CHECK AGAINST DELIVERY
Thank you, Stephen, and to Australian Business for hosting us here today.
Thank you also to Michael Gutman, Managing Director of Westfield for the UK and Europe.
Lord Carter, Minister for Communications, Technology and Broadband.
The Right Honourable Helen Liddell, British High Commissioner for Australia.
Mr John Dauth, Australian High Commissioner.
Members of the diplomatic corps.
Distinguished guests.
Ladies and gentleman.
This week in London, leaders of the 20 largest economies of the world will met to forge a Global Strategy for Economic Recovery. There has been a lot of public discussion about the expectations for the meeting's outcome, but let me begin with a simple historical point.
During the Great Depression, it took nations some 15 years - from the crash in 1929 to Bretton Woods in 1944 - to agree on a global response. The delay of 15 years, deepening the slump in international trade and the soar in unemployment, had devastating impacts for economies, societies and world peace.
During those 15years, an opportunity for global policy coordination presented itself to world leaders - again in London. As I noted in a speech last week in Washington, 66 nations gathered at the World Monetary and Economic Conference in London in 1933 with, as HG Wells described, "a stout determination to be brilliant", but the fanfare to which the Conference opened dissipated as the three great Atlantic powers failed to reach agreement on policies to stabilise their currencies and would not commit to working against protectionism.
Instead, each nation advanced its own interests and pursued its own agenda of protectionism.
It was to take another 11 years and the tragedy of a World War for nations to gather and agree at Bretton Woods on the post-War global economic architecture.
In contrast, today, global leadership has come together rapidly, meeting in the first year of the crisis in Washington in November and again in London in April. The sense of urgency and the spirit of cooperation are a reflection not only of the depths of the crisis that we face but also of the political will that is galvanising concerted government action.
Australia, too, has taken early and decisive action to implement a strategy to see Australia through the current economic crisis.
This action has included an economic stimulus strategy in three parts:
* Action to stabilise domestic financial markets,
* Short-term economic stimulus to support growth and jobs, and
* Long-term economic stimulus aimed at building the infrastructure that Australia needs for the 21st century, including the largest school modernisation program in Australia's history.
Our discretionary fiscal stimulus action amounts to around 4.5 per cent of GDP over the forward estimates. These various measures have contributed and will continue to contribute to Australia's economic growth and the stability of Australia's financial institutions.
While through-the-year to the December quarter all G7 economies had recorded negative growth, Australia's through-the-year growth to the December quarter was positive (0.3 per cent). Australia's economic growth remains among the top seven of the advanced economies. Our export volumes in the December quarter were higher than those of all G7 economies, and the third highest of the 30 OECD members.
In 2009-10, Australia's net public debt is projected to be 1.4 per cent of GDP - around 30 times less than the projected OECD average in 2010 of 48 per cent. Australia has the lowest Budget deficit when compared with the deficits of the G7 economies and one of the lowest in the OECD. Australian banks make up 4 of the world's 11 major banks that still retain an AA credit rating.
The Australian Government remains prepared to take whatever additional action is necessary to continue to support Australian economic growth and jobs and to continue to maintain stability in Australia's financial markets. Nonetheless, whatever national action Australia takes cannot be fully effective in the absence of coordinated international action, given the dimensions of the global economic recession that we will now confront.
The current crisis has shown that existing international bodies are in need of renovation if they are to meet the challenges of the 21st Century. In recent decades, international structures have not kept up with the growth in the pace and complexity of the global economy.
Between 1987 and 2007, real global GDP more than doubled. The value of world stock market capitalisations has increased more than three-fold, in nominal terms, from US$17.1 trillion in December 1995 to US$62.7 trillion in June 2008. Foreign exchange markets show a near tripling, in nominal terms, in daily turnover from US$1.2 trillion in March 2001 to US$3.2 trillion in March 2007. And most spectacularly, the notional contract amount of outstanding debt derivatives increased from US$72.1 trillion in June 1998 to US$683.7 trillion in June 2008, a 9-fold nominal increase in a period of just 10 years.
But during this same period, the international institutions that were designed to ensure stable functioning of the global financial and economic system went through no fundamental reform. In this period, the global centre of economic gravity began to shift as the emerging market economies played a greater role in driving global growth. We therefore face the global economic crisis of 2009 with international institutions designed in the wake of the Second World War and when the world was a vastly different place.
What has emerged is a gap between the capacity of existing global institutions and the sheer quantum and complexity of the economic problems we face. We need to update our institutions so that they assist governments in responding to global crises.
We do not need to start from scratch. Global architecture is struggling but it is not moribund. We still need institutions like the UN, the WTO, the IMF and the World Bank to help prevent conflict, promote trade liberalisation and financial stability and reduce poverty, but we must recognise that we need a mechanism to focus the international political will needed to develop responses to new challenges.
What we need is a driving centre. We need a grouping reflective of the distribution of power in the 21st Century and capable of providing leadership on the great challenges of the future, the stability of the global financial and economic system and the new threats to global peace and security, including climate change.
The G20 is the best on offer. It is not perfect. Realising its potential will take time, involving an evolutionary process, but the G20 has much in its favour. It brings together the established and the emerging powers. It straddles all continents and all major regions: five from Europe, five from Asia, five from the Americas, and five from other regions including Africa. It contains the major emerging powers of China, India, Brazil and Mexico. It includes the largest Muslim nation in the world, Indonesia. Its combined membership makes up 90 per cent of global GNP, 85 per cent of global trade and two-thirds of the global population. It is small enough to take decisions and large enough to be representative. It bridges the strategic and economic weight of the present and the future.
The individual interests of the G20 countries are not always aligned. It embraces different political and economic systems, but this diversity, coupled with its strategic and economic reach, makes it suited to help drive an agenda of global economic action for the future.
The G20 already has a strong existing base of cooperation to build on. The G20 was formed in 1999 after the Asian Financial Crisis - its finance ministers have been meeting together for a decade.
If we want the G20 to take on a broader role in developing global solutions to a range of problems, we need to elevate its level. Ahead of Thursday's meeting, it is important that we focus on the immediate agenda of tackling the global economic crisis - I will focus my remarks today on that challenge - but, in doing so, we must also have an eye to the future. We need to think about what sort of institutions we need to help craft global solutions to the sorts of global problems that national governments cannot solve.
The G20 is a strong starting point for that longer-term task.
The London Summit this week is only the second ever G20 leaders' meeting. Already, the leader level forum has enhanced the political drive behind the institution and helped to deliver concrete action to address this global recession.
The G20 Washington Declaration, agreed in November last year, outlined an ambitious program to help restore growth and begin much-needed reform of the world's financial system. In Washington, leaders recognised the need to: "use fiscal measures to stimulate domestic demand to rapid effect, as appropriate."
Since then, leaders have acted on that commitment with unprecedented and coordinated discretionary fiscal stimulus. For the G20 as a whole, the size of discretionary fiscal stimulus is around $2.5 trillion, and is estimated by the IMF to save up to 20 million jobs. This is on top of the impact of the automatic stabilisers, which are very large in some G20 countries. And the IMF estimates that the impact of national fiscal action has been increased by a bonus of 50 per cent because it was implemented jointly and virtually at the same time across open economies.
Two weeks ago at the G20 Finance Ministers meeting, the Communiqué recommitted G20 nations to further macroeconomic action as necessary. The Communiqué noted: "Fiscal action is providing vital support for growth and jobs ... we are committed to deliver the scale of sustained effort necessary to restore growth...we will ensure the restoration of growth and long-run fiscal sustainability".
For all the talk of disunity and the 'transatlantic fiscal fight' that dominates some parts of the press - these facts and these policy declarations that we have already witnessed unprecedented action and unprecedented coordination on fiscal policy. In addition to fiscal policy, G20 leaders have also taken extraordinary action to support lending in our financial systems, already having:
* eased monetary policy and made the largest global reductions in interest rates around the world in modern times,
* protected savings and deposits, and
* provided liquidity support, including the use of government guarantees
* injected capital into financial institutions, and
* strengthened banks' balance sheets, including through dealing with impaired assets.
This was highlighted in the agreement reached by G20 Finance Ministers on 14 March for a framework for restoring lending which outlined principles for dealing with impaired assets. The principles, which underpin a globally coordinated approach, include the eligibility of assets and institutions, risk transfer and burden sharing, transparency and disclosure, valuation and monitoring. We also committed in Washington to resist protectionism, realising that we must avoid beggar-thy-neighbour policies and sustain the benefits over open markets and globalisation.
While this has not been 100 per cent successful - and some transgressions have occurred - so far these have tended to be venial rather than mortal sins. No doubt part of the reason protectionism has been limited is the pressure exerted by the G20 through their monitoring and public report-back mechanisms to leaders' meetings.
There has also been substantial progress on strengthening the financial system regulatory framework and advancing the 47 action items agreed last November. This was highlighted by the G20 Finance Ministers on 14 March where they identified measures including:
* the expansion of the Financial Stability Forum to include all G20 countries,
* improved regulatory oversight over Credit Rating Agencies, and
* principles for compensation which avoid excessive risk-taking.
To help emerging markets and developing countries cope with the impact of the crisis, the G20 has been instrumental in supporting a major increase in the resources of the IMF and accelerating IMF reform.
The achievements to date represent important early steps to deal with this global crisis.
But there is much more to do as the crisis develops and unfolds. The London G20 Summit this week must make progress towards a Global Strategy for Economic Recovery.
The agenda is broad, but the fact is that the Summit will be judged on one overarching outcome - whether leaders can agree on a forward work plan that helps to restore confidence to a global economy sorely lacking in confidence. In order to provide people with a rational basis for confidence, the London Summit must deliver more than words.
We must reach a substantive agreement on five key areas: further macro-economic action, addressing toxic assets to restore lending, reform of the international financial institutions, reform of the global regulatory framework and holding the line against protectionism.
On supporting growth, leaders must reaffirm Finance Ministers' commitment to take "whatever action is necessary until growth is restored", and we must operationalise this commitment by directing the IMF to report and advise us on the need for further stimulus.
Second, we must act to address the root cause of the crisis - the 'toxic assets' on the balance sheets of systemically significant banks. Secretary Geither's public-private investment plan announced last week is an important initial step in support of confidence in the banking system, but the problem of banking systems in developing countries facing increasing stress will continue to have dangerous flow-on consequences for large Western banks with exposure to emerging markets. We must therefore endorse the Finance Ministers' framework for impaired asset management, including mechanisms for cooperation through the Financial Stability Forum and the IMF.
Thirdly, we must agree to increased resourcing and reform of international financial institutions, with particular attention to the IMF. We should aim to double and, if required, to triple, the pre-crisis level of the IMF's resources. We should also support reform of the IMF ownership structure to better reflect current global economic weightings.
Fourthly, we must work towards addressing the weaknesses in the global regulatory framework - not least because of the necessity of demonstrating to an under-confident public that we are rectifying the regulatory failures of governments that allowed the crisis to occur. We must implement the Washington Action Plan against firm timelines. We must subject all global financial institutions, markets and products to a level of regulation appropriate to their systemic importance. Macro-prudential oversight and FSF coordination of the development of tools to address systemic vulnerabilities could better prevent the build-up of systemic risks.
Finally, we must hold the line against acts of protectionism, be it physical goods or the new forms of financial protectionism that now confront us - the Smoot-Hawley Tariff of the 21st Century.
If substantive agreement to tackle the key causes of the crisis and to mitigate the consequences of the crisis is achieved, the green shoots of confidence can credibly grow.
These substantive outcomes will be a significant achievement, but the actions we not of themselves immediately fix the crisis. That will take some time. The IMF now forecasts growth of between minus 0.5 and minus 1 per cent in 2009. The OECD's Interim Economic Outlook released today says the world economy is in the midst of the deepest and most synchronised recession in our lifetimes. The OECD expects output in its 30 member economies to contract by 4.3 per cent in 2009. These numbers are a wake up call for the G20 Leaders meeting in London.
Looking ahead, the IMF predicts that in 2010, global growth will be between 1.5 and 2.5 per cent, down from 3 per cent predicted few months ago, but the fact is that the risks are on the downside, and the economy could turn out to be substantially worse than these forecasts.
The first major risk to global recovery over the next year comes from the potential economic collapse in emerging markets and developing countries. Most focus in this respect is on Central and Eastern Europe, which will need to roll over US$413 billion of external debt in 2009. According to IMF estimates, Eastern Europe will have a financing gap in 2009 of US$123 billion and of US$63 billion in 2010. The capital needs of Western European banks would be exacerbated by losses in Eastern Europe, with total exposure to the region at about US$1.6 trillion. There are also risks to developing countries in other regions.
The second major risk to global recovery is the process of deleveraging that may depress growth even as the economy recovers. Many advanced countries have experienced decades of low saving and over-consumption. Households and firms have already begun to change their saving behaviour, saving more to restore some of their lost wealth.
In the United States, personal savings rates are estimated to have recently increased to up above 4 per cent, the highest level for fifteen years and up from less than 1 per cent for much of 2005 to 2008. This deleveraging will affect growth in advanced economies. Indeed, the IMF is concerned that this deleveraging will lead to lower consumption, investment and skills acquisition, reducing long-term growth rates and increasing unemployment in the long term by up to 1 per cent.
The risk of a deepening economic crisis in the short term, and depressed long term growth, presents broader challenges. Last November, at the Washington Summit, I observed the likelihood that the global economic crisis would, in some nations, become a political and social crisis. History speaks to the likelihood of this reality.
The President of the African Development Bank, Donald Kaberuka, recently vocalised the concern, observing - "I fear for social stability, I fear for political stability, and it is happening already".
In his 'Annual Threat Assessment of the Intelligence Community" to the Senate in February, which typically focuses on terrorism and nuclear proliferation, the new US Director of National Intelligence, Dennis Blair, claimed that "the primary near-term security concern of the United States is the global economic crisis and its geopolitical implications". Looking forward at potential impacts, the US Director of Intelligence also noted that "statistical modelling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period".
Projections and modelling aside, devastating social impacts are already emerging.
According to the World Bank, an extra 53 million people will be trapped in poverty this year alone as a result of the crisis, and the crisis will hurt the world's most vulnerable, with the World Bank estimating that infant mortality will increase by between 200,000 and 400,000 children per year from 2009 if the current crisis persists.
Dealing with these risks and the evolving nature of the crisis will require the G20 to continue to adapt its work program. A future program should have the following three elements.
First, to deal with the risks to emerging markets, we must ensure close monitoring and regular quarterly feedback from the IMF and World Bank on the risks to emerging markets, as well as their systemic impact on the global economy.
Second, we need follow-up on the implementation of our commitments concerning stimulus, toxic assets, IMF resourcing and reform, regulatory reform and holding the line against an outbreak of protectionism.
Third, we need to commission and develop - through the IMF, World Bank, Financial Stability Forum and other relevant international bodies - an integrated, sustainable medium-term growth agenda. This medium term agenda should include the following elements:
* how do we make the most of our education and training systems?
* how do we use our capital and labour most effectively?
* how do we increase energy efficiency and expand the role of renewable energy?
* how do we ensure that our regulatory systems are consistent across borders?
All these are important medium term challenges.
In closing, there are two challenges ahead of us this week.
First, we have to tackle the short term economic challenges that confront us today and provide consumers and markets with a rational basis for confidence. This means real outcomes at the London Summit, but the other task ahead of us this week is to look to a further horizon.
We must take steps towards laying the foundations of the global institutions and decision-making architecture that will serve the people, underpin the markets and help us tackle the next great challenges we will face. Based on these short- and long-term reforms, we must also build a credible public narrative surrounding a global strategy for economic recovery.
The content of that strategy (as outline in my remarks today) is critical. How global political leaders describe that strategy in their communications with their peoples is equally critical. Re-building confidence, both for businesses and consumers, must embrace both; that is, a strategy that will work, and a narrative which explains the implementation of that strategy to the people.
That is why when leaders emerge from London this week, it is critical that, collectively, we lead the international debate on the return of the global economy to growth levels that secure our collective long-term economic future.