Transcript

of

Hon Peter Costello MP

Member for Higgins

Interview with Jim Middleton, News Hour, Australia Network

Monday, 28 September 2009

E&OE

SUBJECTS: G-20

MIDDLETON:

Peter Costello thanks very much for your time.

MR COSTELLO:

Thanks Jim.

MIDDLETON:

Does the Pittsburgh Summit really mark a watershed moment in the management of the world economy?  Is this a genuine change?

MR COSTELLO:

I think the most important thing to come out of Pittsburgh is the declaration that the G-20 will become the premier gathering of leaders looking at economic issues.  Up until now the G-7 or G-8 has tried to keep itself separate but the acknowledgement that you must now bring in the developing world – China, Brazil, Russia, Indonesia and that the G-20 should now be the premier body dealing with economic issues is really welcome.  And it is a good thing for Australia because Australia is part of the G-20.  We are not part of the G-7 or the G-8.

MIDDLETON:

What about the argument though that it is simply too big a body to manage the world economy that it would have been better simply to have added China and India say as the emerging economic powerhouses to the G-8?

MR COSTELLO:

Well there will be people that will try and narrow down the number of countries that take part.  I think if the Europeans had had their way they would have brought in Brazil, Russia, India and China.  But the great thing is that we already had the G-20 established.  We already had the framework in place and so that gave the opportunity to use this as the Forum rather than try and set up another Form say a G-13 or G-14 which would have excluded Australia.

MIDDLETON:

What about the agenda – a fairly ambitious agenda I would have to say that the G-20 have set themselves for managing the economy, the world economy, emerging from the latest financial crisis.  Is it realisable?

MR COSTELLO:

I think the G-20 will be a Forum for discussing economic policy and that will be its importance.  It can also give drive to actually reforming the international financial institutions which have staff and liquidity – that is the IMF and the World Bank.  So the G-20 will give an impetus for the reform of those institutions but it won’t be a lending institution.  The G-20 will be at its best when it meets together on an informal but regular basis to discuss economic policy and if need be to ensure that there is coordination going on for economic policy.

MIDDLETON:

Now it has set itself a target of balanced and sustainable growth and also suggested that national economies ought to open themselves up to scrutiny to ensure that the strategies that they undertake will match that overarching goal.  Is this achievable without sanctions which aren’t there in the communiqué?

MR COSTELLO:

Well there is no international legal framework behind the G-20.  It is not like the World Trade Organisation, it is not like the IMF.  What it essentially is, is it is body where countries that are important to the global financial system can come together, it represents something like two thirds of the world’s population and 90 per cent of global GDP.  I think it will be at its best if it is kept informal, if it is meeting to discuss those particular issues.  If you try and institutionalise the G-20 it will lose a lot of its informality and it will actually lose a lot of its usefulness.  I think it can become the forum to push reform in those other organisations but I don’t think it will replace the other organisations like the WTO, the IMF or the World Bank.

MIDDLETON:

In a nutshell then or briefly what are the essential reforms that the G-20 needs to lead particularly in the IMF but also I guess in terms of driving the trade agenda which has been so seriously stalled over years?

MR COSTELLO:

The G-20 should become a force for one pushing reform of the IMF and the World Bank: to making those organisations more representative.  Second, the G-20 should become a force for pushing back against protectionism.  It should kick start the Doha Round and try and get something meaningful out of that.  The G-20 must also give impetus to the Financial Stability Board which will be looking at prudential rules and capital rules in relation to financial institutions.  In other words the G-20 won’t become an institution itself but as a gathering of countries that are important to the global financial system it can kick start and push reform in those institutions which already have a legal personality.

MIDDLETON:

What about the contentious issue of executives bonuses which were perceived to be one of the causes and one remove of the current financial crisis?  Do you think that there is a genuine role for an international structure of this kind to press for reform of bonuses at least for CEOs etc?

MR COSTELLO:

I think you can have some useful discussions about principles for executives in these sorts of forums but at the end of the day the remuneration of executives is going to be set under domestic law and each country will have its own law as to how that is going to be done.  There is no World Parliament.  It is not going to be passed through some Supra-National body which will make international law – useful discussions, maybe some principles, maybe some work done in the Financial Stability Board but executive remuneration will always be a sovereign issue for domestic countries to legislate.

MIDDLETON:

Well at a national level then do you think there is virtue in some structure which prevents executives or discourages executives from effectively taking the money and running against shareholder and national interest?

MR COSTELLO:

It is always going to be a tough one because every company is going to be different and its going to be in a different position.  Personally I believe that the directors ought to be reporting this thing to shareholders and the shareholders ought to be taking this upon themselves.  I think that it is the shareholders money, shareholders company, if the share price goes down the shareholders are going to be upset with the chief executive.  I think empowering the shareholders is the best way to go in relation to executive remuneration.

MIDDLETON:

I wonder if we could go now briefly back to the history of the G-20.  It is not something that emerged overnight.  In fact I think I am right in suggesting that it came out of the ashes as it were of the Asian Financial Crisis a decade ago.  Just how hard was it to get, to take the first steps in moving towards a broader international economic institution?

MR COSTELLO:

Well the G-20 was formed out of the Asian Financial Crisis.  There was a feeling particularly in this part of the world that during the Asian Financial Crisis the international organisations such as the IMF weren’t focussed, that they were too Eurocentric and that they weren’t really of assistance to the countries that got into trouble.  And it was the determination to get a more representative body to deal with financial crises that led to the G-20.  Its first meeting was in 1998.  Australia won a place in the G-20 because during the Asian Financial Crisis we were very active in making loans to the crisis affected countries – to Korea, to Thailand, to Indonesia.  And so we have been very much involved in stabilising the financial situation when the G-20 was being formed.  There were attempts to keep Australia out of it, to make it much more narrow but we insisted the crisis affected countries like Korea and Indonesia came into it and ourselves because we had been involved in stabilising the situation.  And so the G-20 essentially brought together the G-7, it brought together the newly emerging big economies of the world and it brought in crisis affected economies of Asia plus the country that had stood by them – Australia.  And that is how we got to the G-20.

MIDDLETON:

Just how hard was it to convince the Americans in particular at the time of the need for a body of this kind?  As I understand it the conversations between Australian Ministers, yourself included, and people like Larry Summers and Robert Rubin of the US Treasury at the time were if I can put it this way particularly willing.

MR COSTELLO:

During the Asian Financial Crisis we had diplomatic conversations with the Americans which were as aggressive as you will ever find at the international level.  Now the prescription that the Americans wanted for Asia during their financial crisis was to lift interest rates and to cut spending.  We didn’t think that was a good prescription.  During this financial crisis nobody in America said they should be lifting interest rates of cutting spending, in fact quite the reverse.  When the American economy itself got into trouble the Americans prescribed interest rate cuts and fiscal stimulus.  Why wouldn’t they do that for Asia?  And of course this is something that we argued very strongly with them about and we said that it was very important that the Asian experience be written into the international financial architecture – that is how the G-20 was formed coming out of the Asian Financial Crisis in 1998.

MIDDLETON:

And what do you think that Australia’s key involvement in trying to sort out the mess left by the Asian Financial Crisis did to Australia’s reputation for economic management?

MR COSTELLO:

Well we got credibility because when Asia went down we kept growing.  We got credibility because when Asia was in its hour of need and needed finance it was the Australians that were lending finance as part of the international rescue and that is what’s got us into the G-20.  The G-20 just wasn’t some list of the largest economies in the world.  There are economies larger than Australia that aren’t in the G-20.  There are some countries that are important financial centres that thought they should have been in the G-20 but weren’t:- even in our own region.  The G-20 was basically formed between the developed world, the emerging economies plus the crisis affected countries of Asia and Australia which was the friend of Asia.  It was formed to put together a group that included every continent which included both developed and developing world which covered two thirds of the globe’s population and 90 per cent of GDP.  It is a representative organisation.  Australia was there at the birth.  We played a very important role in the establishment of the G-20 because we played an important role in the Asian Financial Crisis.  There were many attempts to have a group smaller than G-20 which would have excluded Australia.  But it was a great diplomatic coup to establish it, to have Australia part of it, now that President Bush elevated it to a Leaders Summit and that has been endorsed by President Obama and now that it’s been announced that this will take the place of the G-7 we have a much better representative organisation – one that Australia played a big part in forming some 10 years ago and one that will give Australia a big voice at the international level.

MIDDLETON:

Peter Costello it has been a long and winding road.  Thank you very much.

MR COSTELLO:

Thanks very much Jim.