ROSS GARNAUT. Capitalism, Socialism and Democracy. Part 2.

Nov 8, 2016

The Challenge of Globalisation.

This is the second of a two-part series of extracts from an address which Professor Ross Garnaut gave to the Sydney Democracy Network, University of Sydney, 7 September 2016.  The full text of his address can be found on his website.


Democratic capitalism’s return to success depends on reconciling concerns for ordinary citizens’ standards of living with the demands of globalisation.

A global economy would work better with global governance. However, there is little tolerance for international governance in contemporary democratic polities. There are some real advantages in governance at smaller scales where it is appropriate. Efforts towards global economic governance should therefore concentrate on issues where it has the greatest value.

I focus here on trade and development, where we can build on the role of the World Trade Organisation.


The first guiding principle should be subsidiarity—a principle of European Union governance the dishonouring of which contributed to the British vote to leave. Under subsidiarity, decisions should be left to national and sub-national governments unless there are large advantages in international agreement. Where international cooperation has high value, more ambitious outcomes are possible if commitments are voluntary and enforced by the domestic political process and international peer pressure. Concerted Unilateral Trade Liberalisation under Asia Pacific Economic Cooperation from its formation in 1989 until the Asian Financial crisis 1997-9 and Concerted Unilateral Mitigation shaping the Paris agreement on climate change are successful examples of this approach.

Maintaining open borders

Getting global governance right for trade is critical, given that free movement of goods and services across international borders is now much the most important vehicle for promoting global development. Movements of labour and capital can help, but are less powerful. Domestic political reactions in the developed countries are less neuralgic on trade than on immigration and capital flows. Maintaining open borders for goods and services should have priority

The recent proliferation of preferential trade agreements and the TPP focussed strongly on the negotiation of behind-the-border regulation. Coordination and reform of regulatory arrangements behind the border in each country can generate large benefits, but is much more likely to be fruitful if it involves voluntary decisions following open discussion among representatives of states and within each domestic community. The negotiation of arrangements on immigration, intellectual property and new rights of business to take extra-territorial legal action against governments was of doubtful potential value and a bridge too far.

A focus on open trade at the border within a framework of concerted action towards an agreed goal of multilateral free trade is more likely to be productive. This recognises the sovereign state as the locus of decisions, with the domestic electorate the main constraint on policy choice. Domestic public education on the effects of trade liberalisation in the context of wider policies supporting equitable distribution can expand what is feasible.

Clarity on foreign investment.

On investment, Australia is entangled in a web of security reasons and populist pressures for excluding some Chinese investment. We need to uphold security interests. We also need to establish transparent process, and remove officials’ discretion case by case to transfer billions of dollars of public revenue to private entities. Clear process will help to avoid costly stirring of xenophobic sentiment and anxiety in Australia’s most important economic relationship. The wise course is for the Government on official advice to define and to make public the list of business assets that have such high security value that they cannot be allowed to be sold to foreigners at all—or in the most sensitive areas, not sold into private ownership at all.

Tax avoidance and evasion.

On dealing with international tax evasion, the exchange of taxation information among national tax authorities helps and has been the subject of agreements in the G20 and other global fora. Information on tax evasion has been expanded in recent years by whistle blowing and investigative journalism. Coordination of tax policies could stop a race to the bottom but must overcome corporate pressure on each state to withhold cooperation. It may be feasible amongst a subset of major countries. Larger states can apply pressure to opportunistic smaller states.

New forms of business taxation can greatly reduce opportunities for shifting profits into tax havens or low tax regimes. Large business generally opposes measures to strengthen the corporate tax base. The reactions to the Australian Resource Super Profits Tax (in which the hand of opponents was strengthened by large errors in taxation design) and the European penalties against Apple, are early battles in a war for the future of democratic capitalism.

After the end of the resources boom Australia faces severe adjustment challenges arising from its special circumstances as well as from the international situation. The structural budget deficit has to be reduced, and the real exchange rate depreciated further. Making the necessary adjustment while minimising the damage to living standards for ordinary citizens must be a touchstone of policy reform.

The necessary increases in taxation and reductions in expenditure will only be achieved by a Government satisfying a major part of the electorate and the Senate that the proposals allocate the burden equitably across the community. It must do this in an electorate sensitised by recent experience to the influence of corporate interests on the composition of the budget.

Curbing vested interests and political donations.

How to curb the excessive influence of corporate donations on policy? The question has been placed on the Australian public policy agenda by the recent work of ICAC in New South Wales and by publicity for Chinese donations to Australian political parties and leaders. Campaign funding reform has been the subject of recent discussions sponsored by the John Cain Foundation. There are problems in any approach short of bans on all campaign-related donations by companies, trade unions, other organisations involved in campaigns that have direct and large impacts on the partisan political contest and foreign citizens. Political campaigns would then be funded from public sources, and from donations up to a moderate limit from individual citizens on the Australian electoral roll. Such reforms have been introduced in Scandinavia and Canada, and have been advocated by leading figures on both sides of Australian politics.

The challenges are large, but the benefits of overcoming them larger still. At stake is the whole of humanity enjoying the fruits of modern economic growth while some of our grandchildren are alive. The abundance of capital and scarcity of labour that would accompany the extension of high material living standards to all of humanity would make for more equitable distribution within each country and in the world as a whole.

Getting things right requires conservative reform, to restore the integrity of democratic political systems that have been weakened by the growing influence of vested interests. It requires innovation in policy to deal with new issues arising out of the globalisation of economic life.

Yet we would be naïve to think that democratic capitalism will be alone in the long flow to the maturation of global development.

China is struggling now with adjustment of its economic system for transition to a high-income country. The Chinese Communist party’s struggle against corruption may turn out to be a cover for the settling of factional scores. The recent step back into authoritarian control may go further and block the free and confident exchange that underpins a modern economy. But there is a chance that movement along today’s rocky road will lead eventually to an authoritarian capitalist economy with Chinese socialist characteristics that restores and retains legitimacy by delivering equitably distributed prosperity.

This contest of political systems will occur within a more complex global political environment. There will be other powerful states, with different variations on the themes of democratic capitalism and authoritarian capitalism. Continued economic success in the great Asian democracies, India and Indonesia, may turn out to be transformational. The recent strengthening of authoritarian government in such major countries as China, Egypt, Russia, Turkey, Thailand and the Philippines adds complexity.

International pluralism in political systems is going to be the reality, and peace and the maturation of global development depend on us making that work.

Australia is just about the world’s oldest democracy, and a pioneer of such central democratic institutions as manhood suffrage, the secret ballot and votes for women. All of these developments were noticed and helped to change the world. Ours was the most successful of the democratic capitalist societies for several decades until a few years ago.

We have recently walked into harder times. We need to correct the weaknesses for our own sakes. Correcting the weaknesses will encourage the rest of humanity to see democratic capitalism as a worthwhile vessel for the last stages of humanity’s journey to the maturation of global development. Making the most of that possibly is worth some effort.

See also JOHN MENADUE and IAN McAULEY. The future of globalisation.


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