Speech to the International Chief Executive Officers Forum in Canberra, August 19

Tonight I want to talk about the big difference in Australian economic policy, the big difference between Labor and Liberal. Labor believes in competition and productivity. Our political opponents believe in business deals and preferment. They believe in business. We believe in markets.

I want an economy governed by private sector competition and corporate social responsibility. The Liberals lean towards crony capitalism, a corporatist state in which some firms receive subsidies and special deals from government.

This has always been the Coalition way. It was the basis of McEwenism in the 1960s. It was the way in which Malcolm Fraser and John Howard ran the Australian economy in the 1970s and early 80s. As the development of ethanol policy has shown in recent times, the Prime Minister has reverted to type. As he and his government have grown older, they have slipped further and further into cronyism.

History tells us that crony capitalism emerges and evolves over time, with five stages of development:

1. The creation of political appointments or jobs-for-the-boys, of which the Howard Government has made over 100 since its election in 1996.

2. The loss of fiscal discipline and widespread funding of special interests.

3. The misleading of parliament and the people – a pattern that has now emerged in the Howard Government, from Kids Overboard to Iraq’s uranium out of Africa to the current Manildra-gate controversy.

4. The allocation of special privileges and power to associates of the government – something that featured, for instance, in the recent Cash-for-Visas scandal.

5. And finally, the abandonment of competition policy by awarding government funds, protection and preferment to selected firms in selected industries.

For those of us who believe in fair trading and an open market economy, this last problem is the most serious. In its final form, crony capitalism involves the allocation of publicly funded privileges to the few at the expense of the many (working class taxpayers and consumers).

This is why it is so repugnant to the Labor movement. It perverts the rule of law and increases inequality. It transfers power and privilege from working people into the hands of corporate elites.

Mr Dick Honan

The Manildra-gate controversy is a good example of this process. It has not only involved the misleading of the parliament, it has also debased the integrity of economic policy in this country.

What we have seen is the formation of a public-private cartel: the Howard Government working hand-in-glove with one company, Manildra, to disadvantage every other company in the ethanol market. This is more than just picking industry winners. It is picking one company in a particular industry – in this case, the dominant ethanol producer in Australia – to protect and preserve that company’s near-monopoly status.

This is a stunning example of crony capitalism at work. Let me explain the sequence of events and the perversion of public policy.

On 24 July last year representatives of Trafigura met with Manildra in an attempt to secure domestic ethanol product. Manildra stalled and then refused to supply Trafigura and another competitor company, a small Australian-owned firm called Neumann Petroleum.

On 1 August the head of Manildra, Mr Dick Honan, met with Prime Minister Howard. At this point, Manildra had an important piece of market information: if it did not supply Neumann and Trafigura, the only way in which they could obtain their product was from overseas. The official record of the meeting shows that Mr Howard and Mr Honan discussed: “The payment of a producer credit to ethanol producers to enable Australian ethanol producers to compete with the cheaper Brazilian product.”

On 10 September Cabinet decided to act on Honan’s request by imposing excise on ethanol and paying an equal production credit for domestic producers. By this time, Neumann and Trafigura had arranged an ethanol shipment from Brazil. In an amazing act of favouritism, the Government used the resources of the Australian Embassy in Brazil to monitor the shipment and ensure that it could never dock profitably in Australia.

The fix was in. While Honan had received a public subsidy of more than $200 million, his two competitors were stranded on the high seas with ethanol losses of $1 million. And the Howard Government did not even have the decency to tell Neumann and Trafigura of the new policy arrangements. It sat and watched the shipment cross the Pacific Ocean, knowing that this would financially damage Honan’s competitors.

Not surprisingly, Paul Morton, the head of Neumann and its 59 staff, described the decision as: “Pernicious and treacherous. The way that they did it was absolutely meant to punish Trafigura and Neumann. They weren’t just changing the law to protect Manildra but were setting out to cause us a financial loss.”

If these things had happened solely in the private sector, the members of the cartel would have been prosecuted under the Trade Practices Act. It is one of the worst pieces of public policy in memory, a signpost in the deterioration of the Howard Government.

We all have an interest in this case study, especially in the business community. The market economy relies heavily on the rule of law: fair trading and competition rules for all companies, not just the mates of the state. Fair-minded businesspeople and investors should be outraged by the Manildra decision.

When markets are distorted, investment flows into inefficient uses, thereby damaging economic growth and employment. We all suffer because of rorted public policy and government favouritism. Indeed, the growing damage to the ethanol industry in Australia has confirmed the folly of corporate capitalism.

When they work properly, the good thing about markets is that they aggregate all our interests. You don’t have to someone’s mate to market a product or sell a service. Of course, inequality – inequality of income and especially of wealth – determines the level of participation in the market. The rich can buy and sell more than the poor.

But when I look at the economy and compare it to society, the inequality of income and wealth is dwarfed by the inequality of power and political influence. Many can get access to the market, but very few people can get access to a Liberal Prime Minister.

This is why the public sector needs to be above preferment and dealism. If governments, elected by the will of the people, do not treat people fairly in the market then nobody else will. This is the real tragedy of crony capitalism: it takes the inequality of the market system and magnifies it many times over through the corruption of the state.

Mr Peter Costello

To their credit, the Departments of Treasury and Finance strongly opposed the Government’s ethanol rort. Unfortunately, the Treasurer Mr Costello did not support them. In Parliament last week he called it a good decision and said that: “There are [many] Australians who lobby the Government on particular issues that affect them. In fact, it is very hard to say ‘No’.”

A Treasurer who can’t say ‘No’ is a Treasurer who can’t control the budget. A Treasurer who can’t say ‘No’ is a Treasurer who can’t stop spending on interest groups. This is why the Howard Government is the highest taxing, highest spending government in Australia’s history. It lacks fiscal rigour.

This is one of the characteristics of crony capitalism: the funding of sectional interests ahead of the national interest. The Special Interest Express is back in town. It hasn’t been seen since the days of the Fraser Government but under Mr Costello, it has pulled back into Canberra station.

Since 1997 the Government has been on a $90 billion spending spree. It has been living off the fat of bracket creep and running down fiscal policy. The surplus is now running on empty, with a fiscal balance of 0.1 percent GDP. The following table details the damage:

Deterioration in Budget Bottom Line: Net Impact of Policy Decisions: Year $Million

1997 296

1998 20649

1999 11691

2000 7384

2001 25630

2002 5313

2003 18570

Total 89533

I’ve been Shadow Treasurer for just six weeks, and it seems that every second day there is another story about government waste and mismanagement. The list reads as follows:

* A $30 million bailout package for the Job Network.

* A $26 million bailout for the Government’s flawed higher education policy.

* GST fraud of $3 billion through the falsification of TFNs and ABNs.

* Another $50 million in public money for Manildra.

* A $7 billion increase in the black economy to 15 percent GDP.

* Handouts to business lobby groups totalling $60 million.

* A $2 billion blow-out in the Defence Budget.

* And the mother of all waste and mismanagement, a new Commonwealth logo and the reprinting of Commonwealth letterheads.

This is the problem with the Treasurer: he has never seen a tax he didn’t like and an example of waste that he could ever stop. He has abandoned the integrity of fiscal policy and placed all the weight of macro policy on the Reserve Bank. This is placing upward pressure on interest rates and destabilising the Australian economy. As ever, we all pay a price for bad public policy.

Mr Graeme Samuel

Costello’s cronyism extends beyond Manildra and his fiscal extravagance. He has fought a long battle with the States to install his Melbourne mate, Graeme Samuel, as the head of the ACCC. Labor is opposed to this appointment on the grounds of independence and objectivity.

We do not believe that someone who lists his occupation as a “company director and corporate strategic consultant” should be in charge of corporate competition policy. We do not believe that someone who has publicly supported insider trading should be in charge of the trading rules of the private sector.

In response, Mr Samuel has said that: “It is universally acknowledged that poachers make the best gamekeepers.”

By this logic, Robbie Waterhouse would be in charge of the AJC and Fine Cotton would be running in the third at Randwick. A poacher is a poacher, and he should never have been appointed as the competition regulator.

Allan Fels was always asking for more power and resources for the ACCC. In his first policy announcement last week, Mr Samuel asked for voluntary industry codes. This is the wrong emphasis and the wrong approach.

In government, Labor will strengthen the Trade Practices Act and increase the powers of the ACCC. This is not a question of being pro or anti-business. It is a matter of being pro-competition and pro-productivity.

I believe in competition policy. It is the key to economic growth and consumer satisfaction. Companies will not upgrade their technology, expand their markets and lower their prices without the pressure of market competition.

Under the Howard Government, private sector competition is in decline, with the economy trending towards duopoly and monopoly. This can be seen in the retail, banking, airline, media and telecommunication industries and, of course, ethanol.

Labor will reverse this trend by beefing up the Trade Practices Act. We have already announced our commitment to introducing criminal sanctions, attacking predatory pricing and overhauling Section 46 (abuse of market power). I am now looking at other ways in which the Act can be enhanced. Labor is a true believer in competitive capitalism.

The National Interest

The problem with crony capitalism is that it undermines the national interest in economic policy. This is a point well understood in the Treasury but not by the Treasurer. Recently the head of the Department, Ken Henry, warned against complacency in economic policy. He called for a lift in productivity, saying that: I consider it very unlikely that Australians would find their aspirations satisfied by maintenance of the present relative productivity position. There is a strong case, on economic and social grounds, for striving to bridge the productivity gap [between Australia and the United States].

This has always been Labor’s goal. Our economic tradition and values are for competition and productivity. In 1996 we left Australia with a strong legacy of reform. These were the national interest policies that the Liberals were too timid to implement: a floating exchange rate, financial deregulation, tariff liberalisation, competition policy and national superannuation.

One of the limits to microeconomic reform, of course, is that it can only be done once. Having opened the Australian economy to market competition in the 1980s, it cannot be opened a second time. Ultimately, the gains from micro reform start to diminish. New policies are needed to lift the long-term growth rate of the Australian economy.

This is where the findings of new growth theory are so significant. Traditionally, economists have identified material objects as the main drivers of economic growth. Neoclassical theory emphasised the importance of capital investment, while Keynesians emphasised the need for increased consumption. In both cases, the growth rate is limited by the finite nature of these material goods.

By contrast, the new growth theorists argue that research and technological enhancement are the main drivers of growth. Instead of focussing on the accumulation of objects, economists need to focus on the accumulation of ideas. In particular, education and research are the ‘twin-carburettors’ of economic expansion.

This is a persuasive body of research. Across the Western world, economic activity is becoming less resource-intensive and more knowledge-intensive. Jobs based on repetition and muscle power are disappearing, replaced by work in the information and service sectors.

In the long run, open and creative economies that apply new ideas to the production process will achieve the highest rates of growth. This is where Australia is most vulnerable. The Howard Government is bogged down in dealism and corporate welfare. It has given a low priority to education and innovation. As Australia’s leading new growth economist, Steve Dowrick, has argued:

“Compared with the OECD economies, Australia invests less of its resources into R and D, and a lesser proportion of that investment is carried out within the business sector … Even though an open economy can benefit substantially from research conducted overseas, the magnitude of the returns to domestic R and D are such that a major increase in research effort is called for, especially in the case of a relatively poor R and D performer like Australia.”

Dowrick’s research points to the unique nature of knowledge as an economic resource. Unlike capital and consumption spending, access to information is relatively unlimited. It has the characteristics of a public good, such that one person’s use of an idea does not necessarily harm the access rights of other people. This is why companies tend to under-invest in R and D – they cannot realise all of the economic benefits that flow from their investment.

The dispersed nature of knowledge also produces another important effect. Education and research outlays generate huge spillover benefits for society. For R and D expenditures, Dowrick estimates a social return of between 50 and 60 percent, an extremely high rate of public benefit.

So what does this mean for economic policy? Two conclusions stand out. The case for increased government investment in education and research is compelling. But so too, increased private sector investment is in the public interest, especially when it lifts inventiveness and product innovation.

This is not a zero-sum exercise. The unique nature of knowledge investments can produce win-win outcomes in public policy. The best way of increasing Australia’s economic growth rate is to increase the level of education, training and research. This is the basis of Labor’s productivity policy.

Conclusion

In this new role as Shadow Treasurer, the media have been speculating about my relationship with business. Certainly I want to do things differently to Mr Costello. I don’t believe in crony capitalism and the concentration of privilege. I don’t believe in pandering to special interest groups and blowing the budget surplus.

I’m not part of Melbourne’s high-society. I live in the last street in the last suburb on the fringe of South-West Sydney. I like being an outsider and want to keep it that way. None of my family or friends have ever owned big businesses or been corporate consultants. We grew up thinking that Toorak was the name of a horse race.

My only interest is in good economic policy and the integrity of economic markets. The people that I represent don’t have access to the Cabinet table or the ear of the Prime Minister. We have a fairly simple set of values and beliefs. We ask for nothing more than the rule of law, fair decision-making and the provision of community services.

When governments take these things away and look after the insiders, we lose out badly. Life becomes even tougher in the outer suburbs. This is why I believe in the discipline of market competition and corporate responsibility. This is why I believe in the active role of government and service provision.

They are a poor boy’s arsenal against inequality. This is why I got into politics in the first place. I believe in the benefits of competitive capitalism and the solidarity of a strong and fair society. Always have and I always will.