Mr KERR (4:18 PM) —I rise to speak on the Appropriation Bill (No. 1) 2003-2004. There is an opportunity in the debate that emerges after the budget to canvass a wide range of issues, but the focus we ought to bear in mind is essentially what is necessary in order to ensure Australia maintains a strong economic position and a capacity to discharge its responsibilities to those least well off within the community in a world which is increasingly turbulent. I think the scale of the turbulence can be demonstrated by the fact that hundreds of millions of dollars flow through international foreign exchange markets every second of every day. Most of this flood of money is denominated in United States dollars and in Euros, but a surprising volume of Australian dollars is also traded.

To get some perspective, it is worth looking at some recent data. In February of this year the average daily turnover of the Australian dollar against foreign currencies was $A51.1 billion. That is more than $A35 million every minute of every night and day. This included purchases and sales of the Australian dollar and a wide range of derivatives, including esoteric transactions that most of us only think of when our eyes glaze over as we pass over the financial pages on the way to the sports results—forward, swap and options contracts written in the Australian dollar. This mainly speculative trading only occasionally had any connection with purchases or sales of goods or services.

For every Australian dollar used to buy or sell goods and services or to make fixed investments, there are $45 worth of speculative transactions—we could call them virtual transactions—involving currency trading in the Australian dollar. But these transactions are far from inconsequential. Profits and losses made by speculators hedging or gambling on the value of currencies, oil futures or pork bellies are real and they make or break companies and nations. The poet John Donne made the point that we are inextricably part of a common humanity, that no man is an island unto himself. But that is now true in a much more mundane sense. With the exception of a handful of countries like North Korea and Cuba, economic borders no longer coincide with national borders.

Fund managers and speculators who shift money around the globe in almost unimaginable volumes constitute an `electronic herd' whose superficial, conscienceless judgments can bankrupt a company, shatter an economy or devalue even the most strongly defended currency. Nations that seek to peg their currency to values above the market's judgment are easy prey for speculators to attack. Governments once prided themselves on setting and defending their exchange rates—no longer. George Soros showed that a single major speculator backed by private capital could marshal sufficient funds to break even the defences of the Bank of England.

Global trade in foreign exchange has overwhelmed the capacity of national governments to regulate or control their exchange rates. Taking a day at random, my birthday, 26 February of this year, we can see how vulnerable Australia's defences would be against an attack by currency speculators. On that day, foreign exchange dealings in Australian dollars amounted to just over $50 billion. Yet the Reserve Bank of Australia held gold and foreign currency worth a total of only $42.7 billion. The reserve held sufficient funds to cover barely three-quarters of a day's trading in the Australian dollar.

What lessons can we draw from this? Some are sobering. The most profound but most troubling is that sound economic management alone is no longer a guarantee that a country will not suffer a flight of capital. The market is prone to both irrational exuberance and panic, and it is getting more rather than less volatile. In the late 1990s we saw a stampede of liquid capital out of the South-East Asian economies. Countries that only weeks before had been described as economic miracles were trashed and then described as economic basket cases. Across our region, millions suffered the loss of their jobs or at least falling incomes. Of course, more recently we have seen the high-tech boom and bust. It was not a regionally focused problem but nonetheless a good example of how those making investment decisions can lose connection with reality.

How does this fit with Australia's place in the world? First, let me suggest what it does not mean. It does not mean that our economic settings are immaterial. The fact that some good businesses are always unjustly destroyed in a crash and some shockingly badly run businesses thrive during a boom does not mean there is no difference between good and bad management. Good management will give businesses a better chance of survival. The same is true of national governments. Because accrual randomness, for good and ill, that is visited on the innocent and the guilty alike by the occasional and unpredictable stampedes of what Thomas Friedman has called the electronic herd—that is, speculative financial traders—does not justify bad management, we have to reflect on what we should do as Australians to put our community in the best shape to thrive in a world now largely without economic borders.

My guess is that the only sane strategy is to emphasise both risk diversification and greater self-reliance. Let us look at risk diversification first. My support for a risk diversification strategy explains why I am sceptical about harnessing Australia's future to a bilateral free trade deal with the United States or any similar deal that privileges trade with one set of partners over others. If those partners fail, we fail. Even the world's most powerful economy could be trashed by a collapse in confidence in the United States dollar. There is always somewhere else where speculators can park their money. However, my concern arises not only because putting too many of our eggs in one basket is fundamentally unsound but also because making special trade deals between Australia and other trading blocs is inherently flawed. For instance, Michael Costello, former Secretary to the Department of Foreign Affairs and Trade and later a key executive of the Stock Exchange in Sydney, has argued that a free trade agreement between Australia and the United States would undermine the global trading system and rebound against Australia because China and Japan would retaliate by giving preference to agricultural exports from ASEAN over those from Australia. That of course involves the prediction of the conduct of other nations, but there is also an econometric and analytical argument to the same effect. The Productivity Commission recently issued a staff report. It too concluded that bilateral and regional trade agreements divert trade—in other words, we lose more than we gain.

The second point I would raise by way of a response to the issues of the global market is the need for greater self-reliance. This is more contentious, but by that I mean two things. First, we should take a serious look at what basic industries we should make sure are in place to weather a worst-case scenario—that is, the market turning against us—or the other worst-case scenario, which is a global recession. Given Australia's currently favoured position in economic terms, this may seem a bit like scaremongering, but it is just commonsense. It is like insurance. We kick ourselves if we fail to insure our home and it is always too late if the bushfires come. Just like farmers ought to prepare against drought, but sadly rarely do, we ought to use some modest share of the resources at our disposal during these good times to drought proof our economy.

The second aspect of this issue is that we need to think about what kind of social and physical infrastructure we would need to claw our way back from a bust. Let us examine industry first. Decades of Australian policy have been focused on persuading Australian business to be more outward looking. That strategy in large has paid good dividends and it should remain in place. But we are in danger of throwing the baby out with the bathwater. There is a critical core of industry infrastructure and production—primary, secondary and tertiary—without which Australians would suffer greatly in the case of a major economic withdrawal of overseas capital or a collapse in the purchasing value of the Australian dollar. It is not picking winners to focus on those aspects of our national industry strategy—an industry strategy where our government spends more than $10 billion in direct and indirect assistance each year to the private sector—to ensure, on a constantly reviewed basis, that there are no critical gaps. This would mean that Australia would always have a minimum capacity to produce locally at least all the very basic things we would need but not be able to import if we faced a foreign exchange or similar crisis. There is no framework at the moment to undertake such an examination, and the government has no interest in undertaking that analysis. Nonetheless, I believe it is an important issue which needs to be addressed.

The second strategy would be linked but subtly different. It would be to ensure we have in place the social and physical infrastructure that would allow us to claw our way out of any critical downturn—that is, not just to survive but to thrive afterwards. It is this infrastructure—public education, investment in science and research, technical and professional development, and retraining—that is most at risk under the current government. These would be the keys to our population having the resilience and skills to rebound from setbacks in a world which will always be highly competitive.

We should also not forget the social sphere. We need an adequate tax system, without opportunities for the rich to avoid their social responsibilities, where we accept as a fundamental proposition that those who are most wealthy are able to make a substantial contribution to the needs of the less well-off citizens so that we can fund decent support for the unemployed, universal public health and the like. In hard times, people will readily turn their anger against one another, and social cohesion will be essential if Australia ever faces real trouble.

At the moment, of course, there is an increasing gap between those who are able to make private provision for their welfare and those who are not, and there is a corrosion of the public sphere. The key elements that were put in place for the provision of social goods in education, in health, in training and in retraining have been corroded. It is true to say that we as Australians are sailing in fair breezes, but we are sailing on a sea where gales are not unknown. With luck, our weather will remain kindly, but there is certainly no wisdom in failing to equip our ship with storm sails.