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Presentation to the OECD Forum 2003 – “Corporate Governance – Strengthening Conditions for Investment”
April 29, 2003
Governor General
May 5, 2003
Presentation to the OECD Forum 2003 – “Corporate Governance – Strengthening Conditions for Investment”
April 29, 2003
Governor General
May 5, 2003

Economy, Drought



CNBC Market Watch


Tuesday, 29 April 2003



SUBJECTS: Economy, Drought


Mr Costello, thank you very much indeed for joining us on Power Lunch. Now,

you were a bit of a stand-out last week when the OECD released its economic

report, saying that they’re looking for growth in 2004 for the Australian economy

of 3.8 per cent. Do you think it’s really possible to out-perform that much,

bearing in mind the weak global economy and when so many of your Asian trading

partners are going to have to deal with SARS?


Well, the Australian economy has grown at an average of about 4 per cent per

annum for the last 10 years, so it is certainly within reach. We have a weak

global economy, of course, and that will affect us. SARS is also weighing on

the East Asian economies. However, Australia was quite strong through the Asian

financial crisis of 1997, which shows that it is quite resilient. It is a resilient

economy, that can withstand downturns in East Asia. But it will depend a little

on the climatic conditions. We have had a very bad drought in Australia, although

that looks like breaking. So we could start resuming longer term trend growth,

probably in 2004, late 2003.


Okay. You mentioned the drought there. Are we through the worst effects of



I think we are. We have had our non-farm economy growing at 4 per cent throughout

the course of the drought. It was the worst drought we have had in a century.

It looks now as if that drought is breaking, and that means that the rural sector

will pick up a little, and that will add to growth. The drought has taken about

1 per cent off our GDP growth in the current financial year, so rather than

growing at 4 per cent, the overall growth was 3 per cent, the non-farm economy

was 4 per cent, but overall it was 3 per cent. And as the drought breaks, of

course that will be good for continuing growth in the economy into 2003-2004.


But the OECD also said that once we see the effects of the drought disappear

out of the economy, that rates may have to go up just a little bit to keep inflation

under control. What’s your view of that?


We have an inflation target of 2 to 3 per cent, which we have been managing

pretty well now since 1996. With the higher petrol prices, if you feed that

back into the Consumer Price Index, inflation edged up a little. But with the

ending of the war in Iraq, oil prices are already off, petrol prices, gasoline

prices, will come down again, so we do not see any inflation threat through

the course of the next 12 months. We actually expect inflation will be declining,

consistent with the target that we have for monetary policy purposes.


You mention there the war in Iraq. You’ve got a Budget statement coming up

fairly soon. What effect has the war on Iraq had on government expenditure?


Well, it has led to additional government expenditures. Obviously, the cost

of the deployment of Australian troops on the land, in the sea, the Hornets

which were deployed by Australia – that all has a cost. In addition, obviously,

the aid commitments and engagement in reconstruction in Iraq will all have additional

costs. So that will be a substantial effect on our Budget. But fortunately we

have had a budget which is in surplus in the current financial year, so we are

pretty well placed to handle that. And our debt position is pretty strong, and

we will look to take that cost into account in the recurrent budget for the

next year.


Now, one other thing that is under discussion at the OECD, of course, is what

is happening, particularly of interest to you, is what’s happening on global

trade and in agriculture in particular. There is a lot of protection for EU

agriculture at the moment. Are you happy with that or would you like to see

it opened up a lot more?


Oh no, we would like to see trade liberalised, in agriculture, obviously from

Australia’s point of view, that would help Australia, because we do not engage

in protection or subsidisation of our products. But we have a bigger argument

than that, and our argument is this. That to the degree that you reduce protection

in the agricultural markets, the particular economy itself can get an advantage.

Consumers get lower prices. They have more spending power. Investment is directed

towards more efficient parts of the economy. We would argue that liberalising

Europe’s agricultural policy will actually bring benefits to Europe, as well

as to other trading partners and, of course, as well as to the third world,

which needs access to the markets of the developed economies in relation to

their exports, many of which, of course, are agriculture.


Peter Costello, thank you very much indeed for joining us.


A great pleasure to be with you. Thank you.