Mr. Jerry Ellis, Mr. Adrian Basora, Ladies and Gentlemen. Thank you for inviting me here today to take part in the Eisenhower Exchange Fellowship Conference Program.
This session on Ethics and Economics is subtitled 'Making Transparency Transparent', which gives me the opportunity to outline some of the ground-breaking work done by Australia, on this very issue, which culminated in a paper by that very title - 'Making Transparency Transparent', in March 1999.
After I outline some of the work done on transparency by the Australian Government, I will touch briefly on some broader themes concerning ethics, the market economy and the overall direction of the economics profession.
Firstly though, I wanted to reflect on some of the background the current interest in issues like transparency, accountability and sound governance.
Background
In the 1980's and early 1990's particularly as many developed western economies were either in the midst of, or emerging from, significant recessions, there was considerable interest in the success of the 'Asian tiger' economies.
At that point, those economies were achieving dramatic annual GDP growth, and along with it, rising living standards.
Several commentators in countries such as our own, felt that there were lessons to be learned from the Asian tigers, or at the very least, that we could explain their competitiveness on the basis of a few key factors.
These included low corporate and personal tax rates, low labour costs, and often a 'pro-active' approach to industry policy, characterised by subsidies or guarantees to particular producers or industries.
Following the financial crisis of 1997, we saw some deep soul-searching, both about the international financial system as a whole, but also about whether the fascination with tiger economies had ignored some broader and more fundamental factors which ultimately form the basis of economic stability and prosperity.
In this vein, the then Group of 22 industrialised countries established 3 working groups to look at the stability of the international financial system.
One of these working groups considered the contribution which transparency and accountability make to economic prosperity.
One of the recommendations of that Working Group was that the IMF prepare transparency reports for individual economies, assessing their various economic and political institutions.
In addition, in October 1998, the Prime Minister commissioned a Task Force to advise on how Australia could contribute to international financial reform.
The Task Force recommended, among other matters, that Australia take a lead in preparing a transparency report, scrutinising our own structures against some relevant international benchmarks.
The aim was for Australia to be 'transparent about our transparency'.
The first questions to be asked are: what exactly is transparency in this context, and why is it important?
Transparency is essentially about information – specifically, improvements in the range, relevance, reliability, comparability and understandability of information about both government and private sector activity.
The better the quantity and quality of information about government, the corporate sector and the national economy, the less vulnerable that economy will be to shocks or a sudden loss of confidence.
The reason is that better information allows private investors to more accurately identify and quantify risks and form reliable market expectations.
In so doing, it prevents the long, slow build-up of financial and economic imbalances which can occur when information is not transparent – a situation which can then lead to a rapid and drastic erosion of confidence at some future point.
The Australian report identified a number of policy areas where transparency is important. These included:
- Fiscal policy
- Monetary policy
- Provision of macroeconomic data
- Foreign investment policy
- Corporate governance
- Financial reporting
- Corporate insolvency; and
- Financial sector supervision.
In all of these areas, Australia's transparency performance is very strong.
I will provide a brief overview of some of the structures which are in place in Australia which have contributed to that outcome.
Fiscal Policy
In relation to fiscal policy, the budgetary process takes place within a strict and transparent Constitutional framework.
All revenue must flow into a Consolidated Fund, and all expenditure from the Fund requires Parliamentary authority via annual Appropriation Bills.
Taxes can only be levied in accordance with Constitutional principles, such as the requirement that tax rates must apply uniformly across the Commonwealth.
This has always been a cornerstone of Westminster Government, but other moves towards greater transparency have been more recent.
In particular, the Charter of Budget Honesty, which commenced in 1998, stipulates a range of reporting requirements which enhance the accountability of government.
The Charter requires each new Government to publish a fiscal strategy statement at or before its first Budget, which sets out its long term fiscal objectives, and the key measures by which their performance is to be judged. The Government must then also release fiscal strategy statements at every subsequent Budget.
Then, each year, strict reporting requirement under the Charter provide additional information:
- an Economic and Fiscal Outlook report has to be prepared at each Budget, including the macro-economic forecasts on which the Budget is based;
- forward estimates of revenue and expenditure for future years are required;
- a statement of risks, such as contingent liabilities and sensitivity of revenue and expenditure to changes in economic parameters must be prepared;
- a mid-year economic and fiscal outlook must be prepared during the financial year to provide an update on the state of the budget, including a reconciliation of all changes to the bottom line, whether they be due to new policy initiatives or changes in economic conditions; and
- a Pre-election Economic and Fiscal Outlook must also be prepared when an election is called, in order to better inform debate during the campaign, and provide a benchmark against which voters can judge the affordability of political parties' promises.
In addition, the Government has now shifted to accrual accounting, which provides a fuller picture of the sustainability of government expenditure than the old cash system.
And budgets also now include a balance sheet, showing the government sector's assets and liabilities, giving the community an opportunity to assess the impact of Government policies such as debt reduction or asset investment.
Monetary policy
Australia's approach to monetary policy has some similarities.
Again, there is a high importance placed on regular reporting of high quality information.
The Governor of the Bank and senior officials make appearances before a Parliamentary Committee twice a year, and at around the same time release a semi-annual report on monetary policy.
The Reserve Bank releases a monthly Bulletin, with a commentary on the economy and financial markets included each quarter.
The independence of the Reserve Bank helps to both clarify the Bank's role as well as enhancing its credibility in keeping inflation low. That is to say that with an independent central bank, decisions about monetary policy are removed from the political considerations.
The Bank has a clear commitment to maintaining inflation between 2 and 3% on average over the economic cycle.
The existence of an independent, credible central bank with a well-defined charter clearly focused on inflation is a good example of transparency at work.
Financial Regulation
The RBA's responsibility for the conduct of monetary policy is supplemented by two other independent financial regulators – the Australian Prudential Regulation Authority or APRA, is responsible for the prudential supervision of banks, life and general insurance companies and superannuation funds; and ASIC, which is responsible for consumer protection and market integrity in the financial services industry.
Again, both these bodies are independent of day-to-day government control, and all have a well-defined area of responsibility.
APRA's prudential requirements for banks include minimum capital and liquidity requirements, minimum standards for credit quality and audit arrangements, limits on banks' equity associations with other institutions, restrictions on shareholdings by any one entity in an Australian bank (without the Treasurer's approval) and restrictions on large exposures to related entities.
An important objective of corporate regulation (which is administered by ASIC is to ensure adequate disclosure so consumers can appropriately assess performance of companies and the market more generally. For example, the Corporations Law imposes obligations which require companies to announce any information to the market which may have a material effect on price of an entity's shares. Disclosure requirements also apply to companies who seek to raise funds from the public and intermediaries who advise consumers as to investment of their funds.
Other disclosure requirements include the maintenance of adequate records and the preparation of financial statements and directors reports. These requirements all serve to enhance transparency within the financial services industry.
In these areas, transparency not only contributes to the effectiveness of government policy, but also to confidence in the financial system.
Investors and creditors are given comfort that the system is stable and that regulators perform an essential role in this respect.
Other policy areas
Australia's commitment to transparency extends into a range of other policy areas too numerous to itemise.
One example is our independent Bureau of Statistics, which provides robust social and economic data freely available and reliable for the purposes of economic decision-making.
Our foreign investment regime is consistent and credible, with each application treated according to a published set of rules by an independent Foreign Investment Review Board which then advises the Government.
Australian accounting and auditing standards also provide a consistent basis for economic decision-making, whilst high professional standards in the accounting profession help safeguard the reliability of company reporting.
All of these policy areas are dealt with extensively in the report 'Making Transparency Transparent', confirming that Australia matches up well with international benchmarks.
It has been a well publicised view that many of these factors helped Australia to weather the Asian financial crisis as well as we did, proving that transparency can have direct economic benefits.
Some broader issues
The increasing focus on transparency is a welcome development.
I say this because it helps to elevate the economic debate above the level of micro-policy decisions, towards an examination of the broader and more basic institutions which make a market economy possible.
This is a vitally important issue, but one which is all too often forgotten in the context of the day-to-day policy focus. Nonetheless, it is these broad issues which will increasingly need attention.
Transparency lies at the heart of that debate, because without it, confidence in the government or corporate sectors would quickly erode.
To take an extreme case, we could imagine the implications of a complete breakdown of our social, legal and political institutions. In other words a world where:
- Property rights were not adequately protected;
- Contracts were not honoured and no credible legal system would enforce them;
- People cheated the tax system with impunity, such that no one voluntarily complied with the tax laws; or
- Regulatory decisions were tainted by corrupt processes.
Trust and confidence in the integrity of regulatory, legal, prudential and other government and corporate processes are the basic building blocks of a 'free market system', without which there would be no incentive (or indeed, opportunity) to produce, invest, exchange, educate or save.
In fact, the free market 'system' is really a misnomer in that, unlike socialism, it is not the conscious product of any rational mind.
Rather, it has evolved spontaneously out of the innate human need to interact and to do so according to basic ground rules.
The market is really little more than a complex web of voluntary interaction and the series of institutions which allow free individuals to 'go about their business'.
The quality, strength, and integrity of those institutions is what gives us the ability to successfully interact with each other.
To the extent that transparency and accountability are lacking, people lose confidence in their capacity to carry out even the most basic economic transactions with certainty (let alone invest billions of dollars).
However, it should be made clear that the institutions we should be interested in include more than property rights, or a legal system or transparent government decision-making.
They also include our sense of community, mutual trust, our moral urgings, altruism, and our charitable instincts.
In that sense, market behaviour is not just about profit maximisation, nor merely about the bottom line. It can (and should) include a desire to make a real and lasting contribution to our society – through corporate philanthropy or executive wage restraint, for example.
One of the Howard Government's significant policy directions has been that of building a social coalition – that is, strengthening the bonds of cooperation and trust in the community.
The central idea is that while governments can do a great deal through the provision of social services, much of a society's well-being is determined by the sense of trust, integrity, openness and goodwill generally observed by our corporate and community institutions.
Of course, that sense of social responsibility can have very direct benefits as well.
The Prime Minister has made the point that businesses can do well by doing good. In an era when corporate reputation is important, it is often good business practice to behave in a socially responsible manner.
This is, if you like, an extension of Adam Smith's invisible hand, whereby self-interested behaviour can contribute to socially desirable ends.
As the Prime Minister has said:
"Being a good corporate citizen, building trust, engaging with and supporting communities can add value to the bottom line in a variety of ways.
"The direct benefits to business of exercising social responsibility include greater productivity, reduced absenteeism, a reliable and committed workforce, greater employee morale and company loyalty as well as enhanced company profile and goodwill…
"It can be argued that a reputation for integrity and sensitivity to community expectations has direct commercial benefits."
Conclusion – and a reflection on the economics profession
My father, a well known Australian economist in his day, was a great admirer of economists like Alfred Marshall and John Maynard Keynes –practical economists who banished their mathematics to a technical appendix and got on with the business of solving the real world problems of their day.
Marshall in particular was a technically masterful economist, but his approach was never to get bogged down in the minutiae of providing elegant proofs of arcane propositions.
I think there has, in more recent years, been a tendency for economists to become obsessed with mathematical sophistication to the expense of thinking about the big issues.
Economics needs to be a much broader discipline than that, and bright young economists ought to direct more of their energy to thinking about what many of us would regard as the 'big issues'.
I congratulate the Eisenhower Exchange Fellowship for putting issues like transparency and accountability on the agenda.
With a renewed interest in issues such as these, and with sessions like this focusing on Ethics and Economics, let us hope that the economics profession can broaden its purview and address the big issues of our time.