TRANSCRIPT OF QUESTION AND ANSWER SEGMENT WITH JOHN
MCINTOSH, SATELLITE HOOK-UP TO NEW YORK AUSTRALIAN
INVESTMENT CONFERENCE 28 SEPTEMBER 1989
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MCINTOSH: Good morning. It is John McIntosh and I am
talking to you now from the Metropolitan Club in New York,
which was the Club founded by J. T. Morgan so we are here
gaining inspiration. I have got some questions for you. We
have a limited amount of time, I understand, so I might
break five minutes before the half hour is up to ask you if
you have some comments to make to our very enthusiastic and
full audience here tonight.
PM: Right John.
MCINTOSH: My first question, Mr Prime Minister, is
according to a Bureau of Agricultural and Resource
Economics, commodities accounted for 85% of Australia's
total merchandise exports of the 88-89 year. That is down
only marginally from 88% in 1984-85. What this suggests to
me is that despite the big falls in the $ A a few years back,
despite the substantial levels of investment which you say
is going on, the Australian economy is still dependent as
ever it was on volatile commodities. Do you think this will
ever change? Should it? And if so, can you tell us what
policies you are pursuing to reduce Australia's exposure to
fluctuations in commodity prices?
PM: Well thank you John. There is no question that
primary commodities are going to continue to be a
fundamentally important part of the Australian economy as
far as we can see into the future. Because we are blessed
in this country in many ways which together makes us amongst
the world's most efficient producers of agricultural
exportable products and of course the vast resources of
minerals which go right across the range, of which your
audience is aware. So let's understand that those
commodities are going to continue to be fundamentally
important. But we haven't been content just to sit there
and say well we are going to leave it at that, because that
leaves us far too exposed, as you know, to fluctuations in
world commodity prices. So we are moving to change that
profile of exposure to diversify our economy and to take
advantage of the fact that we have in this country a highly
skilled workforce, a well-educated community, and that we
have the geographical proximity to the fastest growing
economic region in the world. And we are moving in a whole
range of ways to take advantage of that. Let me say that
there are indications of the sort of changes that we want to
see, John. If you look at the area of service exports, for
instance, they were some 40% higher in this last financial
year in real terms than they were two years ago. And
manufactured exports similarly were about 16% higher in real
terms than they were a couple of years ago. Business
investment in Australia is now, as a result of our policies
in the whole area of macroeconomic management, at the
highest level and the highest proportion of our gross
domestic product than it has been ever recorded at 13.5%.
There have been 15.5% real increases in business fixed
capital equipment investment in each of the last two years
which is an extraordinarily high figure. And so you can see
that the things are happening there in the investment terms
to diversify our economic structure. Let me give you some
examples of where we are moving in the right direction. For
instance, we have got five projects worth $ 150 million in
the food processing industries, four are worth nearly $ 100
million in textiles. These are just some examples of the
way in which we are moving to give value added processes
here to the fundamental commodities that we produce. In the
area of steel, BHP has a current investment worth about $ 600
million, which will again help us to cater for niche exports
in that sort of market. And so what we are really doing,
and we are doing it in our macroeconomic policy and our
microeconomic reform, creating an environment for business
of which they are taking advantage to gradually but very
significantly change the profile of exposure of Australia so
that we will have both the strength of our commodity exports
but taking advantage of a growing capacity for exports of
services and manufactured goods.
MCINTOSH: You have emphasised on other occasions that
Australia does not subsidise its farmers, does not subsidise
its coal miners, and has embarked upon a five year program
of tariff reductions. Yet in other parts of the world,
including the US, the trend in recent years has been towards
increased protectionism and ' managed' trade. How long can
Australia stand aside from these global trends?
PM: Well, we are going to continue John, to take a leading
role within the multilateral trade negotiations and
bilaterally to try and bring the world to its senses. We
have got a position where we established in 1986 the Cairns
Group of Freetraders. There we have already established
that Cairns Group as a significant and permanent group in
the Uraguay Trade Round Negotiations that we were
instrumental, I think, in breaking the deadlock that
occurred in Montreal at the end of last year and getting the
resumption of those talks going from April of this year in
Geneva. So we are very very much committed with likeminded
countries to making the world understand what is the
economic truth. And unfortunately, I think, in the United
States the leadership level, as in Europe at leadership
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level and Japan, we haven't got to sell the story of the
economic insanity of increasing protectionism. The fact is,
of course, that the cost and price structure of Europe and
the United States and Japan is much higher than it need be
because of the pursuit of false protectionist policies. If
you take the United States, for instance, the OECD estimates
that in last year, 1988, the United States subsidised its
agricultural producers to the equivalent of about $ 38
billion. And the estimates at Congress suggest that
commodity price support programs alone cost $ 13 billion.
Now the simple reality to that, John, which I imagine your
audience completely understands, is that if you go beyond
the economic legitimacy of self sufficiency, which is a
legitimate aim for any country, and then go into a process
of subsidising your producers, then what you do is escalate
your domestic cost and price structure. It means you are
less competitive. It means there is relatively less
employment opportunities available. Now we understand those
truths. We are going to keep telling them. And I think
there is some hope for the future. I certainly have got a
positive response, when I was in the United States earlier
this year, explained these realities. I think they were
accepted. Of course the bottom line is not the
understanding of the economic truths, it is a question of
political will. And fortunately I think that there are
forces lining up in Europe amongst manufacturers and
organised consumers and workers which are saying, look we
have had enough of being taken for a ride by a small
minority. When you have something at less than 10% of
population who are, significantly less than ten per cent,
being amongst your primary producers. And they are the tail
that is wagging the whole community dog. It doesn't make
sense. And so we are going to keep telling that story.
MCINTOSH: I want to ask a question about the pilots
dispute. In this country, the Reagan Administration's
response to the air traffic controllers' strike in 1981
marked a watershed in labor relations, and the beginnings of
a decline in union power. In this dispute you have
authorised the use of taxpayers' funds to aid the airlines,
the use of military and foreign strike-breakers to do the
work of pilots, and the use of common law remedies to impose
penalties on striking pilots. Do these actions set a
precedent for dealing with future relation problems, or
should we see this issue in isolation.
PM: Well I think it is essentially an isolation for this
reason. That the organised trade union movement in this
country, John, has pulled it completely into line in support
with the uniquely Australian consensus wages accord
approach. And the essence of that as you know, is that the
trade union movement here has agreed to exercise very
considerable wage restraint in respect of claims for
increased money wages in return for which we as a government
have increased the social wage in terms of providing
universal health and hospital coverage, infinitely increased
expenditures in the area of education and social welfare so
that those social wage elements have been increased. And
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for that the trade union movement has accepted lower money
wage increases. Now because we have that general support,
and we have had a situation where, as is being recognised,
there has been a shift from wages to profits, which the
trade union movement recognises. There-has been an historic
shift from wages to profits which has enabled the massive
investment that has taken place which in turn creates a more
competitive structure of the economy which provides more
secure employment. The union movement as a whole supports
that. Now the pilots wanted, if I can use an Australian
phrase, they have wanted five bob each way. They wanted to
take all the advantages of the improvements in the social
wage, that is the tax reductions that have occurred. They
have got the top tax reductions. Improvements in
superannuation. They have got the top superannuation
packages while ordinary workers are getting their first
taste of this. So the pilots have grabbed all the increases
in the social wage, which have come from a mass of workers
forgoing excessive money wage increases, and pilots say
alright we will grab all that of the increased social wage
but we will have the excessive money wage increases as well.
Well the Government is saying, the airlines are saying, and
the trade union movement is saying, that is not going to
happen. So there is a unique sort of situation here in
which we have felt it proper to use all the strength at our
command, including some of the things that you have talked
about. But that is not attacking the pilots as such. What
it is doing is to protect a system which, as I say, has
produced for workers in this country an increase of one and
a half million jobs which is a rate job improvement, job
increase, twice as fast as the rest of the industrialised
world. Twice as fast. And improvement in the social wage.
All those things have come with profits increasing,
investment surging. That is what we are fighting to
protect, and what we will do.
MCINTOSH: Your Treasurer has said that the blow-out in
Australia's current account deficit reflects the surge in
business investment spending. I have some doubts about
where all this investment is going. If you visit Australia
a lot of it seems to be going into office blocks in Sydney
and Melbourne. And a couple of charts in your most recent
Budget documents show that the proportion of the investment
going into trade exposed industries, industries which will
help pay off all the foreign debt, is shrinking. Can
foreign investors be confident that Australia can in fact
service the additional debt that you have taken on over the
past two years?
PM: Well I am grateful for that question John, and I think
you are aware of what is happening here and these trends in
Australian investment do need to be looked at in the
appropriate context. Now it is the case that total
investment is at record levels. I have indicated that
investment as a proportion of gross domestic product is at
the highest level ever recorded. And if you look at it in
five year terms the Treasury documents show that the rate of
investment increase in-this last five year period is light
years beyond what has been happening before. Investment,
John, in non-commodity trade and industries has risen very
considerably since we came to office in 1983 and it has more
than doubled over the period. There was a strong investment
in commodity tradables in the early 1980s which, as you
know, was associated with the resources boom in this
country. Since 1985 investment in commodities has been
fairly stable in the range of about three to four billion
dollars per annum. Investment in so-called non-tradables
has increased rapidly since 1987 and it is quite clear, as
you will appreciate, that a lot of that investment will
contribute directly or indirectly to foreign exchange
earnings. I mean, as you know, investment in buildings and
so on, which may be classified as non-tradable, can
contribute very significantly to foreign exchange earnings
through the leasing of office space to relevant companies.
For instance, the resources and manufacturing sector. So
that distinction is not always a real one. And similarly,
of course John, non-tradable area includes the services
sector, which includes the financial services and it is very
clear, as you personally know, that investment in this area
has given Australia a capacity to sell consulting and other
services overseas. So the business sector, John, does not
lack confidence in Australia in any sense. To the contrary.
As you know most of the increase in foreign debt over recent
years is attributable to the private sector. The fact is,
of course, that as a Commonwealth, as a nation, the
Government, we don't owe debt, we are a net creditor. But
what has been happening is that you have had enormous
investment by the private sector because they have made the
commercial economic judgement that out of the investment
that they make in this country they are able to earn
sufficiently to them, and not only to service that debt in
interest and in capital terms but to return a profit. And
that is of course what has happened. If you look at, in the
particular areas, there are many significant projects which
are forging ahead now with the active involvement of foreign
investors. I mean if you look in the minerals and energy
area, we have just seen the north-west shelf project which I
was opening the other day. Now in total that is a massive
project involving some $ 12 to $ 13 billion investment and
we've just started the first flow of liquid LNG to Japan and
that's going to build up in the 1990s to export income for
this country to the order of two or three billion dollars
per annum. In tourism you're aware of the enormous
investment there. In heavy industry we've got four major
mineral processing projects at the moment involving a total
capital outlay of around half a billion dollars, all due to
come on stream by the end of 1990. In the aerospace
industry Hawker deHavilland have a 20% share in a project to
produce the new NBX helicopters in Australia which is going
to generate something like $ 400 million in export earnings
in its first ten years of production. So we have a
situation there as I say. We owe no net Commonwealth debt
as a government. What we are seeing and I've just given
you some examples of it a situation where over 60% of the
debt is owed by the private sector and it reflects these
sort of investments which are going to provide substantial
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export earnings for us in the future. In other words what
is being established John is a pattern of growth with an
investment surge, rapid employment growth and with tight
Government policies in the fiscal, wages and monetary area
so that the pattern of production, the pattern of growth is
being set in a way which while it is incurring as I say a
debt at the moment by the private sector is being done in a
way which they will be able to repay and which will create
for Australia a very very significantly stronger economic
structure and export earning capacity into the future.
MCINTOSH: Last week we saw the announcement of another
record current account deficit. Are the Government Budget
forecasts still on track?
PM: What we do when we draw up the Budget John, and I
suppose what the major businesses do, you have to rely on,
you use the best econommic analysis available to you. Ours
is very good. Our Budget was drawn up relying on the best
economic analysis available to the Government. May I just
say these things about the August figures which I think are
worth noting. I'm not trying may I say to your audience
John and ladies and gentlemen I'm not in any sense trying
to give some sense of complacency about the figures. We
know that they are large and the general strategies we've
got in place are directed towards creating a level of
activity which overall will mean a level of imports which is
sustainable and which we can purchase. But nevertheless let
me say this about the August figures. It is a seasonally
high month for imports and it was a surge of imports in the
current account figures for August, it was the surge of
imports rather than any decline in exports which brought
that deficit. It also had two more trading days in August
than in July which is a factor which is generally more
significant for imports than for exports. There were the
two one-off factors of a Qantas jet and one of these LNG
ships that I was talking about with the shelf project.
Those serve to push the August figure up somewhat but both
Paul Keating and I have said that for the first six months
of this financial year we expect these figures to be
somewhat high. But the basic problem has been of course
that we've had a level of demand running higher into this
year than we could've expected before. Our policies
therefore are directed, our wages policy, our monetary
policy, our fiscal policy, are directed towards reducing
that level of demand. But could I also make this point
which is related to the answer I just gave a moment ago
John. If you look at the composition of those import
figures you'll see that the biggest increases are in the
categories of other transport equipment and machinery, most
of which of course is composed of investment goods. This
investment growth will certainly, as I say, add to
Australia's productive capacity. So bringing it all
together the figures were too high, there were some special
factors in it, but if you look at the composition of the
imports that are coming in they are building up a stronger,
more diversified, economically competitive export oriented
industry in this country. Our macroeconomic policies will
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gradually bring down the overall level of demand in this
country so that we will, we believe, get a sustainable
position on our external account. But the important thing
for your audience to know is that what we are about in this
country is getting investment, including investment from
overseas, to be part of this restructuring of the Australian
economy which is going to produce, as I say, a more
competitive and more diversified Australian economy.
MCINTOSH: In the last few days the $ A has moved up towards
cents, partly on the back of very high interest rates in
Australia. Do you believe this to be a short term move? If
not does it have any bearing on the outlook for interest
rates?
PM: You are obviously into an area where I must be very
careful in what I say because any comments by a Prime
Minister or a Treasurer can of themselves almost guarantee
spurts one way or the other. So I must be very very careful
in what I say but I don't want to avoid your question John.
As you know, the value of the Australian dollar is
determined by market forces. We floated the dollar and its
level is determined by market forces, market forces in
turn reflect many many factors. Reflect Australian interest
rates, reflect Australian commodity prices and also of
course in a residual sense the value of the Australian
dollar will reflect to some extent the sentiment about a
number of other overseas currencies. When you take all
those things into account it causes the $ A to fluctuate
within a broad trading range. I'm not going to comment or
speculate upon movements in those various factors which can
cause movement in the $ A within that range. Do note however
I think it's relevant to observe for your audience that
since early this year the dollar has fallen from about 89 US
cents to be about 78 cents at the present. That movement in
that period does reflect some advantage for the
competitiveness of our trading industries. On the question
of the interest rate outlook, well of course I have to be
particularly careful there. But the level of interest rates
is partly related of course to the stamps of official
monetary policy. I make clear again, as I have been
directly in previous answers, that monetary policy has been
tightened and it has been tightened deliberately by the
Government over the period as part of our general approach
to try and bring down activity to a level which is
consistent with our capacity to sustain a given level of
imports. So we have had tight monetary policy together with
tight fiscal and wages policy. I think your audience knows
and you certainly know John about the tightness of our
fiscal policy where we've now had another huge surplus, our
Budget surplus, and we have now the fourth successive
reduction in real Commonwealth outlays and a turnaround, as
you know, in the net public sector borrowing requirement
from a minus situation into plus. So our monetary policy
has been tight and that's been reflected in interest rates.
I just want to make these two points about our monetary
policy and interest rates. As an intelligent bloke and as a
politican, an intelligent politician, I'm not going to have
interest rates higher for one day longer than is necessary.
I mean I'm not a masochist. I'm not here to try and hand
Brownie points to my political opponents. That's not my
caper. What my caper is is to do the thing which is
economically responsible for this country John. At this
time it requires a continuation of tight monetary policy.
We're not going to further tighten it, I don't think that's
necessary. But we're not going to keep it tighter for one
day longer than necessary, but I'm not going to loosen it
one day sooner than is necessary. So there won't be any
upward pressure on interest rates coming from a tightening
of monetary policy. But, as I say, like the le vel of our
interest rates reflect a combination of a number of
factors. This Government, this Australian Labor Government,
has done what our conservative predecessors never had the
wit, the will, the wisdom, the guts, the courage or anything
to do. That is we have created a competitive situation.
We've floated our exchange rate and we've created a
situation now where we are a competitive market-oriented
economy which in the fiscal area has produced outcomes which
I know many in your audience would like to see done in the
United States. You'd like to see a pruning of government
expenditure in a rational way which would produce a budget
surplus. We've done all that and created great employment
increase in the process. Now out of all that what happens
to your level of your dollar, what happens to your interest
rates reflects, as I say, a number of market factors. I'm
not going to speculate beyond what I've said as to what will
happen there.
MCINTOSH: ( inaudible)
PM: There is no doubt, speaking both through my mind and
may I say perhaps more importantly in this case my pocket,
the Hawkes will win. There is a lovely correlation. The
Hawkes have been in the Grand Final each year for the life
of my Government and I think that's a happy correlation. So
I'm sticking with them. They will win.
MCINTOSH: As in the US, Australia currently has a very
tight labor market and historically low unemployment, yet
wages growth seems to be quite moderate by Australian
standards. Can we be assured ot the continuing cooperation
of the ACTU with the Government to keep wage growth down and
in particular will there be another wage-tax trade-off in
1990?
PM: Yes I'd just like to say these things. As you know we
have established this is not just my statement but the
statement of your successive presidents Reagan and Bush.
The relationship between our two countries has never been
warmer, more productive than it is now. Sure we have our
differences but we regard the relationship with the United
States as remarkably important. We welcome your investment
here, we offer you a country of well-disposed people to the
United States. We share the fundamental principles of
commitment to liberty and equality of opportunity. We have
a highly trained workforce here. We're well-placed
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strategically to the fastest-growing economic region in the
world. We want to work together with you to add to our
mutual economic benefit and to the benefit of the region and
to the world as a whole.
MCINTOSH: ( inaudible)
PM: Thank you John, thank you.
ends
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