Date created: 28 November 1996

Last modified: 18 November 1997

Maintained by: John Quiggin

John Quiggin

The unacceptable legacy of Thatcherite economics

Sydney Morning Herald ,

The disastrous showing by John Major's Tory party in recent local elections comes at the end of a long period of decline for the British conservatives. The surprise election victory of 1992 was followed by the humiliating decision to withdraw from the fixed parity with the German mark required under the Exchange Rate Mechanism (ERM). The reaction was not so much to the devaluation itself (which a sensible government would have adopted before being forced to do so by the foreign exchange speculators) as to the economic failure that it symbolised. After all the rhetoric of the Thatcher miracle, the ERM fiasco appeared as confirmation of Britain's status as a second-rate economic power. Major's failure to restore confidence in the British economy has important implications for Australia.

There is a growing consensus that Britain has gone badly wrong. A couple of years ago, a spate of reports on the decline of Britain, by Philip Knightley and others, was dismissed as the product of a cyclical economic slump. Yet after three years of economic growth, at least by official measures, disillusionment and even despair are more widespread than ever. Despite the promises of the 'Thatcher miracle', Britain has cemented its place as one of the poor countries of Europe. Growth under Thatcher and Major has barely exceeded the miserable rates of the seventies. This modest economic performance has been accompanied by an increase in inequality worse than that of any OECD country except possibly the United States and New Zealand. Quite literally, the rich are getting richer and the poor are getting poorer.

Even more striking than economic failure has been the corrosive effect of Thatcherism on British social cohesion and moral values. The much-derided appeal to Victorian values has collapsed under repeated revelations of Tory sexual impropriety. In fact, however, it is only in the matter of sexual hypocrisy that Thatcher's Conservatives have anything in common with Victorian England. A far more striking divergence from Victorian values is the Thatcherites' lack of any moral depth or concept of social obligation, the kinds of things which typified the Victorians but which Thatcher herself derided as 'wet.' The dubious career of Mark Thatcher, are more telling symbols of Thatcher's England than is the self-strangulation of a junior minister or two.

Ten years ago, conservative advocates of micro-economic reform in Australia were vocal in their praise of Thatcher. On the Labor side of politics, it was imprudent to express these views in public, but, off the record, leading figures in the government were happy to cite Thatcher as a model. The policies of privatisation and public sector contraction adopted by the Hawke-Keating government in the late eighties can be traced directly to the British model. The only complaint of the Opposition was that the government did not move far enough or fast enough in this direction. The great symbol of this was Keating's failure to introduce a VAT (or GST) on British lines.

No such sentiments are heard today. When Britain is mentioned among the policy elite, it is as an example of how not to do things. In particular, it is claimed that the privatisation policies adopted by Thatcher and Major paid too little attention to competition. For example, the three London airports were sold off as an integrated enterprise and the electricity industry was divided into two large firms which promptly settled into a cosy duopoly.

The Australian government plans to sell airports off piecemeal, and the proposed privatisation of the Victorian electricity generating industry involves five firms each owning only one or two power stations. In their enthusiasm for competitive models, the Australian advocates of privatisation have overlooked the fact that the Thatcher government was presented with convincing arguments that a breakup of the airport and electricity industries would involve the loss of scale economies and a long-term increase in costs. The same arguments apply more strongly here. But the need to avoid identification with the British example is overwhelming.

The model today is New Zealand. The marginal differences between, say, the privatisation of Telecom New Zealand and that of British Telecom, are treated as fundamental issues of principle. The fact that New Zealand's GST avoided such compromises as an exemption for food is held up as evidence of a more serious commitment to reform. New Zealand's focus on public sector net worth is treated as a crucial advance on the Thatcher government's obsession with the public sector borrowing requirement.

Yet New Zealand today looks very like Britain in 1988. The economy is on the upswing, but it has a long way to go to catch up the losses accrued during the period from 1984 to 1992, when real GDP per capita actually declined. This period of economic contraction is defended on the basis that New Zealand was an economic basket case in 1984, exactly the rationalisation used by British advocates of the 'Thatcher miracle' for ignoring the economic devastation of the early eighties. The fact that New Zealand's economic recovery is heavily dependent on favorable movements in the terms of trade is ignored, just as was Thatcher's dependence on North Sea oil. The New Zealand economic miracle could end just as abruptly in the late nineties as Thatcher's did in the late eighties.

More importantly, the current idolisation of the New Zealand government ignores the long-term social and economic consequences of a policy which has drastically increased inequality and social polarisation. These consequences are evident both in anecdotal accounts and in the statistical evidence of increasedly entrenched poverty and rising youth suicide rates. The same tendencies are already apparent, though to a lesser degree, in Australia, as has been shown by the recent work of Bob Gregory and Boyd Hunter.

The attempt to draw a distinction between the policies implemented by Thatcher in Britain and those implemented by successive governments in New Zealand is a triumph of hope over experience. Whether Major wins or loses, it is clear that the Thatcher model has failed. Australians should reject this model and reassert the fundamental values of equality and a fair go for all before it is too late.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

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