Peter Costello

Speeches

Address to AsiaLink Lunch, Melbourne

Address to AsiaLink Lunch

Park Hyatt Hotel
Melbourne

Thursday, 26 October 2006
12.30pm

It is a pleasure to be here with Asialink again, and to be speaking in Melbourne which next month will host the 8th annual meeting of the Group of Twenty (G‑20) Finance Ministers and Central Bank Governors.1 

The G‑20 meeting will be the most significant gathering of world economic leaders ever held in Australia.  It is being held in Australia at the instigation of its Chairman.  The meeting brings together the 20 economies considered systemically important to the world financial system. 

The G-20 aims to bring the world’s major developed economies – the G-7 – together with the emerging and developing economies – Brazil, China, India.  Unlike the G-7, the G-20 has countries from every continent – including South America and Africa and Australia.  The G-20 includes the world’s second largest economy – China – which has no seat in the G-7.  The G-20 represents two thirds of the globe’s population and 85 per cent of global GDP.

The G-20 does not have headquarters and staff like the UN or the IMF.  It is modelled on the G-7 with a rotating Chair, a minimum of staff, and a premium on open dialogue and flexibility.  It is expected that around 350 people will come as part of the delegations to Melbourne.  This is lean by international standards.

The global institutions such as the UN and the IMF were created out of the Second World War.  They have permanent establishments in New York and Washington.  The five permanent members on the Security Council are the victorious allied powers.  The principal shareholdings in the IMF are those of the allied powers.  The IMF structure reflects the balance of economic power in the post war era.  But the global economy has changed.  And increased weight is moving to emerging powers particularly in East Asia.

This means that the G-20 is much more representative of the global economy than the G-7 and that it can be a force for improving and modernizing the global institutions.

In fact one of the principal reasons it was established was to get a more representative forum to consider and respond to threats to the international financial system.  This was in the aftermath of the Asian Financial Crisis of 1997, a crisis that caused a regional collapse and shook the globe.

The G-20 also aims to allow the developed and developing economies to consult on ways to bring emerging economies into the international financial system and the benefits it brings.

Those countries that have managed to open their economies to international trade, international investment, open their capital system, and open their markets to private enterprise, have developed enormously as a consequence.

It is estimated that in Asia around 580 million people have been lifted out of extreme poverty (US$1 per day) in the 20 years since 1981.  This is principally in China and to a lesser degree in India – countries that are emerging from socialism and state control and, as a result, lifting the living standards of the poor.

Contrasting this is sub-Saharan Africa where the number of people in absolute poverty has increased by 140 million in the 20 years since 1981.  Sub-Saharan Africa is the focus of much of the world’s aid effort and yet it has gone backwards.  Asia has been less a focus of the international aid effort and has done many times better.

This illustrates the proposition that I have previously argued:- that economic growth is the greatest poverty buster ever invented; that trade is more important than aid for economic growth;  that the countries that can join the international trade and financial system are those that grow and lift their people out of poverty; and that it is not globalisation that is holding back sub-Saharan Africa, it is the inability to join the process of globalisation that is holding it back.  The factors that are holding many of those countries back is war, racial rivalry, corruption, weak institutions, poor governance, lack of skills, and lack of investment.

An international rules based system for trade, investment and resource security is critical for developing and emerging economies.  It promotes certainty and predictability.  It gives smaller countries a chance to benefit from their trade relations with developed economies.  And price signals in international markets are critical to investment decisions – decisions which are necessary for economic and social development.

Open markets which facilitate economic growth pay dividends nationally and also internationally for the developed and the developing world.  The G-20 has a key role to play in this process and Australia has a key opportunity to shape this process.

Opportunities of the G-20

The first opportunity is to promote global understanding of market-based frameworks and rules-based international engagement.

Australia and our G‑20 partners agree that market- and rules-based frameworks are the foundation for sustainable global economic growth and development.  This agreement is embodied in the G‑20 Accord for Sustained Growth­ – a landmark document that outlines the principles by which economic growth and stability can be achieved. 

But it is not enough to commit to high-level principles, we have to implement them.  This is the great strength of the G‑20 – it identifies the policies we need for growth and focuses on their practical implementation.  This strength is derived from its membership of both developed and emerging market economy members.  When the G-20 identifies key policies it does so drawing on the experience of all its members. If we can use this experience to spread commitment to patient, staged and comprehensive reform, we can enhance global economic prosperity.  Importantly, we can help put others on the path to sustained growth.

The second opportunity is to reshape and modernise international arrangements.

You can see that we have been shaping debate in the G-20 already. We have championed IMF reform.  We have led the G‑20 to tackle the issues associated with demographic change.  We introduced energy and minerals issues to the G‑20 agenda.  Australia has a lot of credibility on international economic issues because of our record of reform and success.

Through the G‑20, we have the opportunity to share Australia’s experience with the major economic powers, both established and emerging.  Through our experience, we can help our G‑20 partners to pursue successful economic strategies.  And through this, Australia continues to promote global economic growth.

The third opportunity is to forge stronger relationships both globally and within our region. As a G‑20 member, Australia has a seat at the table of an influential group.  We continue to take advantage of opportunities through the G‑20 to cement our relationships with China, India, Indonesia, Japan and Korea as well as the G-7.

Australia’s 2006 G-20 Policy Agenda

For our part, Australia as Chair of the G-20 is co-ordinating discussion under the theme of “Building and Sustaining Prosperity.”  This will allow the forum to note the progress to date, but also the need to ensure economic growth and development is achieved in all parts of the world and continues to deliver benefits for future generations.  In particular it will develop benefits to the poor in the developing world.

One of the key priorities this year is improving the legitimacy and credibility of the international financial institutions, especially the IMF. 

The IMF has failed to keep pace with the changing global economic landscape and this has undermined its authority and effectiveness.  This is nowhere more palpable than in Asia, where there has been an appreciable shift of favour away from the IMF in search of more targeted and relevant regional solutions. 

At the IMF and World Bank Annual Meetings in September, IMF Governors took a decisive step to address this concern, shared by all regions around the world.  IMF Governors agreed to implement a two‑stage program to improve governance.  The first stage resulted in a quota increase for four of the most clearly under-represented members of the IMF – China, Korea, Mexico and Turkey. 

The second stage, and by far the more important, will deliver a further round of quota increases for under‑represented countries based on a new formula designed to better reflect the balance of power in the global economy. This should unleash a dynamic that will change the IMF profoundly over time.

The second stage will also enhance the participation and voice of low‑income countries particularly those in Africa.  It will do this through an increase in ‘basic votes’ and by strengthening the offices of the Executive Directors that represent low‑income countries in Africa. 

The historic reforms agreed in September owe much to the leadership of Australia and the G‑20.  When fully implemented they will help to restore legitimacy to the international architecture and improve the effectiveness of the IMF.  But there is still more to do.

We must not lose the momentum for reform now, and in Melbourne next month, we all ask G‑20 Finance Ministers and Governors to turn their attention to delivering these second stage reforms by 2008 and, even better, earlier.  I will also propose that we return to address the broader suite of issues identified in the G-20’s October 2005 Statement on Reforming the Bretton Woods Institutions – including World Bank governance reform and broader strategic and policy issues facing both the IMF and World Bank.

A second key priority for the G‑20 is to get global energy and minerals markets working better.  We will consider the medium-term outlook and the macroeconomic challenges facing these markets. We will explore how these markets can best handle the significant scaling‑up of trade and investment necessary to deliver lasting resource security. 

Global energy and minerals markets are undergoing profound change.  Industrialisation and urbanisation – as is most visibly occurring in China, but increasing in India and other developing and emerging market countries – is boosting demand for energy and minerals, squeezing spare capacity, and raising prices.  Since the key suppliers of many of these products are not the countries with burgeoning demand, greater dependence on international trade is inevitable.

The G‑20, comprising major global resource suppliers and major resource users, is in a unique position to address the challenges confronting energy and minerals markets.  The world’s largest and fastest‑growing consumers and the leading producers and exporters of oil, gas, coal, uranium, iron ore, bauxite, nickel, gold and zinc will all be at the table.

The G‑20 has a central interest in how global energy and minerals markets are functioning.  Well‑functioning markets allow smooth and timely adjustments to changing economic conditions and ensure better prospects for sustainable growth and stability. 

The message I would like G‑20 Ministers and Governors to take away in November, is that lasting resource security can only be achieved by ensuring that global markets are functioning well.  Demand will grow, but there is no shortage of energy and minerals.  We must work together to ensure the necessary trade, investment and innovation occurs to allow resources to flow where they are needed, to sustain economic growth, and stabilise prices.2

This seems like a lot to tackle.  But another of the strengths of the G‑20 is its medium-term focus.  Through its institutional design, including a G‑20 management ‘troika’ of past, present and future chairs, the G‑20 is able to carry policy design over a number of years – something rarely achieved in other global forums.  This year our focus is on reaching a common understanding of the issues facing energy and minerals markets and establishing a clear policy agenda.  South Africa as next year’s G‑20 host will pick up where we leave off and take this policy agenda forward.

This longer-term capability of the G‑20 is also evident in its work on demographic change, a third policy theme for 2006.  The G‑20 has been discussing the challenges of demographic change since 2004.  We have considered the potential impacts on economic growth and stability and last year discussed the interactions of demographic change and labour mobility. 

This year Australia will focus G‑20 discussion on the financial market implications of demographic change and possible policy responses.  Population ageing has the potential to affect saving behaviour, capital accumulation, labour supply, asset returns, international capital flows and the relative demand for different types of financial instruments.

In response to these challenges, we must ensure that economies are sufficiently open and flexible to smooth the effects of demographic change. 

While important for development, financial market reforms in isolation, like migration policies in isolation, will fail to provide an adequate response to demographic change.  Australia and the G‑20 recognise that a combination of policies will be required to meet these challenges, including improving public finances, encouraging labour force participation, and promoting productivity growth.

We have also an issue on our agenda focussing on domestic economic reform processes, including how to implement the reforms outlined in the G‑20 Accord for Sustained Growth.  This will be an open and informal discussion on actually how to implement reform.  At the national and international level there is a lot of agreement on what should be done to reform an economy.  The much harder issue is how to do it – in particular how to harness public support for necessary but sometimes unpopular reform.

The characteristics of the G‑20 make this a useful forum.  It involves frank, informal and open conversation.  We share experience and learn from others successes and failures.  The informality of the G‑20 is, I believe, one of its true strengths.  We can be creative and innovative.  We can foster broader ownership of the issues.

Conclusion

I think it is fair to say that Australia not only recognises the opportunities the G‑20 provides us, the region and the global economy.  We are promoting market- and rules‑based approaches to global economic exchange.  We are improving Australia’s role and influence in global economic decision-making.  We are raising the profile of the G‑20 to secure its place as the global economic forum.  We are showcasing Australia’s policy success.  And we are strengthening our many relationships and economic opportunities by participating in this forum. 

Underlying our approach to these opportunities is my view that the G‑20 is the best forum to ensure global economic prosperity, now and in the future.  And next month Melbourne, Australia will be the focus of that forum.



1. Further information on the G-20, including its origins, membership and previous meetings, can be found at www.g20.org.

2. Allowing price signals to work is critical in domestic markets as well as international markets. Indonesia’s recent decision to substantially cut energy subsidies is a powerful example of commitment to the use of price signals to achieve sustainable supply and demand responses.

26 Oct 2006

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