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Address to ASIA Society, New York

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PRESS I RELEASE \> --- ----



Mr Morgan, Ladies and Gentlemen.

This is the second occasion that I have been here and I know that there have been many other occasions when my colleagues, the former and current Prime Ministers, have been here. We all welcome very much the opportunity to talk to such a distinguished gathering as this. / .

I wanted to take this opportunity to talk a little about the developments in the world economy, some developments in our region given the particular interest of this Society in that region, and then more broadly about how Australia fits into those world and regional developments.

I have just come the annual meetings of the IMF and the World Bank in Washington and, whilst those meetings are not the most spectacular activities with which you can be involved, I think a very great change did occur during the course of those meetings this year. The most striking development, which I think will change forever both the Fund

and the Bank, was the fact that the "enemy" - both the political and economic - of the past has now entered the membership of these two international organisations. Yesterday we formally admitted fifteen new members.of the IMF/World Bank. Those fifteen come from behind the old Iron Curtain. The various States of the old Soviet

Union and some of the other countries of Eastern Europe. The IMF has always been cited as the citadel of free or market economics and its members performance could always be contrasted with the performance of the outsiders in the centrally planned economies. Those opportunities have now essentially gone. Whenever those

comparisons were made in the past there was always an element of conceit, not surprisingly on behalf of those who were holding up the performance of the market economies, and a certain tendency to disparage the performance of those other economies,

Indeed, it was not hard to look good against the performance, particularly in more recent years, of those centrally planned economies. It did lead to a certain complacency on the part of the developed world in making those comparisons. Now that we no longer have the so called 'evil empire', the so called 'failed communist

system', to hold up as a foil, the kinds of comparisons that are going to be made about various economies around the world are going to be quite different. The politics will have been removed from the debate about economics in the world. The reverse is now the case, what happens politically is determined more than ever by how we manage the

world economy and how we share the benefits amongst all of those who are now firmly members of one, international, economy.

There will no longer the opportunity to be ideologically divided. What we will be concerned about in the future is how quickly we can ensure that the benefits of market economics can flow to those very courageous communities who decided to take that huge leap from a system which had been such a disappointment to them into a new and

entirely unknown system.

I was sitting next to the delegate from Austria, a country bordered by a number of the nations which are going through this grueling transformation, and he told me that many citizens of the old Czechoslovakia believed that all they had to do was convert to a democracy and then instantaneously they would be able to enjoy the standard of living

of the Viennese. Of course that isn't the case and it won't be the case in many other countries as well. If we take the Baltic States, just to give you an idea of how dramatic has been the consequences for them of their decisions, something like 95 % of their exports used to go the rest of the.old Soviet Union. That figure has fallen almost to

zero. As a result, the level of output of those economies has fallen by as much as 50% in just one year. So these countries face serious challenges as they try to grapple with the consequence of their decision - a decision which we were all so enthusiastic to support. We all fell over ourselves trying to be the first to recognise the independent

status of the Baltic nations and of the various Republics of the old Soviet Union and, now, Yugoslavia. But for these new countries the change to their own economies and to the lifestyle of their own citizens has been dramatic. It is something that we simply cannot ignore. Those nations made dramatic and courageous decisions. They have

now become part of the same economic family as us and are looking for the benefits to flow from it to them.

As you look amongst all of the members of the IMF and the World Bank it is not so easy any more to split up various groups and put simple labels on them. We have such a huge proportion of the membership of those organisations which can be described as 'economies in transition'. Whether they are amongst the developing world - moving

from predominantly agricultural and peasant based communities along the path towards industrialisation - or whether they are theoretically industrialised countries making the transition from a centrally planned to a market economy, so many of those economies can now be described as economies in transition. One of the remarkable things about

the background papers provided to us in Washington was the study of 35 economies in transition, predominantly developing countries in Asia and Latin America. Those studies recorded the remarkable performance, the remarkable improvement that had occurred in those 35 economies in transition. Their improvement has been precisely

because they either accepted and embraced voluntarily the advice of the IMF or alternatively, that they were encouraged to accept the advice of the IMF in return for certain financial assistance which they have received.

Essentially the advice which they received and have, in almost all cases, embraced has been about liberalising their economies. Embracing unilaterally the ideas of trade liberalisation by reducing the protection of their economy. Imposing greater market disciplines within their economy by reforming their budget processes and by reducing

the size of the public sector, both through privatisation and other means. This was the prescription which was handed to them, a prescription which they have followed with quite startling success in at least those cases which were studied and put before us.

What is surprising however, is that so many of the developed countries, the industrialised countries, have in fact increasingly denied the prescription which they impressed upon the developing world and are now impressing upon those formally centrally planned economies. What we find is that over the past ten years there have been a rise in trade distortions in Europe in the USA and in Japan. There has been in

many of those industrialised countries a reluctance to embrace with equal vigour the issues of structural adjustment within their domestic economies. Indeed, there has been a resistance to embrace the disciplines of the market within parts of some developed economies. There is the problem of structural fiscal deficits which many of those

developed countries either seem incapable or reluctant to handle.

Whilst there has been a tendency to be overwhelmed by the currency instability which we have observed over the last few weeks, the conclusion of most people in Washington is that this was not the cause of the problem, but rather it was symptom of a failure on the part of the developed world to embrace national policies which would be most conducive to an improvement within their own economies and conducive to a

functioning world economy as a whole. Failure to address these policy failings is not only responsible for instability in their own currencies, it has caused instability in the currencies of those nations already adopting the appropriate policies.

When we look at what has been turmoil on the financial markets we need to look behind and see what it is that is causing that particular turmoil. I don't think there is much question that it reflects a failure to deal with structural budget deficits in many industrialised countries and the failure to pursue structural change which would

improve the performance of those particular economies. That goes very much for the situation in the European Community where they are trying to cling onto an agricultural sector which is simply crying out for change and improvement. The costs of maintaining that highly subsidised area is going to become an immense burden for the citizens of the Community. And as the Community becomes enlarged, it will become a

greater and greater cost for them.

I think the developments in world currency markets, plus the harsh fact that there are no alibis, easy targets or excuses left, means the developed world is going to be faced with a much tougher assignment in the conduct of economic policy in the future. We need to realise that if we are going to maintain the political order which is now

emerging in the world we need to extend the benefits of the market economy to those countries which have decided to pursue that particular path. And as I said, this is now the overwhelming majority of countries. The way to do that is to have a world that in fact - rather than just rhetorically - embraces the idea of freer trade, trade liberalisation

and the other structural reforms which are so necessary within national economies.

The decision yesterday to install into the membership of the IMF and World Bank those formally centrally planned economies will have repercussions for many years to come. All of us who have been encouraging that development must recognise that in order to maintain the political stability that we hope will come with that change will require us

to extend the benefits of market based economies to all of those who wish to embrace its disciplines.

The second point that I wish to make is about the region in which Australia lives. I think it can be best illustrated by telling you that yesterday there was a very enjoyable lunch hosted by the Finance Minister from Japan. Sitting around that table were Finance Ministers from East Asia, South-East Asia, from China, Indo-China, the Pacific nations and from Australia and New Zealand. When Australia has gone to the

World Bank and the IMF in years past, our greatest associations have been with Europe, particularly Britain, and with the United States. However, we now find ourselves increasingly comfortable in the company of those countries of our particular region. We feel very much at home. It is important to realise that Asia is about

geography. Asia is not about some stereotype culture, nor is it about some stereotype economy. It is a region of immense diversity - a diversity within which we feel entirely comfortable. Whilst Australia and New Zealand might be the only members of the region which have an identifiably European origin, the diversity within Asia is such

that we find ourselves very much at home in that area. Indeed, we are able to establish very close links individually with the Thai's, the Japanese, the Koreans and others even more successfully than some of those nations can develop with each other given their history. I make that point to underscore the fact that Australia's determination to integrate with Asia is probably the most important priority of national policy and

indeed is proceeding, and has proceeded over the last decade, with very great success.

Over the last 10 years the proportion of our merchandise expons going to the Asia- Pacific region increased from 66% to 73% while the composition of those exports also changed quite dramatically. We are now the tenth largest supplier of manufactured goods to the Japanese, ahead of Canada, Hong Kong, and ahead of all of the ASEAN

nations. A third of our exports to the South-East Asian nations are now manufactured goods. I make this point because so many still have the idea that Australia is a farm and a quarry. What has happened over the last 10 years is that we have seen the share

of our exports constituted by manufactured goods expand very dramatically. Manufactured export growth has averaged 15% per year over the period since 1985-86. More and more of those manufactured goods are finding markets on a competitive basis within Asia particularly South-East Asia. Just to make the point clear, the countries of

the ASEAN are now a larger market for us than the US, despite the fact that they comprise a very much smaller economy than the United States. Indeed, it is our now our fastest growing market for manufactures.

I understand that last night the Asia Society had as its guest the President of Korea. Korea is our third largest export market and we are now the ninth largest supplier of manufactures to the Korean market.


This integration with Asia is not confined to economics. We host half a million Japanese tourists in Australia every year and within Australia there are more people learning Japanese than in any countrys outside of Japan itself. And I am not talking about proportions of the population - this is in absolute numbers. There are over

100,000 people in Australia studying Japanese - more than the number studying Japanese in this country or anywhere else. That is a recognition of the seriousness with which we take our integration. As well, over the last few years we have seen a huge increase in the number of students from Asia who have decided to study in Australia -

either studying English or taking courses within our schools and universities. There are tens of thousands of Asian students in Australia engaged of some form of education and training. This has been an important economic development for us, but much more important than that, it has been a huge additional contact which is helping to educate the Australian people about Asia and will educate Asia about Australia. We have integrated into the school curriculum and into the universities the study of Asia as a

crucial part of education. When I went to school we learnt almost exclusively about European geography and history whereas these days we are more interested in Australian history but also in the history and cultures of those countries which are around us.

This process of integration with Asia is increasing pace and it is one of the reasons why Australia has embraced, perhaps more than many other countries, the idea of economic improvement. Our neighbours rapid growthand their efficiency and competitiveness has the advantage of allowing us to find new markets within those growing economies.

It also imposes a certain discipline upon us in terms of the way in which we restructure our own economy.

To return to where I began. The clear message which, came out of the World Bank and IMF meeting can really be distilled into two points. Firstly, the need for the world to be returned to sustainable growth in order to create jobs. Secondly, to promote development within the underdeveloped countries in order to alleviate poverty.

The achievement of those two objectives requires action by governments both individually and collectively.

The individual action of governments is the matter of dealing with their structural budget deficits, implementing monetary policies which are designed to contain inflation and introducing structural reforms in order to improve efficiency and to increase productivity.

Whilst the industrial world in aggregate is slowly emerging from recession, the performance of the majority of developed countries pales in contrast to many of those in the developing world. Indeed, it was noted in Washington that the prospects for the developing nations were better than those for the majority of the developed world.

And this is primarily because those developing nations are dealing effectively with


those areas requiring their own action rather than relying on improved international circumstances to take care of things.

Australia is one of the few developed countries to have acted comprehensively on all of these fronts.

One of the things about coming to organisations like your own over the last ten years is that you who have heard members of the Government make certain claims about what we are trying to do in Australia. And because we keep coming back, there is an opportunity for you to judge whether or not we have been successful.

We, of course, will say we have been successful. But, increasingly, we are getting independent assessments, both from the OECD and from the IMF, which are recording the fact that Australia's transformation and determination to address its underlying structural problems has been proceeding and has been turning up a more successful

economic performance generally. It is not just a matter of us making these claims ourselves, there is now respectable independent assessment of what has been achieved in that area.

If I return to my previous point about dealing with the question of structural deficits, the reason why Japan and Australia are almost the only two countries able to embrace fiscal stimulus in order to encourage their economies out of recession, is because Australia and Japan were about the only two countries during the 1980's which took the opportunity to reform the structure of their budgets.

The fact that our Government turned our Budget from a deficit to a surplus during the course of the 1980's has provided us with an opportunity now, when the economy is sluggish, to expand the deficit temporarily in order to provide needed stimulus. Even though we have embraced a larger budget deficit to the point of about 3.3 per cent of

GDP, we still have a fiscal deficit well below that of many other of the industrialised countries. Many of these countries find themselves paralysed by the weight of their persistent fiscal deficits and therefore are unable to take the action which they might otherwise take in order to stir economic development within their own economies.

As well as that we have an inflation rate which in 1991-92 was 1.2 per cent, the second lowest of any OECD country, and we have the prospects, not withstanding the recent depreciation in our currency, of maintaining low inflation into the future.

Our program of structural reform has been very comprehensive. This program involves more than just a program of reducing tariffs, which were at a very high level in international terms, to levels which are much more within the order of things amongst industrialised countries generally. We have addressed reform in transport,

communications and public utilities. We are improving the rail system, the road system, introducing a unified and deregulated aviation market between Australia and New Zealand and increasingly with other parts of the world, and improving areas such


as the national electricity system. These improvements are already showing up in improved productivity both within the public and private sector.

One of the most important areas which we always had to tackle, and which has now been comprehensively dealt with is the system of wage fixation in Australia. In the past we were frequently criticised for the fact that we had an overly centralised wage

fixation system, despite the fact that it actually assisted the process of adjustment during the course of the 1980's. In fact real wages fell during that important period of growth and have stayed down during the recent period of adjustment. But as part of our reforms we are now emphasising much more an enterprise based system of wage

fixation, where wage increases will in the future be much more closely linked to productivity improvements rather than the old system where they were linked to changes in the cost of living.

As a result of all of these changes and many more, to numerous to mention, GDP growth this year over last is expected to be in the order of 3 per cent. This will be close to, if not the, fastest rate of growth amongst the industrialised nations. Our inflation, at about 2 per cent, will still be at a 30 year low and below that of our major

world trading partners.

Our efforts to develop a more export oriented industrial culture are also bearing fruit with our export base broadening significantly during the course of the 1980's. Manufactured exports have, as I have said, grown by an average of 15 % per annum

over the last half decade This is over twice the rate of the OECD countries and even faster than the rate of growth of manufactured exports from the newly industrialised countries of Asia. Naturally, we are starting from a much lower base but it does give an idea of the great change which has occurred in recent times.

The export of services have grown by over 14 per cent per annum since the mid 1980s, largely as a result of tourism but also due to the development of exports in education, health, financial services and many other professional services such as architecture and engineering services.

The growth of our sophisticated manufactures is also worth noting. We now export over $1 1/4 billion worth of motor vehicles and motor vehicle parts. We will be the sole supplier to the world of Ford's Capri sportscar and Mitsubishi's Magna Station Wagon. As well as that industrial machinery exports, medical, pharmaceutical and

scientific products, office equipment, computers and a whole range of others have experienced very rapid growth in recent times.

Our experience, and that of our rapidly developing neighbours in the Asia-Pacific region, show that fiscal consolidation and structural reform can provide an important stimulus to growth.


I would like to conclude on the point that in all of this we compare ourselves with the rest of the world and we find ourselves taking a path which some countries are reluctant to take. Just to give an example where we sit with the rest of the world in some of the other important statistics, Australia is a very low tax country, with a tax to

GDP ratio of less than 31 per cent. That puts us right at the bottom of the OECD table.

The other point that I will conclude upon is that we have embraced the idea of trade liberalisation as a means of achieving growth within our economy, as a means of achieving diversification within our economy and improving our competitiveness. We observe with a great deal of concern how slow the rest of the world, particularly the

industrialised world, has been to conclude the Uruguay Round of negotiations within the GATT. We think an opportunity now exists to push that program further. That would do more to stimulate growth within the international economy, do more to impose the disciplines on the industrialised world which we have encouraged the

developing world embrace, and would also be the single most important thing we can do, at least in the short term, to improve the prospects of the poorest nations in the world who obviously need an opportunity to trade if they are going to service their debts and develop their economies.

It is now up to the industrialised world to take seriously its own economic prescriptions. To embrace them and to implement them. I hope that in this new economic and political world that we have created and which we have all supported with such enthusiasm we can take more seriously our own prescription everywhere in

the industrialised world. Not only to achieve a better world economy but also to ensure that the peace which has been established over the last few years will in fact become permanent.

Thank you very much.



Question precis; About the conflicting views about whether structural deficits are more important than interest rate policies?

A: I think that interest rate or monetary policies generally can really only have a marginal effect on the structural problems within any particular economy. I think monetary policy is best left to deal with the achievement of, and the maintenance of, low inflation and should not be relied on excessively as a means of affecting either the

rate or the kind of economic growth within the economy. I think the problems here and in Europe have reflected a failure of both fiscal and monetary policy. Too much pressure has been placed on monetary policy essentially because of a failure to deal with budget deficits. If you impose too much weight on monetary policy it creates the

kind of instability that we have seen in foreign exchange markets over the last couple of week. I think that the instability is likely to remain for as long as some of these basic imbalances remain within domestic economies.

Question precis: The question was making comparisons between Australia and New Zealand and about the comparative weight that we place on monetary policy in economic policy making generally, particularly in relation to inflation. And the second point was does the recent weakness in the Australian dollar have implications for

inflation over the period ahead, particularly does it effect the budget time forecasts.

A: To take the second point first. There has been a fairly orderly depreciation in the Australian dollar. As far as the budget time estimates are concerned the basis on which those calculations are made involved an assumption about the level of the trade weighted index during the course of this year. When I looked at the TWI before I left Australia it was still very close to the budget time estimate, I think with the current level of instability in world markets it would be foolish to make adjustments week by

week to our forecasts for inflation, or of the impact of the exchange rate on inflation over the course of the next year or so, Obviously there will be some inflationary consequences of higher import prices in the first instance, but because of the wage system we now have and because of the undertaking on the part of the trade union

movement to ensure that our inflation rate remains at or below that of our trading partners, we have a mechanism to ensure that the second round effects of those import price rises will not feed into the economy generally. I am not sure how many other countries have a wage system which is in fact supportive of low inflation rather than

antagonistic to it, but that is the kind of system that we have operating in Australia at the moment.

The comparisons with New Zealand. The point about New Zealand is that their economy was basically flattened for five years during which time they undertook some


of these major changes. There has been a huge increase in our real GDP during the course of the 1980s while for much of that time New Zealand's GDP has been almost static or experiencing sluggish growth at best. If you are willing to accept a static GDP forever, of course you can have pretty low inflation. The trick is to have low inflation

with a growing GDP. We think that the balance within our own monetary policy settings is appropriate and we think that the way in which monetary policy is set on the basis of consultations between the Government and the Reserve Bank is really a better way to go rather than embracing some particular obsession about Reserve Bank

independence and inflation targetting.

Question precis: The question was one of foreign investment policy and despite the easings that have taken place over the last few years and more particularly this year has there been some revision, in the course of the last few months.

A: We very much welcome foreign investment and there are very few restrictions now imposed upon them. There are a couple of areas, for instance, the media where there are some important cultural dimensions to the question which we take seriously. There are one or two other areas as well. But there are very few restrictions elsewhere and

whilst we do maintain a national interest provision, which we reserve to use in critical areas, I see that being used in very few instances. An increasing number of foreign investment proposals are now not even formally examined. It is only the very large proposals and the one's which have particular implications. As far as using the foreign

investment power in order to examine other issues, environmental and other things, we have tried to diminish that as well by making foreign investment no longer an issue in relation to most mining proposals.

Question precis: The question was that I painted a rosy picture and what about all the problems that still confront us, particularly foreign debt and secondly, in emphasising the importance of integration with Asia are we ignoring our traditional patterns of

development with Europe and North America.

A: I would not want to leave anyone with the impression that we have solved all our problems and indeed the independent assessments that I referred to from the OECD and the IMF have all made the point that whilst we have made progress we have some way still to go. We recognise and acknowledge that and that is why we are constantly

making decisions about how we can improve and wherever possible speed up the process of change and improvement. I also make the observation that in Australia the political debate is amongst two parties which both want to show they are more engaged in identifying and tackling the real problems which confront Australia. There is a very

clear understanding in Australia about what our problems are and what we need to do to deal with them. I don't think that is the case in all other Western countries where at least in some political debates there seems to be a conscious effort to disguise the real problems rather than encouraging those countries to face up to them. We are very

much concerning about how we can continue the process of change, improving productivity and so on. The other point about Australia and Europe and North


America. They will always be important to us as a source of investment and of course as markets for us as well.

When I mentioned the importance to us of the Asia-Pacific area, of course we include North America as part of that region. So we are not ignoring in any way the important economic links with the Northern Hemisphere generally or particularly with North America. As far as Europe is concerned, one of our problems has not been that we haven't wanted to continue developing our markets with Europe but Europe has not been that enthusiastic about reciprocating, particularly in those areas where we are

massively competitive such as in agriculture. Our markets in Europe for mining and mineral products and increasingly for manufactured goods are very important to us, I would not like to give the impression that we are not concerned to continue those

important developments particularly as a source of investment for the Australian economy. As far as the debt is. concerned that continues to be our number one longer term problem. The important things-for us is that at least our trade balance is in the

black. What we are having to contend with is the stock of debt which was built up over the years and the cost of servicing that debt. Our objective, naturally, is to continue the improvement on the net export side in order to stabilise and then rein back the current account deficit. That is a very important issue for us but we don't want to handle that problem simply by paralysing the economy. We have to handle our

external problems, the problem of debt, the problem of improved exports in the context of a growing economy rather than one in which you simply try and constrain imports by maintaining a stagnant level of economic activity at home.