TRANSCRIPT OF

THE HON PETER COSTELLO MP
Treasurer

and

RODRIGO DE RATO

Managing Director of IMF

Joint Press Conference

Parliament House

Wednesday, 14 June 2006

10.30 am

SUBJECTS: Global and Australian economy, IMF reform, industrial relations, ethanol, stock market, Westpac Consumer Sentiment survey, immigration legislation

TREASURER:

Let me formally welcome and introduce the Managing Director of the IMF, Mr Rodrigo de Rato, who is visiting Australia yesterday and today and many of you would have seen him at the National Press Club yesterday.

Mr de Rato and I have had discussions this morning about the nature of the world economy, Australia’s prospects, regional prospects, the challenges to economic management and the way in which we see events moving. On the whole, prospects for the global economy are strong although obviously there are challenges, the oil price, the large imbalances between some of the developed economies and the danger that there could be a rapid readjustment in relation to exchange rates.

Rodrigo and I have also had discussions, we were together in St Petersburg at the G8 Summit and here, on the nature of IMF reform. IMF reform is something Australia has been pushing for some time. We believe that the IMF represents more the historical weight of countries in the global economy than the current weight. We believe that Asia is under-represented in the IMF and that there should be reform to quotas to recognise the growing global importance of emerging economies in Asia. We think it is important that the IMF be reformed to increase transparency in relation to appointments and we think that it is important that the IMF clarify its role and its jurisdiction vis a vis the World Bank. These are matters that Australia has had strong views on for some time. This year Australia holds the chair of the G20, a group that brings together the developed economies of the world and the emerging economies of the world. Our annual meeting will be in Melbourne, Australia in November and we hope that the G20 can continue to provide an impetus for reform of international financial institutions. This will be an issue at the annual meeting of the IMF in Singapore. Rodrigo, I think, is on the same page as we are about the importance of reform and we expect to see some concrete steps coming out of Singapore.

Finally, may I say the IMF has recently concluded its Article 4 consultation in relation to Australia. I don’t believe that the statement has been issued. We look forward to seeing the statement but we have certainly enjoyed the consultation with the IMF in relation to its annual mission to Australia. And now perhaps I will ask Rodrigo to say a few words.

RODRIGO DE RATO:

Thank you, Peter. First of all I want to say that I am very happy to be in Australia. This is my first visit to the country and the first visit of a Managing Director of the Fund since 1998. I had a chance yesterday of meeting some of you at the National Press Club and I also met yesterday with some Government officials. I have met this morning with the Opposition Finance spokesperson, Mr Wayne Swan and with Mr Costello. I will later on today meet the Prime Minister and the Minister for Foreign Affairs and the Deputy Governor of the Reserve Bank of Australia, Mr Glenn Stevens, and this will be a very good occasion to discuss different issues.

These meetings certainly, the situation of the global economy, has been one of the most important issues, together with also the evolution of the Asian economy. The situation of the Australian economy, as Minister Costello has referred, also has been part of our discussions, and looking forward to the prospect of the Australian economy and its role in the Asian economy. As I said yesterday, we believe that many of the changes that Australia has gone through in recent times can be seen by others as a good path to follow and we think that the micro-economic situation of Australia is strong and should allow the country to move forward in the future.

As Mr Costello has mentioned one issue that has been coming in many of these meetings has been the medium-term strategy of the Fund, which I presented to the Ministers last September and again in the Spring meeting in Washington in April. The main objective of that medium-term strategy is to make our member countries cope and face and take advantage of the opportunities of the 21^st century globalisation and certainly the governance of the institution has to reflect 21^st century economy. In that respect, as I said on more than one occasion, the question of quotas is a crucial question, that is not only an Asian issue but is certainly important for Asia, and we think there is a fair amount of work being done by different countries, among them Australia and I want to thank Minister Costello and his colleagues for their effort in this respect, and I think we have a chance and I will work on it to bring to Singapore some proposals that will help the institution take the right steps in the next two years to become more flexible in terms of recognising the different weights of countries in the governance of the institution. I finally want to take this opportunity to express my appreciation for the close co-operation with the Australian Government as Chair of the G20, we have been working with the Australian Government on many occasions regarding this Chairmanship of the G20 and we look forward to the meetings of the G20 to be held here in Australia in the Autumn.

TREASURER:

Thank you very much.

DE RATO:

Thank you very much.

JOURNALIST:

A question for both of you, is there any reason that say, a Japanese or Chinese or even an Australian, couldn’t head your institution in the near future, it seems to be monopolised by Europeans and Americans to date, sorry Europeans and Americans as Deputies.

DE RATO:

Well, like any institution it depends on the members. It is very clear, I understand that not my predecessor but my predecessor across the street in the World Bank of the last ten years was born an Australian, Mr Jim Wolfensohn, so there is many very clever people in Australia, the question is that you have to get the votes and that of course is a healthy thing in an institution, that is why I think the quota issue, the voice issue, is important, so that those votes truly represent the different weights of the world economy at different moments.

TREASURER:

Well the traditional situation has been a European as Managing Director of the Fund and an American citizen as President of the Bank. And we are very proud of Jim Wolfensohn but he did have to become an American citizen, or did become an American citizen, in order to take that job. Now personally I believe that nationality should not be a criteria, that the best person qualified to lead the Fund should. And I have no doubt that Rodrigo is the best person to lead the Fund and the best person to lead the Bank should, but as Rodrigo says you have got to have the votes and if the shareholdings are weighted towards particular regions of the world then that gives them a big head start.

JOURNALIST:

Mr de Rato, Australia has embarked on a programme of fairly far reaching industrial relations reform, would you expect that to result in lower unemployment?

DE RATO:

Well, first of all, Australian unemployment is already at historical lows and probably you are very near full employment. But I think that in a globalised world all countries are facing similar choices and similar challenges – that is to combine security and safety nets with flexibility. We do not live anymore in a world of national markets, most industries have international competition. We have seen in recent years that not only manufacturers but also services are becoming globalised, and in that respect the labour laws, of not only the 1970s, but even the 1990s, are probably not the ones we need in the 21^st century. Of course, the balancing between security and safety nets and flexibility is a key question of governance – of good governance. And that has to do with ownership. In many areas of economic policy ownership is key. Societies have to understand the rules to be able to live with them. But in social relations and industrial relations, ownership is key. So I think that the need for adapting to a more competitive world and at the same time do it in a way that is understood and accepted by peer people is a very important issue. You have many examples of countries with strong safety nets and at the same time flexible relations – in Europe, certainly the northern (inaudible) is an example, and also some others. I think Australia has taken important steps to become more flexible and at the same time keep its safety net structures, but this is an on-going movement, the world is changing, competition is shifting and labour laws have to reflect that fact. So I think it is unavoidable, that debate, it is unavoidable that societies look into it regularly.

TREASURER:

Now I will, just for the sake of our guests try and get some order. You want to follow up that point Michelle?

JOURNALIST:

Yes, I was just wondering whether you could elaborate on your point about ownership?

DE RATO:

Excuse me?

JOURNALIST:

Could you elaborate on the point you were making in the last answer on ownership? You said that ownership is key…

DE RATO:

Well ownership means that you can find different ways of addressing flexibility in different economies and you don’t have the same type of society all over the world. You have ownership of the social policies in northern Europe, you also have ownership in the United States and I think Australia too. But what I think is that flexible labour markets are a need and a guarantee for employment, at the same time social safety nets are part of the modern society. That balancing act is an important question. Probably my stronger experience there is in my own country, Spain has probably been the country that has reduced unemployment in a more dramatic way in the last 10 years and that shows that labour reform and labour flexibility do have an impact on employment for sure, there is no question about that.

JOURNALIST:

I gather the IMF has been conducting a financial sector assessment programme in Australia of recent months and I am just wondering if you can tell us anything about the status of that exercise when we are likely to see a report and whether there are any emerging issues with financial systems stability and compliance with the Australian financial systems with relevant international codes and guidelines?

DE RATO:

Well we have done an FSAP in Australia recently and it will be made available to the Government and made public in the next few months, exactly when…

IMF OFFICIAL:

Early to mid October.

DE RATO:

…mid October. This is a type of check-up we do in many economies, we have done more than 90 FSAPs in the world and right now we are doing them in many countries. I think it is very useful for governments and regulators that we are able to compare our views with them. I would have to say that the situation of the Australian financial system is very healthy and very strong, but it is facing challenges like any financial system in the world and it has to update its regulations and the regulators’ capacities to an international global financial system which is becoming a source of opportunities but at the same time some challenges (inaudible) risk are appearing and that is no exception in Australia.

JOURNALIST:

Mr Costello (inaudible) are oil companies dragging their heels in relation to the use of ethanol passing those benefits onto consumers? Some Coalition MPs are again talking about a mandate or bringing forward the volumetric target, what is your view on this issue and are you also concerned that the fuel legislation currently before Parliament will expose ethanol to too much competition by 2011 when those tax changes come into effect?

TREASURER:

Well I don’t believe that we should mandate ethanol and the reason for that is that if a product is competitive, particularly if it is competitive with tax advantages then it will be adopted and the market will take it up. The only reason for mandating it would be if it is not competitive, if people wouldn’t otherwise want to use it. I think there is enormous opportunity in the Australian market for ethanol because unlike petrol and diesel, it is not subject to an excise, that gives it an enormous tax start and even with our changes coming in from 2011 bit by bit, through to 2015, it will keep an enormous tax start. Now, I wish the industry well, if the industry using that tax advantage is able to produce a product which reduces prices then that will be of enormous benefit for consumers. But to mandate that consumers have to buy it regardless of price with the possibility that they are buying a more expensive product would be to push up prices against consumers. I am not interested in pushing up prices against consumers. I am not interested in pushing up prices against consumers for the benefit of producers, what I want is the cheapest prices for consumers. That is why I wouldn’t be mandating a product which couldn’t hold its own in the market but we will be opening the market to any new product that can produce a cheaper price to come in and to attract buyers on that basis.

JOURNALIST:

Treasurer, what are your thoughts on what was said on financial markets, particularly commodities overnight, copper was down 7 per cent, is this the start of a long-term trend?

TREASURER:

Look, I think there has been a correction in relation to the Australian stock market, you have got to remember the Australian stock market has been at all time records. Unlike US stock markets or UK stock markets we have been at all time records. So we have been higher than highs of other countries. If there is a correction in other countries then there is a correction in Australia. This is what happens when you have a very strong run-up over a period of time. You get a correction, it is not always unwelcomed. Now, I think what we are seeing in relation to commodity markets is fears of global inflation mean that people think that maybe global growth won’t be as strong in the future, the consequence of that is that commodities have been marked down to some extent but by historical measures they are still very high and we would expect them by historical standards to continue at high levels. I often say to people you have got to remember stock markets don’t always just move in one direction, you get corrections from time to time and that is not unwelcome because if you don’t have small corrections eventually you have very large corrections and it is better to have smaller ones.

JOURNALIST:

Mr de Rato…

TREASURER:

Now, I will go, one, two, three, okay, and then four. Yes.

JOURNALIST:

I was just interested in Mr de Rato’s comments on the same subject. Does this financial turmoil in markets contain any possible dangers?

DE RATO:

Well we see that the markets recently are taken a new appraisal of risk and we believe that that is probably a correction that was due. The markets have been appraising risk in a very benign way in recent times and as some people are saying we have gone through a very expansionary monetary policy in many areas of the world. Now we are moving to a more neutral stance in monetary policy which is healthy, because it is more sustainable, but of course means that interest rates are going up from what we have seen in recent times, so the markets are facing that change. At the same time there is also some signs of inflationary pressures picking up, not to a dramatic situation but nevertheless picking up and that is some explanation for that, energy prices, and also spare capacity which has been very low in many economies for instance in the United States. And another area of concern is certainly what implications will have on this for growth and this is also I think the reason in the markets appraisal. I have to repeat as I said yesterday that the prospects of growth are relatively strong in the world with very strong growth of 5 per cent in 2006 and today what we see for 2007 is that the world economy will continue performing at a healthy pace. Nevertheless the markets are looking again at some fundamentals – macro economic stability, financial stability, anti-inflationary credibility of monetary authorities is becoming more and more important – and we believe that in that respect monetary authorities of central banks are going to have to be extremely vigilant of inflationary pressures and at the same time be very careful in their communication policies.

JOURNALIST:

Mr de Rato, you’re meeting Glenn Stevens this afternoon, is that an issue that you will be taking up with him in terms of the inflationary pressures that seem to be building across the globe and how much of a risk to the 5 per cent forecast for the IMF is the sort of concerted move by central banks to tighten monetary policy?

DE RATO:

Yes of course, I mean I think this is one of the issues if not the issue right now in the world is how central banks are going to adapt to an environment of higher interest rates in the United States and Europe and eventually what will happen to monetary policy in Japan, the fact that oil prices have not only had a very strong increase in recent couple of years but are going to stay at high levels for the foreseeable future and also the fact that, as I said before, some very important economies for the world are performing at capacity and that of course can create also inflationary pressures and they are appearing in some economies right now.

TREASURER:

Two quick last questions, Tim.

JOURNALIST:

Two things that I just wanted to clarify, first coming back to this word ‘ownership’ in the context of industrial relations reforms, do you mean that each country must follow its own national character, I don’t quite know what you mean?

DE RATO:

Well ‘ownership’ means of course that countries understand and accept and are owners of their regulations on many issues and ownership on social and industrial relations is very important. You have different social charactistics in different societies in many parts of the world. At the same time we live in a global market on many issues so that ownership cannot imply that you don’t recognise the force of competition but that you react with different approaches, it depends on the different degrees of social consensus in different countries. Flexibility is needed in the world and the labour market is no exception, flexibility is a clear guarantee for a (inaudible) the best of globalisation but at the same time social safety nets are part of our modern societies and they are a healthy instrument too. How you combine those two, well it might differ among countries and it might differ among different industries. So this is a question that has to be addressed and is being addressed in many countries.

TREASURER:

Last question.

JOURNALIST:

Treasurer, (inaudible)…

TREASURER:

And then last question, right, that’s it. There is another press conference that is due to start quite shortly.

JOURNALIST:

…Treasurer, the Westpac Consumer Sentiment survey shows that it is down half a per cent to June, what is your response to those figures?

TREASURER:

Well I think that overall sentiment is quite strong, it varies from month to month, obviously you would be getting in relation to June the effects of monetary policy, you would be getting the effects of petrol prices, but overall the sentiment is strong as you would expect in an economy which is growing at 3.1 per cent through the year, where unemployment is low and where there are strong profits.

JOURNALIST:

Treasurer, do you think the current immigration legislation before the Parliament should be amended to accommodate the concerns of your backbench colleagues?

TREASURER:

There will be discussions with backbench colleagues throughout the course of the day. The principle which will not be changed is the principle of offshore processing, but if there are parts of the Bill which can be improved, of course the Government will look at that but the principle which is the object here to continue to run a proper and orderly refugee programme, a generous programme but to do it through offshore processing, which we largely do anyway for people who arrive on islands to the north of Australia and will extend to people who arrive on mainland Australia itself, that principle will not be compromised.

JOURNALIST:

But what about allowing genuine asylum seekers to settle in Australia?

TREASURER:

I thought I said that was the last question.

JOURNALIST:

But you opened up so many more questions with that answer.

TREASURER:

Well I will return to all of those questions at a later time, thank you all very much. Thank you.

DE RATO:

Thank you.