Transcript No. 99/97

TRANSCRIPT OF

TREASURER

So what’s come out of it?

Well, look, it was a very good meeting. It’s an interesting forum because it’s got the

industrialised countries and the emerging markets involved. So you’ve got the G7 then

you’ve got China, Russia, Brazil, Argentina, Indonesia and that makes it a very

stimulating discussion with none of the rigidities of the institutionalised fora. There

was a discussion on what should be done to reduce financial vulnerabilities and I think

there’s a general consensus developing that flexible exchange rates are a big part of that

in all of the crisis affected countries. If you tried to peg exchange rates and you had

other vulnerable factors you would get into trouble. And the other vulnerable factors,

particularly the financial infrastructure, not well supervised banking systems, not good

insolvency regimes, not good corporate regulation regimes, that was certainly a big

factor, and high levels of short-term debt which couldn’t be defended on fixed exchange

rates. So there was a lot of discussion about that and moving towards helping countries

develop their own kind of domestic infrastructure. And then quite a good discussion on the

international organisations – what could be done to coordinate work, particularly in the

forums of the IMF, and also another forum which Australia’s actually involved in, the

Financial Stability Forum, which has been set up under the auspices of the Bank of

International Settlements (BIS) which is looking at something of particular interest to

us, what are called highly-leveraged institutions, hedge funds, promoting greater

transparency in their operations and so on. So there was a very good discussion in

relation to that and again focussing on the work of promoting transparency and disclosure

and all of those sorts of matters as well.

So were there other initiatives coming out of these discussions? What’s the …?

I think that this will be an ongoing discussion to develop and coordinate work coming

out of fora, other forums. You’ve got the work coming out of the IMF on disclosure and

transparency, you’ve got the work coming out of the Financial Stability Forum on things

like highly-leveraged institutions and transparency. And I think what will come out of

these meetings is renewed emphasis on domestic systems, getting domestic systems right to

guard against financial vulnerability and the factors I mentioned – exchange rate regimes,

financial infrastructure and management of short-term debt are going to be the key areas

there.

What about the US proposal of reforming the IMF? How was that received? What’s

Australia’s position on [inaudible]?

I think there’s a lot of interest in this. This is the idea that the IMF should get

back to core business, as it were. I think we’ve got to make sure that the IMF and the

World Bank don’t overlap. The IMF was set up really in the first place to deal with

balance of payments problems and that’s its core business. And its core business is

financial stability. So it’s had a lot of core business in the last two years, in

1997-1998. But it’s really the World Bank role to go into development and concessional

lending and I think it’s important that we remember that. One of the things about the

institutions is that, you know, the IMF is an institution now which is what, 50 years old

– probably more. It came out of Bretton Woods. And they all tend to get a bit

institutionalised and one of the good things about this G20 forum actually is it’s fresh

and it gives you the opportunity for frank exchanges – you know, across the whole gamut of

countries, industrialised countries, the emerging markets and people like ourselves who

are medium sized economies but who have got a pretty good track record in the face of

financial instability.

Was there … In terms of the reform of the IMF, was there any difference of view

between developing countries and industrialised countries?

I’m not sure that there was on the IMF. There’s a bit of a difference, I think, between

the developing countries and the industrialised countries on things like highly-leveraged

institutions – what used to be called hedge funds, they’re now called highly-leveraged

institutions. I think the emerging countries want to see more transparency, less

volatility, arising from that. I think also the emerging countries are much more wary of

capital account liberalisation. They’ve been through these enormous swings of capital

flows. You know, East Asia in ’97-98, Russia in ’98, Brazil in ’98 and I actually think

there’s something in that, to be frank. I think it’s a legitimate point for an emerging

economy which doesn’t have a sophisticated financial system, good prudential regulation,

deep capital markets, to have protections against free capital flows until it can develop

those transmission systems. You even think back in Australia. I mean, we used to regulate

our capital account right up until the 1980s. And even when we deregulated our capital

account, for the first decade we got it quite wrong. We went through very big instability

in the early 1990s when our banks couldn’t cope with capital account liquidity and a

number of them got into a lot of trouble and we just weren’t ready for it. Now, we picked

up our game later on in the ’90s and particularly with the Wallis Inquiry in ’96 we got

financial regulation to world state of the art, which was good for us in ’97-’98. But you

say to countries that don’t have sophistication and deep markets, well just liberalise

your capital account. They can’t cope with it. You know, what’s the expression? It’s like

trying to put 100,000 volts down a household power lead.

So, well Malaysia has dealt with that in particular. Are you saying [inaudible] have

some understanding for that or …?

No, I wouldn’t hold up Malaysia … I’m not holding up the Malaysian experience. I’m

saying that to cope with capital flows, you need a sophisticated domestic transmission

system and you need good banking supervision, you need solvent banks, preferably a good

insolvency regime, corporate regulation. Countries benefit from capital flows but they

need to develop that, you know, in order to handle them. I don’t agree with the

proposition that you should shut yourself off to capital flows. What I’m saying is they

are beneficial but you’ve got to make sure that you prepare the groundwork to take the

benefit.

So what sort of protective mechanisms [inaudible]?

Well, you know, the Chileans, you know, there’s a lot of interest. And this is not

Australia because we obviously have a sophisticated system. In fact, we’ve probably got

one of the most sophisticated systems now in the world. But there is a lot of interest in

the Chilean system for emerging markets where they basically have a mechanism to encourage

longer-term capital as against short-term capital. They actually, I don’t know quite how

it works, but when you bring money into the country there’s some kind of financial penalty

if you withdraw it in the first 12 months but if it stays for the first 12 months you can

withdraw it at will whenever you like. And that’s basically just a technique for

preventing really quick short-term capital movements. Now I’m not advocating any of this

for Australia because we’re actually held up as a model by the IMF about what you’ve got

to do in terms of financial sophistication to deal with free capital movements. The only

point I make is it took us a while to get there. And I would say we only actually got

there in the latter part of the ’90s.

Was there any sense in these discussions of reviewing what has happened and whether

there are still risks of it happening again?

Well I think the point that was made here, quite rightly, is we still … we are not

experts at predicting financial crises. If the world was good at predicting financial

crises, the world could probably prevent them. But the sophistication hasn’t got to that

extent yet and, that being the case, there’s still a lot of work to be done on how you

clean up financial crises after they’ve occurred. Now, we’ve been pushing for quite some

time now at least two ideas. One is what are called collective action clauses. So where a

country gets into trouble, collective action clauses will kick in so that it can

renegotiate its positions. And the other is standfast arrangements to give countries

breathing space to restructure. Now I don’t think there is at this moment consensus on

those but I think they’re two issues on the table that, in the absence of any other ideas,

have still got to be carefully looked at in cleaning up financial crises.

When you put 17 Finance Ministers from the G7 or 18 Finance Ministers from the G7 and

11 other countries and the IMF and the EU in a room together, did you come away at the end

of the day with a clear sense of a major point of disagreement on, or even a major line of

disagreement? Does it break down into the developing …?

I don’t think so, actually. It’s interesting. Different … I have a feeling that there

are different views amongst developing countries and different views amongst emerging

economies. I wouldn’t see it … It’s much more complicated than two teams on the

field, as it were. And then there are people like us that are not G7 countries but have

very sophisticated financial systems that, because we are a medium sized economy, have had

to learn the hard way about financial crises and have been a bit of an honest broker in

the Asian financial crisis. So we’re kind of not on either team. We play in the middle.

And there are a lot of other countries that are in the same … Well there are other

countries that are in the same situation.

We were, I think, critical of some aspects of the IMF’s handling of the crises in the

region.

Indonesia. We were of Indonesia.

Did you express that criticism today?

Not today, but I have previously in IMF forums. The first package that the IMF reached

with Indonesia, we were critical of and the IMF itself renegotiated. And I think that the

criticisms that we made were actually borne out. And in the end there were two

renegotiations in relation to Indonesia and I think the last program was much closer to

what we had been urging at the outset. You know, there’s a lovely expression … There’s a

lot of argument about whether the IMF got it right or whether the IMF got it wrong in East

Asia. The argument’s been raging up until about now and there’s a lovely expression,

someone said who won the argument? And the comment was made, not in these meetings, who

won the argument? The comment was made that the game was cancelled because of sunshine.

And as the economies came back in 1999 everyone lost interest in trying to finger who was

right and who was wrong.

Was that the case here today?

I don’t think so. I think the fact that this is meeting and it will go on illustrates

the point that there will be future crises. We can’t predict them. And that’s why we

should be now working on rules for the clean-up. Let me give you an example. I remember

going to Hong Kong in September of 1997. At the handover of Hong Kong to China, the IMF

Annual Meeting was in Hong Kong – September in 1997 – and the general consensus was that

the world would be looking forward to unbroken growth for years.

What year was that?

1997. And by Christmas of that year Korea had run out of foreign exchange reserves and

nearly gone belly up. Now the IMF was not predicting Korea two months before it occurred.

And although I think Asia has now bottomed and I think the Asian crisis is now behind us,

for all we know there could be another crisis around the corner. And history teaches us

that it will happen and that’s why we shouldn’t give up the game for sunshine now. We

should put in place the rules that are going to be required in the next crisis.

But when you talk about putting in place rules, you’re not talking about putting in

place a new architecture. You’re talking about consensus about what various countries …

Well this is my view. What are the rules we should be …

An honest system is what you’re really talking about.

I stress this. I’m only talking for myself in all of this. What rules? Well, you know,

I think emerging countries have got to have orderly liberalisation. It’s got to go hand in

hand as they develop their own domestic infrastructure and the breadth and liquidity of

their capital markets. I think there have got to be some rules about how you handle the

crisis affected countries after the event. You know, and as I’ve pointed to, whether it be

collective action/standstill arrangements. So I think there are now two classes. There’s

the class of preventative and there’s the class of clean-up afterwards. And you know,

whether you call them rules or whatever, you know, I think they’re sort of the practices

that we’ve got to be urging on countries to make the financial system work. I mean, one of

the points that has come out of here, and I think it was said in the meeting and I can’t

recall who said it, is now there are so many countries that are systemically important.

This meeting here, this G20, there are 18 countries in the G20. I think there are 18 in

the G20. That’s right, isn’t it?

Yes.

It’s always very confusing. Those 18 countries are considered systemically important to

the world financial system. Now you take a country like Russia which defaulted in 1998.

Russia’s not that big an economy, you know. It’s about the same size as Australia,

depending on the exchange rate. Maybe marginally bigger but it’s considered systemically

important. Korea’s about the same size as Australia and it went belly up in 1997. And it

is systemically important. There are 18 countries that are considered systemically

important. If you have problems in any of them, they have the possibility of having

knock-on effects in regions and eventually in the international financial system.

Yesterday in Australia there were excellent growth figures. The Australian economy

seems to be roaring along. What do you say about that, and particularly in the context of

the Asian crisis and what might have happened in Australia?

Well, I think I said when I released the Mid Year Review, for the first time I think we

could say the worst of the Asian financial crisis was behind us. And I hadn’t said that

before late 1999. My point is that an economy that performs strongly during the Asian

financial crisis will perform better if Asia comes back. And we’re now, I think, in our

ninth quarter of growth above 4% and this is a very good sign for Australia. If we could

sustain growth during an Asian financial crisis, we can maintain it during an Asian

financial recovery. This is a good sign for us.

Can we then deal with the problems of balance of payments …?

Well I think our balance of payments should actually improve as Asia comes back because

we had pressure on our balance of payments because there’s a weak external economy and a

strong domestic economy. Right? So we’re bringing in imports whereas we’re having trouble,

particularly on our prices with our exports. If Asia comes back, it should help our export

prices and it should start taking pressure off the balance of payments. So I think this

will be good for our balance of payments as Asia comes back, actually.

So what’s the task for you, then? Do you have a continuing reform agenda or …?

We’ve still got things to do in Australia. I mean, we, you know, we’ve worked on fiscal

policy. We’ve worked on nearly all of the things that meetings like this would say you

should work on. I mean, we worked on fiscal policy, we got the budget in balance. We

worked on monetary policy. We entered an agreement, myself and the Governor of the Reserve

Bank, we targetted inflation, we got interest rates down low. We worked on our financial

system with the Wallis Inquiry in 1996.

The IMF now holds us up as a model for financial regulation. We’ve been working on our

corporate regulation system with our work program. We’ve just got that through the Senate.

Now we’ve been working on tax reform. We’ve got to implement indirect tax reform. We are

now implementing business tax reform. We’ve cut the company tax rate, we’ve cut the

capital gains tax rate. That’s law. That was assigned into law last week in Australia. So,

you know, we’ve still got to bed down those changes. We’ve made some great strides. But

look, in this business you’ve just got to keep on moving. The whole world moves. You’ve

just got to stay in front if you want to get economic benefit.

But you proposed last weekend more flexibility in wage rates in Australia and that has

been shouted down by various people. Does that mean that some aspects, some areas of the

reform agenda, are still too difficult for Australia to tackle?

Well, look I won’t comment on those issues from here but the only point I’d make is,

and it’s a general point, is that the world moves and if you want to beat the world you’ve

got to keep moving faster. Now we beat the Asian financial and economic crisis. We’re

about the only economy in the region that did. We wouldn’t have done that if we hadn’t

have been working on the reform program. And there will be another crisis. That’s the

conclusion of this meeting. There are going to be future crises and, the more you work,

the better position you’re going to be in to deal with them.

Is there a sense here about this meeting?

Last question.

Okay, last question. Not so much about actually dealing with them once they occur but

trying to work out a warning system ahead. I mean in broadening this group out to, sort

of, you know, the so-called group of 20, I mean do you try to hear a little bit more about

what’s going on in various countries ahead of some problems?

You’ve got to work on warning systems. But you see the funny thing is that are you

listening for the right sounds? Four years ago, all the IMF work was on macroeconomic

indicators. Now a country would be in trouble if it didn’t have a strong fiscal position,

low inflation, [inaudible] current account. And then Asia came up. A lot of these Asian

countries had very good macroeconomic positions. You know, and so people looked at that

and then they said well what we should have been looking at was the financial

infrastructure – banking supervision, separation of the finance structure from corporate

regulation, insolvency regime. So all the work in the last couple of years has been

looking at that. Now it may well be that the next crisis will arise not from that factor,

because we’re now developing warning systems on that factor, but there’s another factor.

One of the other factors we’ve had a lot of discussion about that can lead to financial

crises is the civil culture. Weakness in court systems, proneness to corruption and

bribery. And so there’s now a lot of work moving on to that, the civil culture. Perhaps we

should be developing warning systems on that as well. And the other issue is the sort of

short-term capital flows. You know, when you’re developing warning systems, you’ve got to

look for the right sounds. This is the point. And the sounds change as the world becomes

more sophisticated.

As I said, that was the last question.