Global Resolve: Wayne Swan on Economic Policy

The Treasurer, Wayne Swan, has outlined Australia’s economic policy, the nation’s role in Asia, and the challenges of the global economy, in a speech to the Harvard Club of New York.

The speech follows Swan’s acceptance of the Finance Minister of the Year award from Euromoney magazine.

This is the transcript of Wayne Swan’s speech to the Harvard Club of New York.

That was a very kind introduction and a very warm welcome, and I want to thank you for having me here.

Harvard has made such an extraordinary contribution to the advancement of economic policy around the world so it’s an honour to be here to address you today.

It’s great to be in New York again, the capital city of the free world.

It’s a tragedy that the remarkable history of this city and the fond memories of it so many people carry are stained of course by two history-altering events, both marked this month.

The first was commemorated 15 days ago, a full decade after the fall of two towers brought death and destruction and beyond that a dramatic escalation of a war our nations still fight together today.

The second was quietly remembered just four days later – three years since Lehman’s collapse pushed the global economy off a cliff, towards the greatest synchronised downturn since the Great Depression.

This city was, of course, the absolute epicentre of a global financial crisis that spiralled into a global recession.

Nobody here needs reminding of the depth of that crisis or the consequences for our economies. We still feel them today.

But today the world faces a different economic challenge – a challenge of confidence, a challenge of political will – that is different to what we saw over the last three years but which could prove every bit as threatening if not dealt with in a coordinated and decisive way.

This time, the epicentre is not New York, but Athens, and there are fiscal spot fires in Rome, Lisbon and Dublin and political spot fires in Brussels and Washington DC, where I have spent the last few days with my international counterparts.

More on that shortly.

This time, the dangerous global economic situation is not brought to us by investment bankers but by political gridlock.

It began to smoulder in Greece over a year ago. Unsustainable sovereign debt and financial volatility sparked this and while everyone recognised what was happening, not enough was done to put it out.

At the same time, here in the United States, we see the lingering consequences of the global financial crisis in soft growth, a weak housing market and persistent high unemployment.

We have seen a political impasse in Congress over dealing effectively with these consequences and while the status quo continues, growth in the world’s largest economy wanes. This is why – whatever Congressional obstacles it faces – I have been very encouraged by President Obama’s jobs plan.

While some important policy steps have been taken in Europe and the US to deal with their fiscal situations, much more needs to be done.

There is limited confidence, particularly in the capacity of governments to deal with this situation.

At present, sadly, nobody is expecting much of a contribution to global growth from either side of the Atlantic for some time.

These developments have had a significant impact on confidence and growth is slowing in developed economies.

We are seeing the crisis unfold through increasing instability in global financial markets.

It’s still too early to tell exactly how this situation will play out.

But it’s fair to say there is a very sober realism among Finance Ministers sitting around the G20 table.

Australia in Asia

Global growth really relies on two things. The first is a coordinated response to the current uncertainties, and I’ll come to that in moment.

The second foundation is continuing growth in developing nations, particularly those in my own country’s Asian neighbourhood.

While the situation is serious, we shouldn’t lose sight of the fact that our region is much stronger.

So while there are dark clouds on the economic horizon, we can take some comfort that the sunlight still pierces through in some regions.

I was recently in China where it was clear that there is considerable confidence about China’s prospects and those of broader Asia.

This just underscores the global economic transition that we have been seeing for some time – the shift in activity from West to East.

Geography, however, is not the only respect in which the global economic pendulum is swinging from West to East.

Demography is another.

In the Asia-Pacific, the middle class is expanding at an extraordinary pace, with something like 110 million people being added each year.

By 2020, there are expected to be more middle class consumers in Asia than in the rest of the world combined.

And by the end of the next decade, around two-thirds of the world’s middle class consumers will be in the Asia-Pacific region.

This means that while we all know Asia is becoming the world’s biggest production zone, it will in my view also become the world’s biggest consumption zone.

This is a key reason why the Australian economy has such a bright outlook, and it’s one of the key reasons why we’re seen as such an attractive destination for investment.

Right now we’re experiencing the first wave of opportunity from this shift in global gravity – you can see it in Asia’s enormous appetite for our natural resources.

This has not only pushed our terms of trade to their highest sustained levels in 140 years, but is generating an unprecedented pipeline of investment in our economy.

We’re now looking at $430 billion of planned investment in our resources sector alone – a staggering investment pipeline in the context of our $1.4 trillion economy.

These long term investments are a vote of confidence in Australia and will provide a continuing solid bedrock of support for our economy in uncertain times.

But while mining continues to make an important contribution, the fortunes of the Australian economy are not inextricably linked to this sector, as some would have you believe.

Mining accounts for no more than one tenth of our GDP and over the last decade accounted for less than one tenth of our total output growth. And the mining sector only accounts for around 2 per cent of total employment.

Mining is an important part of our economic story, but no more important than the role of our manufacturing and services sectors.

Most Australians today work in services, and it is predominantly in services that our long term prosperity lies.

As the rise of the Asian middle class consumer continues, we’ll be seeing many more opportunities emerge across a broad range of sectors particularly for our high-end services – provided by a highly-skilled workforce, native speakers of the global language of English, but situated in Asia’s time zone.

So it is true that we have been fortunate to find in Asia a neighbour with growing demand for our goods and services.

But our proximity to Asia isn’t the only reason why the Australian story is one of strength and resilience.

The Australian success story is almost unique in the developed world and I never tire of telling it.

A large part of this is due to our action at the height of the GFC, but it’s also due to our strong reform tradition which has spanned across 30 years: trade liberalisation, increased domestic competition and international openness, widespread tax reform and deregulation that still left in place the key protections our citizens demand and deserve.

Taken together, these factors have built the foundations of a strong and resilient economy.

The Australian economy was virtually unique amongst advanced economies in avoiding recession, and our economy has grown by over 5 per cent on its pre-crisis level.

This means we now have a low unemployment rate, and have avoided the skill destruction and capital carnage that now plagues so many advanced economies.

Our banks passed the stress test of the GFC with flying colours, and are well regulated and well funded for the period ahead.

And our public finances remain in great shape, with public debt at less than one tenth of that of major advanced economies.

We have a clear plan to return to surplus in 2012-13 which we are determined to implement – well ahead of every single major advanced economy. We’re doing this by restraining spending growth and putting in place the necessary savings.

People will look at our healthy fiscal situation in Australia and say “that’s easy for you to say”.

But let me digress for a moment on this, because Australia’s strong position is not a product of luck.

It is a product of a policy framework that most in this room may not know much about.

We believed back in 2008 and 2009 when we put our stimulus in place that we also needed to chart a strong and credible path back to surplus at the same time as the global recession pushed us into deficit.

What we laid out then was a strategy for spending to support growth in the short term, in return for fiscal consolidation in the medium-to-longer term.

It was also a growth-contingent formula – the pace of our fiscal consolidation was expressly dictated by the state of economic growth.

In short: fiscal support for the economy when it was weak, repaid by fiscal consolidation as the economy strengthened. This is the plan we laid out in February of 2009, and have been delivering ever since.

All these fundamentals are underpinned by a government that is working remarkably well, despite our minority status in the parliament.

What goes underappreciated is the fact that we have not lost a vote on policy in the parliament – with 195 pieces of legislation passed since last September, when the term of our current Government began.

So a combination of our understanding with the crossbench members of parliament and the remarkable leadership provided by the Prime Minister has built solid foundations for policy action.

This allows us to keep the reform wheels turning so we can convert our stunning advantages into enduring prosperity.

To put it bluntly, we can’t afford to put our reform plans on hold while we wait for Europe to get its act together.

That’s why we’re getting on with the important economic reforms that will keep us on the front foot.

It’s why we’re investing heavily in skills and infrastructure – to shore up the quality and mobility of our workforce and help our industries become more effective.

It’s why we’re doing things like reforming our tax system to increase incentives to work, ensure we remain competitive, and help other industries who aren’t in the fast lane of the mining boom.

It’s why we’re building a world-class broadband network that will allow Australian businesses to compete in ways that we can still only imagine.

And it’s why we’re beginning the transition to a clean energy future and kick-starting a wave of investment in renewables, encouraged by a carbon price.

This is the best way for Australia to prepare itself as a competitive provider of high value goods and services to the immense regional economy that is now developing on our doorstep in the Asian Century.

Global Resolve

My second message today is that while Asia is the hope of the side when it comes to global growth in the near term, none of us can rely on Asian growth alone because we’re so interconnected.

That’s why we need the same commitment, the same effort, the same coordination in 2011 as we had at the leading edge of the financial crisis back in 2008.

Of course the challenges we face this time are different.

The current problems in Europe and the US have been exposed by credit contractions and growth slowdowns that occurred as a result of the crisis, not by the crisis itself.

What officials are now dealing with in both cases is the challenge of restarting growth when fiscal and monetary policy arsenals are depleted.

We should also bear in mind that even with recent downward revisions, overall global growth is still fairly firm and we are not yet experiencing a drop in demand like we did in 2008.

But the level of commitment necessary for the global economy to dig itself out of this hole is the same.

Some of the solutions are also the same, like restoring credibility, reinstating confidence and boosting growth and jobs creation.

The challenge in doing this is primarily political.

While policy flexibility is reduced, action can be taken – the issue is whether there is the political will.

That’s exactly why I told my counterparts at the IMF, World Bank and G20 meetings a few days ago that while it is easier said than done, we must deliver.

We need to make clear to the international community that we are taking the decisive action necessary.

Let me talk a moment about that action.

It includes things like credible and flexible fiscal consolidation plans that, as I outlined above, do not hurt the recovery.

It also includes developing economies putting in place policies to foster domestic demand and move towards market-based exchange rates.

Everyone should commit to pursuing growth-enhancing measures – ones that will increase incentives to work, invest and save.

And we cannot ignore the problems confronting Greece and the risk of contagion in Europe.

I accept that they face a European crisis, for Europeans to solve.

But Europe must also recognise that there is a weight of responsibility to all other economies of the world to do this.

As our new IMF Managing Director has said, the policy options are narrower than before, but there is a way through.

The global financial crisis was a crisis that virtually no one saw coming.

Now we have a crisis that virtually everyone has seen coming.

It is our responsibility to provide the leadership to avert this.

Global Prospects

In that room with G20 colleagues you get a very real sense that the future of the global economy will be written as much by politicians as it will be by businesses and workers around the globe.

Because what’s often missing right now is political will and intelligent domestic decisions to support jobs in the near term and commit to a credible, achievable plan for rapid fiscal consolidation when the clouds begin to clear.

There is a growing appreciation amongst finance ministers of the magnitude of the emerging crisis. But we don’t have much time.

Too often in recent months political sand has been thrown in the economic gears of the world. We don’t have the luxury of playing political games with so many jobs at stake.

Three years ago I came to Wall Street and stared into the abyss. I participated in meetings with then-President Bush.

The actions we took brought the economy back from the brink, ensuring we did not repeat the devastation of the Great Depression.

This time around we need to bring the same determination as we did three years ago.

While my G20 colleagues understand the magnitude of the challenges we face, they will need to meet them with political courage and determination.

In particular Europe will need to implement the reforms it has outlined, put in place credible fiscal consolidation plans and ensure adequate capital for its banking system.

It has committed to do this and now is the time to follow through on those commitments.

If we do not take the hard decisions now, three years time from now we may well have locked ourselves into a prolonged period of global stagnation.

But we have the choice to stand here in three years time, with a global economy that’s growing, generating income and jobs, and having avoided a repeat of the decade of destruction that followed the Great Depression.

I am confident that we will do that, through the same determination that saw us collectively stare down the Global Financial Crisis but that will require political will and courage.

Thank you.

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