PREFACE
The business environment -- internationally and domestically -- is one of great uncertainty. Soviet ambitions in the Pacific region, strains upon the ANZUS alliance, instability in the Philippines, the third world debt crisis, can all significantly affect Australia's trading environment. Domestically, an acute balance of payments problem, record interest rates, high inflation and the rapidly increasing level of international indebtedness are of great concern to corporate planners.
I am pleased to republish in this booklet the major papers I have presented at various conferences.
Richard Wood
December 1991
THE INTERNATIONAL STRATEGIC SITUATION
Is the post-Geneva superpower balance stable? The answer is assuredly not. The fact is that there is no stable balance between the superpowers, so called, and no prospect of one. There is no global equilibrium that can be counted on to persist. This is the first harsh fact about the international environment in which business and all the rest of us must operate today.
Global political instability stems from the fact that the Soviet Union is frankly and proudly a revolutionary power with a commitment to expansion. It neither seeks nor values a stable world order. To draw this conclusion, it is only necessary to look at maps of the world since World War II, to observe the changing borders of the Soviet Union (with the incorporation of the Baltic States and part of Poland) and the extension of the Soviet empire first to Eastern Europe and then, after 1960, to the Western hemisphere, Africa, Latin America, the Middle East and Asia.
As late as 1961 the Soviet Union was basically a continental European power. Today it is a global empire with associated subordinate states in Africa, the Middle East, Latin America, South Asia, and it is still expanding. From the perspective of the 21st century it will seem fairly clear that at the same time that the Western European traditional colonial powers were contracting and dismantling their empires, another European nation, Russia, began a process of expansion and incorporation very much like that of the earlier colonial powers. Like the earlier colonial powers it is equipped with a doctrine that justifies the establishment of control in very remote places.
There are, however, some very important differences between the earlier colonial empires and the contemporary Soviet empire. One (to which both the United States and Australia are monuments) was the interest of the earlier colonial powers in colonisation and development, as well as penetration and control. Today the Soviet empire and the pattern of Soviet expansion is unique in the world. It is a uniquely destabilising factor and it is, in my opinion, the factor which destabilising not only superpower relations, but most other aspects of East-West relations; and relations between democratic and non-democratic powers in the contemporary world.
Throughout the post-World War II period the United States and the Western democracies have made the creation of a stable world order their principal goal. One of the most dramatic and ambitious efforts to achieve this goal after World War II was the establishment of the United Nations. The United Nations Charter sought to institutionalise and stabilise existing national borders and jurisdictions among member states. The UN Charter calls for respect for sovereignty of member states; it calls for respect for territorial integrity, which is another way of saying respect for existing borders; it calls for non-intervention in the internal affairs of other states.
The UN Charter does some other things as well. It provides for peaceful settlement of international disputes and commits its members to the non-use of force or threat of force. It is clear that the US and the other Western nations expected that the UN Charter and that the UN itself would not only commit member states to these existing territorial arrangements and patterns of sovereignty, but also, in a very literal sense, police them.
Americans, at least, expected that the collective security arrangements in the UN would work rather like the legal arrangements in a western town. It was expected that most nations would be law-abiding, would respect the laws and live by the terms of the charter. In the case of an outlaw nation violating the charter by failing to respect territorial integrity and committing aggression against another country, then the law-abiding nations in the UN Security Council, like a posse of law-abiding citizens in a western town, would rally round to bring the international law-breaker to change his policies. This would be done by, if necessary, defeating his efforts at aggression or, what would be much more desirable, persuading him through a process of discussion, reason and resolution-making that his course of action was unjust and that he should desist.
It seems quite clear in retrospect that the machinery of the UN and the UN itself was a major effort to create and reinforce a stable world order. And it seems just as clear that it has not succeeded. The fact of its failure began to be obvious quite soon after its establishment. It became clear that not all member states of the UN valued peace more than they valued any other good, and that not all member states of the UN were prepared to respect the territorial integrity and sovereignty of other nations. A variety of threats developed in the world.
The threats which concerned the US most directly in those early efforts at maintaining a stable world order were those directed to the nations of Western Europe. After the incorporation of Czechoslovakia into the Soviet orbit, which, of course, occurred after the prior incorporation of the Warsaw Pact countries, the US under President Harry Truman and Secretary Dean Acheson became progressively concerned at the processes of internal subversion and external aggression that were mounted by the Soviet Union to challenge the territorial integrity and sovereignty of Italy, Turkey, Greece, and France. Harry Truman called a joint session of the US Congress and appealed to them to take immediate action to reinforce Greece and Turkey and, eventually, the other countries of Western Europe, to resist the efforts arising from the Soviet Union, to subvert and incorporate them.
Those policies came to be called the Greek-Turkey Doctrine, and eventually the Marshall Plan. NATO itself was a direct growth of this process and, let us be clear, all of these had as their object the reinforcement of the stability of the existing order in Western Europe. The US did not so much stand for the status quo as for a status quo which could be changed only with the consent of the peoples affected, not by force. We were not trying to prevent change per se, but change by force.
DOCTRINE OF CONTAINMENT
The second major American foreign policy designed to provide for world stability was the Doctrine of Containment.
This Doctrine was more realistic than the UN Charter. It was premised, after all, on recognition that there existed in the world countries which have a deliberate policy of destabilising world order. The policy of containment guided American policy through the Vietnam War and constituted the intellectual basis for the various regional security arrangements that were developed -- NATO, RIO PACT, ANZUS, SEATO and so forth. One consequence of this effort to maintain global order was to involve the United States in two wars in Asia -- the Korean war and the Vietnam War.
I think it is clear, if one looks at the statements and documents of Americans who led the US into those two wars, that they conceived both those actions in the context of maintaining regional order on the basis of collective security. Explanations of the Korean War, for example, make very clear that aggression was not to be permitted to succeed. It was argued that world order could be maintained only by actively opposing the aggression of the North against the South. Similarly, the statements of Dean Rusk, Eugene Rostow and others -- distinguished international lawyers all -- explaining the Vietnam War, justify military action as part of an effort to maintain a stable world order through collective security. Of course, these arrangements did not work out well. One of the reasons they did not work out well was that a lot of law-abiding nations which might have joined the posse, so to speak, did not do so. Another reason was that it turned out that there were perhaps as many of the outlaws interested in destabilising world order as there were countries interested in maintaining a stable world order. Finally the US and the American people lost their appetite for the task.
The search for a stable world order has also led the US into various efforts at arms control. In the immediate post-World War II period, the US Government made a serious offer to put the atomic bomb and nuclear military development under international control. This American offer was accepted by all members of the Security Council of the United Nations, except the Soviet Union which vetoed it. That was, I think, a first American effort at preventing nuclear weapons from becoming a destabilising element in the international power balance. Rapid US demobilisation after World War II was in itself a kind of powerful argument by example.
CARTER'S POLICY OF APPEASEMENT
Another interesting original effort of the United States to enhance stability was that undertaken during the Carter years. The American Government undertook the unprecedented step of deliberately permitting its principal potential adversary to catch up in military strength.
The policy was based on the theory that the reason the Soviet Union was so interested in military strength and expansion, and so preoccupied with developing war-making industries, was insecurity. This insecurity was a consequence of being less powerful than the United States and the West. Therefore, according to this theory, if only the Soviet Union felt more secure, the preoccupation with power and expansion would end. The military build-up would end, and everyone would live happily ever after, so to speak, at lower levels of armament, lower levels of risk and threat.
This reasoning led the Carter Administration to a policy of unilateral restraint bordering on unilateral disarmament. As part of the policy the Carter Administration cancelled the B1 bomber, the Trident submarine, long-range Cruise missiles and virtually eliminated research and development in military technology. The Administration negotiated the uneven restraints of the SALT II Treaty, unilaterally adopted maximally inhibiting interpretations of the SALT and the Anti-Ballistic Missile (ABM) Treaties. Of course, the Carter theory underlying those unilateral restraints did not work out. The Soviet Union caught up with the military strength of the US and the West and then moved on. Carter's own Secretary of Defence, Harold Brown, summed up the situation in the following words: "When we built, they built; and when we stopped building, they built".
These events led to an effort by the Reagan Administration to restore parity in all important military fields by the rebuilding of the American defence potential. These American efforts have been paralleled by the efforts of France and Britain, and Australia and some other countries to restore their own defences.
In sum, we may say that the efforts so far of the US and the Western powers to create and maintain a stable world order in the period since World War II have failed. Not only have they failed, but the instrumentalities which were created to maintain a stable world order have in some cases been turned by the Soviets, and contribute to the destabilisation of the world order. I think, for example, of the United Nations system. Not only does the UN not serve as an effective instrumentality for maintaining a stable world order but the UN has legitimised destabilising movements, such as National Liberation movements. When it gives a quasi-legal status to such groups as the PLO, SWAPO and the Polisario, the UN destabilises world order rather than stabilising it. And that is not all. In its inability to mediate such relatively "minor" conflicts as Libya's invasions of Chad or the Sudan, or its inability to deal with the Iran-Iraq war or the Vietnamese occupation and invasion of Cambodia, the UN demonstrates its irrelevance to stability in almost all parts of the world.
DETENTE
Another example of an instrument developed by the United States and Western European powers and turned by the Soviets to destabilise world order is the policy of detente. As developed and articulated by the former American Secretary of State, Henry Kissinger, the policy of detente was designed to contribute to stability by the use of economics as a tool of foreign policy. By making credit and trade available to the Soviet Union and to the states of Eastern Europe at highly favourable terms the policy of detente sought to involve these states in some profitable and pleasant relationships with the West, and thereby persuade them of the advantages of peaceful, profitable relations with the West. They would be led to abandon expansionist power in favour of the pleasures of the consumer society.
That also did not work. It too was turned by the Soviets to their advantage. It became potentially destabilising for the West as huge Soviet contracts and the jobs they generated became important, if not downright indispensable, to governments of Britain, France, and West Germany.
The effort to negotiate arms control agreements also has not contributed to world stability, principally because of problems of verification and of Soviet non-compliance. Instead, the arms control agreements have tended to neutralise areas of US advantage by imposing restraints on these areas. Meanwhile the Soviets have tended to ignore restraints imposed on them. So far, therefore, we could say that arms control agreements have contributed as much to instability as to stability in military power.
Happy exceptions to the failure of most means devised to provide international stability are the regional security pacts which have contributed to security in specific areas. NATO is a success, perhaps the greatest Western success of post-World War II diplomacy. The economic and political strengths of the European democracies are manifest. Europe is the largest single area in which the Soviets have made no efforts at destabilisation of independent governments in the period since the establishment of NATO. ANZUS has also been a success story. The RIO Pact and SEATO were never as institutionalised as NATO or ANZUS. The North Pacific seems to me today to present troublesome problems because of the absence of collective security arrangements in that region. Where collective security regional arrangements have been strong Soviet power has not been able to expand, and we can speak reasonably of stability -- regional stability if not global stability. The Soviet empire has grown in the interstices of regional collective security arrangements.
MORAL EQUIVALENCE DOCTRINE
I should like to focus briefly on the ideological and moral instruments of foreign policy and to note that the Soviet Union has used the ideological instruments of foreign policy with very great success. It has sought to delegitimise democratic conceptions of world order.
There has been a particularly relentless campaign of propaganda and outright disinformation concerning the United States. The doctrine of moral equivalence that has emerged in the last half decade is a principal fruit of this ideological offensive. It should be taken very seriously.
Its principal manifestation is the concept of superpower rivalry. The very notion that the contemporary world is divided into a struggle between two superpowers for pre-eminence or dominance is, I think, profoundly mistaken and profoundly damaging to the kind of world order which democratic nations desire to preserve. The very notion of superpower struggle suggests some kind of symmetry between the two powers which have in common the goal of world domination and which seek through their foreign policies to achieve this goal. It suggests that the values of independent nations -- sovereignty, territorial integrity -- are subordinate to a more basic process: the process of determining which of two superpowers will dominate the contemporary world.
This is deeply mistaken and dangerous. It is mistaken because the United States has no imperial vocation and no imperial ambitions. Most Americans do not even have a desire to see themselves as leaders of the free world. It is profoundly dangerous because nations whose survival, independence and strength are dependent on ours need to understand that most Americans do not desire to interfere in their affairs. The maximum most Americans are willing to do is to help others help themselves, to reinforce independent countries through regional security arrangements. The notion that the US will take some sort of initiative to impose itself in some region because of some desire or contest it is engaged in with the Soviet Union, in the Pacific or in Latin America or in Europe, or wherever, is simply wrong. There is nothing about the Geneva conversations that has changed this or that could change it.
With regard to the Geneva conversations and the post-Geneva balance of power, I would note that none of the problems with which I have dealt today developed because of a personal falling-out between Josef Stalin on the one hand, and Winston Churchill and Harry Truman on the other. These problems are not based on personal misunderstanding. They cannot be resolved by a better personal understanding or good personal chemistry between Ronald Reagan and Mikhail Gorbachev. They are based, rather, on profoundly conflicting goals and profoundly conflicting desired outcomes.
The United States, like Australia, desires to live in a world of independent nations with which we can trade, among which we can travel, and with which we can live in peace. Our stake in the containment of Soviet expansionism is no different than any other country which desires to maintain its own independence and to live in a world of independent nations with which it can trade, among which it can travel, and with which it can live in peace.
SECURITY IN THE PACIFIC REGION
What is the current state of US-Australian relations? The answer to that is excellent; not perfect, not untroubled, but excellent nonetheless. This is a discussion of security in the Pacific region and I believe that ANZUS is one of the success stories of the post-World War II epoch. In no small measure that is both cause and consequence of excellent US-Australian relations. I see no significant problem on the horizon in US-Australian relations and for two simple reasons: first, because we share all the most fundamental values and commitments. We share a civilisation and that is finally the most important foundation possible for a successful relationship of understanding one another. Second, because we have important interests in common which are not unrelated to but not quite identical with that shared civilisation. The important interests we have in common are, of course, for peace and stability and continuing security in this region.
What are the Soviet Union's objectives in the Pacific? I do not have any different basis for judging that than anyone else does and my judgement is based first on what the Soviets tell us about their objectives and second about how they behave. By those two criteria I judge their objectives to relate to the extension and expansion of Soviet power in this region; that is, the enhancement of a Soviet presence and the strengthening of Soviet military power and political presence, as well as a more generalised capacity to influence events here.
How do we know that? Well, by what they tell us about themselves as a Pacific power and perhaps more importantly, by observing the extraordinary growth in Soviet naval power in the Pacific region. Everyone knows that the Soviet presence in the Pacific has expanded to the point that the Pacific fleet is now the Soviet's largest fleet, containing something over one-third of all of its submarines, over one-fourth of its surface combatants and over one-third of its naval aircraft. Everyone I think now understands that the Soviet ground forces east of the Urals, including those on the Sino-Soviet border, have been dramatically increased from something under 150,000 in 1965 to something over half a million today. The number of Soviet divisions on the Sino-Soviet border has also dramatically increased and the Soviet air force in the fourth, eastern-most military district is now enormously expanded and has over three thousand combat aircraft. The qualitative improvement of the Soviet presence in the Pacific region is as important as its quantitative improvement. The number of SS20s and other intermediate range missiles in Asia has more than doubled in the last half decade and is today not included in the most recent Soviet INF reduction proposals, which is the subject of no small concern to the Japanese among others.
All of this is by way of saying that the Soviet interests in South Asia and in North Asia and the Pacific are clear and established beyond any reasonable doubt. Soviet interest in the Indian Ocean is as clear as its interest in the North Pacific. These are all questions which we discussed from time to time in the United Nations and which, of course, are discussed in the US Government more regularly, and I trust in the Australian Government as well. We also know about the Soviet bloc interests in the Pacific region by observing their presence in certain insurgencies in Asia, and the presence of such close allies and associates as the Libyans in places like New Caledonia and other Pacific forum islands.
This is a part of the world in which the United States, have a continuing interest, but it is, of course, fundamentally our part of the world. The American interest in the Pacific is not casual. They have been following that injunction of Horace Greely "Go West, young man" ever since their nation was established and they went west, of course, right to the Pacific Ocean and then having got to the ocean went on west to Alaska and to Hawaii, and for a relatively brief period to the Philippines. The United States has been concerned about Asia all of their national lives, to an extent that is often neither understood nor appreciated. If we look at the two great indicators of one nation's involvement with another, war and trade, we can see that the US ties to the Pacific have grown stronger rather than weaker in this last half century. Three times in the last half century, more often than in any other parts of the world, the United States has fought a bloody war in Asia, and Asia's role in our trade has, of course, grown progressively more important until now the US trade with the countries of Asia has surpassed that of their trade with any other region in the world and is growing at a more rapid rate.
There is also an interesting demographic fact that is relevant to this US interest in Asia. The Asian portion of their population has been growing very rapidly, particularly, of course, since the Vietnam War. Today the most numerous immigrants in the United States are Hispanic (they are, for your information, the third largest native Spanish-speaking nation in the world). But second only to their Hispanic immigration is their Asian immigration. I mention that because the United States is that kind of porous immigrant society in which successive waves of immigrants not only maintain some cultural identity and contribute to their diversity and pluralism, but also express that through their political processes. they are more involved with, let us say, Italy than if they did not have as many Italian-Americans and more involved, with Israel than if they did not have as many Jewish-Americans, and more involved with Africa than if they did not have as many black Americans as they have.
The Asian component in their population just inevitably enhances and increases the US involvement with Asia. Having said that, however, let me note that the presence of Hawaii as their fiftieth state gives them a permanent stake in the Pacific. But even granted that, the Pacific and the nations of the Pacific are a long way away from them. So the US relationship with Asia and the Pacific, discounting Hawaii, is very different from the Australian relationship with Asia and the Pacific. The Australian relationship with Asia and the Pacific is comparable not to the US relationship with that area, but to the US relationship to the western hemisphere; that is to Canada, to the north of them, to Central and South America and the Caribbean. We need to be clear both about the reality and about the limits of the US involvement in the Pacific. It is particularly important to be realistic about it today.
Why? Because the demands on American resources grow ever larger and more complex and the commitment of ordinary Americans to a major security role all over the world, grows more tenuous. There is in the United States today a triple trend that has a negative effect on their involvement in the Pacific. One is simply the growing American deficits and adverse trade balance. Where once they felt they were not only stronger than anybody but very nearly stronger than everybody, they no longer feel so nearly omnipotent.
That means that the search for limits to American expenditures for security commitments is not likely to disappear but will be a continuing aspect of their foreign policy. Second, the rise of problems in the western hemisphere and in the Caribbean, Central America and South America, has an inevitable effect on their security policy broadly and on the disposition and expenditure of their resources. The Soviet Union and its military theoreticians and strategists were writing as early as 1967 about the vulnerability of Central America and the Caribbean, those small defenceless nations, rather like those in the Pacific Forum -- small, poor, not very populous, not very easily defended. They knew, as a prime minister of one Caribbean island said to me three years ago, "We are fundamentally undefendable".
The appreciation of that condition by the Soviet Union and the growth of the Soviet presence in Cuba and of an aggressive Soviet bloc expansionist policy in the Caribbean, Central America, and South America inevitably, I believe, tend to focus American attention in one hemisphere rather than in more distant places. This is the way the Soviets planned it, this is very likely what they are going to achieve by a policy of steady concentration on small, vulnerable countries in this area. All the more if Americans fail to understand the longer middle-range and longer range consequences of developing Soviet military power off our borders in the Caribbean and South America.
Almost nobody looks at the level of the Soviet military presence in and around Cuba and America's Atlantic coast today, and even fewer people look at the potential for the Soviet military presence in the Gulf of Mexico and off their Pacific coast, based in Nicaragua. Each of these conflicting demands creates new pressures on U.S. resources and will tend, I think, to divert them from more remote places like the Pacific. Third, there is in the United States a tendency on the part of people and parties of the Left to feel that they have been over-extended for a long time and ought to spend their money on social programmes, and there is a tendency on the part of people on the conservative part of the spectrum to feel they are not really appreciated, anyway, and so they might as well stay at home and spend less money abroad. Neither of these trends is very powerful but both are real and influential. They meet in a kind of isolationist channel and reinforce isolationist tendencies which have always been present in the United States although have not been very strong in the last fifty years.
Still, they have powerful interests and commitments in the Pacific. About two years ago I was speaking to a leading American military official, who asserted with regard to the Clark and Subic bases "They are all we've got in the Pacific". What he meant was that they are the only bases for the projection of American military power in the Pacific. I believe that in the Philippines they are at the end of round one or two and not at the end of the fight. We all hope that events will develop positively and we all wish Mrs Aquino well. We all wish the Philippines well. We all hope that the consequence is a stable and more democratic system, but there are grounds for concern. Our newspaper this morning announced new raids by the New People's Army. The Australian, tells us that the death toll from rebel activities last week was sixty, and that there seems to be little hope for negotiated settlement, a cease-fire, because the preconditions the NPA set for negotiating a cease-fire are themselves so extraordinary. The preconditions include the termination of the US base agreements. The same newspaper also tells us of a possible split between the Defence Minister and presumably some portion of the Philippines armed forces and the current government. We, I repeat, all hope that everything develops very well in the Philippines. I say only that the continued US presence over the long run in those Philippine bases must be counted more problematic and less certain than seemed to be the case a year ago.
Considering a potential US withdrawal from the bases draws attention to the absence in the North Pacific of any collective security alliance or alliance structure to replace a major US presence. There is no North Pacific equivalent of NATO or ANZUS. There are some bilateral defence arrangements. Those are important, but they do not provide the kind of integrated force structure and contingency planning available through NATO. The first consequence of the events in both development of Soviet power in the North Pacific and of the more recent events in the Philippines is an enhanced need for a larger role for Japan in the security arrangements of that region, and a larger need for collective security arrangements by the countries of the Pacific.
The various proposals that have been discussed in the US Congress, both before and after the change in the Philippines government and the inauguration of Mrs Aquino, feature talk of possible relocations of American presence in Palau and such places. But high level American officials remind you of the geographical non-comparability of these places and shudder at the thought of adding to your deficit-ridden budget the kind of costs that would be required to establish new bases in the Pacific. I do not think that is a likely or a realistic prospect for the United States Government in the forseeable future.
In ASEAN we see not only a very economically dynamic region, as we see in the North Pacific, but also countries troubled by internal insurgencies and some of the other growing pains of less developed regions. Again I believe that some sort of more effective collective security arrangements are probably highly desirable, if not downright necessary.
We tend to ignore the People's Republic of China in strategic calculations for the region but they are, of course, very major. One must take into account the consequences of any kind of increased pressures on the People's Republic deriving from any generalised weakened Western presence in the area. Pacific forum nations strike me as comparable in many respects to the islands of the Caribbean -- very strategically important.
In foreign affairs geography is destiny. I see no alternative, frankly, for the Pacific but for Australia to play a much larger role in her own strategic planning and the defence of the region.
Australia has played a very large role. My own sense is that it will be necessary for Australia to play a still larger role. I do not purport to be a fortune teller, but I would suppose that the two most important developments for the security of the Pacific in the next decade will necessarily be a larger role in collective security arrangements for Australia and for Japan. I do not see, frankly, how either nation will escape that destiny.
THE INTERNATIONAL ECONOMY
I think the outlook for the world economy is quite favourable and becoming more so. In my judgement this is the case whether we consider economic prospects in the short run or over the long run.
All of us would probably agree that the performance of the world economy during the past year was mediocre at best. Economic expansion, which began towards the end of 1982 (a little later in Australia), continued during 1985 but at a reduced rate -- particularly in the United States.
A few countries did remarkably well in their overall production, especially Brazil and Pakistan, while in some countries -- Singapore, the Philippines and Argentina -- there was an actual recession. With the world economy as a whole moving rather sluggishly, unemployment remained extensive pretty much around the world. In some countries, as in the United States, Japan and, I believe, also Australia, unemployment declined a little; in others, including most countries of Western Europe, unemployment increased.
Another characteristic of the past year was that international financial developments were on the whole unfavourable from the viewpoint of international order and balance. The trade deficit of the United States, which has been expanding rapidly, became more awesome still in 1985. On the other hand, some countries, notably Japan, Taiwan and Germany, experienced a sizeable and growing surplus on trade account. In Latin America, where a considerable recovery in exports occurred after the debt crisis that erupted in 1982, there was a set-back in 1985, particularly in Mexico and in Venezuela.
The one really favourable development in the international economy during the past year was continuance in the curbing of inflationary trends. The rate of inflation declined in the leading industrial countries, and in much of the rest of the world. However, I believe that did not happen in Australia or in New Zealand. And, of course, in some countries, particularly in Latin America, the rate of inflation intensified dangerously and ran into the three digit zone.
In view of the mediocre performance of the world economy during 1985, it was generally expected towards the end of the last year that while the international economy would continue to recover from its recession in the early 1980s, overall performance would remain somewhat unsatisfactory; that utilisation of industrial capacity would be inadequate and that a high rate of unemployment would continue. To be sure, some differences among nations were anticipated. It was generally believed by economists that the pace of economic activity would improve somewhat in the United States, Germany and France; but, on the other hand, that it would proceed at a lower rate, particularly in Japan, but also in Canada, in Britain and in a good part of the Pacific area.
That was the sentiment around the world towards the end of 1985, but in the past few months sentiment has changed. The clearest indication of this is found in the extraordinary behaviour of financial markets. Stock markets have been booming in the US, Canada, Western Europe, Japan and Australia; bond markets have also been strong practically everywhere.
I would like to take just a few minutes to discuss the causes of this improvement of business and financial sentiment around the world. I think there are three main causes. The first is a continuation of the decline of interest rates on a worldwide basis, although, of course, there are exceptions here and there; I think Australia is one of the exceptions. Second, there has been a dramatic decline in the price of crude oil. A third contribution to improved business and financial sentiment is the fact that the leading industrial countries are now co-ordinating their economic and financial policies to a greater extent than they have in recent years. Related to that is the fact that the United States is once again assuming, deliberately and unambiguously, a position of international financial leadership, and that, I think, is an encouraging development for the world.
The continuance in the decline of interest rates has been led by central banks of the leading industrial countries. They have been prompted to do this partly because economic conditions in their respective countries were less than fully satisfactory, and partly because progress has been made in bringing down the rate of inflation. Lower inflation gives larger scope for somewhat easier monetary policies. Also, progress has been made to a considerable degree, in reducing fiscal deficits around the world, in the industrial countries certainly, or in initiating policies towards that objective; and that, too, gives larger scope for more liberal policies on the part of central bank authorities.
The decline in interest rates has been largest in the long-term market, which is by far the most important credit market from the viewpoint of economic development. When long-term interest rates decline there is the prospect that home building will revive and strengthen, and that much the same will occur in the case of commercial construction, industrial construction and equipment building. Short-term interest rates have also been coming down, although to a lesser degree; but that, too, is exercising a beneficial influence on business in the short-run, because with short-term interest rates coming down business firms can pursue somewhat more vigorous inventory policies. Also, of course, consumer purchases of durable goods are encouraged by declines in short-term interest rates.
So, the behaviour of interest rates is one factor in improving business and financial sentiment that is now characteristic of much of the world. The second factor has been the dramatic decline in crude oil prices. Crude oil prices in the SPOT market are now in the neighbourhood of $14 to $15, in contrast to something like $28 or $30 a year ago, and even a few months ago. This decline in crude oil prices will injure the economies of some oil-exporting countries, particularly Mexico, Nigeria, Venezuela and Egypt, but for the world as a whole the declining crude oil prices will serve not only to lower the inflation rate, but also to enhance economic growth.
The decline in crude oil prices will work out its influence on the consumer price level through several channels. In the first place, as far as consumers are concerned, the price of gasoline and heating oil will come down, and that is already well underway. Secondly, business firms will find, as they are already finding, that in using oil as a fuel or as a raw material their costs are lower; that, of course, is reflected at least in part in the prices that business firms charge to consumers. A third channel of influence is through substitutes for crude oil. The leading substitutes are natural gas and coal; their prices are bound to be affected adversely, and that, too, will serve to lower the inflation rate for consumers. There is still a fourth influence. In many parts of the world wage agreements are tied to the cost of living. With the consumer price level moving towards a lower level, wage increases will be lower than would otherwise be the case. This, too, will be reflected in prices charged by business firms to their customers.
So, powerful influences are being released to bring down the rate of inflation. What the effect may be in individual countries I am not equipped to say. However, in the United States it is very reasonable to expect that the inflation rate, which has been running at something like 4 per cent in the last few years, will come down to 2 per cent this year. That is a very substantial decline, and even larger declines in the inflation rate will occur in countries which depend more heavily on oil imports than does the United States.
These effects are clearly beneficial, but what about the effect of the decline in the price of crude oil on growth prospects? With consumers finding that they need to pay less for gasoline and heating oil, purchasing power will be released for other uses and this will have a wide influence on consumer purchases of goods and services. Business firms, finding their costs are lower, are unlikely to pass along all of the reduction in their energy costs; hence, their profits will improve and that, of course, will improve business sentiment. Furthermore, with the inflation rate decreasing, economic policy makers will feel that they have additional room for growth-oriented financial policies. This can be a powerful influence in improving business sentiment at the present time.
The third factor that has been serving to improve business confidence is the co-ordination that has emerged in recent months among the finance ministries and central banks of the leading industrial countries. At a meeting last fall of finance ministers and central bankers the decision was reached to pursue co-ordinated growth policies, but -- more importantly still -- to take co-ordinated measures to lower the foreign exchange value of the American dollar. That policy has been notably successful. That is not only helping to restore international balance, but it also will be helpful, and is already being helpful, in checking protectionist sentiment in the United States.
We had another dramatic example of co-ordination of financial policies in March this year when the central banks of Japan, the United States, Germany, France and the Netherlands, on the same day or nearly the same day, lowered their discount rate. This concerted action is another demonstration of the power and beneficial influence that leading industrial countries have when they agree to co-ordinate their economic policies.
Finally, there is the larger role that the US is now asserting in the international economic arena. The co-ordination of which I have spoken was in large part due to American initiatives. Beyond that, at the recent meeting of the International Monetary Fund and the World Bank the Secretary of Treasury, Mr. Baker, presented a far-reaching plan of financial rescue for the heavily indebted nations in the world, most of them in Latin America but a few, as in the case of Nigeria and the Philippines, elsewhere. That rescue plan has been widely applauded around the world by governments and commercial bankers, and its practical implementation can now be reasonably expected.
The widespread awakening to the need for economic incentives, which go with greater freedom for individuals and business firms, is to my mind the most fundamental economic development of recent years and augurs well for the longer range future of the entire world.
Let me state just a few pieces of evidence. As I think all of you know, there has long been a large gap between the economic performance of the United States and that of the Soviet Union. This gap is becoming wider; it has increased sharply during the past decade. If you go back ten or eleven years to 1975, you will find that the per capita output of the United States was then just about double that of the Soviet Union. But by 1980 the margin of superiority, instead of being about 100 per cent, became 114 per cent. By 1985 the margin of superiority had become 118 per cent. For the satellites of the Soviet Union in Eastern Europe, the gap is widening at an even faster rate than the Soviet-American gap.
These facts have not escaped the attention of the Soviet leadership. They are well known and understood by Soviet economists and by leading Soviet politicians. The greater willingness that Mr. Gorbachev exhibited in Geneva to seek ways of curbing the armaments race reflects, I think, the deterioration of the Soviet economy to a very significant degree.
Moreover, the faith of the Soviet leadership in Marxism is weakening. There are few genuine Marxists left in the Soviet Union at the present time. At the recent Congress of the Communist Party (held last February) Mr. Gorbachev laid emphasis on the sharp decline in the overall rate of growth of the Soviet economy. He went on to proclaim that prices in the Soviet Union must become more flexible, so that they would reflect consumer demand as well as costs of production. He even argued for a reduced emphasis on central planning; for the encouragement of production through economic incentives; and what was most surprising, at least to me -- for some private enterprise in the service trades. So far this is largely rhetoric, to be sure, but do not overlook the fact that good rhetoric normally precedes good economic policy.
There is no doubt in my mind that Mr. Gorbachev and his colleagues in the Soviet leadership have been influenced in their thinking by the dynamism of the American economy; also by the extraordinary performance of the free enterprise economies in Eastern Asia -- Japan, Hong Kong, Taiwan. I believe the Soviet leadership is also not overlooking what has been happening in Communist China, where tillers of the soil instead of working on state or collective farms are now working for themselves and reaping handsome rewards in the process, where small private businesses are now being permitted, and where foreign investment is also being encouraged. The modicum of economic freedom that has emerged in mainland China has produced extraordinary results. In 1983 industrial production in mainland China increased by 10 per cent, in 1984 by 14 per cent, last year by a still higher percentage. Agricultural production has done even better than industrial production. The Soviet leadership cannot be overlooking this development in a communist nation.
WESTERN EUROPE
In Western Europe, countries rely largely on private enterprise. They have, however, imposed very extensive governmental intervention on their economies and this has sapped their vitality. Just as in your country, social welfare programmes have long been popular in Europe. During the decade of the 1970s a veritable explosion in welfare programmes occurred. These programmes came to include not only individual and family concerns about unemployment, illness, old age and other vicissitudes of life; they also came to include special benefits to business firms or industries that happened to be ailing, or which government officials for one reason or another felt were deserving of some special assistance or encouragement.
Let me give you Germany as an example. Government spending which is dominated by social welfare outlays, in 1970 constituted 38 per cent of Germany's gross national product. This is a higher percentage than exists in the United States even today. But by 1982 this percentage had increased from 38 to 50 -- an enormous increase in just 10 to 12 years. And what happened in Germany occurred throughout Western Europe. In some countries, as in Great Britain, government spending, as a percentage of gross national product, is a little below 50 per cent. In other countries as in Sweden, the Netherlands, Denmark, the percentage is 60 or above. This explosion of social welfare programmes in Western Europe has been accompanied by profound changes in labour markets. Labour markets which had been rigid previously became far more rigid. The welfare programmes have also been accompanied by pervasive, very extensive governmental regulations and by sharp increases in taxes, all of which served to raise business costs, to reduce business profits, and to weaken the incentive for capital investment.
These developments accelerated the pace of inflation and brought on progressive increases in unemployment. In short there is a European malaise that is commonly referred to these days as "Euro-sclerosis".
Now, there is a sharp contrast between what has happened in Europe and the United States. The United States between 1970 and 1985 created over 28 million jobs, whereas in Western Europe total employment hardly budged. There is thus a stark contrast between Western Europe and America. There is an even more glaring contrast between the European economies and the free enterprise economies of Eastern Asia, where taxes are low and trade unions are weak, where, except for Japan, social welfare programmes are negligible, and where people are still accustomed to hard work. This is the area in the world where economic growth has been proceeding at the fastest rate.
European intellectuals, economists and by now government officials are well aware of the dynamism of the US and the still greater dynamism of the free enterprise economies of Eastern Asia. The stark contrast between their own performance and that of these dynamic economies has led to agonised introspection on the part of Europeans which is already yielding some fruit. To give an example, in Germany a sizeable tax reduction took place in January of this year; another tax reduction has already been legislated to become effective in 1988, and plans are being laid for further tax reductions after 1988. To give another example, the German parliament has extended from six to eighteen months the period for which employers can hire workers without being committed to retain these workers indefinitely.
The story is similar elsewhere. Great Britain has a bold policy for privatising state-owned enterprises. Its generous unemployment insurance benefits have now become subject to income tax and legislation has been passed which makes it easier for employers to hire non-union workers.
The disenchantment with the promises of Welfarism, with the promises of Keynesianism, with the promises of Marxism, has by now spread across much of the globe. We are living in an age of extraordinary advances in communications, transportation, travel, technology, and these changes have been widening the range of political and economic choice available to people. Knowledge has been spreading, even in countries where governments try to suppress information and have drastic measures for doing so. Knowledge has been spreading about the advantages that are offered by free markets and by economic incentives.
AFRICA
In Africa, where socialist thought and practice had become dominant once colonialism collapsed, new intellectual currents are stirring. At a meeting of the Organisation for African Unity last year, the assembled heads of State of African governments acknowledged that the primacy accorded to the state has hindered rather than furthered economic development. In line with the new way of thinking many African governments are reducing reliance on price controls and subsidies. Governments are seeking to close, rehabilitate, or sell unprofitable state-owned enterprises to private investors. The list of such countries includes Congo, Guinea, Mali and others that had experimented with Marxist economic policies. Moreover, Uganda, Zambia and Zaire have recently been trying out auctions for allocating scarce hard currency according to free market principles.
With such profound stirrings towards freer markets taking place even in socialistically inclined Africa, you can see why I so firmly believe that the long-range outlook for the world economy is improving. That conclusion, I must add however, is based on the premise that the leading industrial democracies, and particularly the United States, will be wise enough to attend responsibly to the three major economic problems that concern the world today.
First, there is the need for a faster rate of economic growth; second, the need for assisting the heavily indebted countries of the world, particularly in Latin America but some also in Africa and in the Pacific region; and third, the need to check the growth of protectionist sentiment in the United States and in Western Europe. I can say with some confidence that protectionism will be curbed, at least this year, in the United States. I am confident, too, that the heavily indebted countries of the world, under a new plan evolved by Secretary Baker, will avoid a crisis in international finance, and that the need for faster rates of economic growth will continue to be recognised.
THE THREAT OF PROTECTIONISM
Since this session is concerned with the international economy, and therefore, with the prospects of trade across political boundaries, it is necessary to establish, as a fundamental axiom, that trade across political boundaries, between consenting adults, provided national security is not endangered, is meritorious.
For us this is no kindergarten exercise. Australia is now facing what used to be called a balance of payments crisis, which is simply the accounting description of the propensity we have for spending more than we earn.
As an appreciation of this problem seeps through our political elites (by which I mean our politicians, journalists, public servants, academics, clergy, and those important people at all levels of industry and commerce, who take part in shaping public opinion) -- many solutions are put forward for debate and approval. One such solution, which was sent to me for commendation and support, was intellectually very simple; to wit, that we should prohibit all imports.
As one whose livelihood is gained from an industry whose products are at least 95 per cent sold on export markets, I found such a proposal spine chilling. Its author had not realised, I think, that a blanket prohibition on imports, automatically implies a similar prohibition on exports, and an end to my livelihood!
Just as the end purpose of production is consumption, so the end purpose of exporting is importing. Imports make exports possible, just as much as the contrary. A blanket prohibition of imports is a rather extreme manifestation of a tenacious tradition, or perhaps folly would be a better word, in Australian culture and politics, a tradition which is best described as the fantasy of Fortress Australia.
With our overall unemployment levels of 8 per cent and rising, our young people unemployed at the rate of nearly 25 per cent, the temptations to use the power of the state, to direct these unemployed people to occupy themselves manufacturing commodities such as computers, VCR's, New Zealand race-horses, Taiwanese shirts, which we continue to import with unyielding determination, have become alluring to more and more people.
Such a policy, it is claimed, if pursued by a determined and enlightened Minister, would solve our unemployment problems, would solve our balance of payments difficulties and would reduce our taxes.
I set out these arguments, arguments now increasingly heard in Australia at all levels of society, both from the Right and from the Left, in order to demonstrate how seductive they are and how difficult it is to show them to be catastrophic in their consequences.
In the United States, the problems of the smoke stack industries, the propensity of American consumers to shop around the world, both literally as tourists, and also through the intermediation of importers, have led to similar debates and similar political difficulties.
Of course it is the issue of trade with Japan which seems to arouse, within the US, the greatest passion. Some of the language used by some leading American industrialists remind one of the language, and policy, which helped to take us into the Pacific War of 1941-45.
Let me note here that the U.S./Japanese trade imbalance is, in per capita terms, only marginally greater than the Aust./U.S. trade imbalance. That one should be seen as a threat, whilst the other should be taken as a perfectly natural state of affairs, shows how significant cultural and linguistic factors are in these matters. In every society, in every political party, ultimately, I suppose, in every individual, free trade principles carry on a war with protectionist or mercantilist heresies. As consumers, we are enthusiasts for free trade. As producers, we are adamant for protection, and we can always find highly ingenious arguments to reconcile our warring halves.
But the problem is not really one of argument. Ultimately, no amount of casuistry can paper over the difficulties of free trade at meal times, combined with protectionism during working hours. Our problem is that of interest, using that word to denote private or sectional advantage. It does not take long for entrenched political interests to form, once protectionism obtains a foothold in the body politic, as the political history of Australia over the last fifty years shows so well.
The problem of interest is one to which I will return. In the meantime, let me briefly consider the arguments.
TRADE PROMOTES WEALTH
Trade across political boundaries is beneficial, to those who engage in it, for exactly the same reasons as it is beneficial when it takes place within the confines of the nation state. In Australia within very recent times, we have had arguments even over this principle. Various state governments have sought to discourage trade within the Commonwealth by enacting "state preference" policies.
Trade, be it intranational or international, enables and encourages the division of labour, the specialisation of skills, the exploitation of resources that are geographically confined, the diffusion of knowledge, the spread and growth of prosperity and well being. In a phrase -- Trade promotes Wealth.
This fundamental observation should be engraved on all our parliament houses, all our public service buildings, all our customs houses. All too often, those who work in these places spend their working lives trying to choke off the flow of trade, and as they work, they think they do their fellow citizens a great service.
Mr Chairman, having attempted to restate some very old, but rather unfashionable truths, I wish to put forward some observations concerning our contemporary international trading situation.
California, so it is said, is the place where we can see today what the rest of the world will be doing, or trying to do, in the years to come.
A feature of life in Los Angeles, which I find pregnant with symbolism, is the San Andreas fault. In particular, I find some of the houses built right on the top of the fault, creaking eerily, doors not closing, windows cracked, many of them deserted, some occupied by squatters, rich in allegory.
Do those squatters, I wonder, study the seismographic record day by day? Do they study carefully the records of the period leading up to the devastating earthquake of April 18,1906, in an attempt to deduce patterns of seismic activity which could provide an early warning signal?
To ask these questions in the context of today's discussions can only mean that I regard our international economy as operating on top of some sort of economic San Andreas fault.
What are the economic equivalents you may ask, of the seismic instruments which track the movements of the San Andreas fault?
THE COST OF CURRENCY MOVEMENTS
The most important, in my view, is the relative movements of national currencies. Just as those squatters, residing in their creaking houses, have become quite accustomed to continuous subterranean movement, and accept the precariousness of their accommodation, so have we become quite blasé about substantial relative movements in our major international currencies.
The Japanese yen has appreciated more than 33 per cent against the US dollar between the G5 meeting of September 1985 and March 1986. Our own Australian dollar has depreciated against the US dollar nearly 20 per cent in the fourteen months to March 1986. The British pound went as low as US$1.05 on 26th February 1985.
The volatility of our currencies are now an accepted part of our commercial and international trading environment, and we have forex markets and hedging markets to act as shock absorbers. We have become anaesthetised to currency instability without comprehending the pain and injury such instability causes.
Let me try to explain the nature of the injuries to which we have become quite insensitive.
It is difficult enough, within a community bound by a common language, a common law, a common history, and taking part in the ebb and flow of a shared politics, to operate an efficient and productive economy when the society's own money declines in value by anything from 8 per cent to 20 per cent per annum.
Within a national economy, economic calculation, (which must handle time periods of at least a generation) becomes more and more arbitrary as the value of money within the society becomes more difficult to predict.
Since investment depends almost entirely upon such calculations, the following happens, and I am speaking again, purely of events within a national economy.
The quality of investment will diminish, as entrepreneurs, misled by the answers to their calculations, overinvest, for example, in the capital goods markets, or build up inventories beyond appropriate levels. Long term investment strategies become increasingly difficult to undertake. Just as in politics a week is a long time, so in commercial and industrial life, three years becomes the limit of calculation and investment. Quick yielding, highly speculative adventures become at first fashionable and eventually mandatory.
The failure of a society to maintain a standard of value, what has been known for centuries, as sound money, will be at first economically debilitating, and in the final analysis, socially destructive.
How much more destructive, therefore, to international trade, will be the disappearance of internationally recognised sound money; given that trade contracts which cross over political boundaries must often bridge profound differences of language, of local custom and law, of religious belief.
Given the gravity of this problem, and the apparent lack of interest on the part of those who should be most affected because of it, it was most encouraging to read, in President Reagan's recent State of the Union Address, the following.
"The constant expansion of our economy and exports requires a sound and stable dollar at home and reliable exchange rates around the world. We must never again permit wild currency swings to cripple our farmers and other exporters.
We have begun co-ordinating economic and monetary policy among our major trading partners. But there is more to do and tonight I am directing Treasury Secretary Jim Baker to determine if the nations of the world should convene to discuss the role and relations of our currencies."
I am aware that the number of high level official pronouncements on the need for international monetary reform over the last eighteen years could fill a large tome.
But nonetheless the comment in Washington is that this is a real attempt to restore monetary stability -- sound money -- on an international scale. There are a number of proposals for such a restoration, and they all have the common theme of the depoliticisation of money. It now seems clear that sound money is only possible in an institutional setting free of the ebb and flow of political force and calculation.
THE DANGERS OF DEBT
The ups and downs of international exchange rates seem to me to parallel the daily seismic charts of our earthquake scientists. But as in subterranean movement, these seismic charts are but the surface evidences of great pressures and restraints, enormous forces and stresses, operating deep below the surface.
In our world economy the clear parallel with these great subterranean pressures is debt.
There is no point now in running through the various estimates of who is indebted to whom, and by how many billions, or trillions.
When Peter Grace visited Australia, in April 1985, he told us how he had become, as Chairman of W.R. Grace, accustomed to thinking about millions, and even hundreds of millions of dollars. When he took on the chairmanship of the Grace Commission, I think more properly titled the President's Commission of Enquiry into Government Expenditure, and became deeply involved in the arithmetic of the US federal budget, it was merely moving up an order of magnitude to become familiar with billions. But when it came to trillions, or "trills" as they were known in White House jargon, his capacity for comprehension had become exhausted. A "trill" was an incomprehensible.
Likewise, the debt burdens which have been shackled onto ourselves, but more significantly, onto our children, have become, as arithmetical entities, incomprehensible. What do these incomprehensible "trills" of debt and expenditure mean?
It means that the cultural and philosophical framework essential to economic progress is in a process of dissolution. Prosperity requires work, thrift, frugality, investment, and faith.
Debt, in a sound and sure economy, is not something which should never be undertaken. But it should be something rather like matrimony, which as the Book of Common Prayer has it, is not by any to be enterprised, nor taken in hand, unadvisedly, lightly, or wantonly. Our levels of government debt, in particular, are unassailable evidence of wanton, unadvised, and frivolous conduct. It is this conduct, it is the wanton and frivolous state of mind which legitimises such conduct, which constitute the great pressures threatening our world economy.
Almost everywhere in the western world do we find that democracy brings with it deficits and debt. The leverage which a wide range of special interest groups, led by highly skilled political operators, can generate seems to have locked our politicians, and our ministers, into a position where their legitimacy, their confidence, their incapacity to break through a log-jam of inherited prescription, has demoralised them.
THE PROBLEM OF INTEREST
This brings me back to the fundamental problem of interest. Samuel Johnson's dictionary, under the entry "Interest -- regard to private profit" -- quotes Jonathan Swift to illustrate the meaning -
"Wherever interest or power thinks fit to interfere, it little imports what principles the opposite parties think fit to charge upon each other."
Politically powerful interests impose mercantilist policies, which in their turn create new interests, until an entire edifice of interlocking groups is created whose profits, wages, and investments depend upon continuing political intervention in, and contravention of, market processes and decisions.
Since these interests have so much at stake in the political process, they invest heavily in politics. Those, on the other hand, who are disadvantaged from government interference in the marketplace, are usually placed in the situation where the folly has already been perpetrated, and where prescription is therefore on the side of folly; where the costs in time, energy, and money of attempting to undo that which has been done seem so great, and the outcome so uncertain, that there seems no point in seeking redress. The best policy seems to be adaption rather than resistance.
If this theory of political decision making were universally true, then there would be no point to our meeting and argument here today. Australia's problems, particularly, would appear insurmountable.
The indifference of the EEC to the consequences of its common Agricultural Policy on Australia's rural industries; the political leverage which Japanese farmers enjoy and the consequences of such leverage on Australia's ability to gain better access to the Japanese food market; are two particular examples of the politics of interest operating in the great metropolitan societies where Australian problems are of no consequence, and where Australian influence counts for little.
INTEREST DOES NOT ALWAYS TRIUMPH
What point is there then, to our discussions today? The point is that interest does not always triumph. On the historical evidence we can find many instances of political and social conflict in which interest has had to concede to argument. This is particularly true of the United States.
This great nation is unique in the history of national states, in that its legitimacy rests not on prescription, but on the ideas set out in the Declaration of Independence.
"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness.
That to secure these rights Governments are instituted among Men, deriving their just powers from the consent of the governed."
In England, of course, the contradiction between the sentiments so eloquently expressed in the Declaration of Independence, and the institution of slavery, had not gone unnoticed. Samuel Johnson, in his pamphlet justifying the policy of taxing the American colonies despite their lack of representation in the House of Commons; a pamphlet entitled "Taxation No Tyranny", said "how is it that we hear the loudest yelps for liberty from the drivers of negroes?"
The contradiction between the universal principles of that Declaration, and the institution of slavery, was not resolved until the Presidency of that outstanding figure, Abraham Lincoln and the defeat of the Confederacy in the Civil War.
Lincoln upheld the centrality of the Declaration of Independence in his Gettysburg address, with words which can still move us:
"Fourscore and seven years ago our fathers brought forth upon their continent a new nation, conceived in liberty, and dedicated to the proposition that all men are created equal. Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure."
That Declaration of Independence and Lincoln's defence of it, by word and deed, must provide an outstanding example of the triumph of argument and idealism over interest.
Another marvellous example of the triumph of argument over interest was the repeal of the Corn Laws by the British Parliament in 1846 and I will briefly draw upon this experience.
In 1846 Sir Robert Peel, the founder of the Conservative Party, persuaded some of his supporters to vote for the repeal of the Corn Laws. In doing so he split his own party, but at the same time he ushered in the most dynamic, prosperous, wealth creating era of British history.
What were the Corn Laws? They were laws which imposed heavy tariffs on imported grain, thus protecting the local grain growers from overseas competition. Prices of grain, flour, bread, cake, and so on, were consequently much higher in Britain than would have been the case without those tariffs. The market value of country estates was also, concomitantly, greatly increased. The majority of Peel's supporters in the House of Commons, represented the rural interest. They were the Tory landed gentry, to whom the newly emerging industrial towns of Britain were unfortunate at best, and anathema at worst.
The Corn Laws directly and substantially affected the standard of living of the new industrial working classes. Bread was the staple food, and since food was a major part of all expenditure for these people it can be seen that the Corn Laws were a method of transferring income and wealth from those who worked in the export industries of the day, textiles, iron, coal, manufacturers; to those who grew wheat, barley and oats for the protected home market.
Peel's role in this extraordinary tale was pivotal. He was able to persuade a significant number of his supporters that the future of Britain, and the future of the class of landed gentry to which they belonged and which they represented in the House of Commons, was at risk. Further he persuaded them that that risk would be mitigated, perhaps completely obviated, if they were to support a measure which would substantially reduce the capital value of their estates; which would reduce in the first instance their annual returns; and which would wipe out as totally uneconomic a significant acreage of wheat-growing country; country which had been devoted to wheat and oats for centuries.
Peel could not have brought off this extraordinary parliamentary victory had it not been for two things. The first was the national campaign that had been waged, both in and out of Parliament, by Richard Cobden against the Corn Laws. Cobden was a brilliant organiser, an effective speaker and pamphleteer. In 1841 Cobden won a seat in the House of Commons, and Peel then found himself having to defend the Corn Laws, in Parliament, against arguments that were overpowering.
The second development which forced matters to a head was the Irish famine. Ireland, all of it, was then an integral part of the United Kingdom, and when the blight devastated the potato crops, since potatoes were the staple food of Ireland, the results were catastrophic. Half a million died and a million emigrated, mostly to North America, but some to Australia. The combination of famine and death in Ireland, and the power of the arguments that Cobden had marshalled against the Corn Laws, enabled Peel to persuade the House of Commons to vote against the direct financial interest of the large preponderance of its members. It was an extraordinary feat of great statesmanship.
Peel thus alienated many of his own party, who split off, and went with Disraeli. Peel put his sense of duty to his sovereign, to posterity, and to his own conscience first, and his obligations to his party second.
It seems likely that the two factors, overpowering arguments and a real crisis, are both necessary in order to bring about real reform. The story of Peel's great triumph over interest is one which ought to be told as often as we can.
THE WEAPONS OF ARGUMENT
Australia, like many other small powers, depends crucially on access to the great metropolitan markets not only for its prosperity, but for its very survival. The only weapons we have are the weapons of argument, and we must do all we can to build up their efficacy. The story of Peel and the Repeal of the Corn Laws is a powerful testament to the efficacy of argument.
It is my fear that the impending crisis in our international trading relations, and therefore in the western economy, may come upon us before we have had time to get the arguments into place. Arguments, in the situation we now find ourselves in, are rather like the great guns which the artillery has to get into the right place in order to be effective. Such guns have to be tested, have to be transported, have to be able to withstand the counter attacks of the enemy.
It is my job to develop, again, the arguments against mercantilism and protectionism, and to get them into position, within the minds of our political elites, in readiness for the day when the full barrage of debate has to be unleashed.
We need to develop, in North America, in Western Europe, and in the West Pacific, networks of individuals and organisations who can do the job of the artillery in the forthcoming battle.
The political elites within the United States, particularly, are vulnerable to the power of argument, since the legitimacy of their society is based upon it.
The United States is so much the flagship of the western world; Western Europe and Japan, (not to mention the very small corvette states, Australia and New Zealand), are so dependent, economically and militarily on U.S. wealth, and knowledge, energy and commitment; that to be able to influence debate in the United States, is to be able to exert real influence.
The great economic pressures generated by debt; the warnings given by the volatility of exchange rates; the shrill clamour of protectionists and interest groups; these things are increasing dangers to trade, to prosperity, to the well-being of the citizens of even the great metropolitan states. Those of us who live and work in the provinces such as Australia, where the dangers seem so much greater, can play a useful, an honourable, perhaps even a vital role, in building institutions, arguments, and ideas, that can grapple with these problems.
AUSTRALIA'S ECONOMIC STRATEGY FOR THE 1990s
In speaking about Australia's economic strategy for the 1990s, it is worth recalling the wider title of the Joint Seminar within which this paper is presented -- namely, "Australia and the World -- Opportunity, Risk and Security".
Within that wider framework there is a need, on the global level, to spell out the international uncertainties, both political and economic, within the framework of which our business and political leaders must chart their courses (and ours). Further such concerns focus more narrowly on our own region.
By its very nature, economic growth depends upon change. Australia is no exception to that. Thus, if Australia's economic strategy for the 1990s is to be directed towards growth -- as it must be -- it will have to be directed also to fostering change.
Again, if opportunities are to be seized and capitalised upon, risks must be taken. Those concepts also are, generally speaking, indissolubly related.
Of course, opportunities are less likely to be exploited, and economic growth therefore less likely to occur, unless there exists a secure policy background -- nationally and internationally -- against which to do so. It is no accident that one of the world's greatest periods of economic growth -- the 19th Century from about 1830 onwards -- took place against the background of the Pax Britannica. It is also no accident that an even greater period of world economic growth -- the forty years since the Second World War -- has taken place against the background of what today might appropriately be called the Pax Americana.
In approaching the 1990s Australia will also have to have regard to that other element in that wider title quoted above -- "Australia and the World". Whatever may have been the situation in the past, Australia today is increasingly locked in to a wider economic and international security environment. One reaction to that is to demand that the world be stopped while we get off. That is not an adult reaction and it is unlikely, therefore, to be a suitable basis for thinking about our own "strategy" for the 1990s.
So there we have it. Acceptance that our future in the 1990s will have to be found within a world beyond our own shores (but coming, in communications terms, ever closer to them); acceptance that, for that reason as well as for reasons inherent in the process of economic growth, our economic strategy for the 1990s will necessarily imply change; acceptance that if opportunities are to be taken, so must risks; acceptance, above all, that there can be no basis for any economic strategy for the 1990s for the countries in our region -- including Australia -- unless they continue to enjoy the overall sense of security and relative freedom from military threat which they have enjoyed for the past forty years; and acceptance that Australia has its part, albeit a small one, to play in maintaining that security: these are the basic conditions by which Australia will be bound in any approach to an economic strategy for the 1990s.
These conditions are, however, very generally stated. What do they mean in practice? For my purposes, I leave aside the last of them -- international security. I do so not because it is unimportant -- on the contrary, it is basic -- but because it is beyond the scope of this paper.
For the rest, it is almost banal to state that Australia's capacity to achieve a vigorous growth of its economy in the years ahead will depend upon the efficiency with which it employs its resources of labour (including brains) and capital.
Our capacity to deploy capital efficiently -- including the capacity of foreigners to assist us (as well as themselves) by deploying their capital here -- has been greatly enhanced by the present Government's decision in December, 1983 to take a major step towards deregulating our financial markets, in that case principally our external financial markets. The full ramifications of that decision are, I believe, yet to be widely appreciated in Australia, even in those investment management circles where, perhaps, one might have expected them to have been most clearly discerned. Nevertheless, the extraordinary enhancement of personal and institutional freedom which that decision has provided is gradually becoming more widely recognised. The ripples are spreading ever outwards from the major impact of that stone plunging into our financial pond. I also believe that, as our own domestic economic outlook begins to turn more sour -- as it is now doing -- more and more Australian minds will be concentrated wonderfully upon the alternative avenues now open to them for disposing of their funds -- whether their own or those they manage for others.
I very well recall an earlier historic post-War economic decision, the abolition of import quotas in February, 1960. That was followed in 1961 by a build-up of enormous pressures on the Government of that day to reverse that decision. Similarly, we may well see this year a build-up of pressures on the present Government to reverse its decision of two years ago.
The most dangerous pressures on that earlier Government came from within the ranks of its own traditional supporters in the manufacturing lobby. The greatest danger to the present Government is also likely to come from within its own ranks. The Left, in particular, is well aware that that 1983 decision represented a fatal blow to its own authoritarian headlock upon our economy. As very recent events have demonstrated, it is now beginning to advance its own nostrums for turning back the clock in that and other regards.
REDUCING PUBLIC SECTOR BORROWING
Of course, decisions by the owners or managers of capital as to the form and location of their investments are by no means the only element affecting the efficiency with which that capital is employed in their (and Australia's) service. Of great relevance also is the extent to which our national savings are conscripted in the service of governments -- in other words, the level of the total Public Sector Borrowing Requirement (PSBR). Let us consider that a little further.
It is a mere truism of national income and expenditure accounting that national savings, plus the extent of any call on the savings of foreigners (the current account deficit of the balance of payments), will equal the level of national investment. Our Government (and our trade unions) assert that they desire the level of business investment in Australia to rise. It therefore follows that either the level of our own savings (including corporate profits) must also rise, or governments must reduce their call upon those savings, or the balance of payments deficit must increase.
I trust I shall not need to spend any time here this afternoon arguing that the last alternative is no longer available to us. I expect everyone would agree that our balance of payments deficit -- and the growing level of external indebtedness to which it is cumulatively leading -- is already much too high. So far from raising it further, it needs to be sharply reduced, to perhaps no more than half its present level as a proportion of Gross Domestic Product (GDP).
Of course, to the extent that that reduction is achieved, even more weight must necessarily be placed upon the other alternatives in that identity which I have just stated. In particular, there will be an even greater need for our governments to reduce their call (the PSBR) upon our national savings. Just as, in the United States of America, there is a clear linkage between the magnitude of that country's Budget deficit and the magnitude of its external deficit, so too does that linkage also obtain here.
Much of the debate which goes on in Australia about the need to control Government spending derives from peoples' increasing sense of resentment towards the growing burden of taxation to which, over the past 15 years or so, they have been inexorably subjected in order to finance that spending. That growing sense of resentment stems also from their own observation of the ways in which their taxes are being squandered by spendthrift Ministers and public bureaucracies. As such, it represents the "grass roots" reaction which will be needed to bring Government spending under control. It represents that essential involvement of individuals in what is, in the end, the political process. What I am also pointing out is that, over and above that, there also exist macro-economic pressures to wind back Government spending. These pressures derive from the need to reduce the PSBR as a means of bringing the balance of payments back into the more acceptable configuration which, increasingly, the financial markets are going to require of any Government of this country.
The battles within the Cabinet room which those processes will inevitably entail are just beginning. It remains to be seen, indeed, whether the present Government will be able to maintain internal cohesion while they are being won, or whether the process of trying to win them will itself produce such fissiparous tendencies as to blow its ranks apart.
One thing, however, is certain. No meaningful economic strategy for this country for the 1990s can be founded upon a (gross) PSBR of around 5.7 per cent of GDP (as originally estimated for 1985/86), any more than it can be founded upon a deficiency in our national savings (balance of payments deficit) amounting coincidentally to around much the same figure of 5.7 per cent of GDP, as now seems likely for 1985/86.
BUSINESS INVESTMENT
To hammer home those nails in the coffin of present policies, bear in mind also that the level of private business fixed investment this financial year, at around a mere 9.2 per cent of GDP, will still be well below the already very low level of 11.0 per cent of GDP to which it had fallen in 1982/83, just as this Government came to office. In other words, the need to do much better on the business investment front provides further quite irresistible reasons why the call of Australian governments upon our national savings must be dramatically reduced.
While the need to do much better on the business investment front is undeniable, the likelihood of our doing so is less clear. So we need to ask, what are the chances, as things now stand, of achieving that major rise in business investment on which both the Government and the Australian Council of Trade Unions (ACTU) have set their sights -- although not, I suggest, their policies?
By chance, this question is particularly topical. Recent press reports of a meeting between the Treasurer and members of the ACTU Executive indicated that the latter were thoroughly unhappy about our business community's performance in raising the level of investment in production facilities in this country. The President of the ACTU (Mr. Crean) is reported to have "sheeted home" to Mr. Keating that the "missing link" in the Government's economic strategy was a lack of investment growth. (The Age, 13 March, 1986).
According to that same report, Mr. Crean said:
"If we expect to maintain the employment prospects into the future then there has to be a reinvestment in Australia that provides the jobs. There has to be the continuation of the basis of wealth creation. But quite frankly, what's the point of creating that base if it's not being used to enhance productive capacity for the future and to create more jobs".
Out of the mouths of babes and ACTU Presidents, indeed.
What I personally find fascinating about this is that Mr. Crean and his ACTU colleagues should be surprised that the Australian business community "appeared jittery about investment". These jitters, according to Mr. Crean, prevail despite "the competitive edge given to industry through the (Australian) dollar's devaluation".
Now in fairness to Mr. Crean it must be said that in apparently assuming that our currency's depreciation should be all that is required to generate a spate of new business investment, he was doing no more than repeat the litany to that effect which the Government has now been preaching for the past 12 months. That litany was carefully and exhaustively set out in the Budget papers last August. Indeed, as recently as 12 February of this year, in answer to questions following his speech to the 39th International Banking Summer School in Melbourne, the Treasurer repeated it. He then said that the chief reason why imports had so stubbornly refused to fall in the first half of 1985/86 was because of the large rise in imports of machinery and transport equipment during that period. This, he said, was convincing evidence that the Government's strategy was working, and that it was now presiding over what he called "the renaissance of Australian manufacturing industry".
As we now know, imports in that same category of machinery and transport equipment have fallen in both January and February of this year. That may, of course, represent no more than the volatility inherent in all these monthly series of statistical data. Alternatively -- and Mr. Crean's remarks would seem more in harmony with this alternative -- that "renaissance" of which the Treasurer spoke has yet to dawn. We are still, to pursue his metaphor, condemned to the Middle Ages.
If so, I would not personally find that surprising. True, a major change in relative prices between imported goods and services and their domestically produced equivalents (where they exist) has been either actually or potentially produced by the steep depreciation in the value of the Australian dollar commencing 13 months ago. True, such a change in relative prices -- although not necessarily brought about in that way -- does constitute one of the necessary conditions for a revival of business investment in those areas of the economy directly competitive with imports. The question is however whether it is a sufficient condition.
Economists, particularly those who, as Marshall and Schumpeter did, maintain close links with the business community while plying their trade in academia, have always emphasised that the processes of business investment decision-making involve not merely the calculation of rates of return on the capital invested at the time of the investment decision itself, but over the life of the investment. They have also usually emphasised that nothing is more detrimental to that decision-making process than uncertainty, and that the risk premia which derive from that uncertainty will be "loaded" onto the calculations of the returns required. Those risk premia will, therefore, depending upon their magnitude, exert a powerful influence upon the likely outcome of such decision-making.
INTERNATIONAL COMPETITIVENESS
Against that background, consider the outlook governing investment risk premia in Australia today. True, our manufacturers have enjoyed within the past year or so a major improvement in their relative cost and price competitiveness. (1) Much the same would be true, say, of a services industry such as tourism and travel.
Yet when our producers regard the Australian scene today, they find that our current inflation rate is over 8 per cent and still rising, whereas in Japan, for example, inflation this year is likely to be zero or even negative; in Germany probably less than 1 per cent; and even in the United States, perhaps no more than 2 per cent.
In other words, in these three major sources of our imports, our competitors are set to haul back the competitive advantage our producers have recently obtained and, given these remarkably high inflation differentials, it will not be very long before they fully do so (further relative exchange rate variations meanwhile apart).
UNION POWER
Even if we ignore for current purposes the present level of interest rates, that is bad enough as a background against which to be considering new investment. Yet in many ways the other forms of uncertainty to which our producers are subjected are much worse than that. One has only to look at the industrial scene in Australia today, and the massive power of the trade unions which control that scene. It is moreover a power which, via the so-called Accord, has been massively enhanced under this Government. The remorseless push towards effectively union-controlled, or strongly union-influenced, superannuation funds is merely the most recent, and most overt, example of that.
Against that background, could anyone safely conclude that Australia today is a country in which to be giving major hostages to financial fortune via the investment of one's own hard-earned savings (or the shareholders' funds for which, as a Director, one has responsibility)? I think not.
Of course, where an investment appears likely to be so highly labour-saving, or so highly productive that it can effectively pay for itself within a very short period, judgments may still be made by company Boards and others that such investments are worthwhile risking. Such an outcome appears much less likely for longer-lived investments. Yet these, I suspect, are quintessentially the kind of investments to which Mr. Crean was recently referring.
If so, two conclusions appear to follow -- one short-term and of immediate relevance to the Government's present economic strategy, the other longer-term and crucial to the topic of this paper, namely Australia's economic strategy for the 1990s.
THE HAWKE GOVERNMENT'S STRATEGY
Take the short-term conclusion first. As noted earlier, the Government's present economic strategy was clearly set out in last year's Budget papers and has been rehearsed on several occasions since in public addresses by the Prime Minister and the Treasurer among others. That strategy is based upon two interlocking foundations:
- Because of last year's massive depreciation of the value of the Australian dollar, there will be a very strong switch in domestic demand away from imports and towards domestically produced goods and services. That switching process will maintain a strong growth in GDP even though the growth of domestic demand will be slackening during the course of 1985-86; and
- the strongly increased demand for domestically produced goods and services will, after a short period during which domestic production rises to previously existing capacity levels, lead to an upsurge in private business fixed investment as manufacturers and others move to increase their capacity to meet the sharply improved demand for their products.
Since the two-pronged strategy was first enunciated, we have heard a great deal about its first prong -- namely the "switching" process in the balance of payments. The famous -- or perhaps by now notorious -- J-curve must be one of the few items of economic jargon to have found its way onto the lips or pens of people all around this country. However, while the jury is still technically out on the final outcome, the Government has already been forced to concede that if indeed there be a j-curve, it is so far proving to be a most stubbornly elusive one.
Although, as I say, the ultimate fate of that economic will-o'-the-wisp remains to be seen, we have heard meanwhile remarkably little about the second prong of the strategy -- namely, the projected investment revival. Now it is fair to add, in that respect, that in the Budget papers the Treasury itself did not foresee this investment revival coming through strongly in 1985-86. Private business fixed investment this financial year was then forecast to rise by only around 5 percent in real terms, roughly in line with the growth then forecast in the economy as a whole. (2)
If however Mr. Crean is correct in his assessment that private business fixed investment continues to be sluggish, that would indeed cast a pall over the second prong of the Government's economic strategy also. I do not know whether Mr. Crean was aware, at the time of his reported remarks, that he was by implication uttering a verdict that this aspect of that strategy was not working either. That, nevertheless, was in fact what he was saying.
If this conclusion be valid, its importance could hardly be over-stated. After all, there is no doubt about the major improvement which the depreciation of the $A has wrought in the international competitive position of our producers. So what is holding them back? While many answers might be given to that question -- current interest rates among them -- I suggest that what is principally holding them back is fear -- the fear of the malevolently anti-business behaviour of most of our trade union bosses.
What this implies is that, so far from the enhanced power of trade unions under the Accord leading to a brighter and a more assured future for the Australian economy, such a relationship between elected Government and non-elected but very powerful persons itself acts to depress those "animal spirits" which, as Keynes said, are fundamental to the growth and vigour of any business community.
I repeat, the importance of such a conclusion, if it be valid, could hardly be over-stated. After all, for the past three years now -- albeit somewhat less so recently -- we have been told that the Accord between the ACTU and the Australian Labor Party represents a fundamental, and fundamentally hopeful, foundation for the future conduct of economic policy in Australia. If, per contra, we are now to conclude that the very enhancement of trade union power which that Accord necessarily entails is itself inimical to business enterprise, including particularly investment, then those claims will clearly ring even more hollowly than, at least in the minds of many, they have previously rung.
So much for the short-term conclusion referred to earlier. That conclusion does, however, lead obviously to its longer-term fellow. On the basis of it, it would seem clear beyond peradventure that no sensible economic strategy for Australia in the 1990s can be founded upon arrangements in our labour markets which bear resemblance to those which now obtain.
UNEMPLOYMENT
Let me add that there are in any case other reasons for reaching that longer-term conclusion. Even after three years of strong cyclical upswing sustained by a level of overseas borrowing we cannot afford, the level of unemployment, at 8.0 per cent (seasonally adjusted) of the work force in February, 1986 is still much higher than it was throughout almost the whole seven years of the Fraser Government. Only in the closing stages of that Government did the 1981-82 wage explosion lead to our unemployment rate rising from 6.2 per cent of the work-force in 1981-82 to 9.0 per cent in 1982-83 (and to over 10 per cent by the end of that year). This wage explosion, which the Secretary of the ACTU (Mr. Kelty) told us last year the ACTU had master-minded and over which it presided, produced the second enormous leap in trade union generated unemployment in Australia within a decade.
The truth is that it ought to be regarded as an abject failure of policy for a country such as Australia to go on suffering, for over three years now, unemployment rates of 8 per cent or more. Although a perfectly valid -- and even useful -- concept within the framework within which such calculations are made, the so-called "natural" rate of unemployment which our economists calculate from time to time is in fact entirely unnatural. It is principally a product (so-called "frictional" unemployment and elements of that kind aside) of trade union power operating within the framework of our legally constituted arbitral tribunals, and with its power strongly buttressed by the very existence of that framework. The exercise of that power in this manner produces wage rates and other conditions of employment which presently keep 8 per cent or more of our population but of jobs -- and, in the process, produce the need for the levying of heavy taxes to meet the payments of the unemployment benefits resulting.
I add only that, if the general level of unemployment denotes a major failure of policy, how are we to find words severe enough to describe a condition of our labour markets resulting in the unemployment of some 21.3 per cent of young people (15-19 year olds)? I have of course spoken on that topic in other forums, but the combination of apathy, misdirected and ill-conceived expenditure programs and, almost worst of all, hypocritical cant which currently serves as Government (and ACTU) policy on this matter must continue to call for the strongest condemnation.
Perhaps equally importantly, we should not assume that the "brain drain" is a phenomenon confined to so-called Third World countries. Increasingly Australians, particularly young ones but also many not so young, are finding that their talents are better rewarded (and less heavily taxed) elsewhere. Moreover, the conditions under which, elsewhere, they can work and lead their daily lives are blissfully freer of the frustrations and sheer diversion of otherwise productive time and energy which, in Australia, derive so frequently from the abuses of power by trade unions. All these are powerful forces working unobtrusively, yet with none the less deadly effect, against Australia's future in the 1990s and beyond.
It follows that if Australia is to have an efficient, competitive economy in the 1990s, all this -- and more -- has to change. Not only must our capital be used much more efficiently -- which means delivering the final coup de grace to the intellectually leaden views of the protectionists which have for so long weighted down the saddlebags of our progress -- but our labour (including our brains) must be used more efficiently also.
DEREGULATION OF LABOUR MARKETS
In short, the major deregulation of our financial markets of two years ago must now be followed by an equally sweeping deregulation of our markets for labour. The so-called "new province of law and order", as it was termed, with characteristic grandiloquence, by Mr. Henry Bournes Higgins, has long since degenerated into a rule of lawlessness and disorder. It has to go.
To guard against any misunderstanding -- or misrepresentation -- of what I mean by this, let me say that I am not advocating that trade unions should be outlawed; nor am I advocating that bodies such as the Commonwealth Conciliation and Arbitration Tribunal should be swept away overnight (although in this case it would not personally pain me if they were).
The basis of any sensible future set of relationships between employers and their employees has to be a strong move away from the Marxist-inspired nonsense that such relationships are of the "zero-sum game" variety. They are nothing of the kind; at their best, such relationships rest, and have always rested, on the view that the interests of employers and those who work for (and with) them are mutually interdependent. The more productive the enterprise, the more fruits for both of them to share. If I may say so, that is true whether one is talking about running a major private enterprise or running a major Department of State.
There is a nice irony about all this. After all, in 1983 we were told that we were electing a Government devoted to national recovery, reconstruction and "reconciliation". The Accord between the ACTU and the Australian Labor Party was argued to be central to that "reconciliation" process. What is now clear is that, until the power of trade union bosses, which that Accord has so greatly magnified, can be reduced to a level more in keeping with their due role in a democratic society, there can be no true "reconciliation" of the interests of those bosses with those of the Australian community as a whole (including, of course, the great majority of trade union members).
I am naturally aware that our trade union bosses will not readily yield the undue privileges which they have won or which have more recently been showered upon them by this Government. The Hancock Committee, to its eternal discredit, and in particular to the eternal discredit of the once-distinguished academic from whom it takes its name, has put to us the view that since these "over-mighty subjects" have now grown so powerful as to be beyond the law, the Australian people should now not merely accept that situation but legislatively sanctify it by formally removing the trade unions from the rule of law. This they would do by setting up a stacked juridical deck of their own and calling it a Labour Court. This shameful proposal has been fully endorsed by the present Government.
For a number of reasons deriving, au fond, from my deep belief in the common-sense of the Australian people, I do not believe that this entrenchment, and even further enhancement, of the power of trade union bosses will actually come to pass. Nevertheless, the processes both of ensuring that it does not and of rolling back the excessive powers which such bosses presently enjoy, will not be easy. Twice in the past decade -- in 1974-75 and 1981-82 -- the trade union bosses have shown that they have the power to destroy the conditions of economic progress in Australia -- and Governments, of different political persuasions in those two cases, with them. Strong leadership, and a very clear attachment to principle as distinct from being diverted into "deals", will therefore be required to effect a change in that situation.
A STRATEGY OF CHANGE
If, however, we are going to be able to talk meaningfully of "Australia's economic strategy for the 1990s", effected that change must be. For without it, there can be no "strategy" but merely a continuation -- and worsening -- of the half-blind stumbling toward mediocrity on which, two years only from our Bicentennial, we are currently embarked.
Four centuries ago, England (as it then was, prior to the Act of Union) was as much beset by religious persecution as Australia is today by trade union persecution. On the occasion then of his being burned at the stake for declining to abjure his beliefs, Archbishop Latimer uttered some words which, ever since I first encountered them, I have thought to be amongst the greatest in the store of such treasure with which the English language has provided us.
As the flames began to rise around Latimer on that pyre in The Broad in Oxford, he comforted his fellow victim Archbishop Ridley with those great words:
"Be of good cheer, Master Ridley, and play the man. For by God's grace, we shall this day in England light such a candle as will never be put out".
So I say to you, ladies and gentlemen, that in Australia in 1983 our present Government, wittingly or unwittingly -- and much could be said on that topic -- also lit such a candle. That candle of external financial deregulation is not yet burning with a full flame, but increasingly, and now quite unstoppably, it is beginning to do so. It is the candle of freedom -- in this case, freedom for Australians to do what they wish with their financial assets -- to which I am fundamentally referring. The flames from that candle are just beginning to lick at the gates of other prisons in which Australians have too long been incarcerated.
The protectionist prison, for example, both distorts the structure of our economy and also strengthens the hand of those trade unions, such as the Vehicle Builders' Employees' Federation (VBEF) which exploit those distortions for their own ends. That prison has already been weakened by two decades of intellectual onslaught to the point where, now, it can no longer be respectably defended. It is, so to speak, ready for the torch which financial deregulation is beginning to lay to it. Our strategy for the 1990s must therefore embrace a wholesale bonfire of our present protectionist regime.
As my comment about the VBEF implies, that very process of putting the torch to protection will itself diminish somewhat the power of those trade union bosses -- and there are many of them, including some of the most powerful -- which operate under, and are sheltered by, the cloak of that protection.
Beyond that, however, lies the need for other actions to restore the trade union movement to its rightful place in Australian society and, in that process, to undo the damage which the Accord -- but not merely the Accord -- has wrought. I look forward to it.
ENDNOTES
1. It should however be noted that, to the extent that they themselves employ imported materials or imported machinery and equipment in their own production processes, their own costs will have been adversely affected by those very processes of currency depreciation which have benefited the competitive position of their end-products.
2. Recently I understand that the Joint Economic Forecasting Group has somewhat raised this forecast, to around 8 per cent in real terms. I personally question that revision but, even if it were to prove accurate, such an outcome would hardly correspond to the shape of anything which could be termed an investment boom -- or "renaissance" for that matter.
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