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Wednesday, 1 April 1987
Page: 1851


Mr LANGMORE(11.41) —We have just heard a speech the like of which I had hoped never to hear in this Parliament. It was a speech of abuse and distortion and cheap criticism. It was quite unworthy of this place. The central facts about South Africa are that it is the country which has the most brutal forms of repression on earth, practised by a quite undemocratic government, where 80 per cent of people do not have the vote and have extremely low incomes and where malnutrition is common. All the honourable member for Parkes (Mr Cobb) could do was criticise the opposition to that regime. There was not one word about how to achieve democracy, justice or peace in South Africa. His speech was worthless.

I want to deal with the issues that are before the House, not irrelevant issues of foreign policy. I am concerned with the Appropriation Bills-Appropriation Bill (No. 3) 1986-87, Appropriation Bill (No. 4) 1986-87 and Appropriation (Parliamentary Departments) Bill (No. 2) 1986-87-and the opportunity they provide to speak about the state of the economy. Today I want to discuss the global economy, the impact of other countries on Australia and changes in policies which would improve the effectiveness of the global economic system and, therefore, Australia's economic position. The principal constraint on the Australian economy at present, as accepted by everyone, is the decline in our terms of trade. The collapse of commodity prices is a problem for all commodity exporting countries: Western countries like Australia, Canada and the United States, but also developing countries. After allowing for inflation, real commodity prices are at the level of the 1930s Depression, the lowest level for 50 years. Yet at the same time the prices of manufactured goods have gone on rising. For example, today exports of raw materials from developing countries will buy only half the volume of manufactured imports they did in 1974. That is, developing countries now have to export double the volume of commodities they did in 1974 to import the same volume of manufactured goods.

Australia has the same problem. Our terms of trade have gradually deteriorated since the early 1950s and, in the last couple of years, have fallen by over 13 per cent. To cope with the consequent deterioration in our current account we have borrowed heavily so that our net overseas debts now total $81 billion. Australia's debt servicing obligation in this financial year, 1986-87, will be about $10 billion or close to a quarter of the value of our exports. This alone substantially worsens our current account. Australia is now one of the major debtor countries. The effect of this economic deterioration in developing and other commodity exporting countries is to force us to reduce our imports of manufactured goods. Therefore, growth of exports of manufactured goods from all countries has been retarded.

There are many causes for the collapse of commodity prices, including growth in production of many agricultural products and minerals so that supply has increased, agricultural protection in Japan and western Europe, substitution of synthetics for natural products, changes in tastes and, perhaps most importantly, the much slower growth of Western countries than occurred in the 1950s and 1960s. Since 1983, industrialised mixed capitalist countries have been so preoccupied with reducing inflation that economic growth and employment growth have received less attention. Between 1960 and 1973 real income per person grew by 3.6 per cent in Western countries but declined to 1.9 per cent between 1973 and 1979 and even lower to 1.1 per cent between 1979 and 1984. With such slow growth, imports also grew very slowly. Throughout the Western economies the mutually reinforcing full employment strategies of the 1950s and 1960s gave way to beggar-my-neighbour deflation. One country's attempt to restrain demand reduced growth of its imports, causing falls in exports from other countries. Mutually reinforcing deflation became entrenched. Unco-ordinated attempts by single countries such as France, the United States and Australia, to break out of slow growth using expansionary budgetary policy caused massive trade deficits as our imports increased but exports stagnated or fell.

The prospects for the global economy for the next few years are little better than in the past six, and could be worse, for one factor which has kept the global economy expanding gradually in the 1980s is about to be withdrawn. For the years 1981-86, high United States Budget deficits, high United States interest rates and the consequent over-valued exchange rate have led to rapid growth of United States imports. United States exports, however, have not grown similarly, so that America had an enormous trade deficit of $A250 billion in 1986. As in Australia, America has to borrow to cover that deficit and it has now become the world's largest debtor nation with overseas debts totalling about $A600 billion.

The world is like a drug addict; it is addicted to the American market. There are whole industries in both industrialised and developing countries which sell almost entirely to the United States. For example, each year Brazil exports to the United States around $1 billion worth of shoes. Volvo and Saab sell half their production to the United States. The Japanese sell more vehicles to the United States than they sell at home. This will not continue. The large devaluation of the United States dollar since September 1985 will gradually reduce the American trade deficit at the cost of jobs everywhere else. If economic activity in the rest of the world does not pick up, a severe global recession is possible. Sir Jeremy Morse, head of Lloyds Bank, and not given to wild comment, is reported to have been asked recently whether the United States trade deficit could be closed without a massive global depression. He did not answer directly but mentioned words such as `disaster' and `apocalypse'.

The global economy is obviously extremely complex and has innumerable sources of resilience. A crisis may be avoided by muddling through, but there are many proposals for policy change and reform of the system which would improve prospects. Innumerable proposals have been made for reforming the international economic system, but several have political momentum and a few, while being resisted by major countries, are so important that they are worth supporting.

Reductions in real interest rates would be of great benefit everywhere, not least in Australia. The principal influence on global interest rates is the United States. This is quite obvious in Australia where interest rates move principally in conjunction with those in America, the perceived risk of devaluation and our own inflation rate. Australian officials and bankers who believe that the size of the Australian Budget deficit determines interest rates have not been observing the real world. Since Labor won government the annual Budget deficit has been steadily reduced while interest rates have gone on rising. The size of the Budget deficit is relevant in part because people believe it to be so, but it is of secondary importance in influencing interest rates behind United States rates, the risk of devaluation and our own inflation rate.

Interest rates in the United States have fallen substantially during the past five years. Long term rates are down from 12.9 per cent in 1982 to 7.3 per cent late last year. Inflation rates in the United States have also fallen from 6.1 per cent in 1982 to 2 per cent in 1986. So real interest rates remain high. These high real interest rates are the result of a pincer of contractionary monetary policy combined with expansionary budgetary policy. Borrowers in the United States and the rest of the world are suffering because of excessively generous tax cuts in the United States and indulgence of the armed forces. To simplify but, nevertheless, to get to the central point: If the United States tax cuts had not been so large or the massive increases in military expenditure had not occurred, real interest rates everywhere would now be lower.

The United States Administration has accepted that the Budget deficit must be reduced, but it continues to try to achieve this by cutting into desperately needed welfare, health, education and other community services rather than curtailing its lavish and wasteful military spree or stopping regressive tax cuts. In a very real sense, Australian home buyers are suffering because the rich in the United States are paying less tax and the military-industrial complex is allowed to buy every weapon it wants.

A new President in 1989 will have to change these priorities. Australians have a lot at stake in the United States presidential election. In the meantime, we must hope that the overall Budget deficit is not cut by too much and that monetary policy is relaxed. Literal application of the Gramm-Rudman Act, which sets tight targets for reduction in the Budget deficit, would depress the United States economic growth rate, retarding recovery everywhere. The United States would be encouraged in this strategy if Japan, West Germany and other balance of payments surplus countries stimulated demand. The United States, Australia and other deficit countries have been urging them to do so, and they tentatively agreed at the meeting of the G5; that is, the Group of Five-the United States, Japan, West Germany, France and Britain-in Paris on 22 February. That meeting was notable for agreement among the G5 to increase its policy co-ordination and also, unfortunately, for its failure to identify adequate policies for doing so.

If the massive United States trade deficit of about $A250 billion in 1986 is to be reduced without decimating other countries' exports, leading to another deep recession, imports by the trade surplus countries must increase. Both Japan and West Germany have particularly low inflation and economic growth rates, but their conservative governments are resisting more expansionary policies, fearing renewed inflation. They also argue that the appreciation of their currencies offers adequate opportunities to exporters in the rest of the world. Of course, they offer a major encouragement. Even if Japan and Germany eventually increase their growth rates, that stimulus to global demand would alone offset no more than 10 per cent of the United States trade deficit. Additional policies are obviously required.

There would be a significant acceleration of world growth if more Western governments made growth of employment their top priority goal, using demand stimulus as their instrument. This is no more than a naive hope, however, as long as conservative governments with neo-classical free market economic advisers predominate in the West. There is more realistic hope, though, of relief in the debt crisis, for all creditor countries, especially the United States, recognise the massive losses they would suffer from extensive default. Developing countries now have debts totalling $A1,500 billion and they have had to slash their imports to try to cope with this. There is growing recognition in the West that the cuts forced on developing countries' imports, while they try to pay interest on their debt, have reduced the creditors' exports. For example, United States Senator Bill Bradley estimates that 800,000 Americans lost their jobs because the Latin American market dried up and economic growth in the region stopped.

To avoid crises, the major lending country governments joined together in the Paris club to negotiate rescheduling-which means delaying interest and repayments-with borrowers in danger of defaulting. Up to 1982 there were only two or three reschedulings a year, but the number has increased rapidly recently. The number peaked in 1985 with 21 reschedulings, with a total value of $A27 billion-a small though useful trifle when compared with the total debt of $A1,500 billion.

In October 1985, United States Treasury Secretary Baker launched a strategy for renewing lending by commercial banks, for commercial bank lending to developing countries virtually stopped in 1982. Baker called for $A30 billion of new commercial bank lending over a three-year period to the 15 most indebted countries, supported by an additional $13 billion of lending by the World Bank and other international banks, on condition that debtor nations liberalised and privatised their economies.

The Baker plan at least and at last demonstrated recognition of the debt crisis by the Reagan Administration but involved no financial commitment by the United States Government. The only concrete result of the plan so far has been a $9 billion package of loans to Mexico, but since even this has been very difficult to obtain, despite intense Administration pressure, bankers believe it will be the only outcome of the Baker plan. Senator Bradley launched an alternative plan in June 1986 for debt forgiveness. Bradley argues that the cost to the United States of lost imports is so great that debtors should be allowed to write off 3 per cent a year of their debts for three years and have interest rates reduced by 3 per cent, allowing them to stimulate their growth rates. This would obviously involve losses for the commercial banks-but so as to prevent even greater losses from default.

Another more recent proposal has been made by Representative David Obey and Senator Paul Sarbanes, the past and present chairmen of the Congress Joint Economic Committee. They advocate the establishment of a new `special facility' at the International Monetary Fund to buy and then restructure Third World debts from the banks using funds borrowed from surplus countries. The facility would purchase loans at a discount from their face value, so reducing the total level of debt, replacing short with long term debt, and substantially reducing interest rates.

While the Bradley and Obey-Sarbanes proposals are still being considered, the stakes are rising. At the end of February Brazil announced suspension of interest payments on two-thirds of its $US108 billion debt. Commercial banks will lose $US500 million a month for as long as this suspension of payments continues. Peru has unilaterally set interest payments at a maximum of 10 per cent of its exports. Such policies will force a further US response.

The credit ratings of major United States banks such as Chase Manhattan and Manufacturers Hanover were downgraded last week because of their `continued vulnerability to lesser-developed countries' exposures'. Chase Manhattan, America's third largest bank, has $6.4 billion in loans to Argentina, Brazil, Mexico and Venezuela, and exposure which amounts to 108 per cent of its equity and loan-loss reserves. The motivation for national and international intervention to at least ease the dangers is therefore growing. One important step which is readily available is a new issue of special drawing rights, or SDRs, by the IMF. SDRs are international money created by the IMF, in much the same way as the Reserve Bank creates money in Australia. SDRs are issued to members of the IMF in proportion to their membership quota, but could be allocated instead to developing countries to increase their international financial reserves, allowing them to increase imports. This idea is supported by all developing and many Western countries but is opposed by the leading G5 countries and by Australia. The Australian Treasury argues that a new issue of SDRs is not needed because there is sufficient global liquidity, and that an increase in reserves would be inflationary. But this neglects the fact that the excess reserves are held by surplus countries, while deficit countries like Australia and the capital-importing developing countries are having to restrain imports so as to minimise increases in debt; and that inflation rates in most countries are now lower because of the collapse of commodity prices.

Australia has a record of being amongst the last countries to accept any new idea for international financial reform. Yet our current account deficit is now so large that we must recognise the importance of expanding global economic activity so that both the volume and price of our exports increase. A new issue of SDRs and the Bradley and Obey-Sarbanes proposals are realistic means of moving towards that goal. Australia should become an effective advocate of such global financial reforms and international reflation. An international conference to discuss the international monetary and financial system as the end point of a careful process of the preparation for reform would also be of value. These issues are more important for Australia than for most countries because our future is being in part determined by international forces. Yet international financial policy is too often left to the technocrats. This must stop. Anyone concerned about economic development in Australia or developing countries should include support for international monetary reform on their agenda.