, Jeremy Corbyn in Britain, Geert Wilders in Holland, Norbert Hofer in Austria and Marine Le Pen in France, even Pauline Hanson in Australia. Traditional parties everywhere were in trouble, as the French presidential elections of 2017 showed, their ideological bearings abandoned under neoliberal enthusiasms and their credibility among old constituencies in tatters.

The lesson? The current challenge is not to patch the old model of globalisation with bits of string and gum (negative interest rates anyone?). It is to construct a new model that combines economic soundness with a political acuity capable of incorporating equity at every level of a complexly interrelated world.

‘Choosing Openess’ means taking on populism

If populism has an element of hatred, then hating the haters as passionately as the haters hate will not work.
If populism has an element of hatred, then hating the haters as passionately as the haters hate will not work.
Published 12 Oct 2017 11:15    0 Comments

Sydney is a paradise for xenophiles like me. In this city the world’s multiplicity of cultures have been grafted onto suburbia. It's not simply Vietnamese in Cabramatta, Korean in Strathfield, Turkish in Auburn, Sri Lankan in Thornleigh, Italian in Five Dock and Arabic in Lakemba, but also suburbs such as Fairfield with Iraqi, Laotian, Balkan and South America cuisines and Homebush West with Indian, Malay, Chinese and Indo-Chinese. Bankstown, just 20kms from the CBD, must be one the most culturally diverse suburbs in the world. One website boasts that 127 different languages are spoken there, although the 2011 Census lists a mere 84. It has about 950 food outlets. As beautiful as our harbour, beaches and surrounding National Parks are, for me it is this mix of cultures that makes Sydney one of the greatest cities in the world.  

Toronto, Vancouver, New York, San Francisco, Chicago, London, Paris, Amsterdam and Berlin all have their own forms of multiculturalism. Some of these cities have a strong assimilation drive. Chicago, for instance, greatly benefits from the variety of international cultures that sit on top of, and soften, the historical cleavage between North-White and South-Black.

But Sydney and Melbourne present a unique balance. On the one hand, there is an evolving environmental space where distinct cultures operate and interact on an equal social status. And on the other, there is a fusion that creates something quintessentially new, and quite distinct from assimilation to the majority culture.

While I suspect we xenophiles are on the increase, many others have a deeply ingrained intuition against those who are not part of the ‘majority culture’. In An Inquiry Concerning the Principles of Morals, David Hume tells us intuition comes first and reasoning and evidence later. Andrew Leigh’s Choosing Openness is a handbook for dealing with a 'closed-based' intuition through reasoning and evidence. There are three fronts: migration, trade and foreign investment. Meticulous, highly readable and honest, the book also has a deeply respectful tone. The question of 'why' is always in the foreground, as is the question 'What is to be done?': ‘Keeping Australia open’ is the title of the concluding chapter.

Leigh’s book presents good advice for any era, but it is particularly timely as we increasingly grapple with an over-arching, geopolitical issue: the question concerning populism. Leigh takes from Cas Mudde the notion that 'populism is the idea that politics is a conflict between the pure mass of people and a small, vile elite'. Leigh then attributes the rise of right-wing populism to four factors: slow growth in living standards; rapid social changes; shrewd populist leaders; and a loss of faith in mainstream centrist parties.

For me, populism is not only anti-elitist, importantly, it is anti-pluralist. This is embedded in Leigh’s reference to the pure mass of the people. Populists assert that they represent the general will in a Rousseauian sense. This is ascertained not through any representative process of determining the will of the people. Rather, it is the assertion that a leader knows what 'real people' think. 'Real people' are a homogenous and moral in-group. Elites and out-groups, by contrast, are immoral. That immorality has multiple dimensions including a Canberra or Washington corruption of what the 'real people' need and want. Importantly, pluralism itself can be seen as immoral.  

Populism in this sense is what Princeton Professor Jan-Werner Muller refers to in What is Populism as the permanent shadow of representative politics. That is, it is intrinsic to modern representative democracy that any aspiring political actor can speak in the name of 'real people' as a way of contesting current political elites. Thus populists will always be able to play off representatives of major political parties. As points out, there was no populism in ancient Athens; demagoguery perhaps, but no populism, since the latter exists only in representative systems'.

Populism is not an irrational pathology, per se.  Nor is it an authentic part of the liberal democratic political order: it exists in contradiction to that order. Populism is grounded in a specific form of intuition, and not without Darwinian roots.  

How should we deal with it? There is really only one way: through reasoning and evidence which is what Dr Leigh’s book is about. If populism has an element of hatred, then hating the haters as passionately as the haters hate will not work. Nor does a strategy of ignoring populists. Fellow travellers with populism, such as Sarkozy in relation to the National Front on immigration, are particularly dangerous. This is often counter-productive, although sadly, not always.

A key theme of this book is that open markets require egalitarian institutions. This is not only a question of fairness, but one of self-interest for the substantial number of beneficiaries of openness. I concur. I also agree with Leigh’s conclusion that our political leaders have a duty to lead the conversation on openness. This needs to be done clearly and respectfully by those in Australia’s major and great political parties.

Dr Leigh concludes his prologue by saying:

as a father, a runner, an economist and a politician, Canberra is pretty hard to beat. But what makes me an internationalist is that I think my city, like other places around the world, will be more interesting and have higher living standards if it engages with the world than if it puts up a ‘Keep Out’ sign to foreigners.

That is true for all of us and all of our cities. 



'Choosing Openness' misdiagnoses the problem

Published 10 Oct 2017 11:46    0 Comments

So far the commentary on Andrew Leigh's Choosing Openness has come largely from an economic perspective, but Andrew Leigh is a politician, and his book (the opening chapter in particular) makes some important arguments about the state of politics in Australia and in other democracies. Moreover, many of the comments made in the Interpreter debate-series on Choosing Openness suggest at least implicit agreement with Leigh's political argument. This deserves attention.

At the core of the book is the premise that 'openness' in its three key dimensions - free trade, a generous and liberal migration program, and a relatively open foreign-investment regime - is under threat from populism, which Leigh defines as 'the idea that politics is a conflict between the pure mass of people and a small vile elite'.

The present wave of populism is right-wing, writes Leigh, and is marked by four key characteristics: slow growth in living standards; rapid social changes; shrewd populist leaders; and a loss of faith in mainstream centrist political parties. Leigh also writes about the place of religious and racial bigotry in the modern populist movement though, wisely, he does not place too much weight on it. As he points out, racism in the US has generally diminished over the last half-century, and it can be safely said that this is true of Australia and other Western democracies too. Moreover, the idea that Donald Trump's election in the US indicates a substantial rise in xenophobia has to contend with the fact of Obama's presidency. No doubt there is plenty of racism in the US, but why assume it is growing when this is the same nation that elected a black, liberal Democrat with the middle name Hussein as its president, and then returned him to office?

My comments focus only on the last of the four factors nominated by Leigh: the loss of faith in centrist political parties. Rather than being a subset of the larger problem of populism, I would give this factor more independent weight; in fact, a case can be made that the decline of mainstream parties is the major drama of our times in Western politics, one that threatens to overwhelm the economic agenda Leigh lays out in Choosing Openness.

Leigh refers at various points in his book to a backlash against openness and a rise in populism, and on one level these claims are not controversial. Despite the fact that far-right parties did not do quite as well as was feared in the recent French and Dutch elections, non-mainstream parties with populist characteristics are clearly on the rise in terms of their voting share and parliamentary representation in many European countries. The same might be said of the US and Australia. But whether the rise of populist parties reflects a rise in populist sentiment is less clear. In fact, a solid case has been made that levels of populist sentiment in Europe are actually pretty static. It’s just that populist parties are better organised than they used to be.

Moreover, what has really changed in Europe, and indeed around the Western world, is the power of established political parties, parties that used to co-opt or suppress populist sentiment. All over the Western world, traditional political parties, formed in the era of large-scale unionism and widespread religious observance, are declining because they no longer represent a definable social and economic base. In Australia, the decline in unionism is the major factor. Union membership has been dropping for decades, thanks largely to the steady transformation of the Australian economy away from blue-collar jobs. The Labor Party, of course, was formed expressely to represent the interests of unions, so it is no surprise that its membership, and its share of the primary vote, has dropped steadily also. It is perhaps more surprising that the Liberal Party's membership and primary vote should also have gone backwards over the last few decades, yet that is the case too. After all, you would think that the decline of the Labor Party might encourage Liberal supporters to double down. But then again, the Liberal Party was formed largely to oppose the Labor Party and the union movement, so perhaps Liberal supporters slowly left the field of battle when they felt the war was won.

In any case, what matters is that, if this version of recent history is roughly correct, then far from representing a rising social force, populist parties are merely the beneficiaries of the decline of mainstream parties. The big old parties used to be powerful enough to contain populist sentiment, but no longer. In turn, that means support for populist parties could be quite fragile, because just like the shrinking mainstream parties, the populists don’t represent a large social and economic base either.

The critiques of Choosing Openness published on The Interpreter so far have also raised some related fears. Richard Holden, for instance, shares Andrew Leigh's concerns about the new media ecosystem which 'allows us to choose our news and our facts, and provides fertile ground for conspiracy theories'. But while it is true that the shrinking of the mainstream media reduces the sense of common ground on which differences can be debated, it is also true that the sheer size of political debate has grown thanks to the internet and social media. Moreover, although humans have always tended to favour sources which reinforce their prejudices rather than challenge them, the internet makes it a great deal easier to get access to contrary views. In fact, although the idea that social-media consumers now inhabit 'echo chambers' has become firmly entrenched in the public debate, there is good reason to doubt the facts behind that claim.

John Edwards warns that 'the biggest threat to openness is from antipathy to uncontrolled migration', and points to worrying election results in Germany and Australia. But rather than seeing the German result through the lens of 'rising populism', we can also view it as a result of the broader trend against mainstream parties. As Marcus Colla wrote on The Interpreter after the German election, among those who voted for far-right parties, 'ideology is only a distant consideration. More important is a growing sense of alienation from government and from traditional politics more generally'. The same is true in the Netherlands, where the once powerful Labour Party lost 29 seats in the 2017 election. In France, neither of the major-party candidates made the presidential run-off election. And in the US, both major parties are so weak that one was completely taken over by an insurgent who was Republican in name only, while the other ran a candidate who almost lost her party's nomination to Bernie Sanders (who was not even a Democrat) and then lost the general election to a man who on all objective criteria was fatally weak. As for Australia, the re-emergence of Pauline Hanson does not necessarily signal a turn away from open migration. We only need to look at the statistics presented in Chapter 3 of Choosing Openness to see that we have always been conflicted about migration, yet our long-term policy settings favouring large-scale migration have continued.

Choosing Openness is an optimistic, can-do book. But consistent with the broader political mood in Australia, there is an undercurrent of deep concern about the trajectory of Australian society. My argument is that many of these concerns are overstated. Yes, there is plenty wrong with this country that desperately needs to be fixed, but there is no new crisis of populism from which Australian society needs to be extricated. If this is right, then it is undoubtedly good news. But for mainstream politicians such as Andrew Leigh, it may be all the comfort they can take from a seemingly irreversible decline of their parties.

Andrew Leigh's book, though its focus is on the future, is in many ways a defence of the reforms of the Hawke-Keating era. Among politicians on both sides, and among a significant cohort of Australian economists, there is a certain mythology around that period of political history and the characters which dominated it. There is perhaps even a desire to emulate the policy heroism of that time. But although it would be wrong to minimise the challenges facing Australia or imply that we can be complacent about the structure of our economy and major policy settings, I would suggest that any desire to 'rescue' Australia from the ravages of populism by appealing to the better angels of 'openness' is misplaced, because if there is a crisis in Australia today it is not societal, it is almost purely political.

Anti-migration sentiment the chief threat to openness

Anti-Islam and anti-racism protests in Melbourne. (Photo:  Recep Sakar/Anadolu Agency/Getty Images)
Anti-Islam and anti-racism protests in Melbourne. (Photo: Recep Sakar/Anadolu Agency/Getty Images)
Published 5 Oct 2017 16:32    0 Comments

In Choosing Openness Andrew Leigh makes a robust, refreshed case for free trade and investment. Both are important sources of the acceleration of global output growth over the last two decades, and of Australia’s long economic expansion since 1991. But while the case for relatively free investment and relatively free trade is convincing, it does not follow that there is an equally compelling case for free migration. As Leigh writes ‘supporters of immigration should not overstate their case'. In the debate over globalisation, the free movement of labour remains as hotly contested as it was half a century ago.

Both the Brexit vote and the election of Donald Trump had as much or more to do with hostility to migration and labour market competition as to trade or investment, an outcome replicated in the recent poll in Germany. In an insightful recent piece The Australian Financial Review's political correspondent Laura Tingle, reporting on the German election, interviewed Mark Hauptmann, an MP from Merkel's Christian Democratic Union representing a prosperous electorate. He was quite clear that the unexpectedly strong vote for the far right was ‘at least half due to the failed policy regarding immigration and the role of Islam in Germany’.  As Tingle pointed out, writer David Marr reached a similar conclusion about Pauline Hanson and One Nation in his March 2017 Quarterly Essay, The White Queen. One Nation voters, he found, don’t like strangers. To my mind the biggest threat to openness is from antipathy to uncontrolled migration, rather than trade and investment.

Australia presents an interesting case in global migration attitudes. By any standards Australia accepts a very large number of migrants. On OECD numbers, 28% of the Australian population is now foreign-born. This is more than double the share in either the US or the UK. In the last two decades net migration has directly added 3.365 million migrants or the equivalent of one seventh of today’s Australian population. It is also a highly successful program. Unemployment rates among the foreign-born are only a touch above native-born unemployment rates, and the share of foreign-born with jobs pretty much matches the share of native-born with jobs (again on OECD numbers). Because of very high net migration Australia’s population is somewhat younger than comparable countries such as the US or Canada or the UK, and very much younger than most of Western Europe, China or Japan. The growth of the Australian workforce over the next several decades will be much faster than the growth of the workforce in Canada, the UK, and the US, on UN projections.

These are great advantages, but it would be quite wrong to say Australia’s experience demonstrates the success of an open door migration policy. It is highly selective, favouring intending migrants fluent in English and with skills known to be in demand in Australia. In the main migration is intended to lead to citizenship and usually does. It is true there is a good deal of compromise around the edges. New Zealanders can work in Australia without requiring approval (and Australians in New Zealand). Foreign students and backpackers can work for part of their time in Australia no matter what their qualifications. There are now guest worker programs for Pacific islanders and East Timorese. Family reunion and a refugee segment of the migration program do not depend on job skills. But by and large migration is controlled by employment criteria, and it works.

This approach supports the high wage structure Australians evidently prefer. Legal minimum wages in Australia are much higher than in the United States, and actual wages for most of the workforce are markedly higher than the minimums. Very low productivity jobs such as household servants, household cooks and drivers, nannies and so forth just don’t exist in Australia, or only in very wealthy households. It is everywhere evident that businesses and governments control costs mainly by minimising employment. At the same time, social security benefits, though means-tested, are reasonably high. The want of low paying jobs combined with reasonably high welfare payments would be a poisonous combination for any considerable low-skill, non-English speaking migration.

Are Muslims an exception to Australia’s capacity to integrate new arrivals? They are certainly a target for Senator Hanson, but I’ve little doubt their integration into Australian society is proceeding in much the same way and at much the same rate past waves of migration. Irish Catholics, Maltese, Poles, Dutch, Greeks, Italians, Chinese and Indians have all encountered the same mix of welcome and resentment. In a generation or two most have settled in, their children hardly distinguishable from other kids in their manner, accent, lifestyles and ambitions. Visiting a recent Year 12 prize-giving at Malek Fahd, one of Australia’s best Islamic schools, I saw the boys and girls were indeed on different sides of the hall, that the girls wore head scarves as part of their uniform and that the religious invocations were sung in Arabic. I also noticed the accents, manner and energy of the graduates was the same as one sees in all other schools, public and private, that the admonitions to work hard, to overcome setbacks, to seize their opportunities were offered to girls and boys alike, and that the outstanding role model with which they were presented was a mother, a doctor, who is also a school alumnus. Now second third or fourth generation, their parents often accountants, IT professionals, doctors, business people, the class of 2017 is already part of the society we have become, their Australian English fluently vernacular and their Arabic often not very good. As much as Pauline Hanson, as much as me, they are us.

Australia has done well with migration. The challenge, as Leigh remarks, is to ‘continue capturing the innovate benefits of migration and minimising the costs to civic life'.

‘Choosing Openness’: Why haven’t we won the argument yet?

Photo: Andrew Xu/Flickr
Photo: Andrew Xu/Flickr
Published 3 Oct 2017 12:06    0 Comments

Putting his economist hat on, Andrew Leigh's new Lowy Institute Paper revisits the case for Australia to still choose openness in an age of rising populism and proposes some ideas for how to do it better.

Around the world we see populism on the rise and globalisation in retreat. Among so-called 'globalists', there is a lament that the arguments for openness have failed to cut through with the general public and the policy battle must be continually fought.

Leigh's contribution is less to go over the arguments in favour (though he does cover them with flair and in an accessible way, which might help persuade detractors). Instead, it is to show where the headline argument doesn't necessarily hold up and to suggest ways to correct this.

In doing so, perhaps a more nuanced argument can be made, better policies put in place, and the kind of populist pressures that have emerged so forcefully in other countries avoided.

The basic arguments for globalisation are well-rehearsed. For trade openness, there is Ricardo's theory of comparative advantage. For openness to foreign capital, the need to fund investment and bring in new ways of doing things. For immigration, the ability to attract foreign skills and ideas and grow the workforce.

Underpinning all of this is the premise that the net gains are sufficiently large that the winners could (theoretically) compensate the losers and still be ahead. Many are also quick to point out that advances in technology are far more to blame than trade for the loss of manufacturing jobs in advanced economies.

So why doesn't this argument cut through?

One reason is that globalisation's proponents often downplayed the fact that there are indeed losers and adjustment costs involved and, unsurprisingly, this imbalance often carried over into the relative policy emphasis. Recent research has also shown that the costs are much deeper than many originally thought. Globalisation's losers were thus never sufficiently compensated.

In the wake of populist uprisings, this imbalance in thinking is slowly being corrected – though there is a long way to go to translate changed rhetoric into substantive policy changes, let alone landing on the right solutions. Australia, luckily, has done better in this area thanks to our strong and targeted social safety net, but taking better care of displaced older workers that, quite understandably, struggle to adjust is one gap Leigh rightly identifies.

A second reason is that while the distributive costs of openness were at least acknowledged, legitimate non-economic costs have too often been left out of the basic pro-globalisation analysis.

Foreign investment that makes housing unaffordable or sharply increases wealth inequality is clearly socially undesirable. Leigh notes that policy in Australia already directs the majority of foreign residential real estate investment into new housing stock, but a residual issue is that a large number of residential properties remain vacant and thus in net terms don't add to available supply.

Another area is the (temporary) effect of immigration on social cohesion. Leigh puts forward evidence that while immigration tends to make society more innovative, particularly due to the benefits of diversity, it also in the short run reduces our sense of community (in the long run, this effect dissipates as new migrants integrate and we effectively redefine our in-group).

Citing research based on how teams of people interact in solving problems, Leigh notes that 'those in diverse teams said that they felt socially uncomfortable and were less certain about their solution to the puzzle. Performance went up, but enjoyment went down'.

A third reason why there is continued doubt is that it actually isn't clear that some recent forms of globalisation are indeed in the national interest. While foreign investment is needed in aggregate, if certain investments carry security concerns (in critical infrastructure, for example) or lower tax revenue due to aggressive tax avoidance by multinationals (with the profits shipped overseas) this can sometimes muddy the cost-benefit analysis (though not necessarily overturn it). The rising influence of both China and foreign technology giants heighten these concerns.

Similarly, while the case for trade liberalisation is sound, the arguments for some of the other things that have been tacked on to trade negotiations, such as investor-state dispute settlement mechanisms and expanded intellectual property (IP) protection, are much less so. The former inhibits policy for little to no benefit (it was originally intended to help developing economies with weak legal systems attract foreign investment). Meanwhile, expanding IP rights further would hurt Australia as a net IP importer, and it's unclear whether it would actually enhance innovation rather than hurt it or simply increase monopoly profits for patent holders at the expense of everyone else.

None of this lends validation to the many misplaced arguments against openness, from fears about employment to emotional calls for Australian business icons and agricultural land to stay in local hands. The arguments about the significant net gains from openness in trade, investment, and migration still stand. But unbalanced policy rhetoric and practice don't help and neither does the automatic acceptance or advocacy for all forms of globalisation, when some may not actually pass the national interest test.

The case for openness is thus compelling, but also more nuanced than many proponents tend to make it. That makes winning the argument all the more difficult in an age where people seem to want simple and direct answers, are often flooded with bad information, and don't know who to trust.

Fortunately, there are few signs that Australians in general are actually disenchanted with globalisation. In fact, the latest Lowy Institute polling presents quite a sanguine picture. A reasonable majority of Australians think globalisation is mostly good, are in favour of free trade, think immigration is about right or if anything too low, and see China mostly as an economic partner rather than a military threat. Attitudes to foreign investment are the least positive, but still doesn't rank as a top concern.

How can this positive disposition be sustained and built upon? Since making a better case for openness is mostly about the nuances, Leigh perhaps unsurprisingly mostly suggests a series of sensible enough policy tweaks rather than a complete overhaul. The key lies in strengthening public confidence that decisions are indeed being taken in the national interest, that those who lose out will be properly helped to adjust, and that checks and balances exist and are working effectively.  

Leigh also points to two areas where much more ambition is needed: addressing Australia's stagnating educational quality and taking an experimental approach to facilitating greater social capital at the community level.

Success in these areas would do more than just manage the downsides of globalisation. It would make Australia both more productive and more socially resilient in a world which is being increasingly disrupted. And as we know, the reasons for this go well beyond globalisation, though it is often the scapegoat.

‘Choosing Openness’ makes the case for globalisation

Published 29 Sep 2017 10:06    0 Comments

What a relief to have a politician talking serious economics without spin and point-scoring! Andrew Leigh’s Choosing Openness makes the case for openness in a world in which globalisation is getting bad press.

He tackles three aspects of openness: trade, migration and foreign investment. Leigh can make the simplest, clearest and most compelling argument for openness in the case of trade. This is the conventional wisdom among economists and most countries are, at least in principle, in favour of open trade. For migration the same economic arguments might seem to apply, but no country opens its borders to all comers. Similarly, with foreign investment, the economic case for unrestricted openness is strong, but in practice no country welcomes all foreign investment. Why the differences between trade, on the one hand, and migration and foreign investment, on the other? Where the case for openness is not simple and clear-cut, how should the proper balance be decided?

The case for free trade

The argument in favour of open trade may be well-rehearsed, but still need repeating. Although this is one of the few topics economists largely agree on, we have failed to win the public debate. Economists have long accepted that not everyone benefits from international trade. Rather, the compelling argument is that those who benefit could compensate the losers and still leave everyone ahead. In practice the losers have not been adequately compensated.

Concerns about low-labour-cost foreign competition are not new: Japan’s post-war recovery brought its increasingly sophisticated manufactured goods onto world markets. But the sheer scale of China’s emergence as ‘manufacturer to the world’ had greater impact, especially after China joined the WTO in 2001. Low-cost foreign competition was not, in itself, the main cause of the loss of manufacturing jobs in advanced economies, which have been declining in global aggregate for most of the post-war period, largely reflecting the advance of technology. Even so, globalisation was an easy target for blame. It has also become more apparent that the ‘China shock’ did have a sharp adverse effect on particular groups in America.

What is the policy lesson? Just as we wouldn’t slow the adoption of new technology in the face of job losses, we don’t want to respond to painful trade adjustments by restricting the growth of trade. Nevertheless, more needs to be done to soften the transition.

Leigh sets out this complex story and makes the case for multilateral agreements rather than bilateral free-trade agreements. The simple argument still stands: trade should be open.

The case for migration

Does this conceptual simplicity – and the case for largely laissez-faire trade freedom – carry over into migration? At one level it should. Letting people migrate freely, moving to the country that offers them the best opportunities, is much the same as trade, at least in narrow economic terms. It ought to benefit not only the migrant, but the host country as well: migration provides extra labour to produce more GDP, increasing scale and bringing new skills and talents. Internal migration enhances efficiency, bringing labour to where it is most needed and arbitraging wage differences, so why not unrestricted external migration as well?

The economic debate tends to focus on a narrow issue: does migration lower wages and take away domestic jobs? As Leigh points out, these objections find no serious empirical support at an aggregate level. The Productivity Commission could not establish any clear empirically-based conclusions on this, and any overall effect seems to be small. But within the aggregate total of migrants, some (young, skilled) clearly have greater economic benefit to the host country than others (family reunion, especially parents). Even if there is no discernable wage impact at the aggregate level, researchers usually find evidence of impact at the low-skill end of the labour market.

Beyond this narrow focus on labour, there are big differences between trade in goods and migration. Trade flows reflect a dual decision by both a foreign supplier and a domestic demander, while free migration would be a decision by the migrant, who typically is the main beneficiary of the move. There are huge differences of social infrastructure that make some countries far more attractive to live and work in than others. These differences tend to attract migrants who would draw most heavily on social security and subsidised services such as health and education.

In any case the migration debate is about far more than economics; social and environmental issues are central. A well-functioning and pleasant society may require a degree of homogeneity and common purpose that could be disturbed by excessive migration. On the other hand, no migration at all makes for a dull society. In short, while superficial similarities can be drawn, the clear case for unrestricted trade openness does not carry over into migration.

This is sensitive territory for anyone but doubly sensitive for a politician. Understandably and sensibly, Leigh glides around these issues and goes straight to the practical policy ground, making the case that the sort of controlled-but-substantial migration which Australia has practised for many years is hugely beneficial - not just in terms of GDP, but in fostering a more interesting and vibrant society.

The case for foreign investment

Foreign investment has a similar mix of superficial similarity with trade, and some awkward differences. If a country has more profitable investments opportunities than its population wants to fund through saving, economic logic says it should fund these externally, either through foreign investment or foreign borrowing. Foreigners will benefit from being able to invest in whatever country offers the best opportunities. Both sides benefit.

But if the economic argument is as compelling as it is for free trade, the politics is fraught. Leigh cites the problem areas as security, real estate and taxation. An effective and consistent approval process would overcome most of the specific issues, although much of the resistance is more nebulous: the ill-defined feeling that foreigners will behave in ways that are against our national interests. He notes that untrammeled self-interest and anti-social business activity are not confined to foreigners:

Just because someone is a citizen does not mean we can rely on them to put the public interest before their self-interest. A monopoly owner in an unregu­lated market is a danger to consumers, no matter the colour of their passport.

This point is well taken. If we are uncomfortable about foreign investment, we need to define more clearly the source of this discomfort. Proper debate on security concerns is hampered by the unquestioned belief that the detailed arguments cannot take place in public, but must be left to the ‘experts’ behind closed doors.

There are indeed some tricky issues here. To start with, foreign capital flows (whether investment, portfolio or borrowing) will by their nature be more volatile than domestic capital. A foreign country might use dominant ownership to pressure domestic policy in its favour. Of course domestic owners do this too, but the foreigners might bring pressure to bear over a wider range of sensitive issues, such as foreign policy. But this rather remote danger seems to apply to trade as much as investment. China could mis-use its role as a dominant customer for our resource exports more readily than it could use ownership of factories, farms or fisheries.

Where does this leave us? While trade, migration and foreign investment are not analytically identical, a strong presumption in favour of more rather than less openness is the proper response to the anti-globalisation trends seen in the UK, US and elsewhere. But the powerful political ground-swell behind these anti-globalisation arguments demonstrates that the case for openness has not yet been made clearly enough, with all the caveats needed to address its complexities. The positive lesson is that globalisation, for all its power to make our lives better, has not worked for everyone.

Broadening the distribution of benefits should be an important element of the openness agenda. Migrant policies need to recognise society’s sensitivities and adjustment costs. Foreign investors should pay fair taxes to fund the costs of creating a well-functioning society with trustworthy laws and administration.

These challenges aren’t addressed by doctrinal appeal to laissez-faire openness. They need more of the nuanced arguments Andrew Leigh makes in Choosing Openness.

‘Choosing Openness’ grapples with the big questions

Photo: James D Morgan/Getty Images
Photo: James D Morgan/Getty Images
Published 28 Sep 2017 09:42    0 Comments

In Choosing Openness, Andrew Leigh makes an important and timely intervention in the Australian debate about globalisation, free trade and immigration. This is, of course, a debate raging around the world, one that has seen Britain exit the EU, Donald Trump elected US President, Marine Le Pen challenge for the French Presidency, and Nazi sympathizers enter the German parliament.

From the outset, Leigh provides the perfect contrast of the winners and losers of globalisation. Nathan, a shift worker in an automotive glass plant in Geelong, lives in an area with 20% unemployment. A barrister living in the eastern suburbs of Sydney charges $10,000 a day. Leigh meets them both, in the same country, within weeks. Yet their experiences of the modern economy could be separated by thousands of miles and several decades.

Building on his earlier work on inequality, Leigh notes that over the past decades the incomes of the top 1%, and even more so the top 0.1%, have risen strongly. Meanwhile, income for those in the middle have seen much less impressive growth. Indeed, in the US, the median worker's income has not risen in real terms for around 30 years. Australia is doing a little better, Leigh reminds us, but there is a glaring disparity between the experience of the top of the income distribution and the middle.

But the real gist of Leigh’s contribution is to link these economic forces to social ones. He wants to explain why 'openness makes us uncomfortable', and he contends that, though economic forces play a role, there is more to it than that. According to Leigh, to explain Trump and Le Pen we need to think more broadly. He identifies four forces.

The first is the terrible economic outcomes for a large share of the population. Second, he points to technology. This is in part linked to economics, through automation and the impact on jobs. But Leigh is more interested in media technology — how we get our information. For Leigh, the 'new media ecosystem' allows us to choose our news and our facts, and provides fertile ground for conspiracy theories. Third, he gives due credit to 'political entrepreneurs' like Trump. Finally, he points to the vacuum left by the shrinking centre.

This strikes me as a pretty good diagnosis. But Dr Leigh is rarely content with understanding a problem. He wants to solve it. And in his characteristically persuasive and upbeat fashion, he goes on to make the case for trade, migration, and foreign investment. And, as is his style, these arguments are filled with compelling evidence.

The unifying theme running through the case for all three things - trade, migration, and foreign investment - is that they make the 'pie' bigger. Trade allows us to benefit from comparative advantage, selling our resources, agricultural products, even education, to a burgeoning Asian middle class. It also allows us to buy things from overseas much more cheaply. Migration fills skill gaps and enriches Australian society socially. Foreign investment provides a capital-thirsty Australia with the fuel to develop our good ideas and take them to the world.

The real question is how to make sure everyone benefits from this expanding pie. In my opinion, this is the great political question of our time, and Leigh grapples with it. In the final chapter, Leigh outlines a range of specific ideas to help re-slice the pie and keep Australia open. From tying skilled migration to labour-market needs to reviewing thresholds for foreign investment, Leigh has a policy tweak for seemingly every problem.

If I have a criticism of Leigh’s brilliant monograph, it is here. He wants to tinker. A little less of this, a little more of that. An adjustment here, an adjustment there.

Perhaps that’s the right answer, but I suspect it will take more. There is a battle of ideas raging that arguably requires a bold call to arms, not a series of technocratic innovations. Leigh leaves me wondering if, while we rewrite Australia’s foreign investment review process, a Le Pen type will capture a chunk of the Australian public by appealing to its gut rather than its mind.

It is ten years since Thomas Friedman’s now classic characterisation of globalisation in The World is Flat. In those ten years the winners and loser from globalisation have become even clearer, and the predictable backlash has gained political traction. It has taken an ugly tone at times.

In this wonderful monograph Andrew Leigh has provided us with a clear and compelling reminder of the challenges involved in remaining open — with all the benefits that ensue — while addressing the concerns of those hurt by openness.