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Tuesday, 19 May 1970

Mr CONNOR (Cunningham) - The Opposition already has stated that it does not oppose the Australian Industry

Development Corporation Bill. This Corporation has been dubbed the McEwen Bank as against its counterpart, the Australian Resources Development Bank, which is now generally known as the McMahon Bank. In a very uncharacteristic admission of his economic philosophy, the Deputy Prime Minister and Minister for Trade and Industry (Mr McEwen), when introducing this Bill, justified it by stating: lt is increasingly evident that what is best for a multi-national giant is not necessarily best for Australia.

In the words of St Luke, there will be more joy in Heaven over 1 sinner who repents than over 99 righteous who need no repentance. The economic sins of omission and commission of this Government are beyond category.

The Opposition supports this Bill not for its details but rather for its foundation upon acceptable general principles, if not for its immediate practicability. Its pedigree is in no economic studbook. It is one of an unnamed litter bred in the political think tank of the Department of Trade and Industry which has yet failed to get its office of Secondary Industry to operate anywhere near success.

The Australian Industry Development Corporation is a unique statutory concept. By definition it is a body corporate, lt is a financial hybrid of doubtful economic zoology. Its stated function is to provide financial resources for Australian companies as defined - companies engaging or to engage in industries in Australia relating to manufacture, the processing or treatment of goods, or the recovery of minerals and any associated purposes. Its aid is to be given only on request or by consent. Should the Corporation involve itself to any degree in legal ownership it shall, by the injunction of a particular section, review itself yearly of its holding of shares and divest itself of them. After making due obeisance to sound business principles, and despite its passive role, the powers of the board of directors are to be exercised annually in borrowing moneys within Australia so as not to exceed an amount determined by the Reserve Bank of Australia, and on the same principles for the borrowing of moneys within Australia by companies whose operations are controlled from overseas. In other words, in competing for what funds are available in Australia it is to be pari passu with overseas investors. Staggering under these injunctions the fledgling Corporation is exhorted to direct its principal borrowings to overseas sources.

The Corporation can best be described as a national merchant bank with a charter for industrial development with the aim of securing, to the greatest extent practicable, ownership by Australian residents of Australian companies. Despite the general broadness, the deliberate broadness, of its provisions and. in some cases, even their vagueness, there is evidence of careful drafting where necessary to conform with apprehended constitutional limitations. Judging from the recent reactions of a Mr Scambler of the Australian Resources Development Bank, we are shortly to experience a variation of the good old Australian aphorism: If it moves, shoot it; if it grows, cut it down. The Scambler version is the one which is the shield and buckler of private enterprise: If there is a substantial profit by the private trading banks, who are congregated together in the Australian Resources Development Bank, then let the Government keep out. But if there is none, let the Government take the rap and accept the responsibility of the hazards. Early events will determine whether there is to be a constitutional challenge on this basis, and the sooner the better in view of the present economic and political climates.

In his speech the Minister for Trade and Industry referred to export franchise limitations. There happen to be a mere 1,100 of them which practically effectively stifle any opportunity for Australian industry to export overseas. Those franchise restrictions can take many forms. For instance, they can restrict or prohibit completely exports from Australia. They can restrict exports to Oceania. They can restrict them to certain countries of South East Asia. For years within this House the Opposition has raised the scandal of these franchise agreements. Other countries phase them out; some even prohibit them, fs it not time that the Government woke up?

The Minister referred also to arrangements for limited competition with the foreign parents of companies. In many cases there are proven instances of older models of different parts and accessaries being pui into the current models which are being sold in Australia to ensure that the Australian model would not be competitive on the export market with the parent company overseas.

Also the Minister referred to the processing of raw materials in Australia. I can conceive of no more advantageous method of boosting Australia's export income than the beneficiation of iron ore here. The process is referred to as one of aggregates. In other fields of evasion we have such instances as the selling at cost or the export at cost to another company owned overseas by a parent company. Then very blandly, in due course when the company's income return is submitted, it is shown that the company has not made a profit on the particular transaction. The Government has completely neglected technology. There are some consequences which can follow from the excessive foreign ownership of industry and resources. These already have been fully discussed in this House. I suggest that the real truth in these matters is that the Government is coming in with too little too late. The real damage to Australian industry has been done already. The Minister gave very scanty statistics showing that there was 90% foreign control of the motor vehicle industry, 80% control of heavy chemicals and pharmaceuticals, 75% control of alumina and aluminium production, and 50% control of the electrical and electronic industries. They are only the tip of the economic iceberg.

Let us consider, by way of contrast, the position in such countries as Japan, which is our major trading partner and also our major commercial rival. The Japanese have been very selective in their admission of investment capital. They have improsed very stringent conditions. In particular, they have taken steps to ensure that in no circumstances is there to be a 51% control or more exercised overseas. If they do choose, in restricted cases, to allow such companies to function within their boundaries, two stringent restrictions are imposed on them: Firstly, there is no guarantee that the capital can be repatriated and, secondly, there is no guarantee that they will be able to withdraw their dividends as and when declared. Even in India, a country which is desperately short of capital for its own development, the authorities insist upon a 51% native holding. They are not prepared to trust any outside company to have a majority control. Of course, in Australia, with the techniques of modern company management, it is quite possible to control a company with even less than that, as I will show. Accurate statistics in this country, of course, are appallingly and deliberately scarce. They are sparse to ensure an uninformed parliament and an uninformed public.

Before considering questions of financial availability we must emphasise that foreign investment in this country is conspicuously concentrated in a selected group of industries with characteristics of a high degree of technical complexity and rapid growth and also, of course, in the extremely lucrative field of mining. In the world of technology it is industrial know-how and ' its application which is of even more importance than capital inflow. In the 19th century the first industrial revolution replaced manual labour by machines. Any country which has to import its technology from abroad will be in a condition of permanent inferiority similar to that of nations in the last century which were incapable of industrialisation. In the case of Australia, in 4 fields only do we stand on our own feet. They are those of steel production, cement, glass and sugar refining. In each of those Australian techniques are comparable with and even surpass the best in the outside world. With respect to others we are a dependent country.

In its preoccupation with capital inflow, the present Government has consistently ignored the importance of technology, of research and development, of improved managerial techniques and of expertise. One of the main benefits claimed in the past for continuing unrestricted and undirected foreign investment has been the need to fill the gap between the chosen level of investment and the amount of capital available from local savings. Japanese capital investment is 32% of its gross national product. Its rate of sayings is the highest in the world. Australia, according to the latest figures I can obtain, saves and invests somewhere between 25% and 26% of its gross national product. That is claimed to be our absolute limit. It may be, but the point I want to make is that until recently over 90% of Australia's gross capital formation has been financed by Australian savings, and less than 10% has been financed by savings from overseas. For confirmation of that I refer to the White Paper of May 1965 on 'Private Overseas Investment in Australia'.

A carelessly repeated myth is now part of the conventional economic wisdom of this country and it is accepted as an economic axiom. The myth is that it is impossible for Australia within its own production to generate sufficient capital to provide for its needs. Even today the overseas inflow would certainly not be 15% of our total needs of capital for industrial development. This Government has ignored the question of investment priorities and, worse still, it has allowed its control over the Australian economy to deteriorate. Between 1953 and 1960 the Australian banking system's share of total assets available for investment fell from 70% to 57%. Today it would not exceed 40%. If real influence is to be exercised on capital investment many of the developments of the last 20 years will need to be reviewed. We have had in that period takeovers of existing profitable companies. We have had the blackmarket banking system, commonly known as the hire purchase system, which has usurped many of the functions of the banks and which has doubled the interest rates which, normally would have been charged for such matters as the leasing of plant, bridging finance and home improvements. Of course we have had such other developments as the inter company borrowing market and merchant banking.

There is a need for a more conscious control and direction of Australian capital investment based on a system of priorities and based in particular on cost benefit analyses. I suggest that one of the ultimate forms of development of Australia will be a corporation which will float its own loans in Australia, which will appeal to Australian patriotism and which will appeal to the average Australian to take a stake in the country. Many a person is hesitant to invest in an ordinary Commonwealth loan but would invest in a Commonwealth development corporation if by so investing he could get the guarantee of the Commonwealth of Australia. That money could be placed directly into the development of Australia's national birthright. In 1965 a certain Senator Gorton in a paper presented to the stock exchange of Melbourne in a symposium relative to investment in Australia stated that the then extent of foreign ownership of all company assets in Australia was between 25% and 30%. The lowest estimate given at that symposium for all manufacturing company assets under foreign control was 33%. None of these figures included portfolio investment. Today we find that an efficiently managed holding of not more than 20% to 30% can give effective control of an Australian company.

One of the major tragedies for Australian development today is that in these companies, whatever the degree of overseas control, decisions are made in the board rooms in New York, Detroit, Tokyo and London deciding the future of this nation. We are in fact still an economic satellite. Through concentration on rapidly growing industries, the expansion rate of control of industry by foreign capital in Australia is greater than the average for solely Australian companies, lt is small wonder that the acutely embarrassing forecasts of the Vernon Committee of Economic Inquiry were swept under the political carpet by the Menzies Administration. The Vernon Committee's prophesy of an increase in foreign investment control to 54% of Australian industry by 1975 seems to be well within the scope of fulfilment on current economic trends. At that stage also the outflow of remittances for dividends, interest, royalties and service charges can exceed the inflow of capital. The implications of servicing this foreign capital are vital for Australia.

In the comparative table prepared by Sir John Crawford on balance of trade and balance of payments on current accounts as presented last week in the course of this debate by the honourable member for Lalor (Dr J. F. Cairns) it was made abundantly clear that Australia has for the past 15 years been dependent on capital inflow to offset its trade deficit. The required inflow, on present momentum, is between $ 1,000m and $l,100m per annum. The cost of servicing this foreign investment is approximately $570m per annum. I will be rash enough to make a forecast. The current quarters inflow will be dangerously close to balancing obligations for outward remittances. This is the most serious fact of all: The extent of economic leverage and astuteness of foreign investors is revealed in the threatened majority control of Austraiian industry with less than a 15% capital investment. Appropriately today the Government has had as its luncheon guest Monsieur Pierre Trudeau, who represents another economic satellite of the United States - a country with a problem similar to ours of a wheat surplus, with an even greater foreign control of its secondary industry, an unemployment rate of 9.2% in French Canada and 6.5% in the whole Dominion. His unexpurgated opinion would make enlightening reading.

The economic prospects of ready borrowing on the international money market were never worse than at present. With world interest rates at a record high level and a series of crises on the major stock exchanges abroad, there are stringent liquid credit restrictions in the United States in an attempt to curb inflation. There is also a record adverse trading balance in what, is still the world's mightiest economy. Forty-eight per cent of foreign investment in Australia has come from the United Kingdom and 38% from North America. With an interest equalisation tax in the United States of America, and British governmental guidelines curbing outflows for overseas investments, the prospects of loan accommodation for this fledgling Corporation were never more limited, ls it intended to give subsidised loans at subsidised rates of interest? Is it intended to use Australian internal borrowings at lower levels as a sweetener to break down excessive interest rates which will have to be paid abroad? Is it to be used as an instrument for political patronage? The Deputy Prime Minister has a propensity for subsidies. He has been dubbed Subsidy Jack on more than one occasion. Whatever he touches he is prepared to subsidise.

Dr Gun - Providing they contribute to McEwen House.

Mr CONNOR - That is right. The prospects are for a further outflow of funds in the future rather than for their inflow. The various companies which have invested here will be under pressure from their respective governments to repatriate these moneys to correct their own trading imbalance. Added to that is the general exodus of hot money which has come to Australia from abroad, particularly from London. The owners of that money have dabbled successfully on the local mining market, they have seen the rot setting in, have cashed in on their shares, and are getting out just in time. That money will be rushing out of Australia at an accelerated pace. Major United States companies today are paying as high as 12% for urgent finance in Euro-dollars. Is it to be expected that even with the backing of the Commonwealth of Australia a very warm welcome will be available overseas for our borrowing efforts? A typical example of the present world financial stringency is the experience of Qantas which, when seeking to finance by overseas borrowing its purchase of Jumbo jets, was rudely shocked to find that it was being asked to pay 12% interest instead of the anticipated 7% as budgeted.

The Treasury Information Bulletin of last month contained ominous warnings, lt said that the lower liquidity ratios of trading banks are likely to become more pronounced in the current quarter, combined with sharp increases in rates of interest which have been taking place. Offsetting a fairly considerable rise in exports there has been a fairly considerable rise in imports, an increase in the deficit in invisible payments and a fairly sharp falling away in net capital inflow. This year is likely to see a reduction in overseas reserves of between $200m and $300m. I quote those figures from the estimate in the White Paper. The moment of truth has arrived for this Government. The report, incidentally, was prepared before the Government decided to pull the rug from under its own bond market by withdrawing Reserve Bank buying support and reducing the market price of $100 long term bonds issued last February down to $88 or thereabouts, thus locking in the huge holdings of its captive borrowers such as the savings banks, the life assurance companies and superannuation funds. Following tradition, the first target of this Government with its stop-go economic policies is the building industry, which is the largest employer of labour in Australia, with a work force of over 80,000.

In curbing inflation - that is the position in Australia today - any government has only 2 remedies - the fiscal, by increasing taxation, and the financial, by control of the money supply and interest rates. Follow ing the yet unhonoured election promise of the Prime Minister (Mr Gorton) to reduce exorbitant taxation on the lower and middle income groups, there is no alternative but to resort to the latter controls, that is, to the control of money supply and interest. In a vote of no confidence in the Government, loan investors have subscribed less than $2m to the long term bonds in the February loan of S200m, two-thirds of which was absorbed by redemptions for loans then maturing. The more wary investors will hold aloof from the present May bond issue in anticipation of still higher interest rates in the August issue when the Government faces almost formidable problems of redemption.

There are evident today world-wide classical symptoms of an economic crisis. The majority opinion of business leaders in the United States is that there will be a recession and even worse. This hill-billy government with its hill-billy economics is more ill equipped to face a major crisis than any former Australian administration. Moreover the Government is hagridden by the Country Party and its insatiable demands. Finance is government, and any government which lacks the power to control fully its national economy has sown the seeds of its own destruction and risks a major national economic catastrophe. Inheriting a stable economy from the Chifley Administration, with the Australian £1 at its highest prestige in history, this Government has allowed every form of fringe and black market banking to run riot in its economy. Its major lapse was the failure to control hire purchase. Today overseas merchants banks discharge all1 the functions of banking without holding a charter for that purpose and without being under proper control.

Before this Government completes its term of office Australia will have in its capital cities crowds of demonstrating unemployed. The President of the Dreyfus Fund, a major American investment institution, said last week:

What is happening on Wall Street is what is happening throughout the world. We are very extended morally, economically and politically, we ate bound to get our first margin call as a national power.

That applies equally to Australia. It has been correctly said that when Wall Street sneezes Japan catches cold and Australia gets pneumonia. We are involved in a Pacific triangle of trade, with Japan's trading surplus with the United States being used to finance her adverse trading relations with Australia. In turn our trading surplus from Japan is used to finance our adverse trading balance with the United States. 1 would refer all honourable members to the recent comment of Mr Prowse, the Assistant General Manager of the Bank of New South Wales, on the apathy of Australia and its Government to the vital issues raised by Britain's Common Market bid as a matter of its economic survival. Mr Prowse warned that Australia should be thinking how cold it might be with Britain inside the European Economic Community, and the gloomy picture that he painted of the possible ramifications for Australia of a successful United Kingdom entry should give every one of us grievous cause for concern.

The Opposition supports the measure for what it is worth. We will put the Corporation to other and better uses when we undoubtedly occupy the Treasury bench after the next general election.

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