Enfant terrible is no sheepish customer

Australia and the Global Trade System - Evolving Financial Markets and International Capital Flows
April 12, 2002

Since British settlement in 1788, Australia has depended on trade with the outside world. Images of ships loading wool bales and iron ore come easily to anyone acquainted with Australia's economic history. Equally significant is the trade in financial assets that accompanies the exchange of goods. Two books treat these aspects of Australia's economic relations with the rest of the world. Australia and the Global Trade System focuses on Australia's contribution to the multilateral trade system and the importance of that system for the economic welfare of small countries. Evolving Financial Markets and International Capital Flows examines the significance of British capital for the development of four frontier economies, including Australia, in the half-century prior to the first world war.

Australia and the Global Trade System is a welcome counterweight to much ill-informed criticism of multilateral institutions, especially the World Trade Organisation. Given the importance of the multilateral trade system for Australia, Ann Capling laments the low level of popular understanding of the system and the history of Australia's involvement in, and influence on it.

Australia was one of 18 countries invited to participate in negotiations to reconstruct the multilateral trade system at the end of the second world war. While not a willing convert to multilateralism, having benefited too much from British "imperial preference", Australia found a unique voice as an enfant terrible , harassing the United States to look beyond its self-interest in designing the postwar arrangements. Being dependent on the US neither for food aid nor for finance, and not closely tied to the US politically and economically, Australia could speak more freely, and assumed the role of spokesman for smaller nations, many of which were still developing.

This role has waxed and waned over the years but came to the fore again during the Uruguay Round when Australia chaired a dissident group of commodity exporters (including Canada) keen to encompass agricultural protection within the negotiations. Application of this "third force" helped the US withstand protectionist elements at home and counterweigh staunch objections from the European Union to bring agriculture within the ambit of the Round.

Documenting Australia's diplomatic successes and failures in trade policy is a key focus of the book. As a political scientist, Capling confesses her disdain for "economistic" explanations of policy outcomes based on the cool-headed calculation of national economic benefit. She does not accept "hegemonic" theories that seek to sideline all but the major players, leaving no room for the influence of bit players such as Australia. The record convinces her that clever statecraft and innovative policy can deliver favourable outcomes to seemingly insignificant actors.

Capling's dismissal of economic analysis as colourless, leaving no room for moral suasion, social pressure and cultural influences, is hasty. Good economic history is well attuned to the wider currents that bear on historical outcomes. Although she claims not to have written an economic history of Australia's involvement in the multilateral trade system since 1945, economists will find much to admire in her work.

Apart from a call not to underestimate the wider influence of strategic policy intervention by marginal players, Australia and the Global Trade System makes a strong case for the optimality of rules-based multilateralism for smaller powers such as Australia. If forced to negotiate bilaterally, smaller powers will always be done down by larger. The hope of economic justice for smaller powers lies in the adoption of a rules-based system by all players that calls the major and the minor players alike to account.

This book is a highly readable account of Australia's significance in the multilateral trade system and the significance of the system for Australia. From 1946 to the present, it traces the high and low points of diplomatic posturing and political pusillanimity. The work concludes on a plaintive note, fearing the collapse of a system that has at least kept major powers focused more broadly than their domestic fronts, and that is a more delicate flower than many critics comprehend.

Evolving Financial Markets and International Capital Flows , by contrast, is not primarily about Australia. Australia appears as one of four "frontier" economies - the other three being Canada, the United States and Argentina - which were the fortunate recipients of great gobs of British capital in the first era of global integration, from about 1870 to the onset of the first world war. What interests the authors is the very different paths of financial development the four frontier economies took, and the different ways in which British financial and capital market institutions influenced those paths.

The book is magisterial in scope. Five detailed financial histories of Britain and the four frontier states are sandwiched between overview and summary chapters. These are treasure troves of historical data and self-contained parallel histories of the financial development of four capital-importing and one capital-exporting economies during this period.

The 40 years or so leading up to 1914 were a period of rapid capital market integration. There was a dominant world financial power and significant flows of capital from a developed centre towards a developing periphery. Financial innovation was rampant. Large sums were invested in a new infrastructure - railways - which it was believed would greatly increase the productivity of land. Capital markets jostled with banks and other financial intermediaries for prime position in the mobilisation of savings. Information deficiencies bedevilled savers and investors, leading to exuberance and subsequent collapse.

While the authors' main focus is the role of British capital in the financial development of the frontier four, they cannot resist pointing to history lessons unlearnt and the inevitability of repetition. Speculative bubbles, unsound banking practices and "crony capitalism" are depressingly familiar refrains. The combination of rich historical detail with commentary and analysis of contemporary experience widens the appeal of this scholarly work.

There is a view abroad that foreign investment steamrolls local institutions, practices and preferences. The constant theme of Evolving Financial Markets and International Capital Flows is how variegated the experiences of the four frontier countries were, notwithstanding the common source of their foreign capital inflow. The differing experiences reflect a blend of British institutional practice and local preference. Scottish branch banking took root in Canada and Australia but not the US on account of US suspicion of cross-border banking. This in turn favoured capital markets over banks as mobilisers of savings in the US, but not in Canada, and to an even lesser extent in Australia.

British investment in Argentina was governed almost exclusively from London. Local control was more common in the other three countries, especially the US. The unwillingness of British investors to entrust control to Argentines bred growing resentment, which eventually soured financial relations between the two and cost the Argentine economy dearly. The willingness to cede control locally in the US came only as British finance houses established a physical presence in America, from which vantage point local investments could be monitored. These subsidiaries soon found themselves intermediating local savings as well as British savings, and the US investment banking industry was born. While the great bulk of British capital financed railways during this period, local preference for public ownership in Australia and private ownership in the Americas was undisturbed by the common source of funding.

Relative to the sizes of the economies concerned, cross-border capital flows in the late 19th century were often considerably larger than today. British savers benefited from the lucrative investment opportunities available in developing frontier economies. Residents of the frontier economies, in turn, would not have enjoyed the rapid improvements in standards of living without the availability of foreign savings to supplement their own, as well as the constructive influence of British financial institutions and policies.

The history of financial development tends to play second fiddle to the history of economic development more broadly defined. There is a tendency to highlight trade in goods as an engine of growth and to overlook the importance of accompanying developments in finance and capital markets. With the appearance of Evolving Financial Markets and International Capital Flows , students of economic development in these five countries can no longer excuse inattention to matters financial. Brim full as it is with historical detail and sweeping comparative perspective, the book deserves a wide readership.

Ian R. Harper is dean of faculty, Melbourne Business School, Australia.

Australia and the Global Trade System: From Havana to Seattle

Author - Ann Capling
ISBN - 0 521 78054 3 and 78525 1
Publisher - Cambridge University Press
Price - £42.50 and £15.95
Pages - 260

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