EMBARGO: 7.00 p. m.
FOR PRESS SEPTEMBER 6, 1976
TEXT OF ADDRESS GIVEN BY THE PRIME MINISTER AT THE CEDA LECTURE
" AUSTRALIA IN THE WORLD ECONOMY" 1
Under the title " Australia in the world economy" I want to talk
about two aspects of Australia's economic situation, as it
relates to the international economic scene.
First of all I will comment on our domestic economic situation
in international perspective and then discuss the changing
character of the Australian and world economies and what this
means for Australian policy.
The debate over, policy in both these areas is inevitably
concerned with the way in which economic policy and social
policy ought to be linked.
Economic policy cannot be divorced from our aspirations for
Australia and for our way of life.
Very often this requires a balance to be struck between
short-term and long-term considerations, between the policy which
will produce the most rapid growth in our material standard
of living and policies which foster the wider range of individual
and national goals.
Many of the economic problems which Australia is now seeking to
resolve have sprung from the failure to find an adequate
reconciliation of economic and social objectives, or to
realistically assess the inter-action of the two.
In particular there developed a view that we could progress
more rapidly towards a number of social objectives through a
dramatic expansion of Government expenditure, and more rapidly
towards some economic objectives by sharp changes of policy in
some areas.
Inevitably problems resulted. Nor was Australia entirely alone
in this, though perhaps we were an extreme case.
In recent years, indeed, most of the industrialised economies
have been beset with problems.
As a result questions were being raised about the future of the
market-oriented economic system that operates in Australia and
countries outside the Eastern Bloc.
A whole industry of doom-saying sprang up, and for a while
appeared to be flourishing.
2.
Today we hear less of such talk.
Most of those countries and Australia among them have turned
back from the precipice.
Along with most other countries with free enterprise economies
we have started once again to apply policies which pay regard
both to economic realities and to social needs.
Sir Douglas Copland, who was the founder of this Association,
and in whose honour this lecture was established, was a
proponent of the need for more resources to be shifted to the
public sector.
Born a New Zealander, Sir Douglas was not afraid to tell Australians
or others for that matter how he thought they should mould
their futures.
His courage and imagination as exemplified in the title of one
of his last books " The Adventure of Growth" must be admired.
However, his well-known criticism of Australia in the immediate
post war period as a " milk bar" economy reflected an approach
which, boiled down to its basic tenets, sought to substitute
the judgements of the few for the choices, freely expressed
through the market system, of the many.
So far as those judgements involve as they do for example in
the writings of economists such as Galbraith expansion of
public sector spending programs, they were challenged
even then by other economists.
The experience of recent years shows very clearly that substantial
public sector expansion can stimulate inflation and that this
inflation, can put at risk social and economic progress.
Most major overseas countries have now realised that they were
pursuing policies that exacerbated inflation. It has been further
recognised that these policies were also resulting in growing
unemployment. True, some are doing more about it than others.
Nevertheless, given the widely different complexions of the
various Governments, the degree of consensus on the general
economic strategy that should be pursued if there is to be
sustained economic expansion is remarkable.
In the words of the communique following the OECD Ministerial
meeting in June this year " the basic premise on which this
strategy rests, is that the steady growth needed to restore full
employment and satisfy rising economic and social aspirations will
not prove sustainable unless all member countries make further
progress towards eradicating inflation"
In the light of this agreed approach, all OECD Governments have
accepted that considerable care will have to be exercised to
ensure that economic recovery proceeds gradually and steadily
so as to avoid any resurgency of inflationary pressures. / 13
They have recognised that the high level of unemployment, while
a cause for considerable concern, is not capable of a quick
solution: the OECD Ministerial Communique stated that
" 1restoration of full employment and normal levels of capacity
in the OECD area will be progressive and take a number of
years." Boiled down to simpler language, this means that when our
economies have been allowed to get into the state that many
of them are in and Australia's more than most there are
no magic wands available.
We no longer have any real choice about the kinds of policy to
be followed.
O. E. C. D. countries generally have rejected broad stimulatory
action as a means of reducing unemployment.
When inflation remains a threat, restoring steady growth and
reducing unemployment is achievable not by increasing Government
expenditure but by reducing the rate of growth of such expenditure,
and adopting policies such as lightening the tax burden and
more appropriate monetary policies which such restraint makces
possible. What people have come to regard as the Keynesian approach is now
recognised to be inapplicable in current circumstances.
Virtually all major countries have now proposed reductions in the
rate of growth of central Government spending between their
last fiscal year and their present one.
In the United Kingdom from 28 to 17 percent
In Canada from 19 to 13 percent
In Germany from 19 to 4 percent
In New Zealand from 29 to 5 percent
In the United States from 13 to 9 percent
And of course, Australia, from 23 to 11 percent.
The Australian Government's policies are fully in line with
this general OECD strategy.
I know that there are many who are impatient to see the Australian
economy back on its feet.
Believe me, nobody wants that more than I and the Government
which I lead.
But what we all have to recognise is that we have a long haul
ahead of us.
Not only was the Australian economy in a much worse state than
the economies of most other OECD countries but Australia has also
made a much later start than most others in moving to bring
inflation under control.
This bears particularly on the problem of unemployment. / 4
Even in those countries which were first to reduce inflation
to more manageable levels, the reduction in unemployment has
so far been comparatively moderate.
In the United States, for example, unemployment in June was 8 percent
compared with 9.1 percent a year earlier.
In Germany unemployment has fallen over the last year from about
4.4 percent to 4.0 percent.
In other major countries unemployment in mid 1976 was higher
than a year earlier.
In the early stages of recovery unemployment may be slow to
come down but if unemployment is to be reduced, and a sound basis
for expanding job opportunities established, the policy approach
we have adopted is the only one.
In Australia-and overseas the lesson is clear. Governments
cannot spend their way out of recession when inflation is running
as it has been.
To attempt to do so would lead, perhaps after a short burst in
activity, to a deepening of the recession and a worsening of
unemployment. There can be no better demonstration of the inappropriateness
of the tradition " pump-priming" approach in periods of rapid
inflation than to look at the record in Australia.
In 1974/ 75 budget expenditures increased by 46 percent and the
deficit rose by almost $ 2,300 million.
In 19 75/ 76 there was a further increase. in expenditure of 23 percent
It would have been much greater but for the direct and indirect
measures the Government took over the latter part of the year.
The deficit rose by a further $ 1,000 million to $ 3,585 million.
Over this period there was an increase of more than 30 percent
in prices.
Yet over this same period there was negligible growth in real
output and Unemployment increased by over 200,000.
The facts are well known.
Let me repeat here the situation which the Government faced when
it came to office at the end of 1975:
At that time the private sector was employing no more people
than it had been 3 years earlier, even though during that period
the labour force had expanded by about 370,000.
Unemployment had risen to a level not recorded in this country
since the 1930' s.
Gross non-farm product in the December quarter of 1975 was still
almost 5 percent below its peak level recorded two years earlier.
The farm sector was in a state of collapse.
The share of company profits in national income remained
depressed at around three quarters of its long run norm.
Real business fixed investment had fallen in the December
quarter to its lowest level for almost 3 years.
And, last but not least, the consumer price index in the
December quarter was 14 percent above a year earlier and
showed no real prospect of a sustained move down.
Some have argued that Australia' s recent economic problems
have had their origins overseas.
External economic trends can and do affect the Australian
economy through the operation of the overseas trade cycle.
But, the structure of the Australian economy has altered over
the post-war period, and we have a much improved capacity to
absorb overseas economic fluctuations without large domestic
effects. In the period 1973-75, for instance, the effect of overseas
economic fluctuations was considerably diminished by:
the broadening of our export base, and
the associated contractual arrangements for
a number of our major minerals exports.
unlike most of the O. E. C. D. countries, we were
also spared any significant direct impact from
the large rise in oil prices overseas.
Inflation overseas would have had some impact upon the
Australian economy, but the pursuit of inappropriate
domestic policies was the prime cause of the economic setback
which we suffered during this period.
The large expansion in Government spending which occurred in
1973 took place at a time when it was clear that private demand
pressures were already excessive.
The Government had come to office in December 1972 on the
false proposition that the economy was headed into a slump.
It became a victim of its own propoganda.
We can see today a similar attempt from the same quarters, to
" talk down" the economy in the hope of electoral advantage.
Then, when the economy none the less fell into recession in 1974
there was the attempt to continue to drive it along by an even
greater boost in Government spending.
Then, when the moment of truth came in last year's budget there
was a frantic effort to slash back the rate of growth of spending.
Of course that moment of truth was just that momentary.
Compounding the problem was the Government's attitude to wages
and salaries in 1973 and 1974.
For quite some time large wage rises were actually encouraged and
supported by the then Commonwealth Government before the
Conciliation and Arbitration Commission. High unemployment,
combined with high inflation, were inevitable consequences. 6
In the present situation, the speed with which the recovery
will progress is largely a function of the speed with which
real wages and productivity can be brought into balance.
The amount of wage restraint accepted by the trade union
movement will play a vital role in this.
Wage restraint in the months ahead could help significantly
to speed up the process of reducing unemployment.
It should not be overlooked that the drop in unemployment
in the United States over the past year or so followed a
period of wage and salary restraint.
It is now clear that the rapid real wage gains in Australia
in 1974 were partly at the expense of thosewho lost their jobs.
Those who are in a position to influence wage demands and those in
a position to influence their outcome would do well to ponder these
realities. Restraint now will also make possible a more normal growth in
real wages to resume in the shortest possible time.
The experience of the recent past has particularly affected
those groups in the community most vulnerable to unemployment
the young, the disadvantaged and the unskilled workers.
The large increase in the real level of the minimum wage, for
instance, has been cold comfort to the many unskilled workers
who have lost their jobs during the recession because employers
could no longer afford to keep them on.
Their labour had become too expensive relative to their more
skilled workmates.
Similarly many young people have found employment difficult to
obtain as the relative rates of pay of juniors to adults have
increased. In recent years wage-fixing decisions affecting the minimum wage,
and certain other wage relativities have aimed to improve the
position of those at the lower end of the income scale.
It is easy to understand this approach.
But when that improvement is sought through the wage system
regard also needs to be had to its implications for the employment
prospects of those affected.
The present high rates of unemployment among such groups are a
harsh reminder that the wage system may not be the best mechanism
for giving effect to social considerations in these matters.
Here as elsewhere, decisions taken for the best of motives may
have quite undesirable consequences.
The art of Government is to be able to strike the right balance
between considerations of different kinds. Throughout Australia's
history that problem has had to be faced.
One of the clearest lessons to emerge from the experience of
recent years is that social policies undertaken in disregard
of economic realitics can not only be economically disastrous
they can be socially damaging as well.
Those who are economically disadvantaged through no fault of
their own, should be able to look to Governments for assistance.
This is a much better way of handling the problems than by
distorting the wage structure.
The Government has in fact adopted a number of measures to help
low income groups.
In particular the new family allowances scheme is a most
important step towards the alleviation of poverty in Australia
and is much more efficient and equitable than the previous arrangements
The effect of all' the measures taken by the Government in the
Budget and in the major statement on 20 May is in fact estimated
to increase average disposable income somewhat in real terms in
1976/ 77. D
I have no doubt that the more we can achieve restraint in wage
and salary demands the greater will be the reduction in
unemployment and the larger the increase in total real earnings.
A 1 percent reduction in unemployment would result in increased
wages of about $ 600 million in 1976/ 77.
It is pleasing to see that the approach the Government has
adopted is winning wide acceptance increasingly I believe by
wage and salary earners, by the Arbitration Commission, and by
business. Businesses, for example, have indicated their confidence in
the Government's policies by the announcement of major
investment proposals totalling almost $ 3 billion in the last
6 months.
So far I have been discussing economic problems Australia
has shared with other countries but has suffered in an acute form.
Let me now turn to consider another aspect of our economic
situation the changing structure of the Australian and world
economy and the implications of those changes for policy.
Here again the interaction-of social and economic objectives has
had, and must continue to have, an important place in our consideratiol
of appropriate policy.
This last quarter of a century has seen marked changes in the
structure of the Australian economy, encouraged in part by
deliberate social policy.
Those changes have affected the nature of our economic
relationships with the outside world.
Most significantly, the manufacturing and service industries have
recorded a rapid expansion while the contribution of agriculture
to Australia's gross domestic product declined around 25 percent
in 1950 to less than 10 percent in 1973/ 74.
The mineral industry has also grown rapidly, although still
accounting for less than 4 percent of total output in 1973/ 74.
While we remain relatively large importers of capital equipment,
we now manufacture a-wide range of consumer goods.
our export base has been considerably broadened and diversified.
Products broadly defined as manufactured now constitute between
one-firth and one-quarter of total exports, as do minerals.
The latter have been the fastest growth items in more recent years.
Rural industry has also broadened its base, notably by expansion
of the sugar and beef cattle industries.
We continue,, of course, as the world's largest exporter of wool
and one of the most important exporters of wheat.
Overall, however, our rual exports have declined from around
percent of the total to less than 50 percent.
These and other similar developments reflect a diversification
and broadening of the Australian economy and of our trading
and financial relationships with the rest of the world.
Interdependence there has always been. I
Both its nature, and its extent, have been changing.
We now live in a world which is much more complex, more diverse
in its economic relationships and inter-relationships.
Twenty five years ago the world seemed to many comparatively
settled in its economic relationships and patters of trade.
The non-communist world generally was dominated by the United
States economy.
The world of Commonwealth countries was dominated by Britain.
It is difficult now to appreciate that the dominance of
Commonwealth preferences in our external trade, * and sterling in
our payments and reserves, should have disappeared in such a
comparatively short period.
Today, the United States economy remains the most powerful.
But there are other economic forces notably Japan and Germanyof
much greater relative power than formerly, with which Australia
does not have automatic historical links.
In this changed and changing world we have to make our own way
to a much greater extent.
We have to fight for mnarkets and for access to technology which
formerly came more or less automatically.
We have also to think about the type of economic system within
which we want to trade and develop. / 9
Australia has long supported the idea of commodity agreements
where such agreements could contribute to greater stability
in international commodity trade.
At the same timie we have tak~ en the view that any such agreements would
need to have regard to underlying market trends and to be practical
both in terms of implementation and financing.
Proposals made by the developing countries over recent years
under the heading " New International Economic Order" envisage
significant, indeed fundamental changes in the present economic
system. Some proposals for commodity agreements, for instance, envisage
that such agreements would be used to transfer resources to
developing countries, by effecting significant price increases
just as the OPEC countries have done in respect of oil prices.
It would not be appropriate here to comment in detail on this
or various other proposals for radical changes in the international
economic system.
Undoubtedly the developing countries need to be able to improve
their standards of living.
Great differences in economic situations between nations, which
are seen to be unreasonable, can unsettle political relationships.
It does not, however, follow that such differences can be
rectified by fundamental changes in the international economic
system. Indeed, many of the changes proposed in the " New International
Economic Order seem likely to lead to less in the way of
development benefits rather than more.
This is because the imbalance between nations lies much less in
the economic system as such than in the policies pursued by some
nations and the historical facts of world economic development.
Because of our geographic position, and our importance as a
supplier of resources, this is a matter of particular importance
for Australia.
We must remain sensitive to the legitimate aspirations of the
developing countries while at the same time supporting
proposals that not only accord with own fundamental economic
interests but also in our judgement with those of the developing
countries themselves.
Associated with the emergence of new and powerful economic forces
in the world there has been a considerable loosening up in external
economic relationships.
For example, there has been a greater preparedness to allow market
forces to operate in the field of trade and payments.
This is by no means universal: important restrictions remain on
international trade, especially on trade in agricultural products
and on capital flows.
We retain, for good reasons, a number of such restrictions
ourselves. By and large, however, it seems fair to say that the last
quarter century has seen a considerable liberalisation
of world trade and payments.
These and other developments in world economic and political
relationships have, I believe, made Australia more reliant
on its own resources and skills.
The apron strings to Britain even to the Anglo-Saxon world
more generally have loosened and frayed and we are today
exposed to a much more diverse, complex set of economic patterns
and flows.
Even as our general interdependence has increased so has our
particular independence.
In this situation there is a balance to be struck between
allowing the operation of purely economic forces and intervening
in the international flow of trade and capital on what might
be described as " non-economic" grounds.
In-the case of Australia, as in other countries, there is a
tradition of intervention in trade flows..
Over the years we have intervened to enable secondary industry
to develop to the point where it is now as large, relatively as
in most so-called advanced industrialised economies.
Indeed it is now about the same relative size as the secondary
sector in the United States economy.
While we should not overlook the natural advantaged that has
assisted part of that growth, there is no doubt also that a
considerable part of it has been due to the protection that has
been given against foreign competition.
Policies of successive Australian Governments have embraced
tariff protection and other measures designed to ensure the
development of a well balanced economy.
This has included:
an adequate manufacturing base to assist in employing
a growing population
and the rcslience to meet the pressures and crises of a
changing and at times threatening world.
Considerable political importance has been attached to peopling
a continent with substantial natural resources but a relatively
small population.
Nor should we overlook the desire of the Australian people to
create a nation that was not just a hewer of wood and drawer of
water for the industrialised world.
In the last few decades, the Australian economy could be said to
have come of age in a structural sense.
It has an extensively developed industrial sector, efficient large
scale rural industrics, a major mining industry which is a
source of basic materials to the giant industrial economies
of the-northern hemisphere and a highly developed structure
of commercial and governmental services to its people.
There can be no turning back from this situation. There can be
no question, for instance, that the Australian economy must
continue to have a substantial manufacturing sector.
This is not to say, however, that questions should not be
raised about the balance between particular industries or within
such industries.
It is in our own interest to make the most efficient possible
use of our resources and to envisage change which helps us to do
SO. In essence, the choice is between higher and lower rates of
economic growth, to the extent that we restrict international
trade and capital movements we tend to forego the opportunity
to have a higher rate of economic growth per head of population.
It should not be necessary to say that economic growth is
imporant.
Expectations of rising standards of living cannot be fulfilled
beyond the limits of the resources available to fulfill them.
It is the rate of economic growth which determines the pace at
which our economy and our society can meet the aspirations
of our citizens.
But that having been said, wve must think beyond economic growth.
Just as individuals have a choice between work and leisure,
governments must often choose policies that are in the broader
national interest), even at some sacrifice of economic growth.
There is a delicate balance to be struck.
To some extent a country's sense of well-being is a relative one.
If Australia falls behind other countries economically, this sense
of well-being will be to that extent reduced. To;; the extent that
we forego our full potential for economic growth, we will be less
able to help the poor and the disadvantaged, both within our own
community and overseas.
We must take this into account in the field of protection policy,
while at the same time ensuring that any significant changes in
levels of protection will not be too sudden or severe.
We will not embark on such foolish ventures as the previous
Government's 25 percent across-the-board tariff cut in 1973.
A reduction which was forecast at the time to involve a loss of
33,000 jobs, it was,' in effect, a decision to export those jobs
overseas. We know the sad effects on many industries of changes that are
too drastic, too sudden.
Indeed the previous Government was forced to reverse engines in
that area and to provide additional protection to certain
industries affected by an unprecedented upsurge in imports.
These additional restrictions,-which now cover about 10 percent
of total imports, are in full accordance with our international
obligations. They have been designed specifically to alleviate potential
serious disruption and will be removed, or replaced by appropriate
long term arrangements, as soon as circumstances permit.
It is important however that we should not delude ourselves that
external policies can be used to assure employment in circumstances
where pressure for domestic wage and price increases remain
excessive. If increased protection is provided in such circumstances, whether
through tariff increases or by other means, it will tend to be
dissipated fairly quickly, leaving the competitive situation much
as it was before.
Many countries using " floating" exchange -rates over recent years
have found that the unemployment effects of rapidly escalating
money wage rates cannot be remedied simply by allowing their
exchange rates to depreciate.
There is no alternative to the pursuit of appropriate domestic
policies to bring inflation under control. This is precisely
what the Government is endeavouring to do.
Our economic future will always depend in part on the caprice of
changing international economic circumstances.
However, with appropriate management of our economic affairs,
we have the capacity to re-establish satisfactory growth in
the Australian economy and to reduce unemployment progressively.
Australia's economic problems arise because of the past pursuit
of inappropriate policies in some cases for many years past.
In these circumstances, solutions are not to be found through
drastic or sudden action.
That would be both economically and socially divisive and
disruptive. Lasting solutions can only be found if the majority of the
people understand and support the basic thrust of the Government's
policies. We believe that the Australian people today do increasingly
understand and support those policies.
Internationally also, Australian Governments will need to continue
to strike a balance between pursuing an independent course of
action and further exposure to the flow of world trade and payments.
As in other areas of our national life, there are policy choices
to be made.
Australia cannot afford to pursue courses,,' f action that would
isolate us from external competition.
As in our domestic affairs, we must face up to the reality
of a competitive outside world.
If we fail to do so, we will run the risk, ultimately, of
becoming a country of second raters.
We have vast natural resources to develop.
If we are to do so, we need to employ our capital and our
labour force as efficiently as possible.
In this field, as in others, the task and the challenge are
ahead of us.
In meeting this challenge we will continue to face the task of
reconciling our economic and social objectives.
Recent experience has made it plain that unless we recognize
economic reality we will fail both in our economic and in our
social objectives as a nation.
There is no way around the fundamental fact that resources are
scarce. Our policies must aim to expand the resources available
to us, because only in that way can Australians hope to realise so
many of their aspirations.
We have seen only too clearly what happens when aspirations run
ahead of resources.
At the same time our policies for growth must also minimize the
social costs of growth.
Achieving that delicate balance is one of our great challenges
as a nation.
As a Government and as a country we cannot afford to fail.
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