Vol. 5, No. 3
SUMMARY
Discussions while overseas between mid-June and mid-July provided some new perspectives on a range of issues. Most importantly, the extent of structural change going on overseas, and the implications, are greater than is generally realised. In particular, major steps are being taken to reduce the excessive role of government in economies and societies, which is increasingly recognised as impeding economic performance. There is now, for example, a new wave of privatisations sweeping across Western Europe, involving the disposal of around $US100 billion of major government assets.
Other important structural changes in process or in prospect include:
- the greater importance being attached by central banks to not allowing inflation to "get away", as it has done in past recoveries, and their developing independence to pursue and sustain low inflation;
- the apparent widespread agreement that, for most countries, budget deficits have now blown out about as far as they can be allowed to, and, henceforth, will be wound back;
- the widespread and growing re-assessment of the relative efficiency of government as a deliverer of services and the increasing emphasis on "market testing" and contracting-out of government services, as well as resort to user-pays policies; and
- the continued decline of manufacturing employment in OECD countries and the reduced prospects for employment in service industries.
While these structural changes are generally improving economic performance capacity in the longer run, they will take time to be absorbed and for markets, particularly labour markets, to adjust to. They seem likely to keep the rate of OECD growth down to low levels for some considerable time. Australian economic policy should not, therefore, rely on faster growth in overseas demand to improve its income and employment levels, and its current account deficit. If we do, we risk an externally-induced reaction that could put us back in recession.
Other points of interest include the likely further downward revision to recent forecasts by international institutions for overseas economic growth in 1994; the growing differentiation overseas between Australia and New Zealand, in terms that are not favourable to Australia; the major review of Australian/US relations underway within our Federal bureaucracy and the Government's strategic error in rejecting the NAFTA option; the worrying weakness of the current crop of leaders of major overseas countries and the generally poor start by the Clinton Administration in particular.
I was overseas between mid-June and mid-July and during that time had discussions with senior officials of the OECD and IMF, of Central Banks and Treasuries in the US and UK, of Standard and Poors credit rating agency and US securities firms in New York, and of Think-Tanks in London and Washington. I also attended a Privatisation Conference in London (where I gave an address). My discussions covered a range of matters and gave me some new perspectives on a range of issues, summarised below.
STRUCTURAL CHANGE
The most common thread is perhaps the growing recognition that excessive government involvement in the economy and society is impeding economic performance. The collapse of communism in Eastern Europe and the former Soviet Union, and the apparent success which the privatisation process is having in some of those countries under enormous difficulties, plus the return in Western Europe of high and rising unemployment and revived talk of "Euro-Sclerosis", is starting to make governments realise the extent of the excessive government involvement in their economies. Hence, there is now an enormous new wave of privatisations sweeping across Western Europe, involving the disposal of something like $US100 billion in government assets ranging from Deutsche Telekom and even France Telecom to government investments in banking, insurance, energy, steel, food, chemicals and even Bofors in the Swedish defence industry (see Attachment A).
At the same time, there is a staunch rearguard action being mounted which is holding up progress. Nothing could better illustrate the forces of resistance than the comment by Jacques Delors (Socialist head of the European Community bureaucracy) at the time of the June meeting of the EC on unemployment, to the effect that Europe did not want to have a labour market which kept unemployment down the way that (allegedly) North America has, namely, by creating a class of working poor! "We are in a hole", his aide acknowledged. "A cut in interest rates is urgent"! But, while resistance to change is strong, I could detect nothing comparable (outside the French peasantry) to the rabid anti-economic rationalist campaign which has developed in Australia.
Of course, there are also some areas, such as social welfare, where the debate about government involvement is only just starting. And there are areas where backward steps have been taken or are threatened. Overall, however, I think the die is cast in the direction of changing the role of government. Perhaps the changes will not be quite as big as those being experienced by the Cuban army, which was apparently reduced to bicycles at the marchpast following the Russian withdrawal! But they will be major.
Some further aspects are discussed in following sections. Here I want only to observe that, while the structural changes that are actually occurring are generally improving economic performance capacity in the long run, those changes (and the forces of resistance) seem likely to keep the rate of OECD growth down to low levels for some considerable time. This has important implications for the extent to which Australia can and should rely on faster growth in overseas demand to improve its income and employment levels, and its current account deficit. In my judgement, economic policy should place no such reliance for the next few years. We will need instead to try to increase market share by implementing our own structural changes -- and at a faster pace than hitherto -- and avoid the temptation to "stimulate" domestic demand as a means of reducing unemployment in the short term. That course risks an externally-induced reaction that could put us back in recession.
Apart from the privatisation of government enterprises, the important structural changes which are occurring or are likely to occur, and which are likely to adversely affect growth in the next 3-4 years, include:
- The greater importance being attached by central banks to not allowing inflation to "get away", as it has done in past recoveries, and their developing independence to pursue low inflation. While it would be premature to say that the battle against inflation has been won, it is more closely fought than for some time. This means that central banks stand ready to raise interest rates and to restrain spending. Particularly given also that high borrowers are not going to be "let off" the debt which they accumulated during the 1980s, the initial effects of a low inflation policy are likely to be to keep recovery slow (but to increase its sustainability) as entrepreneurs and employees adapt to the new environment;
- The apparent widespread agreement that for most countries budget deficits have now blown out about as far as they can be allowed to go and, henceforth, will be wound back. At the very least, the period of "stimulus" is over and, even if budget reduction targets are not met, fiscal policy is likely to be a constraining force on aggregate demand;
- The widespread and growing re-assessment of the relative efficiency of government as a deliverer of services and the increasing importance being attached to "market testing" of government services and to user-pays policies.
- This is likely to lead to reductions in government employment, particularly in Western Europe where most of the limited growth in employment in the 1980s was in the public sector (see below). The US, however, will also be affected. The Clinton Administration has under way a massive "National Performance Review" of the US public service involving 250 bureaucrats in the Vice President's office. This review (part of the "Re-Inventing Government" idea) is scheduled to be completed in early September and, while it is not being touted as a likely means of obtaining budgetary savings, it has obvious implications both for future employment prospects in the public sector and for the 3 million existing public sector employees, particularly the 1 million or so in the postal service and the 1 million or so in defence industries. Taken together, both private and public sector defence industries in the US are estimated to experience a reduction in employment of close to 2 million over the next 5 years, averaging 380,000 per annum, compared with total US employment now of around 120 million. (1) It will take time to replace these jobs in the private sector, particularly in circumstances where there is a fiscal contraction going on. (As one observer pointed out, this is the first occasion after the end of a major "war" when the US has not been able to cut taxes).
- The continued relative decline of manufacturing in OECD countries and its absolute decline as a source of employment. Given the relatively rapid growth in employment in service industries, this has not hitherto been a cause for concern. (2) But with employment in some services industries also being adversely affected in the current striving for improved performance, the capacity of those industries to provide sufficient alternative jobs is being questioned, particularly in a context where public sector employment is under review and is clearly going to be reduced.
- These structural changes will take time to be absorbed and for markets, particularly labour markets, to adjust to. As UK Prime Minister Major said at the EC's June Summit: "Our total labour costs are too high. Our employment markets are too rigid. And our labour force is not adaptable and mobile".
UNEMPLOYMENT AND EMPLOYMENT
An interim report of a major employment/unemployment study by the OECD was released in Paris in June (3) but has received little attention here, perhaps because the Government did not want too much attention drawn to some of the analysis. One of the most interesting things to emerge from that report is the striking difference between the performance of the North American and European labour markets. (4) In particular, since the early 70s the North American labour market has:
- Produced a much faster overall growth in employment: around 31 million jobs have been "created" compared with 9 million in Europe. A particular feature has been the large increase in participation rates in North America (from 68 per cent to 77 per cent) while Europe (which had the same participation rate as North America 20 years ago) has experienced no increase in participation at all;
- Had by far the greater proportion of employment growth in the private sector, whereas most of the European growth has been in the public sector (see Attachment B);
- Experienced only a slight increase in the trend level of the unemployment rate (from around 6 per cent to 7 per cent), whereas the trend level of unemployment has jumped from around 3 per cent to over 10 per cent in the EC and from under 2 per cent to about 7 per cent in EFTA (European Free Trade Area) countries. (5) Latest projections for OECD Europe suggest that the rate of unemployment will reach 11.4 per cent at end 1993 (from 9.9 per cent at end 1992) and increase a further 0.5 percentage points in 1994.
It is difficult not to conclude that the greater "flexibility" of the North American labour market (that is, less regulation and less unionism) has been an important factor in this superior performance. Of particular interest in this regard is the OECD Report's reference to the European practice of setting a minimum wage which is relatively close to the average wage and indexed over time to prices and/or earnings. Thus, the Report says that "instead of being working poor, unskilled workers are unemployed. ... An effective general approach, therefore, starts from the recognition that a low-productivity job warrants the payment of only a low wage".
The report also suggests a strong performance for the Oceania (6) labour market, where the growth in employment has been almost as great as in North America and has also been concentrated in the private sector. However, the trend increase in the unemployment rate (from around 3 per cent to 11 per cent) spoils the story, particularly as the increase in the participation rate has been significantly less than in North America.
Another striking feature of the report is its bringing out of the marked change in the composition of employment, with only 1 in 5 now being employed in manufacturing compared with 1 in 4 thirty years ago. There are now almost as many workers employed in wholesale and retail trade as in manufacturing in OECD countries.
The report offers no clear solutions to the unemployment problem but suggests a strategy embracing a wide range of measures. It is of considerable interest that it seems to put stable macroeconomic policies at the top of the list, pointing out that in Europe at least there appears to have been a permanent ratcheting up of unemployment rates after each recession.
It warns, however, that the "adverse effects of this lack of macroeconomic rigour in the past cannot be reversed by an unduly easy setting of macroeconomic policies in the future" and that "any policy action to affect employment in the short term should not at the same time prejudice the achievement of higher employment in the medium to longer term, for example through jeopardising inflation performance or international competitiveness". At the same time, it notes that the deterioration in the employment situation "increasingly risks provoking precipitate and counter-productive policy action, for example, hasty and possibly ill-conceived macroeconomic expansion, inappropriate reversal of earlier labour market reforms to facilitate structural adjustment, and further resort to open or (more likely) disguised trade protectionism".
Thus, what is needed is a "credible macroeconomic policy framework (that) will strengthen the willingness of economic agents to accept structural change and to exploit economic opportunities". This would "differ from the present situation in a number of key respects:
- there would be less pre-emption of private sector savings by public sector deficits;
- long-term real interest rates, particularly but not only in Europe, would be lower;
- consumer and business confidence would be higher;
- investment, particularly private-sector investment, would be stronger; and
- low inflation would be more widespread, and more firmly established.
According to the Report "The key requirement is to reduce long-term budget deficits".
Under the heading "Adjusting To and Benefiting From Structural Change" the Report also suggests a range of other aspects of the unemployment problem that need to be dealt with. These include improvements in wage structures and wage bargaining systems, in education and labour market policies, in the investment environment so that it is more conducive to entrepreneurs, and in social welfare policies so that they do not encourage dependency.
MONETARY POLICY AND INFLATION
There has been considerable surprise expressed at the hints given by the Federal Reserve Bank ("the Fed"), at a time when the US recovery seems not yet firmly established, that it is contemplating the possibility of increasing interest rates. What does not seem to be widely understood is that, with a monetary policy stance that is probably the "easiest" it has been for 20 years (as reflected in negative real interest rates at the "short end"), and with inflation still running at 3 per cent per annum plus, the Fed is concerned that inflation could quickly get away from it again, as it has in the past. It does not want to repeat the mistakes of the 1970s. The Fed's utterances are thus designed to influence inflationary expectations by creating a threat environment that would provide a told-you-so basis for a quick upwards adjustment in rates should inflationary pressures re-emerge.
Part of the background to the Fed's concern is its assessment that the NAIRU (Non-Accelerating Inflation Rate of Unemployment) in the US has moved up from 5.5 per cent to 6 per cent. Thus, with unemployment at around 7 per cent, the economy is judged to be not far off "full employment" and the point where wage pressures could re-emerge. The employment situation is evidently now given a lot of weight in the Fed's assessments and capacity utilisation less weight than in the past because of the relative decline in the importance of manufacturing in the US economy. Movements in monetary aggregates have a relatively low weight.
The Fed also has an objective to get inflation down further, on a gradual basis: it is "surprised" that inflation didn't come down more before recovery commenced. Given this objective, and given the present "easy" stance of policy, the Fed's nervousness about the re-emergence of inflationary pressures and its apparent preparedness to move interest rates up, are understandable.
Notwithstanding its aim of lowering inflation, the Fed has not moved to try to establish an inflation target because there is an insufficient political constituency for that in the US. This partly reflects the perceived success of monetary policy in getting inflation down in the early 1980s without a target. The Fed has, however, lent support to moves by a small group of Congressmen to change its charter to give more emphasis to inflation. Such moves seem unlikely to succeed, at least in the foreseeable future.
By contrast to the Fed, the Bank of England has adopted an "interim" underlying inflation target of 1-4 per cent per annum and has a "long term" target of 0-2 per cent". (7) The new Governor (Eddie George) appears to be a strong supporter. By contrast, the Reserve Bank Governor, Bernie Fraser, is regarded by the "Old Lady" as "not quite sound" on inflation.
The Bank is now publishing a six monthly "Inflation Report" analysing, inter alia, the state of inflationary expectations (which it regards as not yet consistent with the 1-4 per cent target) and emphasising the importance of price stability in the medium term. In the light of its experience under ex-Chancellor Nigel Lawson, and the need to establish a new policy framework after sterling left the ERM, the Bank has indicated that it favours "independence", but with a precise mandate. It was "surprised" to learn from his resignation speech that former Chancellor Lamont also favoured an independent Bank but had "noted" that Prime Minister Major did not reject that out of hand. The Netherlands system, where the Minister of Finance has an "over-ride" power whose use has to be made public, would be a possible option. The important thing is to shift the public onus for pressing the "nuclear button" (that is, dropping interest rates) to the political side.
Like the Fed, the Bank of England is also nervous about the possible re-emergence of inflationary pressures and, with a view to affecting inflationary expectations, is also dropping hints that it is prepared to raise interest rates even at this early stage in the modest UK recovery. One important factor influencing its concern is the relatively high household saving ratio, which it fears could form the basis for a surge in consumption expenditure, particularly as the proportion of disposable income going on interest payments has declined sharply over the past 2-3 years (but is still at historically high levels). On the supply side, the Bank is also trying to assess the potential for inflationary pressures to emerge from the possible "gap" between output and production capacity. Even with recent falls in the capital stock, the present output gap is assessed as exerting downwards pressures on inflation. The UK NAIRU, according to the Treasury, is probably between 6 and 8 per cent unemployment. The weight being given to such indicators again confirms the decline in the importance being attached to monetary aggregates in determining monetary policy.
SHAREMARKETS
A major influence on the increase in world share prices has, of course, been the fall in interest rates, the increase in the relative returns on equities, and the resultant surge of funds into equities. This process has largely been driven by the drop in short-term rates in the US, which are (as noted) negative in real terms and at their lowest level in 20 years.
From one viewpoint this process is in accord with "market forces". However, there is a growing question as to whether market prices do not already anticipate an unrealistic growth in earnings. Attachment C suggests that that is the case with the Japanese market and the likelihood of over-pricing increases if forecasts of faster economic growth in 1994 are not realised.
Also, the main vehicle for increased buying of equities in the US has been through mutual funds, which have been able to attract very large funds out of bank deposits. These funds could prove to be unstable holders of equities, however, particularly once interest rates start to rise and they again find it difficult to compete with banks.
BUDGET DEFICITS
As noted, it is now widely agreed that, with the exception of Japan, OECD budget deficits cannot be allowed to blow out any further beyond the 4-5 per cent of GDP at which they are now running. Even allowing for likely slippage in those countries with specific measures planned or in place to reduce deficits (such as the US and Germany), and for likely slippage because of lower than forecast economic growth, the days of fiscal "stimulus" seem over, and some contraction may occur.
As to measures being taken to reduce deficits, the US Congress seems likely to agree on a 50/50 split, that is, half the reduction from tax increases and half from spending reductions. The proposal by Labor Secretary Robert Reich for a short term fiscal stimulus has dropped out of consideration and there appears generally to be less Administration enthusiasm in office for increased public infrastructure spending. (The Treasury suggested to me that Professor Aschauer's analysis indicating significant growth benefits from increased public infrastructure spending was largely based on spending on roads in the 1950s when there was a clearly identifiable "back-log".) While the spending reductions are in net terms almost entirely in defence or defence-related areas, and the tax increases come first, the Administration is said to be "more serious" than previous Administrations about reducing the deficit. It has now become almost an article of faith -- even if the "conversion" has mainly to be attributed to "preacher" Ross Perot, who has maintained his political machine and whose political influence remains considerable. (While Perot is a "good guy" on the deficit reduction issue, his protectionist views are much less welcome.) There is, however, considerable resentment at the proposal to increase the top corporate tax rate from 34 to 35 per cent and at the higher personal income taxes which, while presented as "taxing the rich", impact a fair way down the scale.
Driven by the Bundesbank's insistence that interest rate reductions were more or less conditional on reducing the budget deficit, the German Government is implementing spending reductions and it has even started to tackle social security spending. However, while there is much talk in Europe of the adverse effects of high social security spending (and the UK Treasury is undertaking a major review), there is little action being taken to deal with the problem.
The UK Government has set limits on spending growth which are said to be the "tightest" for umpteen years, and has a stated aim of reducing the budget deficit to 3 or 4 per cent of GDP by 1996-97 (from 8 per cent). However, the new Chancellor is said to "believe in public spending" and is clearly not going to do anything dramatic to reduce it from the high level it has now reached.
PRIVATISATION
Mention has already been made of the $100 billion wave of privatisations of government assets sweeping across Western Europe and the example effect from the privatisation process in some former Communist countries. This is clearly having an important influence, particularly in Germany, where the privatisation agency (Treuhandanstalt) established to (in effect) privatise the former East German economy has largely completed its task. The extent of structural changes there in four-and-a-half years has been enormous, with 12,000 enterprises being sold for DM42 billion. The work force of 9.5 million people has been reduced to 6 million but official unemployment has been contained to around 15 per cent. The privatisation agency, which is itself scheduled to be wound down at the end of 1994, has employed a range of methods to privatise, with one of the major problems being to find enough executives with entrepreneurial skills. (Some 40,000 of existing managers were changed).
In (old) West Germany, privatisation is now being progressively extended into the postal service, telecommunications and railways and serious consideration is being given to privatisation of the Federal highways when technology becomes available on an economic basis for charging users (said to be 1998).
The comparative success of the privatisation process in some ex-Communist countries, in the face of enormous difficulties, is also of interest even though the main method of privatisation -- the issue of vouchers to the population at large -- has limited relevance elsewhere. (Its main significance, perhaps, is its demonstration of the potential for privatisation even in situations where domestic savings are low.) (8) The process has already gone a long way in the Czech Republic and further than is generally realised in Russia. About 70,000 small businesses have now been privatised in Russia (about 30 per cent of the total) and about 2,000 large businesses (about 10 per cent of the total). The odd report is already appearing of take-over battles in Russia by rival groups of shareholders!
From Australia's viewpoint, Eastern European privatisation threatens to produce a major source of competition for our agricultural products as, modern management and scientific methods and, privatisation are applied to highly productive agricultural land. The scope for productivity gains is enormous, with the average farm in the old Soviet Union having 150 employed compared to 5 said to be needed. With Western Europe being pressed to "do something" to help economic development in former Communist countries, it would not be surprising if before long the EC gave concessions to allow the entry of "surplus" agricultural products from those countries.
Even though it has already done so much, (9) the UK itself is continuing to press ahead with privatisation, the main projects in the pipeline being British Rail and British Coal.
Consideration is also being given to privatisation of existing motorways, if public acceptance can be secured for a user charge.
However, the most interesting "privatisation" developments in the UK are, perhaps, in respect of the public service proper, rather than the "enterprise" sector which owns and operates large assets. In an effort to improve services and accountability, two-thirds of the public service has been split into agencies with a discrete activity and financial and service level targets. The emphasis is on developing customer contractual relationships. As part of this process, the public service is now being required each year to "market test" a proportion of its services (other than policy advice). (Even Treasury forecasting is being market tested!) In the first year (1993) market testing will involve 1.5 billion pounds worth of services and 44,000 staff.
UK local government is also having compulsory competitive tendering extended to some white-collar services. Some local councils have developed competitive tendering extensively and report large savings and improved quality of services. A new role is foreseen for local authorities, described as an enabling, franchising and monitoring role rather than one directly involving the delivery of services.
ECONOMIC FORECASTS
The foregoing provides some background to the recent economic forecasts by the OECD and the IMF, which now suggest the fourth successive year of growth of 2 per cent or less in industrialised countries in 1993 (1.7 per cent). (10) This is forecast to be followed next year by a 1-1.25 per cent faster growth. This 1994 forecast is importantly based on an assumed faster growth in consumption expenditure, particularly in North America. However, even if that scenario eventuates, commodity prices generally are not expected to increase faster than the general rate of inflation, which is forecast to remain stable at around 3 per cent per annum
Washington discussions suggested that these published growth forecasts are already being scaled back somewhat in the light of poorer than expected performance since they were put together. The low level of the saving ratio in the US, coupled with concern about employment prospects, suggests that, while there will be surges in consumption expenditure from time to time, such spending may not provide the extent of sustained support for overall growth that is now reflected in the forecasts. Some private sector forecasters in the US are expecting the fiscal contraction package to start causing a slow down in the first half of 1994.
The qualifications to the economic outlook deriving from short-term adverse effects of structural change apply to a somewhat lesser degree to the UK economy, where a modest recovery appears underway. That economy has of course already undertaken massive privatisation as well as considerable labour market reforms. Trade Union membership is now down below 30 per cent of the work force, and dropping.
My own assessment is that Australia would be unwise to base its economic strategy (or forecasts) on faster overseas growth in 1994. If that were to eventuate, well and good. In my judgment there is a fair shade of odds against it happening.
PERCEPTIONS OF AUSTRALIAN POLICIES
An important perception is that, whereas "Australia and New Zealand" have tended to be looked at as one broadly similar unit, overseas observers and institutions are now increasingly distinguishing New Zealand from Australia. In fact, New Zealand is the "talk of the town" in terms of its monetary and labour market policies in particular, and is attracting increasing interest from overseas investors. The London Financial Times was full of praise for New Zealand's low-inflation monetary policy and Don Brash, Governor of the NZ Reserve Bank, was written up in very favourable terms for a speech he made there in June. (Sam Brittan apparently suggested that he should have been appointed as the next Governor of the Bank of England.)
This is not to suggest that Australia is seen as heading for a "crisis". Rather, our credit rating can be said to be on "negative watch" as things drift. While financial markets "accept" the 1 per cent of GDP 1996-97 Budget deficit target (even though, as one New York securities firm told me, it is not regarded as credible), it is a relatively high risk strategy for a country with a large external debt and a relatively high on-going current account deficit. There is no talk of institutions likely to pull money out of Australia -- but equally no particular enthusiasm for putting new money in, with the possible exception of the Australian sharemarket which was perceived to be somewhat undervalued in relative terms. Nobody overseas seemed aware of the large "shortfall" in private capital financing of the current account deficit that has developed over the past 18 months (11) or particularly concerned about the extent to which reserves have been used. When the issue was raised, it was agreed that this is a potential source of concern.
The IMF Debt people were emphatic in rejecting the Pitchford thesis that private external obligations should not be a serious concern for public policy. They stressed that inappropriate domestic polices could lead to excessive private sector borrowing and that there are many developing country examples where this has led to a recession. They pointed out that, while it was almost inconceivable that Australia would pursue polices that led to external capital flows being actually cut off (as had happened in many developing countries), that was not the point. Rather, the point was to avoid policies which risk sudden marked slowdowns or recessions. There are lessons from the 1980s' experience of developing countries, (12) as well as our own.
Both the IMF and OECD teams to review the Australian economy in September-October (13) emphasised the importance they attach to progressing microeconomic reform and gave the impression that they feel that this has slipped. Some interest was expressed in the Victorian reforms and the general potential for reform at the State level. It is evident that the OECD will focus particularly on the extent to which enterprise bargaining is being constrained in obtaining productivity improvements by the existing bargaining framework, including the requirement for union involvement.
The OECD team had recently been briefed by Mr Brereton, who apparently extolled the virtues of the increase in enterprise agreements. Even so, they were obviously keen to ascertain the extent of productivity gains, which I suggested were not large to date. They appeared to be unaware of the recent BCA study suggesting that there has been little or no closing of the productivity "gap" between Australia and overseas countries in recent years.
The OECD is also taking a particular interest in education and training, including the effectiveness of the training levy.
TRADE POLICY
Discussions in Washington indicated that a major review of Australian-US relations is under way within our Federal bureaucracy with a view to assessing policy options, such as getting rid of US defence stations, in the event of a deterioration in trade relations. (Perhaps Mr Keating's extraordinary appointment of his right hand man, Don Russell, as Australian Ambassador in Washington is part of contingency planning for a possible serious break in Australian-US relations!) The circumstances in which such a break could be triggered are difficult to assess: but they might include a major US attempt to gain preferred access to the Japanese market, not a remote possibility given the stronger anti-Japanese attitude of Clinton Administration officials and US attempts to obtain Japanese agreement to access targets for US exports.
The Government's rejection of the North American Free Trade Area option is probably a strategic error based on the excessive attention being given to "Asia" for political reasons. The increase in US investment in Mexico since it became likely that that country would become a member of NAFTA indicates the potential for spin-offs. (14) Also, while our circumstances are different, and while our multilateral trade policy is generally appropriate, membership would offer considerable potential benefits for rural exports and trade diversion on the import side would likely be limited given proposed general tariff reductions in train. Pursuit of a policy of "doing nothing to upset our Asian neighbours" may have cost in terms of Australia's national interests. Pursuit of APEC as a possible freer trade vehicle is a very long-term option, with more dubious prospects.
EXCHANGE RATES AND COMPETITIVENESS
There can be little doubt that, on any comparison of prices internationally, the $US and the $A appear "undervalued" relative to European currencies. Of course, retail price "advantages" are not the only determinants of international trade but it is difficult to believe, on the basis of present price differentials, that present exchange rates can be sustained between the $US and ERM currencies. The Financial Times reported a McKinsey comparison of UK and US prices, using an exchange rate of one pound=$l.60, for 268 similar products. This showed average prices in the US to be 32 per cent lower but with many prices being over 100 per cent lower (Attachment D). And UK prices are "lower" than European prices.
Given the apparent price competitiveness of the $A, our inability to do more to increase market share must presumably reflect cost and other factors that are deterring investment in the traded goods sectors.
POLITICAL LEADERSHIP
In an editorial prior to the G7 summit the Wall Street Journal drew attention to the fact that "Bill Clinton led the pack" with a popularity rating of 36 per cent (a level of unpopularity "it took other leaders years to achieve") and suggested that leaders are being elected with "thousands of good ideas rather than a few good ones". We have, as a result, "shallow vessels" who have "failed to keep abreast of cultural change, of the new vitality of civil society ... of the choices and identities made ever more available by consumer society". As a result, "governments appear on the defensive battered by one crisis after another, perpetually hoping to turn the corner so that they can take control." Yet, as former Chancellor Lamont said in his farewell speech, "We give the impression of being in office, but not in power." The current crop of G7 leaders, the WSJ opined, are "waiting for someone to explain what to do and where to go. Government has finally met Godot."
The evident weakness of the "current crop" of leaders is a source of serious concern. There is, in particular, an enormous need to explain the reasons and need for major structural change in government to correct the mistakes of the past 20 years or so. Yet the leadership seems to have no capacity to convey a coherent philosophy and proceeds in an ad hoc fashion.
The Clinton Administration is particularly worrying, given the importance of the US. The search for domestic consensus (the so-called inclusive approach) is resulting in uneasy compromises and an indecisiveness that may explain compensatory foreign policy adventurism, such as the botched Baghdad bombing (applauded by just about all of those who expressed "outrage" at Grenada, the bombing of Libya and the Gulf War!). The President is frequently late for appointments and the process of appointing staff (as well as many of the appointees) to key public service positions is in disrepute and the subject of frequent lampooning (see cartoon below). As humorist Art Buchwald quipped in his column of one hypothetical nominee "Nobody knows what he did, but it must have been pretty bad if Clinton seriously considered his name". When I was in Washington, it was said that Defence Secretary Aspin had threatened to resign because he couldn't get appointments approved by the White House cabal, over which Hillary Rodham Clinton (as she prefers now to be known -- during the election it was simply "Hillary Clinton") is said to exercise a powerful influence.
Indecisiveness and uncertainties are undoubtedly having adverse effects on US employment and investment. The continued postponement of Hillary Rodham Clinton's health "reform" package (now said to be unlikely to emerge before next year) and uncertainty over how it is to be financed (probably by a payroll tax), plus uncertainty about the contours of the $500 billion fiscal contraction package, are important in this context. Again, the promise to raise the $4.25 per hour minimum wage has been postponed for at least a year, but not abandoned. One apparently permanent election promise casualty of some interest in the Australian context is said to be the abandonment of the promise to require businesses to spend 1.5 per cent of their payrolls on training (perhaps the payroll tax field is being left clear for health).
The much stronger anti-Japanese sentiments said to exist in this Administration than in the Bush Administration are also worrying from a number of perspectives, not least the potential threat to our exports. Fortunately, even in their politically-weakened state, the Japanese seem more prepared to stand up to the Americans now that the Cold War is over. The continued US strategy of trying to push the yen to higher and higher levels as a means of trying to force open allegedly closed Japanese internal markets also threatens to be counterproductive in keeping Japanese growth down.
CULTURE
The complainers and the "victims" of society continue to get excessive attention. "The Kiss of the Spiderwoman" focuses on a homosexual and a terrorist in a jail which maltreats prisoners, while Pulitzer Prize Winning play "Angels In America" seemed likely to analyse (and swear) to death the plight of an AIDS victim and his lover, and a closet homosexual Mormon married to a valium popping suburban housewife (I only lasted to the end of the first Act). In the US the Anita Hill/Clarence Thomas case daily produces allegedly new perspectives in the letters and op-ed columns. The No. 1 book on the non-fiction best seller list has the marvellous title of "Women Who Run With The Wolves". One woman in Washington complained to me that she didn't like driving around with only another woman in case it was thought she was a lesbian!
But there is the odd sign of a fightback. Robert Hughes' "Culture of Complaint" is running at No. 9 on the best seller list, which is probably a plus. The book "The Real Anita Hill" by David Brock is at No. 3 on the non-fiction best selling list. One New York play about a "weak" professor accused of sexually harassing one of his students (who "has to" pursue the case for the sake of "the group") ends, after he learns that he has lost his tenure and house over the case, with the professor throwing her around the stage to cheers from (some in) the audience at the evident moral justification. Major exhibitions of Old Masters such as the Titian and the 16th Century exhibition, one of artists' copies at the Louvre and the magnificent Matisse retrospective exhibition at the Pompidou suggest greater attention to historical origins as well as a fascination with individual achievement. Art in such forms is undoubtedly now "big business", judging by the enormous crowds.
Meantime, on England's playing fields the latest curse is not "Oh Hell" but "Oh Lloyds"!
Attachment A
Morgan Stanley's Estimate of Europe's Privatisation Candidates
| Country | Company | Industry | Govt holding % of Co. | Value ($m) |
| Italy | Crediop Credito Italiano BCI Banca di Roma Banco di Napoli IMI ENEL AGIP * SNAM * ENI Group * SME INA ILVA STET Finnmeccanica * Nuovo Pignone Assitalia Iritecna Saipem | Banking Banking Banking Banking Banking Banking Utilities Energy/oil Energy/oil Energy/oil Food Insurance Steel Telecoms Engineering Engineering Insurance Construction Energy equipment | 51.0 67.0 57.0 86.9 13.0 100.0 100.0 100.0 100.0 100.0 68.7 100.0 100.0 52.0 100.0 75.5 59.5 100.0 63.4 | n/a 877.0 2,182.0 2,101.0 570.0 n/a 7,744.1 5,010.9 1,962.2 5,579.1 1,259.4 n/a n/a 4,131.9 1,689.9 396.5 571.2 n/a 476.3 |
| Sweden | Luftfartsverket * Nordbanken Televerket * Gotabank Procordia NCB # ASSI * LKAB * Celsius * Vattenfall * | Airport authority Banking Telecoms Banking Pharmaceuticals/food Forest Products Forest Products Mining Technology Utilities | 100.0 100.0 100.0 100.0 32.0 100.0 100.0 100.0 100.0 100.0 | 298.2 2,510.0 2,106.2 800.0 1,935.6 214.1 341.0 542.4 187.7 1,075.1 |
| Finland | Valmet Enso-Gutzelt Veltsiluoto * Outokumopu Kemira * Neste * Rautaruukki * | Engineering Forest products Forest products Non-ferrous metals Chemicals Oil/chemicals Steel | 80.0 51.0 88.8 57.5 100.0 98.0 87.0 | 199.3 506.6 129.7 401.7 198.9 426.2 210.0 |
| Netherlands | DSM ING PTT * | Chemicals Insurance Telecoms/post | 30.5 8.0 100.0 | 532.6 780.3 6,479.6 |
| Spain | Repsol ENDESA Ence Telefonica Tabacalera Argentaria | Energy/Oil Utilities Forest products Telecoms Food/tobacco Banking | 41.1 75.5 55.0 32.0 52.4 75.0 | 3,192.2 7,120.3 3,315.9 3,096.8 577.1 3,442.0 |
| France | BNP Credit Lyonnais Credit Local Thomson CSF AGF UAP Pechiney GAN TOTAL CNP Elf Aquitaine Rhone Poilenc Renault Usinor-Sacilor Groupe Bull Air France * France Telecom * Gaz de France * Electricite de France * Aeroports de Paris * Snecma * | Banking Banking Banking Technology Insurance Insurance Non-ferrous Insurance Energy/oil Insurance Energy/oil Chemicals/pharm Autos Steel Technology Transport Telecomm Energy/oil Utilities Airport authority Technology | 73 54.0 25.5 59.2 75.0 75.0 75.0 79.0 5.9 42.5 50.8 43.0 80.0 80.0 88.0 99.4 100.0 100.0 100.0 100.0 95.0 | 5,058.0 2,346.0 728.7 2,788.8 4,816.2 6,137.2 1,895.0 2,519.6 472.8 n/a 8,892.9 2,915.3 5,649.6 3,479.6 n/a 2,840.2 21,537.0 5,021.6 2,642.7 787.1 817.2 |
| Portugal | Cimpor TAP TLP Telecom Portugal Portucel * Soporcel Banco Port do Atlantico BPSM | Construction Transport Telecoms Telecomm Forest products Forest Products Banking Banking | 100.0 100.0 100.0 100.0 100.0 55.0 25.0 100.0 | n/a n/a n/a n/a n/a n/a 330.0 n/a |
| UK | British Coal N.I. Electricity PowerGlen National Power BT | Mining Utilities Utilities Utilities Telecom | 100.0 100.0 40.0 40.0 22.0 | n/a 500.0 1,655.0 2,674.3 8,579.1 |
| Ireland | Aer Rianta + Telecom Elreann # | Airport Authority Telecomm | 100.00 100.0 | 93.9 537.9 |
| Norway | Norsk Hydro DnB Christiania | Energy/Oil Banking Banking | 51.0 70.0 100.0 | 2,548.4 1,520.0 1,200.0 |
| Austria | OMV Creditanstalt Bank Austria | Energy/Oil Banking Banking | 72.0 49.5 21.7 | 884.5 950.0 1,032.0 |
| Germany | Deutsche Telkom * Lufthansa Treuhand | Telecomm Transport Holding co. | 100.0 54.7 100.0 | 22,062.5 1,186.9 n/a |
| Greece | OTE * PPC | Telecomm Utilities | 100.0 100.0 | 1,043.8 n/a |
| Denmark | Tele Denmark | Telecomm | 100.0 | 1,048.2 |
| Belgium | Belgacom | Telecomm | 100.0 | n/a |
* Shareholders' Funds as at 31/12/91
# Shareholders' Funds as at 02/04/92
+ Shareholders' Funds as at 31/12/90
n/a = Not available
Note: Method used for valuing government stakes is:
- The percentage given as the government stake is the actual amount held directly by the government, and does not include stakes held by state banks, etc.
- Where a stock market price exists, the governments shareholding is translated at that price
- If no market price exists, shareholders' funds are taken from the balance sheet and multiplied by the percentage owned by the government.
All amounts are in US dollars.
No implication is made that these are valuations of the companies or prices at which they could or will be brought to the market.
Amounts given are as an indication only.
Source: Morgan Stanley Research.
Attachment B
Cumulative Employment Growth in the Public and Private Sectors
Notes: The scale for EFTA and Oceania is higher than that for North America, the European Community and Japan by a factor of 10.
Source: OECD.
Attachment C
Source: Reproduced from the Wall Street Journal, 30 June 1993.
ENDNOTES
1. "Employments Effects of the Rise and Fall in Defense Spending", Monthly Labor Review, April 1993.
2. In the decade 1981-91 the EC, for example, lost 3.2m jobs in industry and farm employment fell 3.3m. Employment in service industries rose by 14.9m, producing a net increase in jobs of 8.5m.
3. Employment /Unemployment Study, Interim Report by the Secretary General OECD, Paris, 1993.
4. Of course, it is difficult to generalise about, in particular, "European" labour markets as experience varies from country to country. Any brief assessment is thus of the average experience.
5. Unemployment rates in these countries (which include the Nordics) have been kept artificially low by public sector job schemes which are now being reduced on grounds of their cost ineffectiveness.
6. That is, Australia and New Zealand.
7. Canada, Finland, New Zealand, and Sweden also now have inflation targets.
8. To date, there has been relatively little private capital inflow into the former Communist countries -- and quite a bit of outflow!
9. To date, 46 major businesses have been transferred to the private sector in the UK, involving all told around 920,000 employees and reducing the state owned sector of industry by two thirds. Proceeds have been around 50 billion pounds. The number of individual shareholders in the UK is now some 10 million, more than three times the number in 1979.
10. This revised IMF forecast for 1993 is 1.4 percentage points below its October 1992 forecast.
11. Only $2.3 billion of the $15.3 billion current account deficit in 1992-93 was financed by (net) private capital inflow, including the balancing item.
12. See also "Private Market Financing for Developing Countries", IMF, December 1992.
13. The IMF team is doing a review which was postponed from before the election.
14. As one commentator put it, NAFTA has been an effective marketing tool both for "selling" reforms within Mexico and for attracting foreign investment to Mexico. In the last 3 years Mexico has attracted more foreign investment than it has in the last 20 years.
