Both luck and good management: a review of Ian McLean’s Why Australia Prospered

The passing of Ian McLean in May 2021 reminded me that his 2013 book on Australia’s economic history had been on my ‘to read’ list for a long time.

An epigraph to the last chapter of Why Australia Prospered quotes the Greek poet Archilochus that ‘the fox knows many things, but the hedgehog knows one big thing’ (popularised by Isaiah Berlin).

McLean was a fox, with this nicely undogmatic book looking at the many factors that can influence economic growth both in general and in Australia, rather than seeking one big theory to explain it all. It takes sceptical looks at theories that might claim too much policy wisdom (post-WW2 Keynesian economics, 1980s & 1990s ‘economic rationalism’), and too little, that Australia was just a ‘lucky country’, as Donald Horne famously put it.

Australia was and is lucky in its natural endowments. These were the earliest source of its economic comparative advantage, as the wool industry developed in the first half of the 19th century. Sheep grazing land was taken without paying for it – whether the wronged ‘owners’ are taken as the Indigenous people who had traditionally lived on it or the Crown as represented by the governor of the colony – and the mild climate made winter housing for sheep unnecessary. Combine these capital savings with cheap convict labour and Australian wool was very competitively priced on international markets.

By the mid-19th century copper and then gold gave Australia a mining industry, contributing to Australia being one of the world’s richest countries in the second half of the 19th century (Australia is sometimes said to be richest at this point, but McLean observes that ‘Australia’ still had a small total economy at the time, and regions in other countries were richer).

Australia was lucky to have these natural advantages, but McLean notes the theory of the ‘resource curse’, where the dominance in a country of a single or small number of commodities has been economically distorting, and brought with it political and social problems. Avoiding these is an achievement.

This seems to be one reason why McLean takes a more benign view of 20th century protectionism, which shielded Australian manufacturing with tariffs, than is fashionable. Despite the low productivity tariffs promote Australia did develop manufacturing exports, and of course these local industries partly replaced imports. This made Australia less exposed to the volatility created by big shifts in the prices of agricultural products and minerals on world markets.

A manufacturing industry was also important during the war with Japan. Its rapid conversion and expansion into war production led to GDP being 41 per cent higher in 1943 than it had been in 1939. After a dismal 50 preceding years of economic growth that was a staggering turnaround.

In the 25 years after WW2 Australia was part of a global period of economic prosperity, before that ended in 1970s ‘stagflation’ – the combined high inflation and unemployment that was not supposed to happen according to then prominent economic theories. While Australia hit these problems at the same time as other countries, it took much longer to solve them. Wage increases promoted by the Whitlam government and real exchange rate appreciation get some of the blame.

One of the prominent theories of economic growth is that it is to do with ‘human capital’, the knowledge and skills of a country’s people. Colonial censuses in the late 19th century showed that most people could read and write, and primary education was made free and compulsory in the 1870s (although attendance was generally well below enrolment). But compared to the USA, Australia was slow in introducing secondary education, and correspondingly also later in developing tertiary education.

McLean is cautious on the economic significance of Australia being late to mass post-primary education. Education is consumption as well as investment; rich countries can afford to keep healthy young people out of the labour market. Australia’s apprenticeship system, which lacks a direct equivalent in the US, was at least partly a substitute source of skills development. Weaknesses in education did not stop Australia maintaining its comparative advantage in agriculture and mining, something it has now done for 200 years.

Why Australia prospered is an academic book, but in the positive sense of being a search for the best explanations of complex historical events, rather than an exercise in confirming pet theories or fighting obscure intellectual battles.

This review was originally published on GoodReads.

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