Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Disclaimer: The Parliamentary Library does not warrant or accept liability for the accuracy or usefulness of the transcripts. These are copied directly from the broadcaster's website.
Rudd jets in for G20 -

View in ParlViewView other Segments

Rudd jets in for G20

The World Today - Friday, 14 November , 2008 12:14:00

ELEANOR HALL: The Prime Minister has just arrived in Washington for the G20 meeting of world
leaders on the global economic crisis that'll be hosted by the US president.

George W. Bush was not pulling any punches about the scale of the problem today, but he did make it
clear that the US is still wary of a solution that involves more government regulation.

GEORGE W. BUSH: We are faced with the prospect of a global meltdown and so we have responded with
bold measures. It is true this crisis includes failures by lenders and borrowers and by financial
firms and by governments and independent regulators but the crisis was not a failure of the free
market system.

History has shown that the greater threat to economic prosperity is not too little government
involvement in the market - it is too much government involvement in the market.

ELEANOR HALL: That is the US president speaking about the G20 meeting on the economic crisis that
he will be hosting in Washington and with Germany officially entering recession overnight and more
dire warnings from international bodies about the breadth and depth of the downturn, it is likely
to be a tense meeting.

A short time ago, I spoke to Chicago-based global economist, David Hale, who provides economic
advice to government and corporate clients around the world, including the Commonwealth Bank here
in Australia.

David Hale, George W. Bush is hosting this G20 summit on the weekend and he is cautioning that more
government regulation is not the solution to the global crisis. What do you expect this meeting of
world leaders to achieve?

DAVID HALE: Well I think it will be a far reaching discussion of many issues without very many firm
conclusions. There is a broad consensus on a few issues. There is a broad consensus that banks
probably should have more capital and less leverage in the future.

There is also a great concern about the quality of the credit rating agencies, their ability to
provide accurate information.

There will also be a discussion about macroeconomic policy. What can countries do to fight the
recession now engulfing the United States, Western Europe and Japan and we've had from several G20
countries some important developments in the last couple of weeks.

Korea and Malaysia have announced tax cuts programs. China, a few days ago, announced a huge
$600-billion infrastructure spending program worth 14 per cent of GDP over two years and I think
we'll see more signs of the G20 countries, the non-industrial countries, moving in this direction.

ELEANOR HALL: Overnight of course, Germany officially went into recession. Is there anything at
this stage that world leaders can do to stave off a long and deep recession across the developed

DAVID HALE: I think we are now locked in a recession because of both the impact of high inflation
on consumer spending earlier this year. High oil prices, high food prices and now since August and
September, a very, very severe credit crunch and unfortunately we cannot reverse this credit crunch
quickly and easily through government action.

So America, Europe and Japan are locked into recession for at least six or nine months.

ELEANOR HALL: The IMF and the OECD are predicting the recession conditions will be across all
developed economies at once for the first time since World War Two. How deep do you think this
recession will be and will it really be as short as six to nine months?

DAVID HALE: Well, America has had recessions in the modern period that have ranged from 0.5 per
cent of GDP which is what we had seven years ago, up to three percent of GDP, what we had back in
the early 1980s when Paul Volcker raised interest rates to 20 per cent.

My guess is right now the US economy could have a contraction of two per cent of GDP but in the
near term, all the risks are on the down side.

We are, right now, having a free fall in consumer spending. We still have weakness in the housing
market. The fact is, in this kind of environment, where we have a high level of distrust, a lack of
confidence, rapidly increasing credit spreads, monetary policies not as effective as it is in
normal times and that's why this situation has the danger of producing a very pronounced and very
severe downturn.

ELEANOR HALL: Well, it was the Second World War which ended the Great Depression. Will it take
something as dramatic this time?

DAVID HALE: No, because it doesn't look like a Great Depression. American unemployment will
probably peak next year at eight and a half per cent. In 1933 American unemployment was 25 per cent
and if it were to go over 10 per cent or 12 per cent, I can assure you there would be very dramatic
actions by governments to try and hold unemployment in check.

You would see more and more tax cuts. More and more public spending. Infrastructure - things like

Governments would simply not tolerate unemployment going back to where it was in the 1930s. That
was a different time in human history. The government chaired GDP in those days with two or three
per cent. Now most industrial countries it is 30 per cent but we are not going to have a repeat of
what happened 75 and 80 years ago.

ELEANOR HALL: You are talking about a lot of stimulus packages being put through by governments. In
the United States there is a call for a $1-trillion stimulus package. That sounds like a huge
number. Do you support a package of that size?

DAVID HALE: Well, I think that is an unwieldy number for the American economy because that would be
something approaching seven or eight per cent of GDP. Historically our stimulus packages might be
one or two per cent of GDP.

The $200-billion number Mr Obama is talking about would be about one and a half per cent of GDP.

We also have the $700-billion Paulson program to try and revive the banking system and because of
the decline in government tax receipts, there will be a core federal deficit next year, if nothing
else happens, of $600-billion.

So when you add up the core deficit, the Obama stimulus, the Paulson rescue plan, you are already
at $1.5-trillion.

ELEANOR HALL: Is this sustainable?

DAVID HALE: Well it is sustainable in the short term because when you have no private credit
demands, the banks have nowhere else to go so they are basically are willing to buy government

We also have countries in Asia that want to restrain their exchange rates against the American
dollar like China so I think the bottom line is, we will find some way to finance it.

ELEANOR HALL: Now what do you make of yesterday's statement by the US Treasury Secretary that the
US financial bailout plan will no longer involve buying up the toxic debt but will instead see
government taking ownership stakes in the banks. That is an admission that the initial approach was
wrong, isn't it?

DAVID HALE: Buying the bad assets would have helped as well because it would have given banks a
much better market price for these troubled assets but injecting capital will help as well.

ELEANOR HALL: Now you mentioned that China had a big stimulus package this week. What about China
and India - these sorts of economies? Can they help lift the rest of the world out of this economic
decline and did the size of China's stimulus package surprise you?

DAVID HALE: I think the size of China's stimulus package surprised everybody. During the East Asian
financial crisis, China also had infrastructure stimulus package to hope cope with the downturn of
the region but it was one and half per cent of GDP.

This number on Sunday was 14 per cent of GDP. It was truly very, very dramatic but again it
underlines the fact that China has a very strong commitment in its government to keeping its growth
rate at least eight per cent.

China and India can certainly play a role in helping to offset the weakness in America and Europe
but their economies are not large compared to the other economies.

China's GDP is a bit over $3-trillion. India is about $1-trillion. That is $4-trillion. The US
economy is $14-trillion. The European economy is $15-trillion. The Japanese economy is $4-trillion.

So when you add up India and China you are still talking about less than 15 per cent of those other
big industrial countries.

It will play a role. It will help. It will be a positive on the margin but it cannot fully offset
the weakness for what is happening in North America, Europe and Japan.

China playing a decisive dramatic global role is still probably 15 years in the future.

ELEANOR HALL: Now what is your prediction for the Australian economy? Will it avoid recession?

DAVID HALE: Australia has been hit here by a big decline in commodity prices, a deterioration in
the terms of trade which has further to go because we haven't yet had a big decline in your iron
ore and coal prices. That still lies ahead.

On the other hand, you don't have any of the financial excesses we have had here in America. Your
banking system is quite sound. So my guess is Australia will slow down but because your home
economy is relatively sound, you should be able to avoid a full scale recession.

ELEANOR HALL: And how bad will things get for developing nations?

DAVID HALE: Well, the answer is they will slow down because of weaker growth in world trade but
they entered this downturn with lots of momentum and because East Asia is sitting on $4.3-trillion
of foreign exchange reserves, East Asia has tremendous potential to stimulate domestic consumption
to compensate for export weakness.

So I think with this stimulus, what we will have in South-East Asia will be a growth rate going
from six and seven per cent down to maybe 3.5 per cent.

Asia's situation today is far, far better than it was ten years ago. It is not immune to what
happens in the old industrial countries but it certainly has today, far more potential for
autonomous action because of these huge foreign exchange reserves.

ELEANOR HALL: David Hale, thanks very much for speaking to us.

DAVID HALE: OK. Thank you.

ELEANOR HALL: That is Chicago-based global economist , David Hale.