Labor, Liberal - where do we go?
William Quick Dinner
Queen's College, Melbourne University - 7 August 1991
I am honoured to have been asked to speak at this dinner in memory of William Quick. The record of his life continues to have a very real relevance to Australia in today's problems. He worked for an ideal for this college and achieved it against what many thought to be impossible odds.
If we look at some of the problems Australia faces today and the continuing growth of Australia's debt to the rest of the world, and the lack of policies proposed to deal with those problems, one might think that they also represent impossible odds.
William Quick, as I read, was not given to hyperbole. He was moderate, wise and sensible, commodities which it seems to me have been remarkably lacking in Australia for some time.
We need to look with clear and unemotional eyes at what has happened to Australia.
I used to have much pride in travelling overseas, Australia was respected for many things, for her loyalty to allies, for honesty in business dealings, for wise counsel. But now respect is gone. Admiration for a small but proud country has disappeared.
We applauded for too long high flying entrepreneurs, whose reputation overseas was never particularly good. They were allowed to do things that would have been condemned in most other countries. Now most are in receivership or liquidation.
Why did the entire political process allow it to go on?
There is another reason for the unhappy contempt with which Australia is now held in many foreign capitals. Since 1982-83The world has gone through a record period of growth. For most of that period commodity prices have been strong. As a great commodity producer we should at the end of this period have had a thriving, vigorous economy with strong overseas reserves. Instead we find an economy broken, bankrupted by international and domestic debt.
People in the financial centres of Tokyo, New York, London and Europe wonder how this was allowed to happen. It did not have to happen. People overseas have contempt for a country that has squandered the good years.
In 1983, Australia had virtually no international debt, our financial system was sound. With a nationally agreed wage pause in place, we knew that once the worst drought for a hundred years broke and once the world economy picked up a little, Australia would move out of recession and start growing strongly.
Today, therefore, is a product of the last seven or eight years. It is a product of the policies of those years. It is a product of the way the capital markets were deregulated.
Let me examine one or two issues. Let me try and explode what I regard as one or two myths.
What do we really think of foreign ownership of Australian assets? We are told we shouldn't mind no matter how much of Australia is sold. We are told we live in one global, capital market. That with financial deregulation it is now one world. With the greatest respect in the world to those who hold those views, I think it is hogwash. An Australian cannot buy a farm in Switzerland. There are many areas of investment in Japan to which Australians are denied. The United States protects huge sectors of its domestic industry, the media, airlines, shipping, from any significant foreign influence. An Australian could not buy control of major newspapers in Italy or France.
I happen to be in favour of policies that will maximise foreign investment for a whole host of reasons. That is quite a different thing from saying that there should be no rules at all and that Australian interests do not need protection by government.
Let me be more specific.
With the opening of the meat market in Japan there has been a large Japanese investment in feedlots and abattoirs in Australia. I would have made two rules. I would have said such operations should be in partnership with Australians. I would also have said that Australians must be allowed to buy into the distribution chain in Japan. We made no rules. We have allowed ourselves to be put in a very weak position. We will not be able to maximise possibilities inherent in the opening of the Japanese domestic meat market.
More recently we have put ourselves in a much weaker position when an American firm, Conagra, was allowed to buy a significant position in Australia's meat export industry. Conagra is one of the largest commodity traders in the world. Its American interests will always be put above its interests in Australia. The sale of American meat to Japan will have a higher priority than the sale of Australian. We have allowed domination of a major industry by a major competitor. That is just stupid.
Is it ignorance, naivety, belief in an ideology that makes no sense or is it a consequence of deregulation, of a belief that you don't need rules, or that there is no legitimate role for government in protection of the national public interest? Perhaps it's a mixture of all of these?
On the other hand, if the sale in the meat industry was allowed to go through because the company from which the interests were bought was nearly broke and nobody else was prepared to pay that price, then that is really indicating a willingness to sell this country even shorter.
If you doubt what I am saying about foreign ownership, let me test your doubts a little more closely. How many houses in your own street do you want owned by foreigners? Does it matter if Melbourne or Sydney suburbs are owned by foreigners? As in so many things, it is a matter of balance. But are we so bankrupt that we are now prepared to sell anything to anyone, regardless of the consequences?
Let me come to another question.
Nowadays everyone believes in private enterprise. We believe in individual action as opposed to government action. But government must be pragmatic. Issues have to be dealt with on their merits, not by application to an ideology or to a formula. Ideology alone will lead to false judgments and foolish decisions. Ideology tempered by pragmatism can provide good government. Let me test the theory and practice of deregulation against those views.
Deregulation has become the Holy Grail. It is the answer to almost every problem. There has been no need to ask: what should we deregulate, how should we deregulate – just deregulate, reduce the role of government, get government out of our hair, there is no role for government any more, let people do what they want to do. Corporations will self-regulate and Australia will be a better place.
That is only a mild exaggeration of what has happened in Australia in the last eight years. We did go through a period when we had unrealistic views about what governments could achieve. But it is not very sensible to replace that mistake with the belief that governments are almost unnecessary and can achieve very little.
There is much in the deregulation debate, when it is discussed seriously, that I support, but many promises were made in the name of deregulation which, on the empirical evidence, had no chance of being true, even when they were made. For example, we were told after deregulation that interest rates would be much lower. We have gone through a period of historically high interest rates as a consequence of deregulation. By world standards those rates are still high.
We were also told that if financial sector was deregulated, Australia's rate of growth would be much greater. Well, as a consequence, we had a boom, now we are having the inevitable bust. It is no accident that the growth of debt and the disrepair in the Australian economy followed an over-hasty and ill-considered deregulation of the financial markets.
Deregulation of the financial sector made possible many of the excesses of the last eight years.
Australia has come to her present position as a result of a number of factors which occurred at the same time. An amalgam of deregulation, the introduction of new banks, floating of the dollar, the opening of the financial markets, coupled with totally inadequate corporate supervision, to which must be added a Reserve Bank which hardly deserves the name. All these have contributed to Australia's current situation.
Deregulation led to a massive growth of credit running at over 20% a year for about six years. That massive growth in credit underpinned the massive growth of corporate, individual and foreign debt. It could not have happened without deregulation. It could not have happened if the powers of the Reserve Bank had not been destroyed or at least put into disuse.
I mentioned the Reserve Bank. In this country recent theory suggests that the Reserve Bank should influence the market by adjustments to interest rates alone, that other reserve bank weapons should not be used. The Bundesbank, the Federal Reserve in the United States, the Bank of England, use an array of weapons, as we once used to. Earlier this year, because of concerns with the American economy the Federal Reserve adjusted the capital ratios of the American banking system as a means of influence or control. Such adjustments have fallen into disuse here.
If you are going to compel your Reserve Bank to use interest rates alone, the swings in the economy are going to be much more severe and more vicious and more hurtful. We have had a record period of high interest rates which has kept the value of the dollar much higher than it should have been. That has greatly exacerbated the problems of all exporters and has encouraged an undue growth of imports. Such outcomes are the reverse of what Australia wanted and needed. Our Reserve Bank needs to use again the panoply of powers which respected reserve banks worldwide have in their inventory.
Perhaps my severest criticism of the way the financial markets were deregulated and the financial system opened up was that it created a new industry of massive and often destructive paper shuffling, of mergers and takeovers that contributed nothing to real national production.
The financial industries are meant to be service industries to help and assist farming, mining, manufacturing, export industries, including a large number of services to individuals. Many in the financial industries have forgotten that primary purpose. Operations in the financial market have often become an end in themselves. Paper shuffling has become more important than the real economy. The value of our dollar is determined, not by the competitiveness of Australian industry and the demand for Australian exports but by movements of capital across the exchanges which often have no purpose but the movement itself.
One of the factors that made the impact of financial deregulation worse in Australia than in other countries was the odd view that there should be corporate self-regulation, that we did not really need strong, supervisory authorities such as exist in European countries or in the United States. We somehow believed that all corporations would do the right thing. The last eight years have exploded that myth rather harshly. In nearly every civilised country, governments believe that they should set rules that will maximise the possibility of corporations being run honestly.
In the United States, despite deregulation, corporate supervision has if anything been tightened not reduced.
There can be much good in deregulation but each case needs to be looked at and argued on its merits. We also need to recognise that there is a role for government, that rules are needed. It, as always, is a question of balance. In recent times, that sense of balance has been lost in Australia.
In my time, small movements towards privatisation were shunned by the private sector and opposed by the Labor Party. The housing loans insurance corporation was up for sale but was never sold, the Australian wool testing authority was sold, amidst the most violent objections by wool industry leaders. Now everyone believes that privatisation is a good thing.
It has not been pursued vigorously enough to make Australia more economic and more efficient. There are many areas and opportunities for privatisation which have not yet become part of the public debate.
If we want Australia to be more efficient, the areas chosen for privatisation have a particular importance. Privatising Qantas may have an impact on the way that airline runs but it will have no impact on the competitiveness of Australia as a whole. Whether the government is the major shareholder, whether private individuals become the major shareholder, will make little difference to that airline. It will still need the total support of the Australian government to survive. Landing rights are bartered around the world by governments. Without government support a national airline cannot succeed.
On the other hand, the production of power, transport, the construction of roads, the operation of our ports, can all make a very significant difference. Some competitive operations could be introduced in many areas where they are now non-existent.
Whatever micro economic reforms are undertaken, however, these alone will not cure Australia's economic problems. One of the difficulties is that micro economic reform is now being advocated as a cure for macro economic mistakes. However desirable, even essential, micro-economic reform may be, it cannot cure, and may not even contribute, to a solution of problems unless the government's macro-economic policy settings are right. This is an area that is little debated but it still represents the government's greatest and most dramatic failure.
Abdication of the Reserve Bank of the 1980's contributed directly to a massive explosion of credit and to the massive growth of state government, of corporate and of individual debt and consequently to our external debt.
Unless the Reserve Bank has the power and the capacity to control an even growth of credit in Australia, there is no hope for good or even reasonable government. In recent times banks have been blamed for many things. We forget sometimes that the banks, as commercial organisations, were responding to the market circumstances and to the competitive environment created directly by government decision. The government could have altered that environment but failed to do so.
Australia's external debt represents our major problem. It is therefore important that it be central to the next election. The political parties should be judged on the capacity of their policies to stabilise and to diminish that debt/ which will continue to impoverish all Australians and, in the world scale, reduce our living standards.
The danger, of course, is that the debate will concentrate. On other, unrelated issues.
While the government policies have been an apparent and obvious failure and should be the centre stage in the political debate, there is a real possibility that the opposition policy for a consumption tax will instead take centre stage.
The task for the opposition will be not only to show that that policy is relevant but also to show that that policy represents the best and the simplest means of overcoming our external debt, of increasing productive investment, of reducing the levels of consumption that we cannot afford and of making Australia a more competitive society.
The rebuilding of Australia's reputation worldwide, finding of some place for Australia in a world that is becoming increasingly exclusive will represent a challenge of an extraordinary kind. Forging new trading links in that world will be a major priority. Making Australia competitive in that world is a paramount necessity.