Kevin Rudd On Why Australia's Banks Have Fared So Well, China's Key Role What Global Leaders Need To Do Now

In November 1998, in his first speech to Parliament, Prime Minister Kevin Rudd of Australia said: 'Competitive markets are massive and generally efficient generators of economic wealth. They must therefore have a central place in the management of the economy. But markets sometimes fail, requiring direct government intervention.' More than a decade later, as governments around the globe debate precisely how much government intervention is needed to deal with the crisis in financial markets, Mr. Rudd is in the forefront in thinking about bank regulation and global reform. He talked about some of his ideas with Robert Thomson, managing editor of The Wall Street Journal. What follows are edited excerpts of their conversation. ROBERT THOMSON: Australian banks seem to have come out of the crisis, relatively speaking, in remarkably good shape. I think there are 11 banks globally with the highest rankings, ratings. Four of those 11 are Australian. KEVIN RUDD: I think there are three factors involved. One is the management of the four major banks in Australia -- intrinsically their management has been conservative in terms of what they've exposed themselves to. Subprime-related mortgaged assets, when I last looked, were less than 1% of their balance sheets. There's a second regulatory factor, however, which intervenes as well. For some time now in Australia, we've supported an approach which is called the four pillars. And the four pillars refer to those four major banks. The logic is this: that in a country, an economy, which is the 14th-largest in the world, with a GDP of a trillion-plus, that for competition reasons, we actually can't have fewer than four banks of size and critical mass to deliver the services necessary for the Australian borrowing public, business or personal. But the consequence of that in terms of what we've seen most recently with subprime and other, shall we say, exotic products, is this: There has been less of a requirement or an impulse on the part of those banks to 'grow or perish' -- and, as a result, less of a predisposition to go out there and to engage in riskier practices. Third, at a prudential and supervisory level and capital-adequacy levels, we have been by global standards relatively cautious. But these are still uncertain and uncharted waters. I don't think we should just beat our chest about these things. I think we all need to work very closely with each other and learn from this practice when we gather together in London and the processes that will follow the G-20 as well. MR. THOMSON: There is a fundamental political and economic debate now about the role of markets. And sometimes the political consequences linger longer than the economic, and thus have an effect on the economic. Do you have an instinct that tells you where you should draw the line for markets? MR. RUDD: What I believe in fundamentally is that open markets are the best and most efficient allocators of resources in an economy. It's the best grower of wealth for working people world-wide. But if you stand back and say that regulating those markets is somehow unclean or somehow ideologically unorthodox, I think you're missing the other half of the equation. I think there's a third bit too, and that is there are certain things that markets will always very imperfectly and ineffectively provide, in what people would describe as the basic public goods of decent education and decent health care. And whether you deliver them by one agency or another, private or public, is beside the point. The central point is that governments, through their taxation collection, say that these enduring public goods must be delivered, because for education it's not only just intrinsically right, but it's the best turbocharger of long-term productivity growth. And if you don't have decent health care, if you have problems about underlying social-welfare systems and public-health systems, it impedes consumption. If you have underpinning your social structure and economic structure a decent universal health-care system, it also helps give people confidence to spend in the economy. MR. THOMSON: Obviously China's going to be an important player at the G-20 summit. The world is waiting for the Chinese consumer to buy and lead it out of trouble. The governor of the People's Bank of China has suggested that the world is too dependent on the dollar as a reserve currency, and that collectively one of the issues to be discussed at the G-20 should be plans for the creation of a global reserve currency. Does that make sense to you? MR. RUDD: First, with due deference to the governor, it's not on my agenda papers. And if there's a late Chinese addition, I'll review it with respect and interest. The second is, the dollar's position on that score remains unchallenged. The key thing, as far as the role of China is concerned, is, one, on the stimulus front, you're right, everyone around the world is waiting for China to come alive vis-a-vis domestic demand and, two, what role will China have in the future? On the stimulus front, medium term, by which I mean starting the second half of the year, I detect some modest signs of optimism about China. It's not just what you've seen publicly declared in the level of formally agreed upon fiscal stimulus to the Chinese economy. There's a whole lot of administrative measures under way within China at the moment through their banking system and credit arrangements more broadly, which may give the rest of the world a bit of a surprise on the upside in the second half of the year. Too early to tell, but there are a few green shoots out there. Underpinning that is China's parallel measures to build a more effective social-security system, because consumers will spend more in China if they've got confidence that they'll be looked after if they lose their jobs. And my recent discussions with Chinese leaders indicate that work is very much under way. The second big one is the future of the [International Monetary Fund]. One of the big looming challenges for us all is how do we deal with the emerging problem of asset impairment coming out of defaults in developing-country markets -- and looking particularly at the one which is now emerging for us all to take very seriously, which is Central and Eastern Europe. If you look at the quantum of resources available to the IMF to deal with large-scale interventions around the world in more than one or two environments at one time, the IMF needs more; it simply needs more. It also needs more flexible instruments to deploy early rather than in a reactive fashion. So the question is, where do you get that more from? And part of the answer must lie in China. But China's voting rights currently within the IMF are about the equivalent of Belgium and the Netherlands combined. And it's supposed to be a system whereby your voting rights are equivalent to your relative size of global GDP. That has to change. And if we want China to play a bigger role on that question -- that is, helping us as a global community intervene effectively so that you don't see terrible consequences in regions like Central and Eastern Europe -- then we've also got to embrace the debate about China having a greater seat at the table on institutions like the IMF. Robert Thomson