Academic journal article The Economic and Labour Relations Review : ELRR

Financial Deregulation in Australia in the 1980s

Academic journal article The Economic and Labour Relations Review : ELRR

Financial Deregulation in Australia in the 1980s

Article excerpt

1. Introduction

With the recommendations of the Wallis Report currently being considered by government, it is timely to look back at financial deregulation in Australia in the 1980s. If adopted, the recommendations of the Wallis Report will be the latest changes in a process which started in the late 1970s. But where did pressures for change come from in the late 1970s? Were policy makers simply reacting to economic pressures or were other factors at work? If other factors were at work, did each factor operate independently? If not, how did they interact? Were their effects consistent? This article examines the process of financial deregulation in Australia during the decade when Australia's financial system changed from a highly regulated system to a system with few quantitative or qualitative controls, a freely floating exchange rate and a deficit fully financed by the market. In so doing it answers the questions posed earlier and places the Wallis Report in context.

Throughout most of the post-war period, the Australian financial sector consisted of a regulated banking sector and a less regulated non-banking sector. The banks accepted government controls because government regulations also placed restrictions on the activities of the non-bank financial institutions (NBFIs), and, more importantly perhaps from the banks point of view, they were protected from international competition by a de facto prohibition on the entry of new banks into the Australian banking system (Harper, 1991:65).

All this changed very rapidly in the 1980s. The rapidity of the change has been attributed to an ideological shift and is seen as evidence of the first fruits of the triumph of economic rationalism. For example, Helleiner (1994: 163) believes that:

   ... liberalization decisions in New Zealand and Australia can
   generally be explained by an ideological shift in favor of a
   neo-liberal conception of finance within the newly elected Labour
   governments in each country from the mid-1980s.

Others, such as Harper (1986: 47) turn to economic forces as the explanation for the rapid deregulatory process:

   ... the unique feature of the Australian experience of financial
   deregulation--the rapid pace and extensive coverage of the
   process--are the result of ... the fungibility of money and finance
   ... The unique feature of financial markets is that the developments
   of substitutes via financial innovation tends to be less costly than
   is the case in markets for non-financial goods and services.

This article argues that, while changes in ideology, or ideas, and economic forces were important, the structure of the financial sector itself and the perceived political interests of the Labor government elected in 1983 also affected the speed of the deregulatory process. The remainder of the article examines the impact of each of these influences in turn, while the concluding section integrates the analysis by looking at how these four factors (ideas, economic forces, institutional structures and political interests) interact to affect policy outcomes.

2. Ideas

While deregulation of Australia's financial system actually began under the Fraser Government and the interplay of factors was more complex than an ideological shift within government, ideas were significant. The pressure for a public inquiry into Australia's financial system is perhaps the most important example of this. Moreover, opposition to the inquiry in certain sections of the bureaucracy, stemming from a reluctance to abandon policy levers thought to be necessary for controlling the economy, also arose from ideas about the appropriate role for, and operation of, economic policy.

Although the possibility of a review of the financial system was briefly canvassed by the LNP Coalition during the 1975 and 1977 election campaigns - prompted primarily by a concern over lack of funds to small businesses (Harper, 1986: 42)--the idea was dropped after each election (Pauly, 1987: 33). …

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