Hedging bets on the future
From Griffith REVIEW Edition 25: After the Crisis
© Copyright Griffith University & the author.
Written by Margot Saville
ONE OF THE BIGGEST PROBLEMS for Sydney is that the state economy is reeling. In May 2009, Access Economics reported that unemployment would hit 9 per cent by the end of 2010. The one-time Premier State has gone backwards since the 2000 Olympics on the key indicators of growth, investment, jobs, home building and wages. It now contributes less than a third of the country's economic production. An exodus of people means its population share has also shrunk below a third, and it accounts for only 15 per cent of new home building. New South Wales receives just under a quarter of new business investment, down from a third at the beginning of the century.
Sydney split into a global city and a local one, urbane and suburban, fast and not-so-fast, in a process that started in the late '70s but received a great boost during the era of deregulation. Australia had started tentatively on that path in 1979, when Prime Minister Malcolm Fraser established the Australian Financial System Inquiry under the stewardship of Keith Campbell, the chairman of property company Hooker Corporation Ltd who examined the banking sector, tax, stock exchange and foreign exchange.
Campbell, like Paul Keating, had learned from personal experience the limits of the highly regulated Australian banking system. The ALP historian and former minister Rodney Cavalier has written extensively about Campbell in his Southern Highlands Branch Newsletter: ‘In the 1960s a weak balance sheet denied the Hooker Corporation a loan from any Australian bank, locked in (as they were) to rigid matrixes of assets and liabilities, income and repayments. Campbell raised the funds for the survival of Hooker by selling options and warrants over Hooker shares, a true first for Australian finance.'
When the Campbell Report was released in 1981, it was ‘praised as a blueprint for the future', according to the business writer Edna Carew. It ‘broadly recommended that the banking and financial markets be freed of government controls so that interest rates and the exchange rates would be determined by the markets and not by authorities such as the Reserve Bank, the Treasury and government,' she wrote in Keating: A Biography (Allen & Unwin, 1988). ‘The Australian banking system, which (with one exception) had not increased in numbers since the 1940s, should be expanded to include new and foreign banks.'
A recession sent unemployment soaring to new highs, and the Campbell Report languished until after the election. Cavalier noted, ‘The impact of an inquiry depends on its political context. There is nothing so powerful as an idea whose time has arrived. When the report is substantive and the chairman persuasive, it will nonetheless go nowhere if it lacks a champion. That champion is necessarily the minister of the moment or the leader of the government. The Campbell inquiry lacked a champion in John Howard, it found one in Paul Keating. The champion was one who had changed his views on economics and regulation. Like any convert, he was a zealot as born anew.'
AFTER THE 1983 ELECTION, Hawke and Keating's victory celebrations were short-lived. The day after the poll, they were told by Treasury Secretary John Stone that the projected budget deficit for 1983/84 was $9.6 billion, $3.6 billion more than expected. Hundreds of millions of dollars had flowed out of the country just before the election. The two leaders had agreed that the old way of looking at things in Australia had run its course. Yet when Keating entered the former Treasurer John Howard's office for the first time he found one copy of the Campbell Report sitting on a filing cabinet, yellowed and faded by the sun. ‘That said so much for Howard's attitude to it,' Keating recalled. ‘When I came to office, there was a momentum for deregulation. Howard had let the Campbell Committee report die and I appealed to Vic Martin to do a report on that. It had to be done by someone who believed in the rationality of the markets.'
Dr Don Russell was a principal adviser to Paul Keating in the 1980s and '90s. He recalled that those unwelcome pieces of news dictated the pace of change – it had to happen quickly. On the Tuesday after the election Keating devalued the dollar, stopping an unprecedented capital outflow. Russell said they grasped that ‘Australia had major economic problems. Inflation was high and we had just lived through a second wages explosion which had led to a collapse in corporate profits and an awful budget deficit...after a decade of failure there was a serious concern that the country might be incapable of fixing the problem. Australian manufacturing industry was in a shocking shape and the old philosophy of regulation, industry assistance and high tariffs no longer appeared to have the answers. Hawke and Keating came to the conclusion that they had to make Australia more competitive, which meant opening industry up to international competition.'
Finally, Campbell's time had come. He made the keynote speech from the private sector at the Economic Summit convened by the new government in April 1983. Cavalier noted that he ‘won the confidence of the mainstream of Labor when he enunciated that high levels of unemployment were unacceptable as an instrument in fighting inflation. Within the week, having pushed himself beyond endurance, Campbell suffered a fatal heart attack.'
At the end of that year Hawke and Keating floated the dollar and removed exchange controls. Russell said this was a ‘watershed philosophical decision', and subsequent moves to deregulate the finance sector and cut tariffs flowed from it: ‘if Australia was to become internationally competitive then the controls had to be removed from the banks,' Keating said at the time. ‘We, can change the financial system in a way which the so-called businessman's party never could, or never had the guts to do. I always thought it's the job of the Commonwealth Government to run the private economy well. And if you're going to do that you've got to sit down and work out where all the impediments are. Then you tick them off, clear the decks...A lot of the Labor Party is about the politics of envy. Well I don't have any of that shit in me.'
In 1984 there was another election, followed by a Tax Summit to canvass reforms, and the next year Keating was ready to announce sixteen new licences for foreign-owned trading banks. ‘And they said it couldn't be done,' he boasted.