Return to Lecture List


Social Reform under Curtin

John Curtin has gone down in history as one of Australia's greatest Prime Ministers, despite his relatively short period in the job.

What most strikes me about the history of that period is the amount of social reform undertaken by the Curtin Government despite the overriding national emergency occasioned by World War II.

During those years, the Government introduced widows' pensions, maternity benefits, unemployment and sickness benefits, hospital benefits, and the Commonwealth Employment Service, and made an initially unsuccessful attempt to introduce pharmaceutical benefits.

It is not unfair to say that the Curtin Government succeeded in introducing more social reform measures during the war than any government for almost three decades after the war. Curtin showed us that regardless of circumstances, it is always possible to introduce significant social reform measures. That said, I would like to turn to the main theme of my remark tonight. The topic I have been given is The future of socialism and the Australian Labor Party.

The Case for Public Enterprise

The subject is timely. As a member of the Labor left, I believe it is essential that we make an intellectually honest attempt to come to grips with the significance of recent developments, not least those in eastern Europe, to look at the implications of those for the case for socialism. It is clear for example, that it is no longer viable to make the case for public enterprise simply in terms of its inherent ideological virtue. Rather, we need to adopt a practical approach, one which focuses on the specific benefit that public ownership can confer. We need to focus our attention on areas where the private market economy is failing to realise Labor's social, economic and environmental goals. The internal ALP debate about public enterprise (which culminated at the recent national conference) in some ways exemplified the wrong approach to debating these issues. On the one hand, from the right, we had a push for privatisation largely driven by the prospect of essentially cosmetic fiscal benefits from the sale of public assets-and that's a point I will elaborate on later. On the other hand, from sections of the left, we saw a tendency to treat the existing structure of public enterprise in this country as inviolate-a position impossible to justify in logical terms.

Tonight I want to concentrate on some practical policy directions for our party on this issue of the future role of public sector enterprise. But first some background.

It is obvious that Australia faces severe economic problems-unemployment has increased and the deficit on the current account of the balance of payments, and hence external indebtedness, remains stubbornly high.

As well as meeting these economic challenges, the Government faces the continuing task of designing and implementing policies to achieve Labor's social justice and environmental protection goals.

Of course, we cannot solve all the problems and achieve all our objectives by means of public enterprise activities alone.

Obviously, macro-economic policies-monetary, fiscal and wages policies-are at centre-stage in dealing with our broad economic problems.

There is a respectable argument coming from some sections of academia that the current account deficit may not be the problem we assume it to be. This argument is that, with the public sector in surplus, all the deficit reflects is private sector decisions, and there really is no cause for the Government to worry. To the extent that this argument has any validity, then it would be hardly surprising that there are difficulties in solving both this non-problem and other real problems.

But regardless of this point, it is obvious that Australia needs a more dynamic, efficient, growing economy, and that international competitiveness-in both export and import-competing terms-must be a big part of that.

Many arms of policy must be-and are-devoted to this objective. As well as macro policies, these include the various components of industry policy, science policy, education and training policy and so on.

I'd like to turn to the role of public business enterprises because that's been central to the debate in the party.

Policies towards Government business enterprises must also be so directed. Indeed, this is recognised, as the major focus of so-called micro-economic reform has been on the ownership and operation of such enterprises.

I do not object to this. The pattern and nature of public enterprise should evolve over time with changing economic, social and environmental circumstances and priorities. But this process should not be all one way, and should not be driven either by narrow ideology-from either the right or the left-or by artificial accounting conventions.

Rather, the process should be driven by an appreciation of the role such enterprises can play in enhancing the operation of a market economy and in meeting social and environmental objectives.

For it must never be assumed that the so called free markets, on their own, necessarily produce the best outcome-even in economic terms, never mind in social and environmental terms. It is well recognised-indeed obvious-that private markets fail in many circumstances.

These circumstances include so-called externalities, where a third party is affected by a market transaction and that's not adequately factored into market decision-making. Pollution is the common example.

An example of a positive external effect is in the market for information, broadly defined. The cost of producing information, and the difficulty of recouping that cost, means that in the absence of government intervention, the private sector will produce far too little information.

This is the basic rationale for our entire education system, public libraries, public research and development programs and support for private sector research and development.

A second area of market failure relates to the terms of competition.

Some markets are natural monopolies, which means that the optimal scale of production is best undertaken by only one firm. This includes basic infrastructures such as road and rail networks, the telecommunications network and electricity grids.

There is a clear case for public ownership of natural monopolies to prevent private abuse of monopoly power. Simple logic suggests that a natural monopoly does not need the additional protection of legislated monopoly status.

In some other cases where the natural monopoly argument is less clear, there is still a case for public enterprise to provide competition to what would otherwise be private monopolies or oligopolies. This is one rationale for public ownership of the Commonwealth Bank (although I think a better argument is the absolute security Government ownership of the bank provides to holders of small deposits).

The enterprises that are established for this reason can be considered to be market conforming-they are not meant to do anything fundamentally different to private sector competitors, although the opportunity to set a better example for private enterprise should be taken.

Enterprises established for other reasons, however, are meant to be market diverging and so should not be subject to the same requirements as their private sector competitors.

Finally, a major form of market failure that is not sufficiently recognised is the very short time horizons of Australian business managers and actors in the Australian economy more generally.

While politicians often get criticised for not thinking beyond the next election, far too many Australian business managers don't think much beyond the next company annual report. That is shown most clearly in a recent survey of Australian company managers, which showed they tend to focus on a time period of six to nine months-much less than in the economies held up as examples of economic success, for example Japan. This is partly a problem of management culture, and partly a problem of the lack of long-term relationships that characterise Japanese business, for example.

Regardless of the cause, the lack of patient capital is a market failure that provides a clear justification for public intervention such as through the Australian Industries Development Corporation (AIDC).

An intelligent strategic approach to policy development requires us to prioritise the areas where these market failures apply and consider appropriate policy responses. Those policy responses will vary from case to case. In some instances, fiscal measures-taxes or subsidies-will be appropriate. In others, regulations. And in yet others public enterprise is the best way to go.

One point that clearly emerges from this discussion is that public enterprise should be most prominent at the leading edge of technological change. A dynamic public enterprise policy will involve a constantly shifting pattern of public enterprise towards newer technologies. For this reason, Government ownership of a domestic airline was more appropriate to the 1940s and 1950s than it is today.

These decisions should be based on a practical assessment of policy objectives and the best way of achieving them. They should not be based on simple ideology. Neither public enterprise nor privatisation are ends in themselves-they are only means to the end of Labor's broader goals.

The Debate on Privatisation

I'd now like to turn to fiscal considerations, which have largely driven the recent debate on privatisation. Nor should these decisions be based on false signals arising from artificial accounting conventions. Let me explain.

The international accounting convention is that proceeds of privatisation as a return on equity are recorded as a negative outlay and so increase the recorded budget surplus.

With a firm fiscal policy required, that makes the budget outcome look better. That is the accounting convention adopted in Australia.

However, this is purely cosmetic-the purchase price will be raised on private capital markets and the economic effect of this will exactly cancel out the economic effect of the extra budget surplus. The artificiality of this convention is shown by the fact that the proceeds of disposing of an investment are not shown as a negative outlay-that is a financing transaction which does not affect the recorded surplus.

So sale of Australian airlines will be a negative outlay but the sale of the primary industry bank in 1987-88 was a financing transaction. The difference is purely semantic.

Surpluses of around $8 billion per year will wipe out all Commonwealth debt in around seven years. By which time surpluses will have to be invested. Investments in the form of providing needed capital to public enterprises should not be precluded just because they will reduce the recorded surplus.

Moreover, the public resources that are alleged to be tied up in Government enterprise ownership reflect the flow of dividends from those enterprises. If dividends are inadequate, an enterprise's financial performance can be improved-as shown by the Government's success in increasing dividends from Commonwealth trading enterprises from $12 million in 1982-83 to an expected $433 million this financial year.

Of course, some organisations may not be capable of generating an appropriate return on assets-and AUSSAT springs to mind as one example. Equally, dividend receipts from enterprises are reflected in their sale price on privatisation.

In short, there is no fiscal argument for privatisation and no fiscal argument against privatisation. Each case must be judged on its merits in terms of the best practical way to achieve economic, social and environmental objectives in changing circumstances.

All that I have said so far is well known. Indeed, most of it has been better said elsewhere, such as in recent speeches by John Langmore (who is the Member for Fraser in the Federal Parliament).

Practical Implications of Public Enterprise Contraction

But I would like to turn to some practical implications. First, areas where perhaps some contraction of public enterprise may be acceptable. These arise where the enterprise concerned is not the best way of countering a market failure, or even where there is no market failure.

Even here, however, I emphasize that I am not advocating privatisation-that should only be undertaken where there is reason to believe that an enterprise will operate more satisfactorily in private hands than in public ownership, and there is no reason to expect that this will generally be so.

The most obvious area is the airlines. Private sector organisations are clearly more than willing to provide airline services-the most powerful argument for keeping Australian airlines in public hands is the competition it provides to Ansett, and there are other ways of achieving this objective.

Other areas are those related to natural monopolies. For example, while the electricity grid is a natural monopoly, power stations are not. It is not essential that all power stations be publicly-owned. Indeed there are potential environmental benefits from greater industry co-generation and possibly the use of other, small scale, power generation technologies.

In relation to the efficiency of the public sector, my colleague Stewart West stated last year that, as Minister for Administrative Services, he had increased the proportion of contracting out to 98% for the construction of government buildings, 40% for project design and 90% for removals and associated storage.

Of course, as Stewart West also recognised, this should cut both ways-just as there is no reason to oppose contracting out where it can offer better value, there is no reason to prevent the public agencies from tendering for private sector work (that is, contracting in).

Another area of public enterprise that needs to be looked at in at least some States-including my own State of New South Wales-are the forestry commissions. Those commissions are too often a conduit for implicit subsidies to the forestry industry, at considerable environmental cost.

Defending Public Enterprise

I'd now like to turn to the question of defending public enterprise. On the other hand, most existing public enterprise operations can and should be defended.

Public enterprise must be defended where it undertakes activities that the private sector would, on its own, underfund. Logic suggests that in such cases there should be no restriction on private sector competition. Far from wanting to protect CSIRO, for example, from competition, we are actively encouraging private sector research and development efforts.

I am responsible for two such areas-the Commonwealth Employment Service (CES) and the higher education system. Both these areas are under attack from the Coalition.

In the case of the CES, the opposition took into the last election-and continues to support-a policy of a 25% funding cut including a substantial degree of privatisation.

In contrast, we are increasing CES resources to enable it to introduce arrangements to support the unemployed and the disabled to become full participants in the workforce and wider society.

Devolution of decision-making is a good policy generally, but in the case of universities, institutional autonomy and academic freedom are absolutely vital to their basic role.

The Liberals, however, propose to abolish mechanisms of university accountability for the $3.6 billion-and increasing-funding they receive each year. They have a secret agenda here. There is only any logic to market forces of this nature if there is going to be a much greater private funding and private control. In short, privatisation.

Now, I am in favour of an increased role for industry in education-but not if it compromises institutional autonomy and academic freedom, or if it compromises our policy of enhancing access and participation by disadvantaged groups. We must reject the clear thrust of Liberal thinking in these areas.

I think we need to go beyond defending public enterprise to extending public enterprise in appropriate areas.

Defending what exists now is intellectually easy-I now turn to the real challenge of identifying future areas for expanding public enterprise. There are obvious problems with much of our basic infrastructure that should be addressed.

For example, I am currently representing my constituents on the issue of the location of additional airport capacity in Sydney. A broader approach-economic, social and environmental-would give a very different answer to that preferred by the narrow interests of the airlines and businesses operating in the central business district of Sydney, which is to build a third runway.

As noted above, one of the areas of greatest market failure is in the process of developing new technologies. Direct government support for R&D is provided in many ways, including the CSIRO, the universities, and the primary industry R&D corporations that have been recently created.

The problem is not Australia's basic research capacity-which is impressive by most standards. Rather, the problem is in commercialising research results. One of the major reasons for this is the lack of patient capital which I referred to earlier.

Existing institutions-such as the CSIRO company Csirotech, the various university companies, and the primary industry research and development corporations-should be encouraged to address this issue of commercialisation. I welcome, for example, recent comments by the CSIRO chief executive that the CSIRO is considering a significant expansion of its commercial arm.

However, I believe that more is required. We should also be establishing a public capital base for the commercialisation process. At the very least, we should enhance the role of the Australian Industries Development Corporation (AIDC).

Another-not mutually exclusive-option would be to create a new innovations corporation with both a capital base and a capacity to acquire, hold and licence patents.

A third option would be to create some specific new public enterprises in individual areas.

And the example I have in mind relates to energy. Most of you will be aware that Australian-developed solar technology powered the winning car in the recent Darwin to Adelaide solar car race. What has been less well publicised is that the Commonwealth is funding the special research centre at the University of New South Wales that developed that technology. I announced a three-year extension of that funding when I visited the centre in August.

I believe there is major potential for a new renewable energy corporation, possibly growing out of the recently-established energy research and development corporation by the addition of a significant funding base to the R&D effort that is being undertaken. Moreover, I believe we should look to the State electricity authorities to take a broader approach by encouraging energy efficiency, not just electricity consumption. I welcome, for example, the decision of the NSW Electricity Commission to participate in the solar research centre at the University of New South Wales I mentioned a moment ago.

In particular, those authorities should take a leading role in encouraging highly energy-efficient appliances-just as they encouraged the early spread of electrical appliances throughout the household sector.

It is to be hoped that initiatives of this sort emerge from the current industry commission inquiry into the electricity industry, although given the ideological bias of that body I think that is fairly improbable.

Of course, public enterprise activities will not play the major role in addressing environmental problems-a much bigger role will be played by appropriate fiscal and regulatory measures. There are major potential economic gains from such measures. It is becoming increasingly recognised, for example, that high standards can provide economic advantages through the spur to innovation and hence industry development that can result.

Arranging ways to make money out of protecting the environment is a sure-fire way to get the environment protected, although that's only a component. There may be other opportunities for public enterprise-such as through the State national parks' services-in this area.

Finally, if we are to have long-term economic growth in Australia, we must address the problem of management short-sightedness through the development of a more substantial venture capital market.

This market has expanded in Australia-from $2 million in 1983 to $950 million in 1989-partly because of the stimulus provided by the tax-subsidised management and investment companies (MICs). Nevertheless, our venture capital pool as a share of GDP is less than half of that in, say, North America, and obviously in recent times that has contracted in line with current economic circumstances.

The other major institution we have is the AIDC, whose role should be expanded. I always find it remarkable, on reflection, how little attention was given to the part-privatisation of this enterprise in the privatisation debate.

The AIDC is a public financial enterprise whose current primary purpose is to correct for the failure of the Australian capital market to channel sufficient funds into relatively long-term investments need for industry restructuring.

This is obviously a very major contemporary policy concern and one that the private market economy has clearly failed to address. Yet the debate on this at the 1988 conference was perfunctory at best-just about all the attention being devoted to debate on the airlines!

Clearly, with more and more of our national savings being directed through superannuation funds, this source needs to be tapped for venture capital purposes. Ideally the funds themselves would recognise this need and act accordingly without government intervention.

If they fail to do this, however, we should consider some alternative mechanism, possibly including Government-backed fund of funds or a mechanism involving the AIDC to attract fund investment.


I am not saying that the ideas I have floated this evening are tablets in stone that should be implemented without delay.

However, we are reaching the limits of the level playing field approach to industry policy that the Government has adopted to date.

Consequently, industry policy is back on the public agenda. All I have said tonight is that the role of public enterprise should figure as prominently as other measures to give our firms, in the words of my colleague John Dawkins, "a hand up rather than a hand out."

The Labor Party has never been narrowly ideological about these issues. John Curtin harnessed both public and private sectors to the war effort. Ben Chifley should be remembered as much for subsidising General Motors as for trying to nationalise the banks.

The present Government has intervened where it considered that to be appropriate, such as in the 150% research and development tax concession, and now the Training Guarantee. Public enterprise policy has not been all one way either-we have improved the operation of existing enterprises and created new ones.

The important point is that we should consider these things on their merits.

I believe we need a different sort of debate about public enterprise. We need to reverse the current decision with endless public sector contraction. We need to be prepared to use public enterprises as one of a range of economic policy tools to tackle current problems. The public enterprise sector must not be conceived as a static edifice, but also capable of evolving to meet new social, economic and environmental priorities. Only on this basis will it be possible to put the case for socialism on a genuinely contemporary footing.

Return to Lecture List