AUSTVLI( 7
PRIME MINISTER
FOR PRESS 28 APRIL 1978
SYDNEY CHAMBER OF COMMERCE LUNCHEON
I am glad to be able to address today such a broad crosssection
of the New South Wales business community. I
attach great importance to regular communication between
Government and business. The genuine exchange of views
can remove misunderstandings, and help towards finding
solutions to the problems which confront us all.
Of course, communication today is itself a major industry
whose output is prodigious and where persuasion, pursuit
of special interests and over-simplification as well as
the telling of the plain truth form part of that output.
It is prudent to keep this always in mind for in econimic
matters in particular, the truth is rarely simple.
I want to speak to you today about economic policies in
Australia and the rest of the world. Let me begin with the
world economy, a topic very much in the minds of all Government
leaders at the moment and the subject of my discussions in
Japan last week with Prime Minister Fukuda and his ministers.
Over the past year or so, increasing concern has been expressed
throughout the world about the sluggish growth of the world
economy and world trade. Faster world growth is clearly
necessary if the global problems of under-utilization of
resources and high unemployment, especially amongst the young,
are to be overcome.
The great difficulty which faces all national governments is
how best to achieve this result without rekindling inflation.
Various solutions have been put forward in the past year, many
with somewhat colourful titles.
There was the " Locomotive" theory, whereby the powerful " Motor"
economies of the United States, West Germany and Japan would
pull the economic carriages of the rest of the world on to
the growth track. ./ 2
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This theory had its attractions, but it also had some serious
drawbacks, for it could be taken as encouraging governments
of the weaker economies simply to sit back and wait for the
locomotive to begin pulling. This was, and remains, a false
hope. The weaker countries could only take advantage of the benefits
which increased world growth might bring if they had effective
anti-inflationary domestic policies in force. Without such
domestic Policies, the increased world demand could merely
result in higher inflation and thus negate any lasting benefit
to the trading world: and in particular, preclude any significant
decline in unemployment.
In other words, the locomotive theory was of little use to those
countries which had not yet completed necessary internal repair
work on their own rolling stock. The " Locomotive" theory was
then supplanted by the " Convoy" theory.
Under this theory, a fleet of national economies, instead of
just two or three, would set sail together from the recessionary
harbour all mutually supporting each other. One difficulty
with this approach is that the convoy ranges from battleships
to rather leaky dinghies, and like all convoys, the fleet can
only move as fast as its slowest member.
Both these theories try to offer general solutions to what is
an aggregate of particular national situations. In doing so,
they do not seem to take full account of the complexity of the
world economy. For example, we are all aware that the health
of the world economy depends greatly upon the health of the
U. S. economy; but that does not mean that the U. S. should
try to pull others out of recession if by so'doing its domestic
economy would be impaired.
Recent fluctuations in the value of the U. S. dollar have brought
home rather sharply the point that the U. S. must correct certain
basic imbalances within its own economy if it is to avoid
being a source of instability for the world rather than an engine
of sustained recovery.
In an important speech earlier this month, President Carter
re-affirmed the danger which resurgent inflation presents to
the U. S. economy, and thereby to the world. Australia cannot:
ignore the effects of developments overseas. At the same time,
we must avoid the error of seeing " overseas" as some sort of
homogenous entity to which some single remedy can be applied.,
The truth is very different. Out there, there are a multitude
of countries, all of which are struggling with their own
problems, many of them rather similar to our own.
The ability of each country to join in the " Convoy" on any
lasting basis will be determined by the quality of its domestic
economic performance in beating down inflation; in restoring
the probitability of new investments; in bringing Government
finances and the growth of money supply under control.
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In short, the first task for each country is to pursue with
steadiness and determination the re-establishment of these
fundamental pre-conditions for future growth of its own economy.
As these pre-conditions are attained, cautious expansionary
policies can then be pursued without consequent damaging
increases in inflation.
Some of the stronger economies have reached this position, and
West Germany and Japan in particular are now pursuing moderate
expansionary policies.
In Australia too, our successes ' in reducing inflation and
overcoming some of the imbalances which had been created in our
economy have enabled the government to undertake a moderate
expansionary initiative, not through inflated government spending
but through the less inflationary course of cuts in personal
income tax which were recently introduced.
One implication of what I am saying is that there needs to be in
the industrialized economies a greater readiness to take a
medium-term view of the policy formation process, to lay down
policies accordingly and to stick with them as, slowly, they
begin to put things right.
We have tried to follow that course since late 1975 I think
with some success. And I acknowledge in that regard the increasing
support we have received from the business community in doing so
as it has come to be recognized that there are today no simple
and speedy solutions to the fundamental imbalances with which
our economy is still beset.
Yet there is still a tendency to react or over-react to every
new set of statistics, to look for crises where none exists and to
inflate even quite small problems to the status of national
events which, it is then suggested, should be accommodated by way
of some policy change or other.
What we should be paying attention to, are the fundamentals which
underlie our economic situation and which, if not put right, will
continue to debar us from any lasting progress.
Let me be a little more specific, and in doing so try to set
Australia's problems within the broader framework of the
world's economy.
I place Australia's own problems first in that categorisation
because the plain truth is that Australia's overall economic
welfare depends first and foremost upon our own efforts. Only
Australians can correct the results of past mistakes most of which
were made here in Australia.
I am assisted in this task by being able to refer, very topically,
to a survey of the Australian economy which was released last
night by the Paris-based organisation for Economic Cooperation
and Development.
The OECD, as it is called, undertakes regular surveys of the
economies of all its 24 member countries. I commend the
close and careful scrutiny of our own economy and its problems
which is contained in the survey. Though I must say that I do not
share all the views expressed in the survey's conclusions..
If the survey has a single theme, it is to point out the economic
constraints under which the Australian economy in company with
many others is still labouring and which do of course limit the
policy options open to a responsible government in such circumstances.
Indeed, the OECD discusses at s ome length the distortions under
which the Australian economy has been operating for some years now,
and it concludes that " The Australian economy is still undergoing
a process of glow cyclical recovery and gradual adjustment of
some of the major imbalances which developed in recent years". ( P. 44).
If I may digress for a moment, you will note that the OECD recognizes,
as some commentators do not, that a recovery is in train in
Australia. In commenting on our past experience the OECD report points out that:
" Australia has suffered, in acute form, two problems common to
many OECD countries: rapid inflation and'an increase in real wages
well in excess of productivity". ( P. 44).
Furthermore, the OECD observes that, unlike many other countries
the immediate cause of these problems in Australia was not:
" The import price rise for oil and other raw materials but a
domestic wage explosion". ( P. 44).
The survey points out that, as a result of this largely self-inflicted
wound, Australia saw: "' the emergence of some of the classic
symptoms of real wage imbalance deterioration of employment and
investment beyond what can be explained by the weakness in activity,
weak balance of payments despite low levels of capacity utilisation,
and greatly accelerated capital/ labour substitution". ( P. 44).
How, you might ask, does a country get out of such a mess? The
OECD survey goes to some trouble to analyse how we got into the mess,
and the clear conclusion that it reaches is that the only way to
get out of it to achieve economic recovery is by going through
the rather painful process of correcting past mistakes and
restoring those basic economic relationships that I referred to
earlier to a more sensible pattern.
My own government has set out, from the beginning, to follow such
a policy course and effect the fundamental repair job which was
necessary. But there is still some way to go and we propose to
maintain our steady course of policy while we get there.
For example, we have achieved a real advance in reducing price
inflation to the point where our performance is now broadly in line
with the OECD average. The March Quarter Consumer Price Index
issued on Wednesday of this week showed that over the past twelve
months the index has risen by 8.2 per cent. Over the first three
quarters of this financial year the index has risen at an annual
rate of 7.7 per cent.
I make no bones about saying that these are still high figures,
but can any fair-minded observer deny that, by comparison with the
state of our affairs a bare two years ago, they are again, to
use the words of the OECD survey " an important achievement"?
We have, however, had less success in dealing with perhaps the
most fundamental distortion from which our economy is suffering
and to which the OECD survey devotes a major part of its analysis,
namely, a level of real wages that is " out of line" with the
productivity of the labour involved. That distortion remains.
Until it is removed and better corporate profitability is restored
and inflationary expectations are entirely quenched the road to
full economic recovery for Australia will continue to be difficult.
That is why we have continually stressed, and will continue to stress,
the need for the Arbitration Commission to play its part in
restoring sanity to the wage determination process and reducing
unemployment. We are keenly aware that our policies, or more correctly the past
mistakes which those policies are designed to correct involve
some continuing and heavy costs, costs which represent the payment
for past errors.
In this connection, the OECD survey mentions the high level of
unemployment in Australia which is of such serious concern to
all of us. The survey goes on to say that: " with a considerable
part, but by.. no means all, of unemployment cyclical in nature there
would on the face of it seem to be strong reasons to turn to more
expansionary policies to try to alleviate the problem".
Having, as it were, offered this tempting prospect of a quicker
and easier path to recovery and reducing unemployment through
measures such as pump-priming government spending the OECD then goes
on to explain that the prospect is in fact a mirage.
I quote: " It seems probable that such policies would indeed lead
to some short-term expansion of output and reduction in unemployment,
but that the net gains so achieved would be less over the longer run
that what is likely to be achieved under policies broadly similar
to those now being followed".
In short, the superficially attractive path of providing an
inflationary governmental " stimulus" to the Australian economy is
seen on closer examination to be one of irresponsibility which no
government with a view to the medium and longer-term welfare of the
Australian people could countenance.
The survey concludes that: maintenance of the present stance
is broadly appropriate".
There are many other sections of the OECD survey which bear
quotation and I again commend it to you as a useful and objective
contribution to the economic debate in Australia.
On the whole, it reaches the same conclusions as those long held
by my own government, namely that there is no instant, packaged
solution to the economic problems to which past mistakes have
given rise.
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What is required is a continuing and unremitting attention
to the basic imbalances which still persist in our economy which
must be put right if Australia is to enjoy the future which
her resources offer her and to which her people, given resolution,
good sense, and firm leadership, could reasonably expect to be
entitled. If these qualities are forthcoming, the decade ahead of us will
make the dark years in the 1970' s seem merely like a bad dream.
The job is up to us all. 000---