AUSTRALIA'S NEW TACK It's not the greatest time for an austerity campaign, what with the America's Cup yacht races about to start. But the country is fast coming to realize that it must trim its sails.
By Louis Kraar REPORTER ASSOCIATES Stephen Madden and Julianne Slovak

(FORTUNE Magazine) – SAILORS and socialites, corporate executives and curiosity seekers are heading toward sunny Perth for the America's Cup races. The $350-million, four-month party, which will include Australia's spirited defense of the world's most important yachting trophy, as well as nearly every other sport imaginable, is bringing a comfortably remote country to the center of world attention. But just as the fun is about to begin, Prime Minister Bob Hawke, 56, is warning that Australia faces an economic crisis as serious as war. Hawke has resorted to blunt talk because many of his sunburned, surf's-up, ever optimistic countrymen have been slow to grasp how much the collapse of world raw material prices has hurt Australia's commodity-based economy. The country's current account deficit, which measures trade in goods and services, is $8.3 billion this year, a distant second, but still second, to the U.S.'s notorious $117.7-billion deficit last year. Foreign debt has exploded from $7.3 billion in 1980 to $52 billion, or 37% of gross national product, this year (vs. 50% for Mexico). Payments, including interest on the debt, will absorb more than 40% of export earnings next year -- a danger signal to many foreign creditors. The Australian dollar is dropping like a spent boomerang. In less than two years it has declined 40% against the U.S. dollar and 60% against the Japanese yen. Australians joke about a man who smuggled $100,000 in Australian currency into Sydney. The punch line: It had a street value of $60,000. (Financial figures in this story are expressed in U.S. dollars, at an exchange rate of 62 Australian cents to the U.S. dollar.) Economic growth, which huge international borrowings have pumped up to an inflation-adjusted average annual rate of 5% over the past three years, should slow to around 1% in 1986 and hover around 3% in 1987. Unemployment, now over 8%, shows no signs of improving. Inflation, at around 7%, is already a good deal higher than most industrialized countries' and is likely to keep rising in coming months. If Australia cannot find a way to augment commodities with other kinds of exports, it could be swamped by a Latin American-style debt crisis by the end of the decade. The credo Australians live by is, ''She'll be right, mate'' -- everything will work out somehow. And maybe it will. Hawke and other Labor party leaders are trying to hold down wages and restrain government spending, even though these economic changes will lower Australia's comfortable living standard. Per capita disposable income in Australia is roughly $5,700, vs. $11,817 in the U.S. Some 70% of Australian families own their own houses. Aussies spend more on casino gambling than on national defense; they drink an annual average of 31 gallons of beer per person -- the alcoholic content of which falls somewhere between that of U.S. and German brews -- and their national passion is sports. Says John Macleod, 55, chief economist for CRA, a giant Australian minerals company: ''I expect us to come out of this fairly quickly, not because of a turnaround in commodity prices but because Australians will wake up to the fact that they have been living in cloud cuckoo land.'' Another hopeful sign is the emergence of a new breed of Australian businessmen -- entrepreneurs and managers -- who have a flair for risk-taking and an aversion to government interference. Some of these are profiled in boxes accompanying this story. Australia is also strengthening economic ties to Asia, though many Aussies still identify more with Britain, 10,000 miles away, than with Indonesia, 300 miles away. Though high wage rates and nearly insurmountable tariff barriers (up to 70% on textiles and footwear) have made Australian manufactured products uncompetitive in world commerce, the country is gradually learning to market its vibrant service economy. As David D. Hale, chief economist for Chicago- based Kemper Financial Services, says, Sydney and Melbourne could develop regionally oriented specialties in banking, fund management, and securities trading. Tourism is already becoming a growth industry, fueled by America's Cup enthusiasm, Japanese looking for sunshine, and a bargain-priced Australian dollar. John Howard, leader of the opposition Liberal party -- despite its name, Australia's major conservative party -- wants the country to become an educational center for Southeast Asia, particularly for students who want to become fluent in English. Says he: ''Speaking English is the one thing we do better than the Japanese.'' An Australian comeback would be good news for U.S. investors. Americans have an $8-billion stake in the country, the biggest U.S. investment in the region. Such companies as General Motors, IBM, and McDonald's are highly visible in the small Australian market. Most U.S. money, however, has gone toward an anticipated resources boom that never quite materialized. New York money managers tend to think that the Australian economy has hit bottom and should soon start to recover -- but slowly. Says Nick Sargen, a vice president at Salomon Brothers, a New York investment bank: ''I don't expect to see a crisis ensuing, but you have to be cautious rather than optimistic about Australia.'' The road back will be bumpy. Former Prime Minister Malcolm Fraser, 56, who headed the last conservative government, says Australia's current plight is not simply a cyclical downturn but a ''new strategic situation.'' World markets for wool, wheat, meat, metals, and minerals -- which account for over 80% of Australian exports -- have changed. Many countries that once imported food are now self-sufficient. U.S. and European farm subsidy programs totaling about $100 billion a year have undercut Australian grain prices and hurt agricultural exports. And Washington has been subsidizing U.S. wheat sales to the Soviet Union and China -- both big Australian customers. Increasingly, Third World countries are exporting raw materials to pay their debts. That's why China, for example, is becoming a coal exporter. To make matters worse, international customers are substituting new materials for Australia's minerals: fiber optics, for instance, instead of copper for telecommunications lines. Says Fraser: ''It's going to be the product of people's minds, their inventiveness, the things they create and build with their hands, that earn higher living standards for the future -- not digging up more coal or producing better wool.'' A BIG PART of Australia's ''cloud cuckoo land'' is a highly regulated labor market that pampers workers instead of motivating them. While union membership is declining in most industrialized countries, almost 60% of Australian workers hold union cards, and the percentage is going up. Australia long ago adopted British-style craft unions complete with class-warfare rhetoric, even though the country is so egalitarian that taxi passengers usually ride in the front seat next to the driver. Many Australians blame the militancy on shop stewards who came from England and Ireland. A company chartering a foreign luxury vessel to bring passengers into Perth for the America's Cup relates that a seaman's union leader refused to cooperate, saying, ''Our blokes don't go to yacht races.'' For all the talk of economic crisis, nearly every employee gets a mandatory four-week vacation -- with a 17.5% bonus. Arbitration commissions, which work like courts, set wages and working conditions that apply to every industry. A prospering small company pays the same basic wages and benefits as a troubled large one. Wildcat strikes are common, even with such centralized wage-fixing. ''It's the No. 1 disaster we've imposed on ourselves,'' says Hugh Morgan, 45, executive director of Western Mining Corp., one of Australia's largest companies. While world markets determine the prices of Australian exports and the value of its currency, the response of Australian business is fettered by wages and working conditions that are fixed by fiat. The union game is to ask for the world, then settle for a few acres. Employers have no choice but to pay. In a typical case, a union in the southeastern state of Victoria presented a construction company with 13 pages of demands, including minimum pay of $620 for a 30-hour week plus such standard extras as an ''inclement weather allowance'' and bonuses for demolition work as well as ''work of an obnoxious or dirty nature.'' A construction worker doing a dirty demolition job in rainy weather would be entitled to $990 a week. If he worked the weekend shift, he would get triple time. Featherbedding horror stories abound. In Canberra, the Australian capital, where a $620-million Parliament building is under construction, unions insist that each mobile crane must have a driver plus two men holding on to whatever the crane is lifting -- in case one man trips. Standard U.S. practice is one man in the crane, one man on the ground. Charles Copeman, 56, chief executive of Peko-Wallsend, an iron-mining company in the desolate Pilbara region in the northwest, says he identified scores of restrictive work practices that are ''really devices for getting overtime pay'' and padding the payroll. Unions, for instance, required five employees to operate a railway- surfacing machine designed to be run by two. At ore stockpiles near the port where the iron is shipped, two persons had to be employed to operate each piece of equipment: One did the job while the other rested. Since workers get paid for time spent traveling to the mine on company buses, they demanded that a slow-moving water truck precede them to suppress dust -- even in the rain. COPEMAN, a mild-mannered engineer, decided he had had enough. Last July he drew up more efficient work rules and announced he would fire any worker who would not follow them. An arbitration commission forced him to take back the workers he fired, but it is also helping negotiate changes in the work rules. Copeman says, ''The issue is management's right to manage.'' Public opinion also seems to be swinging against what Australians term ''dole bludgers,'' or loafers. An openhanded welfare system not only supports the needy -- only a small part of the population is poor -- it also takes care of a class of carefree young people. These youths spend their days surfing and sunning on ''the dole,'' as Australians call unemployment benefits, of up to $55 a week. Though that does not seem like much, the dole bludgers often band together to rent houses or buy cars, and take part-time off-the-books jobs to make ends meet. In Australia even the unemployed can live well. John Elliott, 45, the chairman of Elders IXL Ltd., a $4.5-billion-a-year conglomerate, explains: ''The beaches are free; it costs $5 (Australian) for a game of golf; there's access to tennis courts. People can spend their leisure time more easily than anywhere else in the world -- without much money.'' To stay on the dole the unemployed must go through the motions of job seeking. Recently 30 able, sunburned Aussies turned up at a metal-fabricating factory barefoot -- which assured that they wouldn't be hired. The Australian television program 60 Minutes, a takeoff of the American news program of the same name, investigated workfare programs in the U.S., in which welfare recipients perform some kind of public work for their payments (see Politics & Policy). The program provoked thousands of letters and phone calls from viewers endorsing workfare for Australia. The Hawke government is trying it, though on a voluntary basis, while also promising to tighten screening for welfare benefits. A former union leader whose government heavily depends on union support, | Hawke shades his version of Australia's troubles depending on his audience. Sometimes he depicts them as sudden thunderbolts hurled from outside and ''not of our own making.'' Sometimes he sounds almost like a corporate chief executive: ''We can get out and win markets that we could never before contemplate.'' He urges Australians to develop a new ''productivity ethic,'' but opposes tinkering with the wage-fixing system. And he has barely chipped away the edges of big government. It represents some 20% of the economy, including state corporations, and nearly 30% of employment (vs. 16.7% in the U.S.). In any case Hawke's popularity seems to be sliding with the economy, and he faces elections within 14 months. JUDGING from preliminary opinion polls, Hawke could lose. John Howard, who was Treasurer in Fraser's conservative coalition, is already making detailed plans for what he expects to be his government. The 47-year-old leader of the Liberal party describes the current economic malaise as the beginning of the ''age of realism.'' He wants to trim government spending and union power. Any company with less than 50 employees could negotiate wage rates and employment conditions directly with workers rather than with unions. That could apply to as much as 40% of the work force. He also wants to reduce the 60% tax on corporate earnings. Says he: ''The incentive to invest is not very high at the moment because the after-tax return is still quite low. You're safer putting it in government securities.'' Because of relatively high inflation, 90-day Treasury notes yield about 17%. Bringing realism to the incumbent Labor party has been the job of Treasurer Paul Keating, 42. Keating, who wears Italian suits and collects French antique clocks, left school at 14 and went to work for a municipal employees' union. He spreads commonsense economics by using memorable phrases, some of them unprintable. ''Subtlety never matters here,'' he says of his country. Shortly after Labor took power in 1983, Keating floated the currency. He also allowed 17 foreign banks to open offices in Australia to cure the ''most constipated financial market in the world.'' Eager for hard currency, Keating removed most restrictions on foreign investment and dropped withholding taxes on dividends. In May, Keating warned that Australia could become a ''banana republic'' if it did not change its high-living ways. Having got everyone's attention with the line, he produced his own version of Reaganomics in August: an austere budget that included wage restraint, no real increases in government outlays, and the admission that living standards would fall. In describing the effects of the new austerity, Keating's boss, Bob Hawke, says, ''The party is over, finito.'' The biggest boost for business, the Treasurer says, is a lid he claims to have clamped on labor costs. The Hawke government has reached an accord with the most powerful unions to index wages to inflation, but at a discount. The result, according to Keating, has been a 5% cut in real wages over the past three years. Those pay constraints and the devalued currency, he says, give Australian manufacturers the ability to compete with imports in the domestic market and to export. ''Look, we want to try and get Australia right,'' he says. Despite Keating's pragmatic policies, Moody's Investors Service has lowered its top triple-A rating on Australia's long-term debt by one notch. The falling Australian dollar wiped out returns to foreign investors in government bonds denominated in Australian currency. The big losers have been American and Japanese bondholders. Keating says financial markets are ''gloomy as all bugger'' about Australia right now. ''The foreign exchange markets are sending a message: 'We want you to flatten the place. We want a recession.' That won't fix things in the long run though.'' What would help fix things is greater business investment. Keating argues that businessmen are more bullish than foreign exchange traders -- though that's not saying much. Ford Australia, a subsidiary of the U.S. car company, is tooling up to make a sporty car code-named SA30 for the U.S. market. The automaker also sees an opportunity to export aluminum components, such as cylinder heads and wheels, to the U.S. The Melbourne manufacturer's big problem -- like that of other Australian companies -- is productivity. The shrunken Australian dollar puts Ford Australia's hourly labor costs below those of Japan, but its output is lower too. Says managing director Bill Dix, 62, an Australian who has spent his career at Ford: ''We've got not only a 38-hour week and four-week vacations, but more public holidays than most other countries.'' Altogether, he figures that Australian auto workers put in at least 200 hours less a year than their Japanese counterparts. Ford Australia has daily absentee rates of 10% to 15%, at least twice the U.S. rate. And though Ford is widely regarded as a model employer in ^ Australia, its turnover is running at 20% annually. Since most departures are voluntary, the company has to run nonstop training programs to fill in the vacancies. The turnover seems extraordinary in a country with high unemployment. Says Dix: ''I think the real problem is that the average Australian isn't concerned with job security. He says, 'Oh, one way or another, I'll get by.' '' WHEN 87 of 750 workers at a Borg-Warner auto components plant in Sydney went on strike in late August, Ford and the rest of the auto industry shut down for nearly a week. The strikers' demand: extra personnel to fill in for absentees. ''We're sitting in the world's most dynamic region,'' says Dix. ''If we blow it, countries like Taiwan and South Korea will scoop up the pearl. That's really the risk we're running at the moment. Most people are still searching for how to do it without getting down to work.'' Government and union spokesmen point to BHP, a minerals and energy giant, as a dramatic example of both industrial cooperation and export prowess. At its low point four years ago, BHP almost quit making steel: It was losing $1 million daily and being overwhelmed by imports. Now the company is one of the world's few private-enterprise integrated steel producers making a profit. The fast turnaround came through a rare joint effort by government, unions, and the company. Under a five-year rescue plan that started in 1984, the government provides a subsidy to Australian buyers of domestic steel, so far at a cost of $50 million. In return for that, the industry and its workers paid a price. Peter Laver, 46, general manager of BHP Steel International Group, says: ''Companies had to invest and modernize steel plants, while the unions had to recognize that jobs would vanish.'' BHP, known on international stock exchanges as ''the big Australian,'' did a fast shrinking act. It has cut steelmaking capacity 25% to 6.7 million metric tons annually since 1984 and shed 35% of its workers. BHP is plowing some $850 million into new equipment. As a result of the investment and the weaker Australian dollar, BHP's production costs for semifinished steel are 50% below its major international competitors'. BHP also benefits from having its own economical supplies of coal and iron ore. ''We can sell everything we make because our variable costs are probably as low as any in the world,'' Laver says. About 25% of BHP's output goes abroad, mainly to China. BHP owns ten small primary mills in the U.S. that fabricate construction materials from Australian steel, and the company is shopping for more American links. The unions are already putting a crimp in steel's success. A BHP progress report on the steel plan says that ''since the industry has returned to profitability, union support for incremental productivity improvements has been the exception rather than the rule.'' This spring strikes erupted in two BHP plants, violating union pledges made under the steel plan. Melbourne-based CRA, a mining and investment company controlled by Rio Tinto-Zinc Corp. of Britain, has invested in several promising re- search and development projects. In a joint effort, CRA and the German steelmaker Klockner are experimenting with a new manufacturing process that uses ordinary powdered coal. If successful, CRA could feed steel mills with one product the size of a golf ball that contains 96% iron and 4% carbon. John Macleod, CRA's group economist, says, ''We wouldn't have to ship iron ore, which contains 36% rubbish, or coking coal. Here's some technology that gets Australia out of a trap.'' The heads of Australia's most ambitious corporations are diversifying abroad. That's because Australia, even in good times, is a small country with limited growth potential. Rupert Murdoch has expanded his News Corp. to include British newspapers and U.S. newspapers, magazines, and television stations. (He has become a U.S. citizen in the process.) Robert Holmes a Court, a persistent suitor of BHP, is one of several big investors in after USX, formerly US Steel. In September, John Elliott, chairman of Elders IXL, a conglomerate based on a jam manufacturing company that had as its motto ''I will excel (IXL) in everything,'' paid $2 billion for London's Courage brewery. Elders also owns Foster's beer, an Australian brand acquired in 1982. Elliott wants to take Foster's around the world. ''We believe that in the next five or ten years there will probably be four or five international brands of beer,'' he says. ''We want to be one of them.'' In spite of making beer and a $1-billion purchase of BHP stock, Elliott sees more promise in Australia's service industries than in manufacturing. He says: ''Australian manufacturing is slipping by world standards, and our labor costs are too high.'' His service businesses include an agricultural distribution operation, a Southeast Asian investment bank, and a London financial services firm. Australia's largest financial institution is Westpac, a Sydney-based bank with $35 billion in assets last year. The bank was called the Bank of New South Wales until Managing Director Bob White, 63, changed the name to Westpac to convey a business thrust across the Western Pacific. When the Labor government opened financial markets to foreign competitors, White had no complaint because the deal provided for reciprocal opportunities for Australian banks. So Westpac has opened branches in Tokyo, Hong Kong, Seoul, and Taiwan within the past two years. Says White, ''We followed the trade routes.'' WHITE is also expanding the bank's presence in the U.S. by lending to such commercial customers as Chicago's O'Hare International Airport. This summer Westpac agreed to acquire Wm. E. Pollock Government Securities Inc., one of the primary dealers in U.S. government securities. Once the deal is done, Westpac will be one of five foreign banks that can trade U.S. government bonds. Australia's natural beauty and friendly people make tourism a promising service industry. Comedian Paul Hogan, 46, probably one of the world's best- known Aussies, has charmed Americans with his humorous TV commercials promoting travel. Since the campaign began in 1984, travel to Australia has increased about 75%. To lure Japanese visitors, who are attracted by Australia's vast spaces and the Great Barrier Reef, the government is considering the elimination of visa requirements. Tourism, however, is no immediate panacea for Australia's foreign exchange squeeze. Australians still spend $1.3 billion more traveling abroad than they earn from foreign visitors. Bringing in big tourist bucks is going to take a lot more than Paul Hogan's coaxing. Visitors arriving in Melbourne on a Saturday afternoon will find most shops shut for the weekend because of laws restricting retail hours. Some of the best restaurants close Sundays because they do not want to pay the astronomical overtime pay rates set by powerful unions. Getting a drink may also be a problem: Many restaurants do not have liquor licenses, though they usually have the initials BYO prominently displayed in their signs. Domestic fares on Australia's highly regulated airlines can be expensive, as much as $1,000 for an economy-class coast-to-coast round-trip ticket.

Australia's economy would get a boost by having more people. At most, Australia anticipates a population of only 19 million by the year 2,000. & Australia is the least densely populated country, with only five persons per square mile. Most of the population is concentrated in urban centers along the coast. Many economists think the country needs a lot more people to thrive. Historically Australians have been ambivalent about one quick way to increase the population: immigration. Though the country welcomed Europeans and North Americans, it restricted immigration from Asia and Africa. The ''White Australia'' policy was abolished in the Seventies, and Asia is now the largest source of immigrants. Australia has a special Business Migration Program to lure wealthy immigrants from around the world. Investors with $300,000 to put into a business, and their families, can come to Australia with no hassle. Entrepreneurs who have skills, products, or technologies -- and $93,000 to invest -- are also welcome. Strict immigration policies keep out most of those without money or relatives in the country. While adding spice and energy, the newcomers hardly make a dent in the predominantly Western population. Total immigration -- from everywhere -- is very limited. The 89,000 newcomers who arrived last year (from Europe, New Zealand, South Africa, and Asia) only slightly outnumbered Australians who died or emigrated. Australians are coming to realize that they have to get out of the Lucky Country syndrome -- their notion that a rich endowment of natural resources will pay the bills this time as it has in the past. Doing so will be painful. It will take time and discipline to fashion competitive service industries and even more effort to create world-class manufacturing companies. Something easier might come along to bail Australia out -- a worldwide boycott of South African minerals, for instance, or a big gold strike. But these bits of luck will not be as effective as the basic economic reforms Australia is now undertaking. A thoughtful banker in Sydney remarks, ''I'm confident that we can recover -- after we've had a few more nasty lessons.'' Australia has so much of everything that eventually she'll be right, mate.