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CEDA Board of Governors meeting, 20 October 2009

Posted : Friday, January 15, 2010

Governance and the stimulus package were at the centre of CEDA's Board of Governors biannual meeting in October.

In a wide-ranging discussion, the governors also exchanged views on Australia's relationship with China, health, climate policy, and community attitudes towards nuclear power.

Meeting some weeks prior to the Liberal Party's leadership change, the governors presented wide-ranging opinions on the climate debate, the policies that flowed from it and the science behind climate change.

The climate change issue  was described by one governor as "like a runaway train". Others expressed the view that it dominated federal politics, and required more debate in the wider community.

In a frank exchange of views, the attendees put forth differing perspectives on the broader climate change issue, particularly on the science behind the greenhouse gas emissions debate.

Sir Eric Neal questioned whether an Australian emissions trading scheme was really the direction to take: "Is it necessary, is it going to make any difference? It may well prove a costly impost. And, if we go it alone, it may well make little difference globally."

Tim Besley put a quantitative dimension to the debate on Australia's contribution to greenhouse gas emissions.  "I'm convinced the science is not settled…that's backed by the fact some of the IPCC scientists have changed their minds.

"Anthropogenic CO₂ contributes about 3 per cent of the world's greenhouse gases - most of these are water vapour. Our share of that 3 percent is 1.5 per cent. That makes Australian anthropogenic contributions to total greenhouse gas emissions, .00045%. "

He added: "There's evidence the planet has been hotter in the past…many scientists say this is all caused not by anthropogenic CO₂ but by solar activity or cosmic radiation - all of which says to me that the science is far from settled.

Dr Stuart McGill questioned the accuracy of projections of temperature change based on climate computer models: "The models cannot 'hindsight' what has happened to temperatures, therefore why would we rely on models to 'foresight' temperatures with complete accuracy". He also called for more focus on deliberations and actions through National Governments and National Science Councils and Academies rather than through bodies operating under the auspices of the United Nations.   

Several governors took the view that the Copenhagen summit would not produce a binding agreement; yet action could still be required.

Sir Arvi Parbo commented: "While there is very serious doubt about the validity of the human-caused excessive global warming theory, it really doesn't matter whether the theory is right or wrong because we have no satisfactory mechanism to be able to significantly reduce worldwide emissions.

 "It seems to me the only practical action is to find ways to adapt to climate change whatever the cause and whether it be warming or cooling. We should redirect the resources now being used to try to reduce carbon dioxide emissions to finding ways to adapt to climate change. The reality is that there is no alternative."

In a contrasting view, the point was made that the science behind the climate change debate was well-founded, and supported by the Academy of Science in the United States, and by Australia's Academy of Science and other peak scientific bodies.

"I believe the science is well-founded, and we dismiss that at our peril", was the view expressed by Professor David Penington

"It's extraordinarily complex - we don't have the capacity as individuals to make judgments. We have a very large international expert group that has analysed the situation as best it can.

"There's no doubt the concentration of CO₂ continues to rise and the probability is that will contribute to further climate change. The advice they have is that something needs to be done about it."

Malcolm Fraser agreed with David Penington.

ETS or carbon tax?

Apart from the diverging views around scientific theories, there was general agreement that the world's dependence on fossil fuels should be progressively reduced.

The idea of taking a measured risk management approach to the climate change issue was broadly supported and that could mean changes for the type of policy instrument adopted.   

As Tim Besley put it, the precautionary principle would support  a shift in thinking from an ETS to a carbon tax, which would be transparent, flexible and could be increased, decreased or abolished.

The ETS also risked repeating the derivatives crisis, in another speaker's view.

An apparent increase in community interest in nuclear power generation was also discussed. 

Ziggy Switkowski predicted greater receptiveness to the idea of nuclear energy once people understood the need for measures beyond the current approaches to climate change.  "In the world's top 25 economies, where Australia ranks 15, every other economy uses nuclear power or is about to introduce it.

"My sense is that, not yet, but in the next two, three or four years when there's sufficient interest…nuclear will be considered seriously."

Improvements were also being made in start-up times (now 8-10 years) for nuclear power plants.

Good Governance

CEDA research director Michael Porter led a further discussion on governance, based on his paper "Good governance, not bad government" which questioned the role of the Federal Government's stimulus package in Australia's bounce-back.

In a rethink of the fundamentals of the finance sector, he made several key points:

Sound and predictable governance, not big government, should underpin an economy's growth.

The global financial crisis had reminded us of the world's high level of financial integration, leaving all countries at risk of contagion from a financial disaster of one (the US). We clearly need sound financial governance in all countries, not least in the dominant financial nations.

• In our region, the growth of Asia would drive Australian exports for decades.

In governance, Australia enjoyed significant opportunities, in Michael's view. "Given the bleak performance of both the US and the UK, pursuing sound governance in Australia within a less disciplined external environment can enable Australia to become a wealthy role model and centre of economic, financial and social policy."

Economic failure or success could be transmitted across integrated capital markets very quickly. So too the capacity to close access to markets and withdraw lines of credit.

Government stimulus

"This all means that, while Keynesian stimulus may be warranted at times of unforeseen contraction such as at the end of 2008, the far more important requirement of government is that it ensures the financial system is secure."

The paper contends that while it was important to keep the construction sector afloat and restore optimism in infrastructure markets; "neither of those actions has been of comparable impact to the restoration of confidence, to a lessened degree, in the international financial market".

Australian governments "continue to sustain a major direct and constraining role in the economy," in Michael Porter's view - particularly in telecoms, broadband, education, training, health, transport and other infrastructure.

"Government is better at facilitating structures than running or manning them."

In terms of other nations, such as AusAID recipients, he sees a role for Australia in promoting sound governance "both by aid and example".

In conclusion, the paper advocates maintaining an elastic supply of capital in Australia, even as funds have dried up dramatically in other countries.

"What has largely explained the strength of the bounce back is not the fiscal spray, but capital market restoration."

Economic outlook

Mr Andrew Mohl and the Rt Hon Malcolm Fraser had been asked to comment on the paper, in the context of broader developments internationally.

Andrew Mohl commented that in Australia the outlook was incredibly bullish. "The big issue is will we have a government that, having done a good job managing the crisis, will now drive productivity growth? Or will it be an interventionist, big government, big taxing, big spending, big reviewing, but not doing much, type of government - and frankly I think the jury is still out."

In the United States he'd observed "it was scary how quickly it's business as usual".

The Unites States' bank bail-outs had indicated to him: "If you're too big to fail, it effectively means the taxpayer is underwriting the downside. There has to be a cost of the taxpayer doing this."

So could the American financial system fail again?

In his view, while many of the former executives no longer held their jobs, "the human psyche had recovered remarkably quickly, as had the appetite for risk.

"But the experience boards and executives have been through should mean it takes a while for something similar to happen again."

Asked about the future role of Australia's regulators, Mr Mohl said that, in one of the downsides of our involvement in the G20, we would have many solutions imposed on us that we don't need.

"There will be intervention, more red tape, more administration, and we may well inherit that. The fact that our system came through as strongly as it did tells you that ASIC and the independent central bank, the key players here did their jobs."

In Malcolm Fraser's view, prudential supervision reforms brought in by Peter Costello in 1997 had not been given sufficient credit.

"It was then taken more seriously in Australia."

In discussion on the G20, he added: "I don't think you can have an international regulator body, but you might have some rules…perhaps a body that would report on the activities of central banks around the world, to judge whether they were doing a good or bad job…In some countries, central banks are not as effective as they could be."

On current government spending, he expected it would be left to the Reserve Bank to raise interest rates, rather than withdraw the stimulus which, in areas like schools, would be difficult.

Foreign investment

In other discussion points, CEDA chairman Geoff Allen raised the issue of China's access to investment opportunities in Australia.

"We have a situation where Singapore's sovereign wealth funds are allowed to access, without serious comment, our telecommunications and transport infrastructure; but when the Chinese approach us, all sorts of questions come up. How does this affect our public interest?"

A number of the attendees said the relationship with China had not, in the past year, been handled in a sophisticated way. While the relationship between the two nations was an important one, Australia was inconsistent in weighing up which investments to approve or reject.

As Rt Hon Malcolm Fraser commented and many endorsed, the Chinese did not understand the attitude of the Australian Government. The Defence White paper had become a real issue. Many things had been done by the government to make sure that we did not appear to be too close to China when what Australia really needed to do was to think through its relationship with China again.  

Australia's social development

In broad terms, the role of the Governors is to bring their extensive experience and knowledge to bear on issues central to Australia's economic, political and social development. Their perspectives help guide CEDA's research and conference agenda.

In addition to the main discussion points of governance and climate policy, several other issues were identified as of particular concern in Australia's immediate future:

Limited access to finance of small and medium-sized businesses in an environment where credit was being rationed

• Australia's low proportion of social housing and Federal state government relationship issues that impeded progress  
• The absence of a national water policy
• The need to build up the capability of the non-profit sector (which was bigger than the entire retail sector) at the same time as the rate of volunteering was falling
• Governments' lack of commitment to health care
• The need for Australia's elder statespeople to speak up on matters of national importance so the country could benefit from wisdom and experience

Professor David Penington put on record his disappointment with the recommendations of the recent National Health and Hospitals Reform Commission. With bureaucrats concerned solely with numbers of patients, "the whole commitment to health care and quality seems no longer important".

Malcolm Fraser also reflected that "massive under-investment in health and education" had been a major weakness of the previous government.

"Our universities are falling in international scales, while many other governments are pouring money into universities and fundamental research. These are absolutely critical to a prosperous future…It's a great pity we've gone through 15 years of enormous affluence and missed these opportunities."