By Liam Mannix
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It might not feel like it, given recent interest rate jumps and a rising cost of living, but we live in a very rich country.
A replica of the Endeavour, which sailed into what became Botany Bay 250 years ago today.Credit: AP
Divide our GDP by the number of adults and we are among the very richest countries in the world. Government debt is relatively low. Compared to similar countries, our tax rates are low. Despite our relatively small population, we have the 13th largest economy in the world.
Why? That’s one of the great economic mysteries. “It is difficult to explain why Australia has grown so much over time,” says Jakob Madsen, professor of economics at the University of Western Australia. “It certainly has been exceptional.”
Australia is a colonised nation, and many nations colonised by Britain – think Nigeria, Zimbabwe – have fared very poorly compared to their colonisers.
Even neighbouring Indonesia, which also suffered colonisation, has an economy a fraction of the size of ours on a per-person basis.
So why did Australia get rich?
A fascinating 2001 study, from three researchers awarded the Nobel prize for Economics last week, gives us an answer, one that explains not just Australia’s fortune but the fortune of many countries: the fate of our first European colonisers.
The harsh lifestyles of the first settlers to land at Sydney Cove are part of Australian myth.
But compared to other colonies, the First Fleeters had it easy, argue Daron Acemoglu, Simon Johnson and James Robinson in their 2001 paper.
Mosquito-borne diseases caused significant mortality among European settlers in other colonies.Credit: iStock
In the first year of colonisation in Sierra Leone, 72 per cent of Europeans died. British troops stationed in India faced mortality rates between 7 and 17 per cent.
Most of this was driven by tropical diseases against which Europeans did not have immunity. Malaria and yellow fever were the primary killers; the mosquito-borne viruses can have mortality rates of up to 90 per cent.
Both are tropical diseases; the southern colonies in Australia were largely spared from them. Being far from the metropolises of Europe also meant some freedom from the diseases of home, such as tuberculosis and smallpox.
(Of course, those European diseases soon made their way to the First Nations communities, who had no immunity. Smallpox may have killed as many as 80 per cent of Indigenous Australians.)
Back in Europe, these different disease environments had major effects on decision-makers.
In places like Australia, New Zealand and America, Europeans could easily dream of a new Europe. Colonists flocked to the new settlements; when Britain was choosing where to send convicts it picked Australia over Gambia due to concerns about disease.
In Africa and South America tropical diseases meant there was no obvious prospect of a “new Europe”. So the colonists built an entirely different type of society, one where the sole goal was to run a country’s lands and people to maximise benefit for the coloniser.
In the Belgian Congo, King Leopold’s private army burned villages, took hostages and mutilated children to force locals to gather rubber and ivory. Spain imported so much silver from Peru it caused hyperinflation and bankrupted the country.
Colonization pushed Indigenous Australians from their lands and into reserves.Credit: Brook Mitchell/Getty Images
This different type of colonisation did not make much of a difference to Australia’s First Nations people. Their society and economy was still destroyed, they experienced mass mortality, they were herded from their country into reservations, they were forced into unpaid labour.
This was a different form of colonialism. “But none of this is to say colonialism is a good thing,” says Richard Holden, professor of economics at the University of NSW.
Simple survival isn’t enough to grow rich, argue Acemoglu, Johnson and Robinson. It is what Australia’s colonisers did next that matters.
Settlers hoping to build a new Europe typically wanted two things: freedom, and the ability to grow rich, they argue. The former required strong checks on government power, and the latter the establishment of private property, so they could own it.
Australian settlers also demanded the rights and institutions they would have enjoyed in England, like jury trials and political representation.
In extractive colonies, like South America, governments also set up institutions, but they were designed to extract – like the Spanish encomienda, the legal right of colonisers to enslave.
Strong institutions give local entrepreneurs confidence to invest and grow a business. A strong rule of law and limits on government power give entrepreneurs confidence first that they can sign contracts and grow their companies, and second the government won’t simply take their wealth from them.
Acemoglu, Johnson and Robinson show a direct correlation between the mortality of early settlers and a country’s later economic development (shown in the graphic below).
Acemoglu, Johnson and Robinson paint a rosy picture of the economic effects of a certain type of colonialism. But we should also think about how those economic effects are distributed. Indigenous households have a lower average income and a higher rate of poverty than the rest of the country.
We also shouldn’t ignore Australia’s other advantages, such as our huge landmass and abundance of natural resources like gold, coal and iron ore.
But resource-rich countries usually don’t end up rich. Compare resource-poor Japan or Switzerland to oil-rich Nigeria or Venezuela. Resource wealth actually tends to suppress economic growth – a phenomenon known as the resource curse.
Oil riches seem to encourage government corruption and economic mismanagement.
But this only happens if the resource riches are discovered before strong institutions have been bedded down. Consider Norway: a country with institutions so strong it managed to divert its oil wealth into a sovereign wealth fund for the good of its citizens.
So if institutions matter, why don’t colonies simply install them after they gain independence?
It’s not so simple, Acemoglu, Johnson and Robinson show. Newly minted leaders of extractive economies have a strong interest in maintaining the power structure – because it now makes them rich. Slavery in Brazil persisted after independence for more than 60 years.
Why strangle the golden goose if you can own it instead?
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clarification
This story has been updated to say that Jakob Madsen is a professor of economics at the University of Western Australia.