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Primary industries and energy: the next step



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AN ADDRESS BY THE HON. SIMON CREAN M.P. MINISTER FOR PRIMARY INDUSTRIES AND ENERGY TO THE NATIONAL PRESS CLUB CANBERRA

14 AUGUST 1991

PRIMARY INDUSTRIES AND ENERGY: THE NEXT STEP

Introduction

A year ago this month I addressed the National Press Club for the first time. Then it was as Minister for Science and Technology. Today I speak to you as Minister for Primary Industries and Energy.

Initially, people found it surprising that a former trade union leader should move into areas such as science and technology and then primary industries.

But it was short lived and I have been gratified by the positive and cooperative interaction I have had with representatives from both constituencies.

I don’t find these appointments especially incongruous. There is, in my mind, no disjunction or inconsistency between what I did before I entered Parliament, and what I have been doing since.

My fundamental objectives remain now what they were then: the creation of a more competitive, productive economy, and of a more just and equitable society.

COMMONWEALTH PARLIAMENTARY LIBRARY MICAH

Both goals remain priorities in my present portfolio, together with ensuring industry development is sustainable environmentally as well as economically.

I bring to my new portfolio a wide range of industry contacts, an understanding of industrial relations, a strong commitment and practical approach to industry development and a conviction that science and technology have a crucial role to play in economic development and environmental protection.

It's a portfolio which places me at the very heart of this country’s challenges and problems.

We depend on our agricultural and mineral products for 70 per cent of our export earnings. It is both our strength and our weakness. We must fight to preserve and expand our traditional markets against restricted access and the incursion of subsidised products from Europe and the U.S. But we must also diversify our export economy beyond this dependence on commodities, and recognise that these commodities also provide us with a springboard into new higher-value markets, including advanced manufacturing and service industries.

This economic diversification is not an option we can toy with. It is an absolute imperative. Unless we develop beyond being a producer of base commodities, we are destined, as a nation, to fight for the crumbs and scraps of global economic wealth. Unless rectified, our condition of economic vulnerability and dependency will severely curtail our national sovereignty, and our ability to meet social needs and environmental objectives.

Our most serious and most contentious environmental issues - arising from the way we use our natural resources, including our soil, water and forests - impact upon my portfolio. Other, global environmental problems, such as the greenhouse effect and ozone depletion, could have enormous consequences for our agricultural, resource and energy industries.

Let me, then, turn to each of the issues I have just mentioned: to industrial development, sustainable development, to social justice and to trade.

Econom ic Development

Economically, Australia is a paradox.

Judged by our living standards, we are a highly developed nation. But by our trade profile, we are in the under-developed league.

On the one hand, we have some of the most efficient and dynamic primary industries. On the other hand, Australia has consistently missed the the boat in developing a strong, competitive manufacturing base - even one that draws upon our comparative advantage in primary production.

Australia has therefore largely lost the opportunities presented by the very strong growth in world trade in manufactures and services over the past decade or two.

The Hawke Government has made formidable progress in helping Australian industries develop more competitively as evidenced by the contribution to growth from net exports. Our programs of economic reforms have aimed to remove the obstacles to our efficient industries and to develop a climate for the emergence of more outward looking industries in manufacturing and services.

However, the reality remains that we continue to lack effective linkages - linkages between industry and science, between our agricultural and mining industries and other businesses: between those who produce or extract the raw material and those who can competitively add value through the development and manufacture of new products.

Against this background, I want to focus on the three broad components of economic and industry policy: macro, micro and sectoral.

Macro Economic Policy

The first component is macro economic policy.

I acknowledge that for many in our primary and resource industries, the state of the economy has brought with it a number of difficulties, particularly in the form of high interest rates and the high and at times uncertain Australian dollar.

But these consequences reflect the economic stmcture we must change.

The combination of falling unit labour costs through the Accord, the floating of the Australian dollar and our fiscal policy has produced domestic surpluses and the significant fall in our inflation rate base. This

policy mix put in place by the Hawke Government has made us a much more competitive nation.

As the economy recovers, as we continue to correct our balance of payments and reduce our overseas debt, we will, because of these policy settings, become even more competitive.

But while becoming more competitive is crucial it of itself is not enough - we must also become more productive.

Unless we increase our productive capacity, we will continue to run the risk of exposing our economy to the cycle of boom and bust. We will run, once again, the risk of demand outstripping supply, of consequent

imports outstripping exports and of increased reliance on foreign borrowings.

And we will run, once again, the risk of high inflation, a high dollar and a return to tight monetary policy.

This government has shown itself to be prepared to champion the cause of reducing costs. Only this government, through the Accord, has consistently delivered a wages policy to ensure the non-inflationary wages growth needed if the benefits of enhanced productivity and international competitiveness are to become entrenched.

I believe, given the fundamental constraints on the economy, that we have development the correct macro economic framework.

M icro-Econom ic Policies

The second component is micro-economic policy.

My portfolio has a major stake in the micro-economic reform process.

In its 1989-90 Annual Report, the Industry Commission calculated that, if implemented, the reforms analysed in areas such as transport, posts and telecommunications and electricity could generate gains to the entire

economy of around $22 billion in output and over 50,000 additional jobs over the longer term.

The measures announced in the March Economic Statement should also have significant benefits to the primary industries and the resource sector. The across the board tariff cuts are expected to increase output in the agriculture sector by around 1 1/2 per cent - that means $2,800-

$3,600 per farm. In the mining sector output could increase by around 5 per cent. The new sales tax exemption, coupled with existing exemptions, virtually remove all taxes from inputs used exclusively and principally in primary industry.

Anti-dumping procedures have also been strengthened.

In addition, reform in shipping and transport, the waterfront and the labour market have been vitally important to my portfolio industries.

I was closely involved three years ago in the negotiations on the shipping reforms. These reforms have met their targets, resulting in a significant reduction in shipping costs, and primary producers have acknowledged this.

I know what is needed in many of the areas of micro reform; and that’s sensible involvement of the parties affected, not just economic theory or threats.

There is still much on the agenda for micro reform in areas of electricity generation and distribution, mining and minerals processing, rail reform, the dairy and sugar industries.

I will be working to ensure the findings of enquiries in these areas are used sensibly as catalysts for appropriate change.

I will also be pursuing the reform agenda for our statutory marketing authorities in increasing their commercial orientation and accountability, but also looking at what role they can play in developing the agri-business side of our primary production.

Much of the focus of reform has been on the adequacy of our labour market to deal with the 1990s. The wages policy we have developed not only produces the macro outcomes referred to earlier but by linking wage outcomes to productivity, sensibly used, will drive workplace reform.

But I believe we also lack sufficient managerial and entrepreneurial skills to provide the vision and the leadership vital to become industrially more developed and competitive.

With some notable exceptions, our business management has let this country down. It has been management deficiencies, as much as labour market rigidities, that have held us back.

Structural Adjustment and regional development

The current rural down-tum has heavily underscored the necessity for structural changes in the rural industries. My department estimates that 20 per cent of all commercial farms - about 22,200 farms - will come under severe financial pressure in 1991/92. While the majority have

prospects of returning to profitability in the longer term, others are not expected to survive.

The Government has acted to help both groups, and is determined to keep as many farmers on the land as possible, provided they are potentially profitable. We have increased funding for the Rural Adjustment Scheme, or RAS, by $100 million to $160 million this financial year. This gives the Commonwealth the capacity to support up to $1.4 billion of rural debt under the scheme.

Unlike the earlier rural adjustment programs, which did tend to be used as welfare mechanisms, the present RAS is clearly directed towards long-term structural adjustment and micro-economic reform. It is intended to help farmers improve or hang on to their farms if they have prospects of returning to profitability, or to help them leave farming if they have not.

One of my first tasks in taking over the portfolio was to break the impasse that had arisen between State and Federal Governments over the allocation of funds between these different purposes, so that the scheme could be put into full operation. This has now been done.

I have also brought forward to October a review of the adequacy of funding in anticipation of heavy demand for RAS assistance.

It makes little sense encouraging farmers off the land, if there is nothing else for them to do. So I am looking at ways to create new

opportunities for rural people, including encouraging the development of new rural enterprises to add value to rural products.

Such measures would be aimed at helping farmers and others in rural areas set up new businesses; to help already established enterprises to expand and develop, especially into processing and into export markets; and encourage key regions to diversify their economies.

If adopted such measures will complement and build on existing State and Federal programs to promote regional economic development, and are strongly supported by the States. Studies of some of these programs indicate a very good return on the investment.

Sectoral Policies

The third component of the policy approach is sectorally based.

Sectoral policy is not an alternative to macro- and micro-economic strategies, as some commentators imply. It is complementary to them but given our past manufacturing response, it is an essential complement.

I argued this successfully last January and a mechanism for a sectoral approach to industry policy was included in the March Economic Statement.

Those who reject such an approach should reflect on the fact that those sectors of manufacturing that performed best during the latter half of the 1980s were those for which a sectoral industry policy had been adopted, sectors such as aerospace, pharmaceuticals, information

technology and steel.

The approach does not start from the basis of providing government support, but from an analysis of the opportunities and what has to be done to realise them.

It will identify the alleged barriers to necessary investment and what needs to be done, if anything, to remove them, including impediments where the playing field is not level. It's an approach that is industry driven, but Government facilitated. It doesn't imply financial support but sensible leverage and linkages to ensure competitive productive expansion.

It is not an exercise of picking winners - they pick themselves - but of more fully realising the potential.

One of the best ways of more fully realising the potential of the farming and mining sectors is to extend the activities of these sectors into areas such as processing, refining, manufacturing, and other value adding activities.

As I said in my introduction, this is not an option for us. It is an imperative, a point graphically made by the changes in composition of world exports and in commodity prices over the past two decades. (See attached Graphs).

The total value of agricultural and mineral products has changed little, while that of manufactured goods continues to rise steeply. Although we don't have the data for the service industries, their trend would be similar. Commodity prices show a long-term decline.

I believe this approach, properly executed, offers us a chance to increase substantially our net export growth to position us more as price setters, not price takers, and in the longer run, lessen the impact of the 'booms and busts' in the commodity industries.

It also offers us an opportunity for better regional development with a much more diverse economic base and it forges stronger links between Australia's primary and resource industries and our manufacturing industries.

This is not to suggest that we should stop doing what we do best, if that is exporting primary commodities. But we should also be promoting every opportunity for maximising our competitiveness in those areas where the potential gains are greatest.

There are many opportunities to increase the value of our exports. As a first step, I have also asked my Department to review all of the potential areas in the portfolio industries for greater value adding.

Take the wool industry for example. Australia has great potential for raising the value added component of our wool exports.

We produce around 70 per cent of the world's supply of apparel wool. But only a quarter of that wool undergoes any early stage processing before being exported, and only around 5 per cent of our wool is processed to later stages - and most of that is for domestic consumption.

Australia lags well behind our competitor suppliers in the proportion of the wool clip which we process. To put it bluntly, we should be able to do better than that.

I have asked my Department to assess and develop a proposal put to me for the early stage processing of Australia's wool clip. The first step will be a meeting of relevant Federal department and agencies and nationalindustry bodies, We will work closely with the Australian Wool

Corporation, which is exploring market opportunities for value-added products.

If we were to process the whole clip, it would mean constructing about 80 additional processing plants, each representing an investment of about $13 million and each providing employment for about 80 workers.

The Government, building on the work of the Prime Minster’s Science Council, is developing a sectoral strategy for the food processing industry. All interests, particularly industry, are represented on

working groups looking at questions such as priority products and markets, technology and innovation, cost impediments and work place reform. A report should be ready before the end of the year for Cabinet's Structural Adjustment Committee.

The catalyst for this approach was a report by industry to the Science Council, a report resulting from a group of key industry players which the Government brought together. The report said that Australia could

quadruple the value of processed food exports to $9 billion a year by the year 2000, because of the rapidly growing markets for processed foods in Asia. That is 300,000 new jobs.

But it was impressed upon us that this window of opportunity will not be open for long. Unless we move quickly to ensure that the necessary investment and innovation takes place in the Australian industry, we will see the investment, and the markets, go to our competitors. We could

even see a major part of our own domestic markets lost to imports.

In regard to mineral processing, I believe Australia should process much more of its non-fuel minerals and develop opportunities to process increasing amounts of minerals from the region.

Australia has the potential to become the metal warehouse for the rapidly-growing Asia-Pacific area, and we could dominate world production of metals showing the fastest growth, such as aluminium, magnesium and new alloys and other metals, and become recognised as a world leader in mining and mineral processing technology.

I am pleased to say some companies are already showing the way with vision and determination. Minproc Holdings, for example, is actively looking at further processing opportunities for their resources of mineral sands, while Queensland Metals Corporation has taken a longer- term perspective on developing its magnesite deposits.

Enhancing and sustaining productive capacity

Another key issue I will be addressing in the coming months is the development of the Government's ecologically sustainable development strategy.

The ESD process has for the first time brought together all the different interest groups to develop workable strategies and mechanisms for reaching decision about resource use. In doing this, it is hoped we can reduce the often intense and bitter public conflict that has raged over these issues in the past.

As you know, the draft reports of the nine ESD working groups were released last week.

Six of the nine reports relate directly to industries within my portfolio: namely, agriculture, fishing, forestry, energy use, energy production and mining. The others are also relevant. Tourism, with its

implications for regional resource management, transport with recommendations on energy and manufacturing in relation to value added.

Quite apart from this, I developed a keen interest in ESD through my previous portfolio responsibilities. I believe that research and innovation are a key to a better understanding and integration of economic and environmental objectives.

There is a considerable level of agreement to date, but key issues remain to be resolved, together with due consideration being given to the public consultation.

The Working Groups are to finalise their reports by the end of October. They will provide the basis for the development of policies for ESD.

Central to the critical issue of improving land management is the need to reduce duplication and improve co-ordination, especially with regard to adminstrative and institutional arrangements at both State and Commonwealth levels.

We will need to adopt more integrated approaches that take into account whole systems rather than just individual elements in isolation. For example, in agriculture, we need to encourage whole farm planning integrated with regional planning.

To this end, I have already raised the matter at a meeting of the Australian Agricultural Council and the Soil Conservation Council. Because this integrated approach straddles activities within the Environment portfolio, I have had preliminary discussions with my colleague Ros Kelly. I have also spoken with the Australian Conservation Foundation and the National Farmers' Federation, who support a more integrated approach.

It's my view that significant scope exists to improve natural resource management efforts at the Commonwealth level and I hope to release in December this year a Commonwealth decade of Landcare Plan that effectively contributes to an integrated solution to land management problems.

Social Justice

Let me turn now to social justice and mral communities.

This is an issue I have become acutely aware of through the mail I receive and as I move about the country.

It is not an issue separate from all I have discussed. The surest and most effective way to provide social justice is to get in place the framework and the policies for sustainable economic growth.

I have come to the portfolio at a time when the Australian rural economy is in a period of sharp decline, caused primarily by falls in the prices of several important commodities. Substantial declines in wool, wheat, sugar and dairy prices occurred in the last financial year and there is little prospect of a quick recovery in most of these markets. As a result, a sharp drop in farm income occurred and the decline is expected to continue into this year.

Farms with high levels of debt and correspondingly high cost structure are particularly exposed to commodity price falls, and an extended downturn in prices will place them under severe financial pressure. Many have no prospect of realising or borrowing against their assets.

According to departmental estimates, almost half of farm families had taxable incomes, including off-farm incomes, of less than $10,000 in 1990/91. This will worsen: the average farm cash operating surplus for all broadacre farms is expected to fall by a third on top of the 54 per cent drop last year. As a result, about 40 per cent of broadacre farmers will have negative farm incomes in this financial year.

A significant part of rural Australia is hurting very much; this is confirmed by yesterday's ABS figures on the fall in the value of mral commodities.

These immediate pressures in mral Australia compound those already faced as a result of longer-term industry restmcturing, and present me with an immediate challenge.

The Government has to ensure that, while we continue to strive to enhance competitive industries, those who may be temporarily disadvantaged by adverse circumstances or restructuring are supported by appropriate institutional arrangements.

I am seeking to address this crisis both by adjusting existing programs as well as arguing for new initiatives.

This involves analysing an array of Government services, ranging from financial counselling through the welfare structures of the Social Security system to education and training support and questioning their adequacy in meeting the crisis.

Earlier, I referred to the structural adjustment aspects of the Rural Adjustment Scheme. That Scheme also has a role to play in delivering social justice to those in the rural community.

In June, the Commonwealth and States agreed to my proposition to give farmers on unprofitable farms who apply for household support under RAS, a six month breathing space before having to decide whether to leave the farm. This was done in order to provide urgently needed income support, while examining options within the Social Security system.

Many farmers, with very low or negative incomes have substantial property assets that exclude them from the types of assistance available under the Social Security system to people in other sectors of the economy.

I hope we can soon act to improve this situation with respect to family assistance.

Also, I have asked rural counsellors for information on the extent to which current eligibility criteria for Government welfare support exclude farmers, especially from unemployment benefits and pensions.

I have already discussed this issue with my colleague, Senator Richardson, and will pursue it vigorously.

Data on the extent of the problems and needs is an essential tool for planning. The annual farm surveys conducted by the Australian Bureau of Agricultural and Resource Economics provide timely and comprehensive statistics on the economics and productive capacity of farms.

In collaboration with the NFF, the Bureau will expand these surveys to collect data about all people living on the farm from each farm surveyed. This is to enable better analysis of issues relating to rural adjustment and family social and economic well-being.

Trade

The last issue I want to refer to today is the trade framework.

I have stressed the need for greater value adding to our primary production. Whether we export the basic commodities or the value- added product, if we are to succeed we are going to need greater

discipline and transparency on world markets.

Reduced subsidies and improved access to markets will be crucial. These simple facts explain the very high priority we have been giving to the success of the Uruguay Round.

Our farmers and our miners have been doing everything right. They are efficient, competitive, environmentally clean and produce quality products. They are heavily exposed to international markets and the challenge we face in the Uruguay Round is to achieve an outcome that will permit them to compete fairly on the basis of their comparative advantage.

The message that the Caims Group has been propagating for some time should by now be perfectly clear to our Uruguay Round negotiating partners. There can be no outcome to the Round unless there is a satisfactory outcome from the agricultural negotiations. Some of our partners need to think carefully about this, particularly if they expect benefits in some of the other important Round areas.

There have been some recent encouraging signs. Good progress has been made in resolving technical issues and in narrowing negotiating options; the US has generally stood firm with the Caims Group in its

resolve to achieve genuine reform of agricultural trade; European Community (EC) member states are considering proposals for reforming the Common Agricultural Policy and the G7 Heads of Government have agreed at the July Summit in London to personally intervene in the Round, if necessary, to break deadlocks. The importance of the Round succeeding can hardly be put into starker terms than when seen against the economic and political cohesion of the major industrial economies.

However, there are formidable challenges to overcome. The recent escalation of the US's use of export subsidies under the Export Enhancement Program again highlights the dangers inherent in the

current situation and the importance of achieving a successful outcome to the Uruguay Round. It is countries like Australia that get caught in the crossfire in subsidy wars such as that between the US and the EC.

We are in close contact with the Americans on the subsidy question. Australia officials will be leaving no doubt in the minds of US officials engaged in bilateral agricultural trade talks about our concerns. Those that are due to start in Washington in a few hours' time. These talks will focus on the recent US actions, against the background of President Bush's assurance concerning Australia's traditional markets.

There is little doubt that the EC's CAP is the root cause of the problem. Export subsidies, in fact, all aspects of the CAP, have had a devastating impact on Australian agriculture. Accordingly, at the height of the anger against the US last week, I called the heads of the EC missions together to highlight their contribution to the problem.

In September, Australia will hold talks with the EC at officials level. We will be pressing the Europeans to find ways to scale down the trade subsidy war.

I am prepared to follow up these moves through personal contact. At the invitation of the Australian Government, the French Minister for Agriculture will be visiting Australia in early September. I will raise our concerns with him.

I will also be visiting Rome in November for the biennial conference of the UN Food and Agriculture Organisation. I will take that opportunity to talk personally to European Agriculture ministers about how serious this problem really is.

We have no option at this stage but to persist vigorously with both multilateral and bilateral approaches using every available opportunity. We certainly could not hope to win any subsidy war.

I believe that threats are also not helpful at this stage. If we should fail with our direct bilateral approaches and our multilateral approach in the Uruguay Round, then obviously we will have to consider alternatives. At this stage, however, nothing would be achieved by conceding the game.

Conclusions

During the past decade or more, I have been fortunate to be an active contributor to a number of major altitudinal and structural changes occuring in Australia.

I have recognised the challenges we face as a nation, and always sought outcomes in the national interest.

Through my work in the labour movement, I have been involved in crucial aspects of the process of macro- and micro-economic reform, (including the implementation of a national superannuation system).

As Minister for Science and Technology, I have worked to ensure our research is better linked to its application, that research findings are better commercialised and that the benefits of innovation are better captured.

The Primary Industries and Energy portfolio does not present a new or radically different challenge to me.

What it does present is an exciting opportunity to draw these threads together.

The outcomes I seek are:

* better returns to the nation and farmers from the primary sector, especially by reducing the costs to producers and forging stronger links with the manufacturing and service sectors.

* better management of our natural resources, including our soils, water and forests

* to provide, on the basis of real need, for the special circumstances of our rural producers during the present rural crisis, and

* finally, to win better access to overseas markets for both basic commodities and value-added goods and services.

What I have outlined to you today are the broad goals towards which I will be working with energy and commitment,

They are goals that are fundamentally important to Australia's future.

Thank you.

Trends in real commodity prices Index

1 7 0

1 5 0

1 3 0

9 0

7 0

5 0 h -

1970 1988 1982 1985 1976 1979 1973

Rural · .....Minerals — Total

Source: ABARE 1989

Composition of World Exports 1960 - 1989

$ U S B illio n

MANUFACTURES

MINERALS

AGRICULTURAL

1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1989

Sou rce: GATT

W orld com m odity prices In 1 9 9 0 -9 1 S D R term s

100

E abare

V i f80 \ J \70 yw Other minerals60 \ Energy % \ Rural50 ' 9In d e x♦t--------- -1985 # 1987 ’ -86 -881989 * 1991 ’ 1993 *199*5 -90 -92 -94 -96