Abbott’s message to the world: governments should stand back

Tony Abbott’s small government message played well to a WEF audience. AAP

As widely anticipated, prime minister Tony Abbott’s speech to the World Economic forum (WEF) stressed the absolute centrality of the private sector as an engine of economic growth.

Outlining Australia’s vision for the G20 in Brisbane next year, he urged other G20 countries to work together to remove obstacles to business and free trade and called for smaller and less interventionist governments.

In what could be described as a global upgrade of his “Open for Business” domestic rhetoric, Abbott expounded his private business-centred agenda: deregulation, private infrastructure investment and freer international trade.

Certainly, Abbott also touched upon more general themes, such as the reform of the international financial system, the fight against tax evasion, and global governance.

Still, the central message was that the Australian presidency of the G20 will be all about empowering the private sector and getting rid of the know-it-all government.

The business of economic growth and development

Mr Abbott’s view reflects two strong convictions. One is that economic growth fixes every other economic problem, including unemployment and poverty.

The other is that a smaller government strengthens prosperity. Paraphrasing Abbott’s speech, governments do not create wealth, people do. Hence, governments should do for people what they cannot do for themselves and no more.

There is little doubt that this speech must have been very well received in Davos, as Mr Klaus Schwab, founder and executive chairman of the WEF, also noted in closing the session.

The pro-market, pro-business, and anti-government message of Mr Abbott aligns very well with the views and ideological position of WEF. In this regard, the choice of Davos to reveal Australia’s view for the G20 was a winner.

But a less favourable global audience might question the foundations of Mr Abbott’s argument, starting from the two convictions on which this argument is built.

Experience and empirical evidence suggest that economic growth is necessary to fix most economic problems, but it might not be sufficient. In fact, the extent to which growth increases employment, reduces poverty, and strengthen people’s prosperity depends on its sources and effects on distributional inequalities. That is, there are different types of growth and they are not all equally good in terms of population’s welfare.

Furthermore, the idea the government needs to be small in size and scope to generate prosperity is also at odds with experience and empirical evidence. Northern Europe is an easy counterexample.

But one does not need to travel all the way to Sweden or Denmark to build a case against the case for small governments. Australia was one of the very few countries that stayed open for business throughout the global financial crisis, avoided the recession, and kept on creating employment.

This was possible thanks to the interventionist fiscal policy of the government. With a different government, slim and non-interfering, Australians would have been in much more troubled waters.

Governments fail, but so do markets

Challenging Abbott’s convictions does not mean understating the role of the private sector in the economy. It means acknowledging the potential limitations and risks of a strategy that blindly believes in the exclusive ability of the private sector to deliver wealth and prosperity for all.

When markets fail or deliver socially undesirable outcomes, the private sector is ill-equipped to ensure adjustment. The laissez-faire approach that lies underneath the speech of the Prime Minister has been proved wrong quite consistently in economic history. It is hard to see how it could work in the current, extremely complex, economic environment.

Obviously, government intervention is also subject to failure, and we have plenty of proof of that. So, what the global economy needs is better government; but better does not mean smaller.

The government is not always bad in the same way as the private sector is not always good. So, minimising one to maximise the other is not the recipe for welfare and prosperity.

More likely, economic development requires a balance between private and public, between the invisible hand of markets and the visible hand of government intervention.

Even objectives likes freer international trade, infrastructure development, better governance for the financial system, which the prime minister indicated as Australia’s priority for the G20, do not necessarily call for smaller governments.

Quite the contrary, it is the complementarity of private business and government intervention that helps the economy develop along a path of prosperity and social equity. Failure to recognise this can only undermine global development efforts and alienate support for Australia’s G20 agenda.

Davos was an easy audience for Mr Abbott. But is the G20 Presidency just about making Davos happy?