‘GLOBAL GROWTH: TRADE, EQUITY & OPPORTUNITY’
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
WASHINGTON DC, USA
WEDNESDAY, 23 JULY 2014
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In February 1942, after the fall of Singapore, Australia stood isolated and alone.
In those dark days, the great Labor Prime Minister of Australia, John Curtin spoke to our nation of what he called: ‘The Task Ahead’. Curtin said:
Without any inhibitions of any kind, I make it quite clear that Australia looks to America, free of any pangs as to our traditional links or kinship with the United Kingdom.
And so, amidst human history’s most destructive struggle between freedom and tyranny, Australia looked to America.
72 years later, the ‘task ahead’ for our generation is very different – but we still look to America.
We look to America as a partner in prosperity, a driver of global growth and a leader in free trade.
And we look to Asia too.
As another former Australian Prime Minister, Paul Keating, memorably said:
Australia looks for its security in Asia, not from Asia.
In 1942, the Australian city of Brisbane was the headquarters for General Douglas MacArthur.
In November this year, it will host the G20.
In Brisbane, President Obama and President Xi, Chancellor Merkel, Prime Minister Cameron and Prime Minister Modi, will sit around the same table, leaders who represent:
- Two thirds of the world’s population
- 85 per cent of the world’s gross product, and
- 80 per cent of world trade
The G20 forum has grown in significance and stature since the Global Financial Crisis, due partly to the work of Prime Ministers Rudd and Gillard.
And now, in the second decade of the 21st Century:
When we stand on the cusp of the most profound economic and demographic transformation in world history.
When a child born today will live in two centuries: the 21st and 22nd.
When money has never flowed faster, when our world has never been more borderless, when our possibilities have never been more limitless…
The leaders and nations of the G20 have a new opportunity.
Having acted to help the world economy withstand the worst financial crisis in three generations – our task is now to build the architecture for the next three generations of prosperity.
For the world economy of 2030, 2050 and beyond.
The G20 has the opportunity to set meaningful reform objectives – and achieve them.
The G20 has the opportunity to ensure that complacency is not used as an excuse to put off essential reform.
That protectionist retreat does not prevail over economic advance.
That short term vested interest does not obstruct global benefits.
Today, I submit to you the five key areas of action for the G20:
1.) Inclusive Economic Growth
2.) Youth Unemployment
3.) Rebooting Global Free Trade
4.) Multinational Tax Avoidance
5.) Climate Change and Energy Security.
These are not easy challenges – but I believe we should be setting ambitious goals.
Before I discuss these priorities, I would make this brief comment on the current international context.
The recent UN Security Council Resolution is a most welcome step.
Effective international cooperation will be essential to investigating the tragedy of MH17.
Right now, our first priority must be to assist families in their grief, and to identify and bring home the victims’ remains.
So far, President Putin has indicated Russia will fully cooperate with the investigation.
These words must be matched with actions.
We must see those responsible brought to justice.
Getting to the truth of the matter may require Australia – and the other members of the G20 – to consider whether Mr Putin attends the Leaders’ Summit in Brisbane.
In any event, it is still four months before the G20 commences - and the way Russia conducts itself between now, and then will be very relevant to the decision we make.
INCLUSIVE ECONOMIC GROWTH
The 2 per cent global growth target set by G20 Finance Ministers is a worthy starting point.
But without real and concrete action – it is merely an empty gesture.
More than ever, we need to examine not just the conditions that create growth – but the methods we can employ to include our citizens in its benefits.
In formulating a global growth strategy, our focus needs to be on inclusive economic growth, growth that eliminates poverty and enhances equality.
These two objectives are interrelated, but they are not identical.
In the three decades between 1980 and 2010, 680 million Chinese people were lifted out of poverty – more than the entire current population of Latin America.
China alone accounts for around three quarters of the world’s total decline in extreme poverty over the past 30 years.
This is an economic achievement without parallel in human history.
But it is not solely due to economic growth.
The degree of pre-existing income equality within a country is a major factor too.
One economic survey found that a 1 per cent increase in incomes in the world’s most unequal societies delivers a 0.6 per cent reduction to the poverty rate.
In the world’s most equal countries, that same 1 per cent increase cuts the poverty rate by 4.3 per cent.
To borrow a favourite economic metaphor – a nation’s income distribution, its equality, will determine how many boats are lifted by the rising tide.
As Piketty wrote in his extraordinary, in-depth analysis of income distribution, Capital in the 21st Century:
“For much of human history, the rate of return on capital significantly exceeded growth in the economy.”
An economic trend that meant the only way to become wealthy, was to inherit wealth.
In the late 19th Century, America broke this nexus.
In the relative blink of an eye, the United States became famed as the self-made nation, the home of the small businessman with big ideas, the entrepreneur with boundless optimism and the inventor of devices that the world didn’t know it needed, then decided it couldn’t live without.
And as the developing nations of the Asia-Pacific emerge from poverty, in so many ways it is the United States of America they will be emulating.
It has been this way for generations – ever since talking films gave aspiration an American accent.
For many, these are modest ambitions: a life where your hard work is rewarded and your children enjoy a better standard of living, and greater opportunity than you.
Yet in China, America, and the world over, inequality looms as a threat to growth.
Paradoxically, the same factors that have driven economic growth in developed nations, and lifted millions out of poverty in the developing world: globalisation, technological process and market-oriented reform – have magnified inequality.
Not just inequality of income – but inequality of access.
Access to affordable healthcare, to quality education, to technology and civic amenities and to clean air and clean water.
This is a challenge for advanced and emerging economies alike – to give people more equal access to the drivers of economic growth.
A strong minimum wage – and delivering real wages growth is so important to achieving access, particularly for those on the lowest incomes.
Australia has a proud tradition of supporting a reasonable minimum wage that is a genuine living wage – not a life sentence of working poverty.
Not only does a strong minimum wage reward people for hard work, often in physically demanding jobs.
It also, as President Obama has put it, helps:
‘grow the the economy from the middle out and the bottom up so that prosperity is broad-based’
An increase in the value of real wages creates more consumers, in bigger markets – and it drives stronger growth.
Investing in the capabilities of individuals, improves our aggregate performance.
That is why the economies of the G20 need to re-engage young unemployed people, and empower them to fulfil their potential.
Right now, in the United States, youth unemployment is double the national rate.
In Australia, it is more than double.
In the UK it’s nearly three times as high as the national rate.
Every year a young person spends out of the workforce is not just a year of personal loss but a year of lost economic output, and a marker on the road to a future of missed opportunity.
Our future competitiveness, our future productivity, depends on the skills, flexibility and experience of our workforce.
This means removing barriers to higher education, investing in training and re-training.
And it requires us to see learning as a public investment in the future, not a short-term expense.
Without sincere, genuine action, we risk shutting the next generation of employees out of the workforce, and letting their talent and potential go unfulfilled.
And we will not achieve lasting growth, without action on youth unemployment.
REBOOTING FREE TRADE
The World Trade Organisation estimates that progress on free trade would deliver trillions of dollars of income gains.
And the high road to trade liberalisation is multilateral trade deals in which all countries agree to lower trade barriers.
In 2014, we live in a world of global supply chains, where trade in services and IT agreements are essential to economic growth.
A world where the majority of trade is conducted in semi-finished components - not finished goods or resource-based starting materials.
In such a world, modern open market trade arrangements and infrastructure are vital in enabling the free flow of the best ideas, eliminating poverty, tackling youth unemployment – and even preventing war.
Our challenge today is not just to argue the case for these reforms– it is to deliver them.
The last global trade deal of significance – the Uruguay Round – was concluded twenty years ago.
As it stands, global free trade negotiations have ground to a halt, frozen in the Doha round.
It is overdue for the economies of the G20, nations who represent 80 per cent of the world’s trade, to consider a re-boot.
We need re-ignite the trail to multilateralism.
The G20 cannot, and must not, blithely accept a limited, realpolitik view where bi-lateral and free trade (market access) agreements are the only options on the table.
I recognise that FTAs are not without value, indeed they can be stepping stones to multilateral agreements.
Labor progressed Australian FTAs with Korea, Japan and China when in Government.
We also finalised agreements with Malaysia, Chile and a comprehensive arrangement with the ASEAN economies and New Zealand.
But as instruments of compromise and the product of pragmatism, bilateral Free Trade Agreements will always offer unproven market access, inferior to global free trade rounds.
Re-booting multilateralism demands a two-pronged assault on overt and covert protectionism.
The 2008 Washington summit – widely viewed as the meeting that made the G20 the world’s premier forum for economic cooperation - agreed to a standstill on protectionism.
This is was an important statement of principle – especially in the context of the GFC.
After all, the understandable national reflex at a time of global financial instability, rising unemployment and plummeting investment is to revert to populist, short-term protectionism.
But this standstill has sometimes been honoured more in the breach than the observance.
Between May and November 2013, the WTO reports that G20 member nations introduced 116 different trade-restrictive measures.
Only 20 per cent of protectionist measures introduced amidst the GFC have been wound back.
A level of progress on par with the world’s next ten biggest economies – hardly leadership by example.
Redoubling our efforts on overt protectionism, needs to be accompanied by a new focus on covert, ‘behind-the-border’ protectionism.
Andrew MacKenzie, the head of BHP Billiton and the Chair of the B20 trade task force, has labelled this ‘murky protectionism’ - the true enemy of free trade.
The 2009 Trade Ministers meeting in Bali identified measures such as: currency manipulation and unduly burdensome registration procedures.
This process, initiated by former Trade Minister Craig Emerson, was designed to inject new momentum into the Doha round.
The G20 should champion the Bali principles – and move for their rapid implementation.
Right now, the G20, speaking with a single voice, is probably the only institution that can re-boot genuine free trade.
And it must.
For the party I lead, the Australian Labor Party, our commitment to open markets has never been an ideological, or theological one.
It sprang from the realisation that ‘fortress Australia’, sheltered behind its high tariff wall, was not delivering for our people, for ordinary Australians.
The high tariff wall kept prices elevated, and isolated firms from global competition.
Australian businesses that might have thrived on the global stage were kept cosseted.
Labor’s three waves of tariff cuts in 1973, 1988 and 1991 –delivered over two decades of continuous economic expansion.
We look at open markets as the most powerful engine of growth the world has known.
And we know that growth is the best way of creating good and fulfilling jobs in productive and competitive enterprises.
But we recognise that while trade liberalisation boosts overall growth in the medium and long term, it can also deliver short term pain for industries formerly protected by tariffs.
Labor believes that governments have an obligation to not leave behind the workers from those
industries during periods of economic transition – to make sure that people have the skills and flexibility to adapt to change, and benefit from it.
MULTINATIONAL TAX MINIMISATION
In this modern, knowledge-intensive economy, companies are minimising costs through innovation, outsourcing and automation.
And because successful businesses are always looking for a competitive edge, many of the biggest multi-national corporations are also leading the way in tax minimisation.
Whether it is elaborate transfer of patents and transactions through the memorably titled ‘Double Irish with a Dutch Sandwich’…
…or the use of intra-company lending to effectively shift profit from high-taxing jurisdictions to low-taxing ones.
Shrewd companies are pushing the boundaries in pursuit of ‘tax arbitrage’, for maximum benefit at minimal liability.
These practices substantially erode a nation’s company tax base – and they distort the market, unfairly disadvantaging local businesses, big and small.
And they create a perverse incentive for nations to compete for initial international investment by hollowing-out their own tax systems.
The 2013 G20 summit in St Petersburg endorsed the OECD’s action plan on Base Erosion and Profit-Shifting – Brisbane should maintain the international momentum on this issue.
The viability and credibility of the G20 depends on implementing what was agreed at previous meetings – not setting and forgetting new goals each year.
In the near term, a concerted push to reduce base erosion and profit-shifting is an obvious and immediate method for bolstering the fiscal position of advanced economies.
In Australia alone, Labor acted to improve the Budget bottom line by over $5.3 billion in this area.
In the longer term, it is evidence of the fact that Governments cannot ensure fiscal sustainability purely through austerity-style cuts or Keynesian stimulus.
Sound economic policy always demands careful consideration of both expenditure and revenue.
Getting the maximum efficiency from our corporate tax base is especially important when we consider the demographic realities of the next century.
When I was at school, there were 7.5 taxpayers to support every Australian aged 65 years or older.
When my daughter was born in 2009, that ratio was five to one.
By 2050 it will be around 2.5 to one.
This is not a unique quirk of Australian demography – it will be one of the dominant themes of the world’s advanced economies over the coming decades.
And at the same time as the personal tax base is contracting, our citizens will be requiring more and better services from their Governments.
Breakthroughs in medical research will create higher expectations in healthcare.
The growing number of high-skill jobs will increase pressure on the availability and quality of higher education and vocational training.
And senior citizens, people who have worked hard all their lives, paid taxes all their lives and made a contribution will rightly believe they are entitled to dignity, security and comfort in retirement.
Incremental reforms that remove loopholes and tighten tax arrangements are important.
But former Australian Treasury Secretary, Dr Ken Henry, is among those who have argued that we need to take a more ambitious approach – by looking at rent-based taxation arrangements.
In the UK, the Mirrlees Review has considered the idea of a unitary tax model – treating a multinational corporation with numerous legal subsidiaries as a single entity.
Other experts have proposed the option of destination-based cash flow taxation - levying the income from the ‘real’ transaction, less all expenditure on associated transactions, to reduce profit-shifting.
Of course, these are highly complex arrangements, rife with difficult implementation issues.
And practicalities are especially important when we consider the revenue collection difficulties, governance issues and other ‘shadow financing’ concerns in developing nations.
Simply put, any progress on a more comprehensive, effective approach to tackling multinational tax evasion depends on international co-operation.
The G20 will have to drive progress to a more efficient corporate tax system for the future.
CLIMATE CHANGE & ENERGY SECURITY
The fifth, and final, priority for this year’s G20 must be climate change.
Make no mistake, climate change is an economic issue, an environmental issue and it is a security issue – and for all these reasons, it belongs on the G20 agenda.
Just as global growth, global free trade and multi-national tax avoidance require international consensus – climate change is a global problem that demands a global solution.
For my party in Australia, this has been a politically difficult issue for some years now.
Having been unable to secure support for the first incarnation of an Emissions Trading Scheme, Labor introduced an economy wide price on pollution – the first step in moving Australia to an ETS.
Australia’s ETS was designed to link to the world’s largest carbon market – the European Union - and internationalise our carbon mitigation.
The price on carbon was recently repealed by the current Australian Government – which ran a long, highly effective negative campaign against a ‘carbon tax’.
So this month, Australia gained regrettable worldwide attention for moving backwards on climate change.
Labor remains committed to effective action on climate change through policies like an ETS because it imposes the minimum cost on Australian businesses and Australian households.
And because opting for inaction on climate change is both environmentally, and economically, reckless.
A view supported by, among others, former US Treasury Secretary Henry Paulson who has warned of:
‘The profound economic risks of doing nothing’ on climate change.
According to Paulson:
Waiting for more information before acting’ is not ‘conservative’.
It is ‘taking a very radical risk’.
It is also, I would submit, another form of false economic protectionism – a damaging economic isolationism.
Today, 39 national and 23 sub-national jurisdictions – accounting for almost a quarter of global greenhouse gas emissions – have implemented, or are on track to implement, carbon pricing instruments.
In 2014, the world’s emissions trading schemes are already valued at more than $30 billion.
The seven pilot schemes in China are the second largest carbon market in the world.
South Korea will introduce its ETS on 1 January 2015.
Mexico put a price on carbon in 2013.
New York and eight other North-Atlantic states are part of the Regional Greenhouse Gas Initiative.
Oregon and Washington are exploring carbon pricing options, and California – itself the world’s 8th largest economy – already has an ETS in place.
President Obama has made his preference for an ETS clear, but the political dynamic in Congress has meant that the United States will focus its national effort on reducing emissions through heavy regulation and intervention.
As the world moves to take action, it will not be long before a lack of climate policy is an obstacle to finalising trade deals.
In fact, it is entirely possible that trade negotiations will mandate an effective price on carbon to ensure a level trading field.
Just as the 2015 Paris Climate summit will give world leaders a chance to formulate their emissions targets, the G20 offers the opportunity for stronger, deeper economic links in the emissions market.
The benefit of emissions trading is the economy-wide incentives it creates for clean energy, and more efficient energy use.
Effective action on climate change provides a strong price signal to diversify the national, and global, energy mix.
As we all know, a disruption in energy supply can have a catastrophic impact on a nation’s economic growth.
Reliable renewable energy acts a shock absorber for the unforeseen natural disasters and sudden geopolitical shifts that can imperil conventional energy supplies.
For G20 governments, energy security depends on creating an environment of regulatory certainty and encouraging innovation and investment in renewable technologies.
Delivering prosperity with fairness, rebooting global free trade, closing tax loopholes for multinationals and making progress on climate change action are ambitious goals, I recognise that.
The diversity of views between G20 nations - and within G20 nations – only enhances the difficulty of the task ahead.
But rehashing reasons to fail will not help us face the challenges and opportunities of this century.
This is not a time for incrementalism, patching or pandering.
We need to break the mould of short-termism and sectional interest.
We need to start planning for the long term – and investing in the long term.
Our people expect no less from their leaders.
If we are to take up the task of reform, to build prosperity that will stretch beyond our lifetimes – then we must be bold, we must be ambitious and we must be optimistic.
I began today with the words of John Curtin, a great Australian leader and a hero of mine.
I conclude with the words of another man I deeply admire –President Theodore Roosevelt.
Far better is it to dare mighty things, to win glorious triumphs, even though checkered by failure... than to rank with those poor spirits who neither enjoy nor suffer much, because they live in a grey twilight that knows not victory nor defeat.
That must be our goal – to dare the mighty things, to win the glorious triumphs and to build a better, more prosperous world.
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