CHEC AGANSTDELUINETRIYLE MBDAERLGIOVEEDR * V
PRIME MINISTER'S PRESENTATION TO WORLD ECONOMIC FORUM
SPECIAL SEMINAR
DAVOS,. 4 30 JANUARY 1987
OPPORTUNITIES FOR NEW ECONOMIC LINKS WITH AUSTRALIA
LADIES AND GENTLEMEN,
THIS MORNING I WANT TO SHARE WITH YOU THE WAY_ I SEE
AUSTRALIA'S ECONOMIC POTENTIAL, AND THE OPPORTUNITIES
AVAILABLE TO THOSE WITH AN INTEREST IN FORGING CLOSER
ECONOMIC LINKS WITH OUR ECONOMY THROUGH INVESTMENT IN
AUSTRALIA. IAM PLEASED TO SEE THAT THE EME ORGANISERS HAVE AGAIN
MANAGED TO ATTRACT A LARGE AND VERY IMPORTANT BUSINESS
AUDIENCE To DAVOS. FOR OUR PART, 4 VIEIMPORTANCE AUSTRALIA
ATTACHES TO THIS CONFERENCE IS REFLECTED IN THE FACT THAT
IAM SUPPORTED BY MY COLLEAGUE THE MINISTER FOR INDUSTRY,
TECHNOLOGY AND COMMERCE, SENATOR JOHN BUTTON AND BY A
DISTINGUISHED DELEGATION OF AUSTRALIAN INDUSTRIALISTS.
MEMBERS OF THE AUSTRALIAN BUSINESS DELEGATION WILL BE HAPPY
TO ASSIST YOU WITH ANY MATTERS RELEVANT TO THEIR FIELD OF
INTEREST. ANOTHER OF MY MINISTERS, PRIMARY INDUSTRY MINISTER
JOHN KERIN. 0 WILL BE ARRIVING AT DAVOS-EARLY NEXT WEEK TO
DISCUSS WITH YOU THE AGRICULTURAL TRADE INITIATIVE ILAUNCHED
LAST NIGHT.
CHECK AGAINST DELIVERY
2
WITHIN THE CONSTRAINTS OF TIME, AND TO PERMIT AS MANY OF
YOUR QUESTIONS AS POSSIBLE, IWILL BEGIN BY OUTLINING THE
STRENGTHS OF THE AUSTRALIAN ECONOMY AND THE BROAD ECONOMIC
STRATEGY OF my GOVERNMENT. JOHN BUTTON WILL FOLLOW UP BY
DETAILING SOME OF THE SPECIFICS OF AUSTRALIAN INDUSTRY AND
INVESTMENT POLICY.
THE AUSTRALIAN ECONOMY HAS CERTAIN-STRENGTHS WHICH MAKE IT
INHERENTLY ATTRACTIVE TO INVESTORS. WE HAVE A SKILLED
WORKFORCE, A RICH NATURAL RESOURCE BASE, AND A WELL-DEVELOPED
INFRASTRUCTURE.
WE ARE ALSO CLOSE, IN GEOGRAPHICAL AND POLITICAL TERMS,
TO THE MOST DYNAMIC ECONOMIC GROWTH AREA IN THE WORLDi THE
WESTERN PACIFIC RIM.
WE ARE POLITICALLY STABLE AND SHARE BROAD BIPARTISANSHIP
ON THE ECONOMIC GOALS OF GROWTH THROUGH INVESTMENT.
OUR NATURAL ADVANTAGES HAVE EARNED US THE TAG ' THE LUCKY
COUNTRY'. THAT NAME IS APT -WE ARE LUCKY. BUT OUR GOOD
FORTUNE HAS ALSO BEEN THE SOURCE OF SOME DIFFICULTIES AND
IMBALANCES IN OUR ECONOMY. IT HAD LULLED US INTO
COMPLACENCY DURING THE LONG EASY DECADES OF GROWTH AFTER
WORLD WAR Two. * 1 .111V7r 11, I Ir 1* t.
3.
DURING THOSE YEARS, WE RELIED TOO HEAVILY ON THE EFFICIENT
PRODUCTION OF AGRICULTURAL STAPLES, SUPPLEMENTED BY AN
APPARENTLY ENDLESS ABILITY TO SATISFY WORLD DEMAND FOR RAW
MINERALS. OUR MANUFACTURING SECTOR WAS HEAVILY PROTECTED
AND WAS ORIENTED LARGELY TOWARDS THE SMALL DOMESTIC MARKET,
WE WERE A LESS RELIABLE SUPPLIER THAN WE SHOULD HAVE BEEN.
OUR ECONOMY AS A WHOLE FAILED-TO -RECOGNISE, AND WAS NOT
STRUCTURED TO CAPITALISE ON, THE-POTENTIAL OF OUR NEIGHBOURS
IN THE PACIFIC RIM.
THE DANGERS IN THIS APPROACH WERE DRAMATICALLY HIGHLIGHTED
FOR US IN 1985/ 86 WHEN WE SUFFERED A HUGE TURNAROUND IN OUR
TERMS OF TRADE. THANKS IN PART TO THE SHARP DROP IN THE PRICES
OF THE PRIMARY COMMODITIES WHICH MAKE UP SUCH A LARGE PART
OF OUR EXPORTS, WE LOST OVER THE 18 MONTHS FROM EARLY 1985
ABOUT $ A6 BILLION IN NATIONAL INCOME, OR 3% OFF OUR CAPACITY
TO MAINTAIN EXISTING LIVING STANDARDS.
THERE HAS BEEN A LARGE DEPRECIATION OF THE AUSTRALIAN DOLLAR
OVER THIS PERIOD. WHILE A CORNERSTONE OF THE LONGER-TERM
REBUILDING OF THE AUSTRALIAN ECONOMY, THIS DEPRECIATION HAS
NONETHELESS BROUGHT SOME SHORT-TERM DIFFICULTIES BY INITIALLY
WORSENING OUR BALANCE OF PAYMENTS DIFFICULTIES, WHICH ARE
NOW RECEDING, AND BY FUELLING A TEMPORARY RESURGENCE IN
INFLATION. I
THE REASON WE ARE CONFIDENT ABOUT OUR FUTURE IS THAT WE
CAN NOW LOOK ON A VERY DIFFERENT AUSTRALIAN ECONOMY FROM
THAT OF FIVE YEARS AGO ONE WHICH IS SHAKING OFF ITS
COMPLACENCY, WHICH IS BECOMING MORE DYNAMIC AND
ENTREPRENEURIAL, AND WHICH IS PREPARED TO PROVIDE THE
SUSTAINED EFFORT NEEDED TO REDUCE OUR OVER RELIANCE ON
THE PRODUCTION AND EXPORT OF PRIMARY COMMODITIES.
THE AUSTRALIAN GOVERNMENT AND PEOPLE HAVE TAKEN THE NECESSARY
STEPS TO MAKE THE AUSTRALIAN ECONOMY MORE COMPETITIVE AND
TO ENSURE THAT IT REMAINS SO. WE ARE PREPARED, AS A
COMMUNITY, TO MAINTAIN OUR EFFORT FOR AS LONG AS IT TAKES.
I WANT TO BRIEFLY COVER THE MAIN FEATURES OF OUR
MACROECONOMIC POLICY AND OUR INDUSTRY REVITALISATION
POLICIES. I WILL SAY MORE LATER ABOUT OUR APPROACH TO THE TRADITIONAL
MACROECONOMIC INSTRUMENTS OF MONETARY AND FISCAL POLICY. LET
ME TURN FIRST TO AN AREA IN WHICH WE HAVE BEEN QUITE INNOVATIVE.
ONE OF OUR FIRST TASKS IN GOVERNMENT WAS THE DEVELOPMENT OF
AN EFFECTIVE INCOMES POLICY THROUGH A CO-OPERATIVE ACCORD
BETWEEN THE GOVERNMENT AND THE TRADE UNION MOVEMENT. UNDER
THIS HISTORIC AGREEMENT, THE UNION MOVEMENT AGREED TO WAGE
MODERATION AND GREATLY IMPROVED INDUSTRIAL HARMONY. THIS
AGREEMENT HAS ENABLED REAL WAGES TO FALL SUBSTANTIALLY OVER
THE LAST THREE YEARS, WITHOUT INDUSTRIAL STRIFE,-DESPITE A
STRONG ECONOMIC RECOVERY,
IN RETURN THE UNION MOVEMENT SOUGHT IMPROVEMENTS IN THE
SOCIAL WAGE THROUGH, FOR EXAMPLE, BETTER MEDICAL INSURANCE
ARRANGEMENTS AND INCOME TAX CUTS. AND OF COURSE, THE UNIONS
LOOKED TOWARDS THE GREATER JOB SECURITY AND IMPROVEMENTS IN
EMPLOYMENT PROSPECTS THAT WAGE RESTRAINT OFFERED.
THE RESULTS HAVE BEEN OUTSTANDING: IN THE 44 MONTHS SINCE
THE EMPLOYMENT TROUGH OF APRIL 19831 752,000 NEW JOBS HAVE
BEEN CREATED.
ACCOMPANYING OUR MACROECONOMIC POLICIES WAS A PROGRAM OF
REFORMS DESIGNED TO SECURE STRUCTURAL ADJUSTMENT AND TO
MAKE THE ECONOMY MORE RESPONSIVE TO THE TRADE AND INVESTMENT
OPPORTUNITIES IN OUR PART OF THE WORLD TO WHICH I HAVE JUST
REFERRED. WE MADE AN EARLY DECISION TO FLOAT THE AUSTRALIAN DOLLAR
AND TO DEREGULATE FINANCIAL MARKETS. AN OVER-VALUED
EXCHANGE RATE IN THE LATE 1970s AND EARLY 1980s HAD IMPAIRED
THE COMPETITIVENESS OF AUSTRALIAN INDUSTRY.
WE SET IN PLACE PLANS FOR PHASING DOWN THE PROTECTION OF
OUR MANUFACTURING INDUSTRIES AND ENCOURAGED THEM TO BECOME
INTERNATIONALLY COMPETITIVE, EXPORT ORIENTED AND INNOVATIVE.
WE REMOVED OR EASED THE CONTROLS ON A NUMBER OF IMPORTANT
EXPORTS--WE DEREGULATED OTHER PARTS OF THE AUSTRALIAN
ECONOMY.--WE REFORMED -THE--AUSTRALIAN-TAXAT-ION-SYS-TEM.---------
AND WE LIBERALISED FOREIGN INVESTMENT GUIDELINES.
WE WERE ALREADY BUILDING A MORE FLEXIBLE, OPEN ECONOMY, AND
THESE ENDEAVOURS STOOD US IN GOOD STEAD WHEN OUR TERMS OF
TRADE TURNED AGAINST US IN 1985/ 86.
BUT THE SIZE OF THE EXTERNAL PROBLEM CALLED FOR FURTHER
POLICY ADJUSTMENTS.
MONETARY POLICY WAS TIGHTENED TO CeRTAIN IMPORT DEMAND AND
TO COUNTER THE INFLATIONARY EFFECTS OF THE WEAKENING AUSTRALIAN
DOLLAR. HOWEVER, SOLE RELIANCE ON MONETARY POLICY FOR ANY
LENGTH OF TIME WOULD HAVE HAD INTOLERABLE EFFECTS ON BUSINESS
CONFIDENCE AND INVESTMENT, WHICH WOULD BE INIMICAL TO LONGERTERM
STRUCTURAL ADJUSTMENT. SO, IN ADDITION, THE GOVERNMENT
HAS STEPPED UP ITS EFFORTS TO REDUCE ITS FISCAL DEFICIT AS
A SHARE OF GDP AND TO RESTRAIN NOMINAL WAGES GROWTH.
I
THROUGH CURTAILED PAYMENTS TO STATE GOVERNMENTS, MORE
SEVERE LIMITATIONS ON THEIR BORROWING CAPACITY AND AN EXTREMELY
AUSTERE 1986/ 87 FEDERAL BUDGET, THE GOVERNMENT ACTED LAST
YEAR TO GREATLY REDUCE THE PUBLIC SECTOR BORROWING
REQUIREMENT. THE FEDERAL BUDGET DEFICIT HAS BEEN REDUCED
TO AROUND ONE AND A HALF PER CENT OF GDP, COMPARED WITH
PER CENT OF GDP -IN PROSPECT WHEN-WE CAME . TO OFFICEIN 1983.
I ASK WHAT COMPARABLE COUNTRY CAN BOAST OF THAT DEGREE OF
FISCAL ADJUSTMENT OVER THE PERIOD?
ON THE WAGES FRONT, WITH THE CO-OPERATION OF THE TRADE
UNION MOVEMENT, WE ARE EXPECTING TO ACHIEVE AN OUTCOME FOR
WAGES GROWTH IN THIS YEAR THAT IS BROADLY IN LINE WITH THAT
OF OUR MAJOR TRADING PARTNERS AND THUS SUBSTANTIALLY TO
PRESERVE THE ENORMOUS COMPETITIVE FILLIP PROVIDED BY THE
DEPRECIATION. BUT IN ADDITION TO RESTRAINING LABOUR COSTS, THE GOVERNMENT
HAS INITIATED MEASURES DESIGNED TO BOOST LABOUR PRODUCTIVITY
DIRECTLY. TRADE UNIONS AND BUSINESS ARE CURRENTLY ENGAGED
IN A JOINT EXAMINATION OF OUTMODED, RESTRICTIVE WORK AND
MANAGEMENT PRACTICES. PROGRESS IS BEING MADE IN EASING THESE
PRODUCTIVITY-DESTROYING PRACTICES IN A SPIRIT OF CO-OPERATION
AND CONCERN BY ALL PARTIES SO AS TO MAKE AUSTRALIAN INDUSTRY
MORE EFFICIENT, MORE FLEXIBLE, MORE COMPETITIVE.
I
AUSTRALIA NOW HAS A SOUND INDUSTRIAL RELATIONS SYSTEM:
IT HAS A RESPONSIBLE WORKFORCE THAT RECOGNISES THE BENEFITS
OF WAGE MODERATION, OF GREATER PRODUCTIVITY AND OF GREATER
INDUSTRIAL HARMONY.
THROUGH OUR MACROECONOMIC MANAGEMENT POLICIES WE HAVE
CONVERTED A LARGE DEPRECIATIONOF -THE AUJSTRALIAN DOLLARINTO
STRONG AND WE EXPECT SUSTAINED, REAL GAINS IN
INTERNATIONAL. COMPETITIVENESS FOR AUSTRALIAN INDUSTRY.
THE OUTCOME OF THIS ECONOMIC STRATEGY IS THAT AUSTRALIA IS
NOW WELL PLACED TO CAPITALISE UPON THE TRADE AND INVESTMENT
OPPORTUNITIES IN THE WESTERN PACIFIC AND FURTHER AFIELD.
THERE ARE ALREADY ENCOURAGING SIGNS THAT OUR INDUSTRIES ARE
RESPONDING TO THE IMPROVEMENTS IN THEIR COMPETITIVENESS
AND WINNING NEW CONTRACTS AT HOME AND ABROAD. RECENT
BALANCE OF PAYMENTS FIGURES INDICATE THAT THE CURRENT ACCOUNT
DEFICIT IS FALLING: IN FACT AUSTRALIA RECORDED A MERCHANDISE
TRADE SURPLUS LAST MONTH, THE FIRST IN 16 MONTHS.
IT PERHAPS NEEDS TO BE STRESSED TO AN AUDIENC& mIN EUROPE
JUST HOW FAR THE FOCUS OF DYNAMIC ECONOMIC GROWTH HAS SHIFTED
TO THE PACIFIC REGION.
LET ME GIVE YOU JUST A COUPLE OF INDICATORS OF THE VITALITY
OF OUR REGION: TWO YEARS AGO, TRANS-PACIFIC TRADE SURPASSED
THAT OF TRANS-ATLANTIC TRADE FOR THE FIRST TIME; AND EAST
ASIA'S SHARE OF WORLD GNP HAS ALMOST TRIPLED SINCE THE LAST
QUARTER CENTURY. AUSTRALIAN INDUSTRY FOR THE REMAINDER OF
THE CENTURY IS WELL POISED TO COMPETE IN THIS REGION.
IWANT BRIEFLY TO SKETCH HOW I SEE CHANGES IN TWO OF THE
REGION'S LARGEST ECONOMIES ASSISTING US IN THIS.
JAPAN IS ON THE THRESHOLD OF A NATURAL RESTRUCTURING PROCESS
WHICH OFFERS THE PROSPECT OF LARGE IMPORTS OF MANUFACTURES
UTILISING STANDARDISED TECHNOLOGY, INCLUDING COMPONENTS,
AND A RANGE OF SERVICES INCLUDING OVERSEAS TOURISM.
AUSTRALIA'S OWN RESTRUCTURING PROCESS WILL BE COMPLEMENTARY
TO THE CHANGES IN JAPAN, N'OWHERE IS THIS MORE EVIDENT THAN
IN BASIC METAL PRODUCTION. JAPANESE BASIC METAL PRODUCTION
HAS BEEN CONTRACTING SLOWLY UNDER COMPETITIVE PRESSURE FOR
MORE THAN A DECADE WHILE AUSTRALIA HAS A STRONG COMPARATIVE
ADVANTAGE IN THESE INDUSTRIES. As JAPANESE EXPORTS OF STEEL
AND NON-FERROUS METALS LOSE THEIR COMPETITIVENESS, AUSTRALIA
WILL BE WELL POSITIONED TO STEP INTO THE BREACH.
THE OTHER MAJOR ECONOMIC FORCE IN OUR REGION IS CHINA. THE
MODERNISATION PROGRAM OF THE CHINESE LEADERSHIP IS CREATING
HIGHLY ATTRACTIVE OPPORTUNITIES FOR TRADE AND INVESTMENT.
WHILE THE PACE OF CHINA'S MODERNISATION IS NOW BEING
CONSTRAINED BY THE COUNTRY'S EXTERNAL IMBALANCES, GROWTH
CONTINUES AT RATES WELL ABOVE INTERNATIONAL AVERAGES.
THE SHEER SIZE OF THE MODERNISATION-PROGRAM AND THE DEMAND
FOR CONSTRUCTION MATERIALS SUCH AS FINISHED STEEL THAT
THIS -I-S-CALLI NG-FORTH,-ARE-CREATI-NG-OPPORTUNI-T-I-ES-FOR----
SUBSTANTIAL NEW INVESTMENTS IN-COUNTRIES CAPABLE OF MEETING
THAT DEMAND.
AUSTRALIA IS SUCH A COUNTRY, IN ADDITION TO OUR GEOGRAPHICAL
LOCATION AND OUR RESOURCE ENDOWMENTS, THE WARM RELATIONSHIPS
THAT HAVE DEVELOPED BETWEEN MY GOVERNMENT AND THE CHINESE
LEADERSHIP HAVE POSITIONED-AUSTRALIA AS A HIGHLY ADVANTAGEOUS
LOCATION FOR FOREIGN INVESTMENT AIMED AT SATISFYING THE
CHINESE MARKET.
IN FACT I DOUBT THAT ANY OTHER GOVERNMENT ENJOYS SUCH CLOSE
RELATIONSHIP WITH THE CHINESE LEADERSHIP AS THE PRESENT
AUSTRALIAN GOVERNMENT.
AS WELL AS POSSESSING COMPETITIVE STRENGTH IN INDUSTRIES
WHICH ADD VALUE TO OUR ABUNDANT NATURAL RESOURCES, AUSTRALIA
HAS A COMPETITIVE SPRINGBOARD INTO THE REGION THROUGH ITS
HIGH QUALITY SCIENTIFIC AND TECHNOLOGICAL CAPACITIES.
V I-
11.
THESE HAVE CREATED A NUMBER OF SMALL, INNOVATIVE COMPANIES
USING NEW, SOPHISTICATED TECHNOLOGIES ESPECIALLY IN THE
AREAS OF COMPUTER SOFTWARE, MEDICAL AND SCIENTIFIC EQUIPMENT
AND BIOTECHNOLOGY. THESE COMPANIES SPEND A HIGH PROPORTION
THEIR TURNOVER ON R AND D AND ARE HIGHLY EXPORT ORIENTED.
MANY ARE LOOKING TO FORM STRATEGIC ALLIANCES WITH OVERSEAS
FIRMS IN ORDER TO FULLY REALISE-THEIR-DEVELOPMENT -POTENTIAL.-
THE REAL DEPRECIATION OF THE AUSTRALIAN DOLLAR HAS ALSO
IMPROVED SUBSTANTIALLY THE COMPETITIVE POSITION OF AUSTRALIA'S
TRADED SERVICES INDUSTRIES, INCLUDING THE TOURIST INDUSTRY.
THE POTENTIAL FOR GROWTH OF THE TOURIST-INDUSTRY, NOT THE
LEAST IN TERMS OF TOURISM FROM JAPAN TO AUSTRALIA, IS
ENORMOUS. ULTIMATELY IT WILL BE FOR BUSINESSMEN LIKE YOURSELVES TO
JUDGE THE COMMERCIAL ATTRACTIVENESS' OF INVESTING IN AUSTRALIA.
MY GOVERNMENT IS DETERMINED TO MAINTAIN THE GREATLY IMPROVED
COMPETITIVENESS OF AUSTRALIAN INDUSTRY.
THE TRADE UNION MOVEMENT HAS A POSITIVE COMMITMENT TO THE
EXPANSION OF EXPORT-ORIENTED INDUSTRIES. I HAVE DISCUSSED
THIS WITH THE TRADE UNION LEADERSHIP AND I CAK TELL YOU NOW
THAT THE AUSTRALIAN TRADE UNION MOVEMENT WILL BE HAPPY TO
HAVE CONSULTATIONS WITH POTENTIAL INVESTORS IN AUSTRALIA SO
AS TO ASSURE THE NECESSARY CO-OPERATION BETWEEN EMPLOYER
AND THE WORKFORCE IN PROSPECTIVE PROJECTS.
12.
AUSTRALIA IS WELL PLACED BOTH GEOGRAPHICALLY AND POLITICALLY
IN-THE MOST DYNAMIC REGION OF THE WORLD. WE WELCOME FOREIGN
INVESTMENT AND I INVITE YOU TO AUSTRALIA TO MAKE YOUR OWN
ASSESSMENTS OF INVESTMENT OPPORTUNITIES IN OUR COUNTRY.
NOW-PASS YOU TO ~ tHNBUTJTON;-AUTSRALIA'-S INDUSTRY-MINISTER.
Pr
1 r I
we
Reolin th World
AP o
FIL2j~ L3iL7y C'
Chart 1: World price and stacks: wheat
Mt L
160 Sok
140 120 100 1 981-82 1983-84 1985-86
Nate: Slacks are at the end 0f year. wheat priceis US
HRW lord) lab Gull
Chart 2: World price and stocks: butter
ki World price EC stocks
1400 1200 1000 800 600 400 200 1 98 1-82 1983-84 1985-86
Nate. Slocks are at thre end ot year. butter price is thre
indicator warld price
Chart 3: World price and stocks: sugar
1981-82 1983-84 1985-86
Note: Slacks are at the end of year. sugtapr rice is fob
Caribbean iss/ t The world agricultural crisis is
180 placing serious stress on
10international economic and
10political relationships. This paper
10advances an Australian proposal to
help resolve the crisis.
120 World agriculture has not been in a
100 worse position since the Great
Depression. Commodity prices have
been plummeting, seriously eroding
and often ruining the financial position
of farmers in many countries. The
costs of farm programs have soared,
imposing greatly increased burdens
on taxpayers. At the same time,
consumers in some advanced
countries have been required to pay
highly inflated food prices.
The debt problems of many lessdeveloped
countries have been
accentuated, casting a shadow over
the international monetary system.
Many of the world's poor have been
deprived of a livelihood.
Unemployment has risen, especially
in rural areas. Traditional international
political alliances have been placed
under strain.
2200 2000 1800 Important Indicators of the
1600 Crisis
1400 The crisis in world agriculture is shown in
1200 stark terms at Charts 1-3. In summary,
100since the beginning of the decade:
100 world wheat prices have fallen 50 per
cent and stocks have risen by more than
70 per cent,
world sugar prices are down 80 per cent
and stockpiles are 45 per cent higher;
butter prices have fallen about 50 per
cent and stocks have increased to a
massive 1.7m tonnes;
EC stocks of beef have risen to over
600,000 tonnes about three times the
usual level,
feedgrains. rice and oilseeds have
suffered similarly precipitous price
declines and serious overproduction.
The direct costs of farm programs have
risen enormously: in the US to around
US$ 26 billion from US$ 3-S billion early in
the decade, in the EC costs have doubled
USc.' I in the past 5 years reaching US$ 23 billion
this year ( excluding direct expenditures
by national governments), and in Japan
taxpayers in 1985 paid US$ 10.5 billion in
farm subsidies.
" The direct costs of farm programs
have risen..,. in the US to around
US$ 26 billion, in the EC ,( to)
0 US$ 23 billion this year" Budget costs tell only half the story.
Consumer prices in Japan and the EC,
and for some products in the US, are
administered at levels much higher than
world prices. This additional transfer paid
to farmers by the public when they buy
their food amounts in some cases to much
more than the subsidies paid from
taxation revenues.
Taxpayer subsidies and consumer
transfers in the EC are together costing
more than US$ 900 each year for each
non-farm European family. In the US, each
non-farm family is paying around US$ 700
of its annual taxes in subsidies to farmers,
with additional significant consumer
transfers. The figures for Japan per fulltime
farmer would be significantly higher
than these.'
' Taxpayer subsidies and consumer
transfers are costing more
than US$ 900 each year for each
non-farm European family.'
Surpluses to Continue
In the absence of substantial policy
changes, the crisis in world agriculture will
be with us into the 1990s ( see Chart 4).
Despite the fact that world grain stocks
have risen to the equivalent of two-and-ahalf
years of total world trade, Australian
projections show that, if current policies
continue, stocks will rise further before
slighlty declining.
Causes of the World Crisis
Factors on both the demand side and the
supply side led to the current huge
surpluses of farm products. In the decade
ending 1982, the volume of world trade in
agricultural commodities grew by 35 per
cent. Most of this growth came from the
developing countries. The early 1980s
saw the period of buoyant world trade and
economic growth come to an end.
Developing country demand stagnated
both because of slow international
economic growth ( with the associated
international debt crisis) and because of
the effectiveness of their own agricultural
development programs.
Most importantly, however, the
agricultural policies of the leading
indlustrialised nations reduced the
incentive for farmers to adjust to the
changed world demand conditions. The
outcome is depicted in Chart 5. A massive
wedge of stocks accumulated as supply
and demand diverged.
The substitution of US Government
payments for declining market returns is
shown in Chart 6. As market prices tell,
target prices moved in the opposite
direction. For the EC and Japan ( Charts 7
and 8) consumer transfers and direct
subsidies were used increasingly to
insulate farmers' returns from falling world
market prices.
The Heart of the Problem
The incentive to produce given by farm
programs is causing supply to massively
outstrip likely demand. This problem is
compounded by the rigidity of these
incentives and the rapid rate of growth in
agricultural productivity. The magnitude of
the excesstve incentive to produce
cereals, sugar, butter and beef in Japan,
the US and the EC is shown in Charts 9-
12. It can be seen from the charts that Japan
pays its rice, sugar and butter producers
around eight times the world market price.
The benefits it has received from access
to world manufactures' markets have not
been met by reciprocal access for
exporters of agricultural products to the
Japanese market.
The Price Adjustment Gap
The graphs in Chart 9 show the ratio of
internal administered prices to world
market prices. The Price Adjustment Gap
( PAG) is equal to the extent to which that
ratio exceeds unity. Direct and indirect
subsidies are important determinants of
this gap.
The PAG can be closed from below as
well as from above. If the incentive to
produce was reduced through reductions
in administered prices paid to farmers, the
resultant reduced world supplies would
facilitate recovery in international market
prices. " The incentive to produce given by
farm programs is causing supply to
massively outstrip likely demand."
Reduction of the PAG to zero is, in the
foreseeable future, an unrealistic
objective. Equally unrealistic, however, is
the preservation of the gap at ifs current
level. The aim is therefore to reduce the
gap as fast as possible. A PAG of greater
than 0.3 ( ie internal administered prices
more than 30 per cent higher than world
prices) should nnt be regarded as
acceptable domestically, or
internationally, in advanced industrial
nations. Supply Control and Stock
Management Reducing administered internal -prices is
one way to encourage convergence of
international and domestic prices. There
are, however, other ways to work towards
this objective. Some may wish to manage
markets not only nationally but also
internationally. About 40 International
Commodity Agreements ( ICAs) covering
13 commodities have been introduced
since 1931. However, their record of
success is very poor. " Japan pays its rice, sugar and
butter producers around eight times
the world market price."
Direct supply controls face practical
problems in effective administration, can
inflate costs faced by producers and
constrain improved efficiency through
technological change.
Supply control and market management
are thus poor substitutes for the discipline
needed to attack the underlying cause of
the problem, namely high administered
internal prices and associated trade
restrictions. These must be the focus of
farm policy reform. Nevertheless there are
two areas where direct supply controls
have a potential role to play.
" supply controls can be a
temporary substitute for deferred
further reductions in administered
prices."
First, where the PAG is inordinately wide,
reductions in internal prices will have to be
phased in over a long period. In the early
stages, direct supply controls can be a
temporary substitute for deferred further
reductions in administered prices. Such
supply controls are the clear responsibility
of the countries unable to reduce quickly
their large PAGS.
Second, while current enormous surplus
stocks of grain, sugar, dairy products and
beef overhang markets, world prices will
be very slow to rise. There is a need to
quarantine surplus stocks from the
market, only releasing them in line with the
success in reducing current production.
Responsibility for the management and
disposal of surplus stocks rests with the
countries that accumulate them.
Farm Incomes
Governments are understandably
reluctant to reduce support prices for
farmers because of the posstble
consequences for farm incomes.
Government payments, for example,
currently constitute about one half of the
net cash incomes of US farmers.
Subsidies and consumer transfers in the
EC and Japan make up an even higher
proportion of farm returns.
" if administered prices are reduced
by a number of countries acting in
concert and if stocks are
quarantined and managed, steady
improvements in market prices will
help compensate for reduced
subsidies" Chart 4: US and world grain stocks
Mt
400 D u
30 Rest of world
200 100 1965 1970 197 1980 1985 1990
66 -71 -76 -81 -86 -91
Projections
Chart 5: Representation of world
agricultural trade and stocks
Quantity 1970 1980 198
Char6: US onratle, taretprcean
Ch 6 averoag e, aret price at
4
3/ 2 1977 Act1981 Act -1985
11978 1980 1982 1984
-79 81 -83
mDeficiency paymeni
Average market pricea Target price
Loan rate
a: Does not inciude deficiency payments
b: Subiect to Gramm-Rudman-Hoiiings reductions
Chart 7: EC administered and market
prices for soft wheat
Ecu/ t
250
200 150 100 so 0 1979 1981 1983 1985
-82 -84 -86
Targei price -Basic inlervenblon price
Average domestic Market price
-Export price fob Rouen
JProducer support ( effect ot border and intervention
measures)
Chart 8: Administered Japanese prices
and world prices for rice
' 000Y/ 1
300 250 200 150: 100 01978 1980 1982 1984 1986
-Government purchrapsreic e fromJ apanese producers
( brown rice)
-Government seling price to whioiesaiers tbrown rice)
World price( T hai white lob Bangkok)[]
Deficit paid by government
mExcess above wortl price paidb yc onsumnteerffse ct of
import restnictions)
Chart 9: A: Price adjustment gap: cereals
Ratios Japan
-x\ I E (, cwheat)
-' US ( wheat)
0 1976 1981 1986
Ratio of Japanese producer price tow orldp rice iThai
white. milled lob Bangkrok)
-Ratio of ECs upport level tow orldp rice ( US HardR ed
Winter wheat. lob Guli)
-Ratio of US target price tow orldpr ice ( US Hard Red
Winter wheat. lob Guli) If administered Prices are reduced by a
number of countries acting in concert and
if stocks are quarantined and managed,
steady improvements in market prices will
help compensate for reduced subsidies
and transfers. Nevertheless, farm incomes
would fall in the short term, necessitating
support and adjustment measures.
While inevitably income support measures
will have some impact on the level of
output, this impact can be minimised by
separating income support from the
prices received by farmers for their
p~ roduction.
Achieving Change: Internal
Timetables The next several months will be a very
active period of domestic agricultural
policy decision making.
The US agenda includes an expected
Congressional debate on farm policy,
triggered by the recent Presidential
proposals to reform some provisions of
the Farm Bill. Program decisions,
including loan rates, target prices and setaside
provisions, will begin to be
announced in June, with the wheat
program, and will continue through
October. " The next several months will be a
very active period of domestic
agricultural policy decisionmaking."
In the EC, the Commission's price
proposals for 1987-88 are expected to be
debated in the Council of Ministers until
decisions are announced, most likely in
April. In Japan, the Diet has the 1987-88
budget, including farm spending, under
review at the present time. Livestock price
decisions are due in March and crop
prices in the period July through
September. If early significant reform is to be
achieved, it must be reflected in the
decisions taken in this timetable.
Achieving Change:
International Timetables
Concerted changes in farm policies in
many countries are needed to share
equitably the burden of adjustment. While
the requisite immediate decisions are a
matter for national decision making, the
climate for change can be improved if
nations act in concert. A broad
international accord is therefore needed.
A series of important international
meetings are scheduled for the first half of
1987, including:
a meeting of wheat exporters in the US
in February:
the meeting of Trade Ministers
scheduled for New Zealand in March,
the Ministerial Council Meeting of the
OECD in May, the meeting of the World Food Council in
June; a critically important meeting of Western
leaders at the Economic Summit
scheduled for Venice, also in June.
Each of these meetings should add to the
momentum for reform of farm policies and
agricultural trade and interact with the
domestic farm policy timetable discussed
above.
The Need for Immediate
Action
The crisis cannot be allowed to persist, yet
the MTN negotiating process will
inevitably be protracted.
Early reform would facilitate progress
during the MTN by removing important
obstacles to the negotiation of new rules
for the conduct of agricultural trade. It
would also encourage wider MTN
progress by example, and by the
incentive given to countries which, while
badly affected by agricultural
protectionism themselves, protect their
own sensitive areas.
Australia's Commitment
Australia's rural sector is, of course, not
highly protected: rural policy in Australia
will continue to facilitate the
responsiveness of our farmers to
changing international prices. Australia
does, however, have relatively high tariffs
in some manufacturing sectors.
During 1986 Australia took action to
increase the competitive pressures on its
textile, clothing and footwear and
chemicals and plastics industries, two
important manufacturing sectors. Similar
action has been taken in our motor vehicle
and steel industries. Australia has
recognised the costs of insulating
important sectors from international
competition and has not waited for the
finalisation of MTN negotiations to take
action. Australia is committed to making the MTN
round a success. To demonstrate this
commitment Australia is prepared to state
its willingness to negotiate the binding of
tariff levels in all sectors of Australia's tariff
regime. This is a significant commitment
given that Australia in the past has bound
only a very low portion of its tariff.
The Uruguay Round and
Agriculture In September 1986 the GATT Contracting
Parties agreed, in the Ministerial
Declaration launching the Uruguay
Round, to aim for agricultural trade
liberalisation and to strengthen GATT
rules and disciplines affecting agricultural
trade. " A series of important international
meetings are scheduled for the first
half of 1987"
In the spirit of the Uruguay Declaration,
the Australian Minister for Trade has
explored, with several of the major trading
countries, the concept of a ' ceasefire' on
subsidies directly or indirectly affecting
agricultural trade. A ceasef ire' would
provide a necessary breathing space and
a stable basis for the negotiated rolling
back of these subsidies.
There seems considerable in-principle
support for the ceasef ire concept.
Discussion has focused on the best
means for effective implementation and
monitoring. One simple and effective
means to implement the ceasefire is for it
to be applied to a measure which reflects
important farm subsidies, namely the gap
between administered internal prices and
international prices. A subsidy ceasefire
and a progressive reduction in the PAG,
initiated by a reduction in administered
domestic support prices, would reduce
three important forms of subsidy. They are
deficiency payments, consumer transfers
and export restitutions.
" One simple and effective means to
implement the ceasefire is ( by
narrowing)..,. the gap between
administered internal prices and
international prices."
In order to facilitate a harmonious
reduction in the PAG and to provide a
reasonable assurance that the burden of
change is being appropriately shared, it
would be useful if domestic policies could
be reformed against the background of an
accepted set of general principles.
The OECD has been working on a
Ministerial Mandate on Agricultural Trade
for some four years. The Organisation has
accumulated a comprehensive picture of
the agricultural policies in all leading
member countries, including the
quantification of the net subsidy
equivalent of the various measures
deployed. The OCD is therefore well
placed to develop a set of guiding
principles and to monitor farm policy
reform. Action Already in Train
The Australian proposal has been
developed in full knowledge of moves
towards reform in Japan, the US and the
EC. The coming months, however,
provide the opportunity for greater, coordinated
progress.
" 1changes already in train. will
not make a sufficient contribution
Recent EC moves include modification to
the grain regime, agreements to reduce
dairy supplies and to change the beef
intervention system, and a slowdown in
the rate of administered price increases. However, changes already in train,
important as they are, will not make a
sufficient contribution to the resolution of
EC budget problems and the international
agricultural crisis.
In Japan, the Agricultural Policy Review
Council has recently enunciated new
guidelines for the administration of farm
policy. These include an enhanced role
for international market prices in
determining internal prices. Price
increases have been constrained in
recent years, with the pivotal rice price
having been frozen in 1986-87.
Nevertheless the gap between Japan's
internal prices and world prices remains
very large.
" it is important that national
proposals and decisions add
progressively to. constructive
change."
In the United States, the President has
recently advanced proposals for
substantial reform, including cuts in target
prices. The attitude of the US Congress to
these proposals will undoubtedly be
influenced by the EC price decisions.
If genuine progress is to be made in 1987,
it is important that these national
proposals and decisions add
progressively to the creation of an
international environment conducive to
constructive change. The sequence of
international meetings already discussed
provides an opportunity to capitalise on
that environment, to develop an accord on
agricultural policy and trade reform and to
propel progress in the critically important
Uruguay Round of Multilateral Trade
Negotiatirins. " The OECD is well placed to
develop a set of guiding principles
and to monitor farm policy reform."
The plan described below requires
simultaneous decisions from a number of
leading countries in order to spread the
burden of adjustment. This initiative is
intended to be catalytic. It attempts to
point out a path leading to continuing
progress. To achieve progress, clear
leadership from the US, the EC and Japan
is vital. Without hard decisions and strong
leadership the problems associated wfth
the world agricultural crisis will deepen.
The proposal is advanced by Australia as
a contribution to resolving the crisis in
world agriculture. The Australian
Government recognises that others may
wish to advance alternative proposals.
Australia is willing to participate in
discussions which attempt resolution of
the problem from other perspectives.
Nevertheless the proposal now advanced
provides a basis for resolution of the
problem. Australia commends it to other
nations for evaluation. Chart 10: Price adjustment gap: sugar
Ratio 8 Japan
6 US
4--2 0 1981 1983 1985 198
-Ratio ofJ apanese target price tow orfdpr ice, fob
Caribbean ports
Ratio of ECi ntervrentipornicie to worfdpr ice, fob
Caribbean ports
Ratio of USm arket stabilisation priceto w orfd price.
fob Caribbean ports
Chart 11: Price adjustment gap: butter
Ratio 8 Japan, EC
1982 1983 1984 1985 1986
Ratio of Japanese stabilisation indicative price to
indicative worid price ( NZ MAFF)
Ratio of EC itervention price to indicative worfd price
( NZ MAFF)
Ratio of US wholeosale price, grade A Chicago, to
indicative world price ( NZ MAFF)
Chart Ratio 12: Price adjustment gap: beef % us
1970 1975 1980 1985
Ratio ofJ apanese dairy beewt holesale priceto import
price Ra tio ofU Kw htolesaptrei ceto export paritpy nicefo r
beef and veaf
Ratio of USw holesafe priceto c anner cuttecro w beef
to of imporptr ice oiA ustralian cow beet
EC A J 1\
Elements of the Proposal
1 A commitment to halt subsidy
escalation and freeze and
progressively reduce the gap between
administered internal prices and
international market prices for farm
products.
Such a commitment would be consistent
with the intent of the Uruguay Declaration.
Australia proposes such a commitment be
advanced by agriculture and trade
Ministers at an early opportunity.
2. An early reduction in internal
administered producer prices for
1987-88. The Seven Economic Summi . t
Countries should provide the
leadership.
Prices could, for example, be reduced by
per cent for all commodities where the
gap between internal adlministeredl prices
and international prices is greater than 30
per cent. Such a proposal could be
implemented by the US, the EC and
Japan in forthcoming price reviews and
budget processes and by other countries
at similarly appropriate opportunities. A
commitment along these lines could be
affirmed at the Economic Summit in
Venice, along with a commitment for
further reductions until the gap narrows
substantially. 3. The narrowing of the price gap be
expedited by interim measures aimed
at containing supplies and
quarantining stockpiles in those
countries where internal administered
prices remain significantly higher than
international prices.
Surplus stocks have generally been
accumulated in those exporting countries
where the levels ot farm price subsidies
and other market-related assistance are at
the highest levels. Consequently these
countries are themselves primarily
responsible for them and should adopt
measures to contain and quarantine them.
Progress in restoring international balance
in agricultural markets would be disrupted
if there were fears that surpluses might be
released in an undisciplined manner onto
world markets.
4. Farm income support measures be
separated, wherever possible, from
producer prices for farm output.
In order to facilitate the reform of
administered prices, farm adjustment
measures, social welfare assistance and
direct income support policies should be
further developed in those countries
where large PAGs exist. 5. The development of an accepted set of
principles to liberalise world
agricultural trade through reform of
domestic agricultural policies by
national governments.
Such a set of principles would assure
individual nations that their actions are
part of a wider movement towards reform.
The OECD is well placed to develop and
advance such a set of principles. They
could be considered by the Ministerial
Council Meeting in May and endorsed by
the Economic Summit in Venice in June.
6. An accord on international agricultural
reform be hgreed at the Economic
Summit in Venice in June.
Last year's Economic Summit Declaration
marked a turning point in international
attitudes to the agricultural crisis. This was
reinforced by the GATT Uruguay Round
Declaration. The 1987 Economic Summit
provides a further opportunity to broaden
the commitment to international
agricultural reform encompassing the
above principles and concepts.
7. Negotiations on agriculture within the
Uruguay Round of: effective
disciplines on the operation of direct
and indirect agricultural subsidies and
price support programs,-and
increased market access.
Expeditious strengthening of the GATT
rules and disciplines in relation to
agriculture is critical if the momentum
towards reform is to lead to permanent
improvements in the operation of
international agricultural markets.
U U
Elements of the Proposal
A commitment to halt subsidy escalation and freeze and
progessively reduce the gap between administered internal
prices and international market prices for farm products.
2. An early reduction in internal administered producer prices
for 1987-88. The Seven Economic Summit Countries
should provide the leadership.
3H The narrowing of the price gap be expedited by interim
Smeasures aimed at containing supplies and quarantining
stockpiles in those countries where internal administered
prices remain significantly higher than international prices.
4. Farm income support measures be separated, wherever
possible, from producer prices for farm output.
The development of an accepted set of principles to
liberalise world agricultural trade through reform of
domestic agricultural policies by national governments.
An accord on international agricultural reform be agreed at
the Economic Summit in Venice in June.
7. Negotiations on agriculture within the Uruguay Round of:
effective disciplines on the operation of direct and indirect
agricultural subsidies and price support programs; and
increased market access.
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