IMF/World Bank Meeting, International Economy, Australian Economy, Exchange Rate

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October 1, 2002

IMF/World Bank Meeting, International Economy, Australian Economy, Exchange Rate





Press Conference

Australian Embassy,

Washington DC

Sunday, 29 September, 2002



SUBJECTS: IMF/World Bank Meeting, International Economy, Australian Economy,

Exchange Rate


Thank you ladies and gentlemen for coming out today. As you know the annual

meeting of the IMF/World Bank is just winding up here in Washington. The principal

areas that have been under discussion are the world economy, particularly the

threats to the world economy from the very substantial fall in equity prices

around the world, and the fact that the expected recovery in the United States

economy in 2002 has been weaker than hoped. The corporate governance scandals

have affected confidence to some degree, and also the large structural problems

in the Japanese economy have been under discussion, with the difficulties in

the Japanese banking sector continuing, and Japan, as you know, still in a very

weak state. The IMF outlook is for Australia to continue to be one of the strongest

performing economies in the developed world and we concur with that. We’ve managed

to avoid the American recession of 2001. We don’t want to be complacent because

we know that there are still great challenges in front of us, and it’s important

that we keep our reform program going. But as I said at the annual meeting today,

the Australian experience does demonstrate the importance of economic reform

and it can bring higher productivity and stronger non-inflationary growth. We

want to continue to produce outcomes such as those.

From here I’ll be going to New York to open the Merrill Lynch investment conference

for investing in Australia, and to talk to a foreign policy association in relation

to prospects for economic growth in Asia.


Treasurer, first, how much discussion if any have you had at this meeting about

the possible economic effects of military action in the Middle East by the United

States, perhaps early in the New Year.


Well, if there is instability in the Middle East you would expect that from

an economic point of view that will have an effect on oil prices, and rising

oil prices is a negative for growth in the developed world, so that’s something

to bear in mind when you’re looking at the prospects. To some degree, we’ve

already seen those price rises. The point I’m making here is that it’s not necessarily

just military intervention, but it’s volatility and instability that effects

its way into prices, and higher oil prices are not good for the American economy

or indeed the Australian economy or any developed world economy. We lived through

a period of rising oil prices in 2000 in Australia, and that was not good nor

conducive for economic growth.


Having had a chance to get a sense of the world community, other Finance Ministers’

views on this, do you think it’s a major concern at the moment?


I wouldn’t rate it as the major concern. I think the falls on world equity

markets are the major concern for growth both in the United States and the developed

countries generally. You’ve had a situation where in the United States, also

in European stock markets, prices have fallen by about 25 per cent this year.

That’s an extraordinary number of people that have lost an extraordinary amount

of money. And you would expect that to affect consumer sentiment and also business

investment. That’s the big story in world markets at the moment, that’s the

difficulty that we’re confronting. Now the Australian stock market has fallen.

It hasn’t fallen anything like the falls in the United States or Europe, and

partly that’s because we avoided the excesses of the bubble on the way up. But

the outworking of this incredible volatility is the big economic challenge that

countries are facing at the moment.


What chance that conflict, or just the instability perhaps, but certainly conflict

in the Middle East, might force the Howard Government to consider a levy to

cover the costs of … an Australian contribution?


Well, I’m not speculating at all on a levy, because that rather assumes something

that hasn’t occurred. No military action is being taken in Iraq. The Australian

Government has not determined to engage in that, so obviously I’m not going

to speculate on what our response would be.


In terms of the discussions this weekend with the Finance Ministers, how likely

do you think is their planning and forecasting towards military action in the

Gulf? How much was that in their consideration when looking forward?


You mean amongst Finance Ministers generally, or amongst American …?


Both, especially the Europeans and the …


Look it’s one of the risks that you have to take into account in your economic

planning. I think it’s been referred to in the communiques, the fact that instability,

and I again emphasise it’s not necessarily war, just instability in the Middle

East, can have an effect on oil prices and it has already to some degree. The

price of oil has gone up quite substantially in recent months, so it’s one of

the risks to the world economic outlook. Is it the largest? No I don’t believe

it’s the largest at the moment, but it’s one of the downside risks that you

would factor in your thinking.


The other side of that of course is the US deficit, and many people are speculating

that if there is instability in the Middle East or a war in the Middle East,

then that deficit would be further increased. Is that a factor in peoples’ forecasting?


Well there’s been a huge turnaround in the position of the United States which

a year or two ago was looking at substantial surpluses and now has quite a substantial

deficit. The reason for that turnaround is principally the US recession. Nothing

undermines a budget position like a recession. But in addition to that was the

build-up of expenditure in response to the events of September 11. Now further

military action could also have a further effect. The point about all of that

is that the US budget was already in deficit, principally as a consequence of

2001. You wouldn’t say that this has had an inflationary effect because if you

look at long-term yields they’re exceptionally low at the moment, but it’s something

that policy makers in the United States I know are referring to and keeping

an eye on.


What is your view as a senior Australian minister, do you think that Saddam

Hussein should go regardless of the cost?


The Australian Government position is that full access should be made by Saddam

Hussein for inspection of all weapons of mass destruction, and that weapons

of mass destruction in Iraq should be destroyed. That is, it’s not just the

inspection, it’s the ending of the program to develop the weapons of mass destruction

and the dismantling of those weapons of mass destruction that are already there.

So our view is that the regime should end its program of weapons of mass destruction.

That’s what we call on the Iraqis to do, and we call on them to open to full

inspection so people can satisfy themselves that that’s what is occurring.


The British and the Americans at the UN obviously are trying to get a resolution

up, but they’ve flagged that there’s a prospect of action if they don’t get

a resolution. Baghdad has said yesterday it’s not interested in the new resolution.

What’s Australia’s position? That there could be action regardless of the lack

of a UN resolution?


We hope that the Iraqi regime will comply with what the international community

is demanding, and we hope that the UN will clearly state the requirement that

there be full inspection towards the dismantling of the program. And we don’t

go any further than that at this stage because we hope that the forums of the

UN will be able to accomplish that.


So you don’t say whether the failure of Iraq to comply with any resolutions

should be met with military action?


We call on Iraq to comply. That’s the stage that we’re at. We call on them

to comply with, one, the inspections, and two, the dismantling of the program.


But given that Treasurer, do we believe, is it the position of the Australian

Government that existing resolutions in the UN are sufficient if Iraq were to

fully comply, or do we subscribe with what is clearly Washington’s view that

we need a new resolution?


We think that Iraq should have been complying with existing resolutions. The

whole international community thinks that. It was back in 1998 that Iraq threw

out the inspectors and said it was no longer going to comply. We think it should

have been complying. We think the UN had in place a program for this which we

support. But the UN is now being asked to look at a new resolution, and we welcome

that fact, and we don’t anticipate what the outcome of that is going to be.

We await the outcome of that, and in the interim we ask the Iraqi regime to

comply. You say to me what will happen if that doesn’t occur? Well, if that

doesn’t occur then we’ll be announcing our response.


Is there do you think any way the Australian Government would support a military

action in Iraq that did not have some support of the United Nations Security



I’m not going to speculate on that either. At the moment it’s in the UN and

we’re awaiting the outcome of those discussions.


Treasurer, can I ask you, I understand a lot of the discussion at this meeting

is centred on the failure of the market model, the failure of the economic model

of the 1990s very largely. Yet Australia seems to have defied that trend. Do

you get a sense of Australia being the odd pupil out here or not?


I think it’s widely recognised in the meetings of the international economic

bodies that Australia in the last 4 or 5 years has been one of the stand-out

economies of the developed world. That during the Asian financial crisis the

Australian economy shrugged that off and continued to grow, and during the US

recession of 2001 and the general global downturn, we still continued to grow.

And there aren’t many countries in the world that have that record. There’s

a lot of interest in what we’ve done in Australia. How we’ve managed to shrug

off both of those international difficulties, and I think that’s put down to

a lot of the structural reforms that we’ve been doing. The very strong budget

position, the repayment of debt, the big tax reform of 2000, the importance

of reform in our labour markets. Whether you call that the model of the 1990s

or not I’m not sure, but that’s a big part of the Australian story. We have

a flexible economy which is high productivity. I look back on that and I say

those reforms of years ago have given us results today, and it’s the reforms

of today that will give us the results of tomorrow. That’s why we’ve got to

keep on going with economic reform.


One of the factors has also been the low Australian dollar. With the size of

the US deficit, if this blows out further, what do you envisage happening vis-a-vis

the Australian-US dollar ratio?


Well the big issue here I think is what’s going to happen with the US dollar.

The US is running a very large current account – five per cent of GDP. Very

high by historical standards, in absolute dollars enormous sums of money. The

United States is now requiring other peoples savings to fund their current account

gap. Now that could affect the US exchange rate at some point. It depends on

a couple of factors. How long this continues, what the sentiment is, what peoples’

belief is as to investment prospects in this country.


A war in the Gulf would not be (inaudible)


Other than to observe that all of those factors affect exchange rates, I’m

not going to make predictions on the future of the US exchange rate any more

than I make it on the future of the A-dollar.