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Transcript of Dr John Hewson MP address to chamber of manufacturers of NSW

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Leader of the Opposition

24 October 1991 REF! TRANSCR\0314\BQ



Phillip Holt, Brian Smith, my parliamentary colleagues, distinguished guests, ladies and gentlemen.

Might I begin by saying how very pleased I am to see one

particular guest here tonight, John Fahey. I am particularly pleased to see you looking so well, John, in the circumstances of today. I got the very distinct impression that the union movement was just going through the motions today.

Might I also congratulate the Chambers of Manufactures for a small thing they did in the course of this program but I think a very important thing. The focus on the Flag and the singing of the National Anthem was a very nice touch in a country where the schools system seems to be putting those sorts of symbols behind u s . And I think one of the most important things we need to do is to develop a sense of national purpose and in that sense

it does begin with recognition of our Flag and recognition of our Anthem.

I would also like to begin with an admission that I actually believe in manufacturing. I grew up as the son of somebody who worked in manufacturing. I was taught to aspire to a career in manufacturing. My father thinks I am a monumental failure because I went into paper shuffling as a banker and then I ended up in politics. But all the successful people that we knew when

I was a child were manufacturers. They lived in the best parts of Sydney, usually on the waterfront, in what is now my

electorate. I do believe in manufacturing, but I want to issue you a few challenges tonight about the future of manufacturing and how we might together put it in the place where it ought to

be in terms of the Australian economy of the 1990's.


Parliament House, Canberra, A.C.T. 2600 Phone 77 4022


I read a survey this morning of one of the major employer groups, or somebody who had done a survey of a range of business

organisations to see what they thought were the most important impediments to them in expanding their export capacity. I was absolutely amazed that the impediment that this survey ranked number one was too little government assistance. And things like price competitiveness ranked number five; the exchange rate ranked number six and the labour market ranked number seven. I

think, unfortunately, there has been an attitude developed in some parts of industry that the place to begin is with increased government assistance rather than that being a last resort. Now I know that there is a very active debate in Australia today about the role the government ought to play in the development of industries like manufacturing, the sort of assistance that

should be given, the concept of a level playing field or rational economics or whatever way you want to describe it has been the subject of an enormous amount of debate. So I thought against that background I might usefully tonight share with you our thinking about some of those issues and do that in the context of how we might develop a very effective and vibrant

manufacturing sector in Australia.

I want to focus on one particular issue, namely the need for reform and the pace at which reform ought to proceed in

Australia. Now I stand here tonight after our Treasurer has finally admitted that we are in the worst recession in 60 years. I don't say that in any political point scoring sense, I say it in the sense that thank God we are at last facing the reality of our current circumstances. We have very deep seated structural problems in Australia and we should not underestimate the magnitude of those problems and we should not underestimate just

how much we are going to have to do in this country in the course of this decade if we are not going to end up as some backwater of the Asia-Pacific region, the fastest growing region of the world, but a region in which we have been sadly left behind in recent years.

It is not just that we are in recession. It is that this

recession brings with it a lot of features we haven't seen since the 1930's, the pressure under which our banks are operating, for example, the depth of the unemployment situation and the

prospects that are there and the all the social and domestic financial pressures that spin off those sort of fundamental problems.

We did some work in the last couple of days looking at the

unemployment situation in Australia. As you know we now have 10% unemployment which is the near highest level, I think, since the 1930's. But the thing that disturbs me most is it isn't going to get better very quickly under the sort of policies that we have seen in the last decade or indeed in the last couple of

decades of this country.


We have used the Government's model to do some forecasts. We've used their numbers, we didn't make up our numbers in terms of growth or anything like that, we used their numbers and we used their model. And it shows that by the middle of this decade,

1995/96, unemployment would still be 9% and indeed that would only be achieved if there was a further significant cut in living standards, particularly of workers between now and then and it would be achieved with another blow out in the current account

deficit to 6% of GDP. Now that is a staggering prospect. We are sitting here now at 10% unemployment, we are approaching the possibility of 300,000 Australians being long term unemployed, that is unemployed for more than 12 months. And perhaps most disturbing to most of us, 1 in 3 of the young people in Australia will be unemployed through most of that period and many that

leave school this year will not find a job in the course of that 5 year period.

Now that deep seated structural problem I think summarises the magnitude of the decline that has taken place in this country and it should give a sense of urgency about what needs to be done in order to turn things around.

I think it is worth noting that if we want to get full employment by the end of this decade we have to create somewhere between 1.5 and 2 million new jobs and that is a massive challenge - starting from the base we have got and recognising that although we are

in a very deep recession there is nothing this time that is going to come along and pull us o ut.

Our post-War history has always been that the world economy picked up or there was some commodity boom, or some significant surge in the terms of trade or whatever that turned our country around. But in these current circumstances none of that is on

the horizon. Our major agricultural commodities are in desperate shape, the agricultural circumstances are as at least as bad as they have been since the 1930's and we now have a drought in some

parts of Australia and on top of that, of course, the world

economy, particularly our major trading partners, countries like Japan, is still slowing down.

So, my point is very simply that the problems are very large and the magnitude of the change that has got to be achieved to turn that around is very significant. Just to stabilise our debt, which is already sitting at about $165 billion, we have to shift

about 3.75% of our national production into exports and keep it there through this decade. The way of emphasising the magnitude of that point is, we have never done that in any year at any time in the post-war period. So the magnitude of the task is very

great and there should be a very genuine sense of urgency about what has got to be done.


In these circumstances I can understand that people get very disheartened about government, people get very cynical about government and about politicians. And I would say that you are particularly justified in taking that view on the track record of politicians and governments in the last couple of decades.

I can also understand that you get very tentative about so called economic theories and economic arguments when your business is going out backwards or being driven offshore. And I can

understand, therefore, the way a lot of spokespeople from your industry and other industries lash out in circumstances and try to put maximum pressure on government to provide assistance. My response to you is, let's recognise first that you have got a problem. I am not saying that I don't believe that government's don't have any role in terms of intervention, I believe that there are circumstances in which markets do fail, I believe there are justified circumstances in which governments have to

intervene and have to provide assistance, but I refuse to start with that proposition, I refuse to rank it number one in the list of priorities. I think it is better to begin with the fact that we have a problem and let's see whether we can solve the problem

and then let's see whether there is any need for assistance or particular or specialised government intervention.

So it is against that background that we as a party have decided to risk our political fortunes on what is really the most radical and dramatic set of policy changes that have ever been called for in this country, be they by a government or by an opposition.

Because I personally don't think we have got any time and I

personally don't think we can settle for anything less than a massive overhaul of some of the basic practices and attitudes of our economy and indeed of our whole social structure.

Now, a piece of our policy strategy, which has been the focus of these Chambers and of course of manufacturing more broadly, has been our decision to advocate zero tariff protection by the Year 2000. Now I don't do that in any sort of hairy chested belief

in economic theory per se, although I would put it to you that the theoretical justification is overwhelming. But I put it to you that it is an essential part, but only a part, of what has got to be done to drag our industrial base into a situation where

it can realistically hope to match best international practice.

I am not mad in advocating that either in the sense that I don't think that is all you do, because I have no doubt that if you

just go out there and cut tariffs you will certainly reduce industry and you will certainly quicken the pace at which it declines or indeed shifts offshore. But as a part of an overall reform agenda which goes to the very heart of the cost

disadvantages under which business operates today I have every confidence that we can achieve an objective of zero protection by the Year 2000, indeed I have every confidence that perhaps almost everybody in this room would come back to me in the Year

2000 and say that we do not need protection.


But it is important that it is done as part of a package. And

that is what is fundamentally different between ourselves and the Government in relation to protection. We use similar words about cutting protection but we genuinely believe that the other shoe has got to be put on the ground, that the reform agenda must be pursued and it must be pursued as a matter of urgency. That

reform agenda includes labour market reform, it includes cutting back significantly on the size and influence of government and the extent to which government gets involved in business

enterprises, and it includes genuine tax reform of the type we have been advocating in recent days.

It also requires a very broad based attack on major cost

disadvantages that exist in our infrastructure which are in effect taxes on all you - there is a waterfront tax because of the inefficiency of the waterfront; there is a power generation tax because of the inefficiency of the power generating

facilities in Australia; and there is an aviation tax and a land transport tax and a telecommunications tax or charge -all of them major disadvantages as far as your businesses are concerned.

Beyond that there are a number of other things we need to do as well. Some of them are going to gp to the heart of the nature

of government in this country and the process by which decisions are taken. For example, we need to commit formally to achieving price stability. The Government needs to be prepared to give the Reserve Bank the independence that is necessary for it to play

its part in achieving that objective, and 3 or 4% inflation is not good enough. We should aim for 0-2% inflation, the

internationally accepted definition of price stability, and we should to start to educate everybody, including ourselves, about how important it is to achieve that as part of the package.

Similarly, we have to take a very realistic attitude to the whole environment and development debate in Australia. I am one who believes that the pendulum debate has swung far too far in favour

of the green movement. But to change that, as I said, will go to the very heart of the way Government is run in this country. The present Government has staked its political fortunes on its capacity to do deals with some of the leaders of the green

movement in order to tie up second preferences votes in marginal seats in cities like Sydney and Melbourne. We need to be

prepared to go out an argue the case on its merits and put some of those organisations on notice that they will not be able to play that club like role in relation to our Government. Because it is ludicrous to my mind that projects that have satisfied or would satisfy the toughest environmental standards in the world,

for example the Wesley Vale Pulp Mill, get blocked simply

because of some deal that has been done between a Government and


the leadership of the green movement. And similarly when lesser projects, but still nevertheless important barometer projects like Coronation Hill get blocked, even when they pass the

environmental standards, then there is some trumped up argument about Aboriginal heritage considerations that stops that project going ahead, this country just simply cannot afford that sort of attitude in government and cannot allow the pendulum to stay where it has swung. It must be brought back towards the bottom where you get a much more effective balance between consideration

for the environment and consideration for development.

Similarly, we need to look long and hard at areas like our

immigration program, which has been a fundamentally important part I believe of the country we now have. Immigration, to my mind, has made an overwhelmingly important contribution to Australia. But in the current circumstances of the worst

recession in 60 years, and recognising the reality that a lot of the recent migrants, some 35% of them, end up on unemployment or other benefits within a year, we have a much reduced capacity to absorb migrants and they have less interest in coming here, they

find us a lot less attractive in a recession and so we need to be willing to accept a lower level of immigration intake.

Put all those factors together, you will ask me the basic

question - how on earth are we going to create 1.5 to 2 million jobs in the course of this decade?

I put it to you, that the opportunities are there in that sort of package, not my estimates, but the estimates of the Business Council or the estimates of the Industry Commission and others, putting those together there is at least a 13 to 15% boost in

annual production in Australia available from that sort of reform agenda. It is over $50 approaching $60 billion of national output, at the very least. In that sort of figuring the

opportunities are there across the board.

That figuring allows for a boost in manufacturing and an increase in the significance of manufacturing as much as it foreshadows an improvement in the role of our traditional industries like agriculture and mining and raising the prospect of value added

in both those areas as well. And, of course, it offers the

prospect of significant improvement in the performance of our service sector, whether it is tourism, or whether it is financial services or education services or health services or whatever - all with major export potential.

So the opportunities are there and that reform agenda will give you that sort of growth and will give you the dynamic

manufacturing sector you are looking for.


Now I think in these circumstances, groups like the Chambers have played a very important part in raising some of the issues that need to be addressed and in focussing attention and elevating the quality of the public debate on some of those issues.

I think it is very important that you continue to do that. I

think probably the thing that has distinguished the last 10 years is that the quality of the public policy debate is an awful lot better than it was, it is a lot more sophisticated and

governments are under quite a lot more pressure as a result of that debate being better informed.

But might I suggest that in the circumstances of what has got to be done, you would be better putting your efforts principally into pressuring the Government to eliminate some of the cost disadvantages that I referred to than in pushing for increased assistance of the selective type.

Now, don't get me wrong, it has to be a package. If it isn't a

package you will end up with what you have observed in recent years. John Button, for example, started out in the right

direction with things like the Car Plan and some of the other various plans in relation to particular industries to phase down protection in the context of other micro reforms, as the

Government describes them. But they didn't deliver the micro reform. And indeed they compounded that by not actually running a very effective macro economic policy as well. So while car industry protection, if I stay with that example, was being cut,

they were busily putting interest rates up and increasing the real cost of capital to industry, capital which is still

remarkably high given the depth of this recession.

Equally, they were seeing the exchange rate, as a result of that, pulled up well above an uncompetitive level, making it

increasingly tough for you to expand export activity. And of course, unbeknown to me why, they have stayed with a wages policy which is going to guarantee a massive increase in unemployment in the course of the next couple of years.

Indeed, if you go back to 1989 and use the Government's numbers through to the end of this financial year, to September of next year, there is a 7 to 8% increase in real wages being delivered under the current wages strategy of the Government. Now it is

economic lunacy to deliver a 7 to 8% increase in real wages in the midst of a recession where you are looking down the gun

barrel of sustained 9 to 10% unemployment anyway.

Equally, I think it is lunacy to go and embrace the concept like occupational superannuation which will add another 100,000 people to the unemployment list by the middle of this decade as well.


So in those circumstances we have to change, but equally I think you have to change. Because we all have to do what has got to

be done to make manufacturing our future, to use your theme. We can deliver our part in terms of the policy changes that are required. I am prepared to actually fight every day that I am here in Opposition and particularly in Government, to make those changes. But there has got to be sustained, I think, pressure

from within your organisation and within your industries as well to make sure that the Government doesn't fall off the pace. To make sure that it doesn't simply pursue the route of cutting protection without delivering the waterfront reform and the land

transport reform and the tax reform and the labour market reform that are fundamental to ensuring that that cut in protection doesn't drive you out of existence.

In most cases I think it is possible that you can end up with a bigger and more dynamic industry, even though it has been heavily protected in the past. The best example, to stay with the car industry example, came from a discussion I had with the Ford Motor Company in Melbourne. I asked them what were there major cost disadvantages? What did the Government need to do in terms

of eliminating those cost disadvantages to give them a viable operation in Australia? Jack Nasser and his people told me that 30% of the cost disadvantages simply related to the interest rates and the exchange rates of recent years, uncompetitive costs of capital and an uncompetitive exchange rate. Another 40% was due to the labour market and the labour market rigidities, lack of flexibility in particular. And the remaining 30% was due to

the other factors, including scale, technology, transport cost deficiencies and so on. And they readily agreed that if you fix the interest rate, exchange rate and labour market alone they would have a viable manufacturing operation in the car industry

in Australia. If you do that in the context of tax changes,

which change the nature of the price of cars, the impact of the tax system of cars, then of course you can end up with a

significantly larger automobile industry in Australia, although it may not have 5 manufacturers and they may not produce

somewhere between 8 and 13 models. It is possible to have a

larger industry and a more dynamic industry giving better quality cars at a cheaper price to Australians with indeed some export potential.

I think that example can be taken almost all the way across

manufacturing. If you look at your profit and loss accounts and you go down the list and pick out each of the items that we have referred to as a major cost disadvantage and work out how much better off your bottom line would be if those cost disadvantages

were eliminate, or at least significantly reduced, then you find when you get to the bottom line you don't actually need

protection. Because in many cases, 8 to 10 or 15% tariff

protection isn't all that significant in the context of cost disadvantages that are somewhere between 20 and 50% relative to best international practice in the areas that I have identified.


So, I put it you that the future of your industry is very much in your own hands. Those changes can be made, there should be maximum pressure on government in the 1990's to ensure that they make those changes. For my part, I am absolutely dedicated to

ensuring that as long as we are in a position to do anything

about it we are going to make those changes. Because we can turn this country around.

Let me finish with one final positive comment. There is so much focus these days on the negatives, the fact that we are in the position we are in and why we are in it and so on. Yet there

really ought to be a lot more focus on the positives and the

opportunities that are there in a country like Australia. While manufacturing has some disadvantages, it equally has a lot of advantages in an Australian economy that is so rich in natural

resources, that is so uniquely placed on the edge of the fastest growing region of the world and that has some of the capabilities that other countries can only dream of in terms of a very well educated and articulate workforce offering the possibility, in particular, for brain based and manufacturing and service based


There are a lot of positives and we worry of course that if we just concentrate on getting our own house in order that the rest of the world won't play that game and they will beat us out of international markets and they will pull us down.

I have never heard a convincing argument for why we shouldn't get our own house in order anyway. I have never heard a convincing argument for why we shouldn't pursue efficiency at all costs, and then see what we can do in terms of international trading

practices. It may be that we have to back up our domestic

activity, our pursuit of efficiency domestically, by putting maximum pressure on our region or on some of our major trading partners for improved trade access into their markets. I

certainly don't think that is impossible. In fact, I believe that a lot of our existing market links have not been effectively developed and could well have been developed a lot more than they have in recent days. Let me just give you one example, I hear

constantly the argument that we are too small in Australia, a country of 17 million people, we can't possibly dream of

developing a large and effective manufacturing base off that sort of size domestic market.

Well if you want to think small you will stay small. Indonesia has 180 million people, 10 times the size of our country, almost within swimming distance from Darwin which could be a major port. You have a major market on your doorstop that hasn't been

anywhere near exploited to the extent it could by Australian industry. Indeed, although Indonesia has only opened up in a market sense since the middle 1980's, I have been surprised at how little, while not denying that there has been some, at how

little Australian industry has made a presence in that very large market.

REF! TRANSCR\0314\BQ 10.

Lee Kuan Yew on the other side didn't see it the way a lot of

Australian industry has seen it, he has done one deal in relation to the port in Singapore, linking with 40 major ports in

Indonesia that he claims will guarantee the viability of

Singapore, a tiny little island of 2.5 million people, will guarantee the international viability of Singapore for decades. If you think small you be small - the opportunities are there.

And if you go broader than that and look at the whole region, the region itself, the Asia-Pacific region, as I said before on most of the forecasts will be the fastest growing region of the world for the next 40 or 50 years, offering us opportunities across the board. There is so much focus these days on what the United

States is doing with their market, or what Europe is going to be like beyond 1992 - well don't forget that in 40 years time the Asia-Pacific region will be twice the size, as a market, of both the American market and the European market added together. Some

4.5 billion people and we are here, uniquely placed, not only from the point of view of our industry to access that market but of course, I believe, that we could become a take off point for foreign investment from other areas establishing a manufacturing base in Australia and trading into that region.

We offer a lot of the things in terms of political stability and stability of the legal system and quality of the support

infrastructure and resource base and so on that none of them have. If we get our own act in order I believe the potential for Australia as a trading nation in that region is very significant indeed.

So I would finish with a challenge to you, to recognise the

tremendous potential that you have in the Australian economy and that you have in what will be the fastest growing region of the world, the Asia-Pacific region, where I firmly believe our country's future lies.

I congratulate you for the contribution that you have made to the public debate and might I say, in particular, I congratulate you for the support you have given us on the goods and services tax. We will be looking for quite a lot more of that in the course of

the next few weeks and months as we get out and debate the detail of our package. I don't think you will be disappointed, I think you will see in that package a capacity, even of an Opposition, to address the major cost disadvantages that I have listed

tonight and to take a pro-business stance for the first time in a very long time in Australia.

Because I believe that if we don't rebuild the business community in Australia we will not rebuild the Australian economy and we will not create sustainable jobs.

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