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How to Respond to the Terms of Trade Boom

From this week’s Ideas@theCentre:

Listening to some commentators, you could be forgiven for thinking that the terms of trade boom was the worst thing that ever happened to the Australian economy.

Relative to what we pay for our imports, Australia now gets higher prices for its exports than at any time since at least 1870. This was illustrated by Reserve Bank Governor Glenn Stevens’ observation that ‘five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. Today it is worth about 22,000 flat-screen TV sets.’

This increased international purchasing power is attributable not only to rising commodity prices, but also lower prices for imports, not least manufactured goods. The flip side of Australia’s terms of trade boom is the collapse in the terms of trade for countries like Japan.

It wasn’t supposed to be this way. In the 1950s, economists Raúl Prebisch and Hans Singer argued that manufactured goods prices would enjoy a secular rise relative to commodity prices and that developing countries should engage in activist industrial policy and import substitution to avoid a declining terms of trade. The same argument has long been made in Australia, but would have had disastrous consequences if its policy prescriptions had been followed in response to previous terms of trade slumps.

Julian Simon would certainly agree with the proposition that real commodity prices should decline in secular terms, but he also noted the broader gains in real purchasing power from increased productivity and declining real prices for manufactured goods. It is fair to say that Simon would have been agnostic on any trend in their relative prices.

The terms of trade boom came about in part because it was unexpected, not least by the mining industry itself. It underinvested in the 1990s, partly because of implicit acceptance of the Prebisch-Singer hypothesis on the part of many investors. Historical experience highlights the danger of conditioning public policy on assumptions about the future direction of relative prices for traded goods.

Our best response to the terms of trade boom is to become even more open to inflows of foreign labour and capital and to reduce the government’s command over resources so that the mining industry can expand with less pressure on other sectors. While the non-mining sectors will contract relative to mining, they can still expand in absolute terms if we continue to remove government-imposed resource constraints to overall economic growth.

posted on 02 September 2011 by skirchner in Economics, Foreign Investment, Free Trade & Protectionism, Population & Migration

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‘Everybody’s Money’s the Same Colour to Us’

Australian farmers don’t want a bar of scare-mongering by the Farmers Federation:

farmers such as Simon Tiller have a clear message to any foreigner interested in his multi-million-dollar operation: come on down.

The 29-year-old father of two would not say where the “considerable overseas interest” was coming from for his $15.5 million wheat, barley and canola concern east of Esperance, 700km southeast of Perth, but he is adamant foreign investment is pivotal to keeping Australian agriculture strong and productive.

“Can you imagine the mining industry getting off the ground without foreign investment? It’s a sophisticated global economy and we need to keep pace,” he told The Weekend Australian.

While the West Australian Farmers Federation has warned about the dangers of “large-scale Chinese ownership” following moves on Australia’s sugar industry and rumours China was seeking 80,000ha of WA farmland, grain producers such as Mr Tiller around Esperance won’t have a bar of any “scaremongering”...

Foreign investment was good for farmers who wanted to sell - it gave them an out - and those that didn’t as it “kept values rising”.

I make related arguments in this op-ed.

posted on 27 August 2011 by skirchner in Economics, Foreign Investment

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Some Agreement and Disagreement on FDI in Australia

Paul Barratt agrees with me that foreign investment in Australian agricultural land does not raise questions of sovereignty or food security. However, he argues that foreign investment may give rise to other ‘national interest’ concerns. Barrett gives as an example the proposal by Chinalco to increase its stake in Rio Tinto. Yet the concerns raised by Barrett in this context were investigated and dismissed by the ACCC. Similarly, the Australian Taxation Office has a very broad mandate and strong powers to address the transfer pricing issues raised by Barrett.

The point of my article in the Australian Financial Review was not to say that commercial transactions should be outside the scope of regulation. As I noted in my op-ed:

Australia has a robust regulatory framework around land use and business investment more generally. Politicians should put their trust in these frameworks, rather than seeking new mechanisms for political interference and meddling in commercial transactions.

The Foreign Acquisitions and Takeovers Act (FATA) and the FIRB do not add anything useful to the regulation of business investment in Australia that is not already addressed by other agencies, upon which the FIRB relies heavily for advice. FATA and the FIRB exist only to provide a mechanism for political interference in the market ownership and control of Australian equity capital. Parliament should legislate to regulate business investment in the national interest, regardless of ownership. But this can be done effectively without the FATA or the FIRB.

posted on 07 July 2011 by skirchner in Economics, Foreign Investment

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‘I Don’t Like It’: Australia’s Hansonite Political Class

I have an op-ed in today’s AFR arguing that Australia’s politicians are united as much by a desire to meddle as by xenophobia in their opposition to foreign investment in agricultural land. Text below the fold (may differ slightly from edited AFR text).

Alan Oxley makes related arguments in today’s Australian.

continue reading

posted on 02 July 2011 by skirchner in Economics, Foreign Investment

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Chinese Perspectives on Investing in Australia

With Sinosteel pulling the plug on a $2bn iron ore mine, the Lowy Institute has come out with a timely survey of Chinese Perspectives on Investing in Australia. The Lowy analysis highlights the role of government policy in causing confusion among Chinese investors. It singles out what it calls ‘public (but undocumented) comments in 2009 by a FIRB official.’ I assume the author means these comments, which are now on the public record following an FOI request.

The Lowy analysis is disappointing in arguing that if the FIRB did not exist, we would have to invent it. It even suggests setting up a FIRB presence in China. Given that the Treasurer has sought to regulate Australian FDI in China through some of the conditionality imposed on Chinese acquisitions in Australia, that would be perversely appropriate.  It seems that geography is no boundary to the Treasurer’s discretion. Australia’s dysfunctional regulatory regime for FDI is a problem not only for Chinese investors, but for anyone engaged in cross-border acquisitions of Australian equity capital.

posted on 24 June 2011 by skirchner in Economics, Foreign Investment

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We’re Too Busy to be Transparent: FIRB

FIRB chairman John Phillips on the rejection of the SGX-ASX merger:

“I couldn’t understand why anyone would support it—unless they had a vested interest.”

John ignores the possibility that some people might support the merger by taking the view that it was none of their business what ownership structure ASX management chose to pursue. Unfortunately, many in government and the media see their role as being back-seat drivers of other people’s business decisions.

John also complains about the FIRB’s time being taken up responding to FOI requests:

Mr Phillips said the FIRB was currently subject to many Freedom of Information requests which were taking up the time of its staff.

“We are getting so many requests from (journalists) and others under the FOI Act which is unfortunate in a way because it is taking up the time of people who ought to be dealing with applications,” he said.

Mr Phillips said he was “not sure how much more transparency there can be”.

I can think of one less FOI application the FIRB would have had to deal with if they had taken the time to put their public speeches on their web site. It is the FIRB that wastes everyone else’s time by denying access to information that should be on the public record as a matter of course.

posted on 09 June 2011 by skirchner in Economics, Foreign Investment, Rule of Law

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How New Zealand Turned Away IKEA

In contrast to the Australian Treasury, the Acting Secretary of the New Zealand Treasury injects some sense into the debate over foreign direct investment:

Acting Secretary to the Treasury Gabriel Makhlouf has hit out at critics of foreign investment in New Zealand, saying Treasury has consistently recommended removing all screening.

The British civil servant who arrived in this country 15 months ago told the New Zealand Institute of International Affairs that lowering foreign investment would be counter-productive to growth ambitions.

Small, high productivity economies relied heavily on international connections of people, capital, trade and ideas, he said.

He advocated the reduction of costs and distortions associated with capital inflows, particularly tax.

“If we are to continue to screen foreign investment, and Treasury has consistently recommended removing all screening, it needs to be kept to a minimum and under constant review,” he said.

“Some of you might have followed the story of the big Swedish furniture outlet called IKEA, and its attempts to find a site for a store in the North Island,” Mr Makhlouf said.

The company ran into so many obstacles that it eventually abandoned its plans to establish a New Zealand branch. Domestic policy settings relating to roading infrastructure, the Environment Court process and the approach of the local council managed to sink IKEA’s plans.

The UK has one of the world’s most liberal FDI regimes, so the New Zealand regime must have come as a surprise to Makhlouf.

posted on 02 June 2011 by skirchner in Economics, Foreign Investment

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Italian-French Food Fight: How to Regulate FDI

A couple of US lawyers note the global trend towards invoking bogus strategic and national interest considerations to support political intervention in cross-border acquisitions. They suggest the following principles for regulating politically-sensitive transactions:

First, the review process should encourage investment and be tailored to apply to transactions implicating true national security interests. Screening for other reasons, such as a “national interest” standard should require an exceptionally high standard for intervention. To support this principle, reviews should be led by a responsible agency able to assign appropriate weight to the interests of open investment while also fully protecting against national security risks. The review process should be protected from political interference…

Also, the review mechanism should provide as much certainty as possible to investors…

Third, the government agencies conducting the review should be accountable.

Australia’s regime for regulating FDI fails on all three counts.

posted on 21 April 2011 by skirchner in Economics, Foreign Investment

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A Failure of Political Leadership

I have an op-ed in the Straits Times that discusses Australia’s regulation of foreign direct investment in light of the Treasurer’s rejection of the SGX-ASX merger:

the Treasurer’s sweeping powers and the open-ended nature of Australia’s ‘national interest’ test are a standing invitation for politicians to pre-empt and second-guess commercial outcomes. The Foreign Acquisitions and Takeovers Act is a lightning rod for political intervention in the market for ownership and control of Australian equity capital.

The Act adds nothing useful to the regulation of business investment in Australia. It allows government to infringe the property rights of the owners of Australian equity capital, who are denied the opportunity to sell to the highest bidder and thereby realise the full value of their equity. That in turns reduces the amount of capital available for re-investment in Australia by the sellers of these assets. The Treasurer’s opposition to this and other deals devalues Australia’s stock of equity capital.

posted on 12 April 2011 by skirchner in Economics, Foreign Investment, Politics

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ASX-SGX RIP: Wayne Swan’s ‘No-Brainer’

Treasurer Wayne Swan’s rejection of the SGX-ASX merger is given an explicitly protectionist rationale:

“Becoming a junior partner to smaller regional exchange through this deal would risk us losing many of our financial sector jobs,” he told media.

Former Treasurer Peter Costello resorted to similar protectionist arguments in boasting about his role in frustrating the globalisation of Australian business:

The head office generates the corporate, financial, legal and insurance services and the highly skilled jobs that come with them.

The regulation of foreign direct investment in Australia is now effectively an arm of domestic industry and employment policy. Swan has received advice on the matter from the RBA and ASIC, but it remains to be seen how much of this advice is publicly released and how much stays a state secret. No doubt The Australian will try and FoI all of it. The journalists at The Australian are the only ones who understand that this is principally a rule of law issue. The commercial merits and implications of the proposed transaction are a secondary consideration.

posted on 08 April 2011 by skirchner in Economics, Foreign Investment, Rule of Law

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Offshore Perceptions of Australia: A Failure of Leadership

The WSJ on the failure of the federal government and opposition to provide leadership on the SGX-ASX takeover:

Ms. Gillard professes to understand the general principle involved, having said that “An open economy has been in Australia’s interest.” So the failure by her and Mr. Swan to more aggressively support lifting the ownership cap to open the economy further is puzzling.

She may feel politically constrained as the head of a minority government beholden to a small band of Greens and independents. But that’s all the more reason to mount an aggressive persuasion campaign. Equally disappointing is the reaction—ranging from silence to outright hostility—from members of the ostensibly more free market opposition.

On this issue, the federal opposition is not even ostensibly free market.

Jennifer Hewett argues the government won’t risk defeat on something it doesn’t care about anyway:

It would be hard enough to muster political energy and risk defeat for something the government strongly supported, but Labor doesn’t really like this deal one bit. That is even though it knows blocking it on national interest grounds would be awkward for a government already regarded with suspicion by the international investment community. It’s why the Treasurer is sounding so cautious.

posted on 21 March 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law

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‘If the FIRB Doesn’t Kill It, We Will’

The FIRB is nothing more than a fig-leaf for political decisions that have already been made:

A senior source told the Herald that the government’s disposition was to reject the [SGX-ASX] merger, despite what the board recommended. ‘‘If [the board] doesn’t kill it, we will.’‘

posted on 19 March 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law

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WikiLeaks Blows the Whistle on Australian FDI Policy

WikiLeaks confirms what many have long suspected. The Australian government runs a secretly discriminatory policy on foreign direct investment by China:

The Foreign Investment Review Board told US diplomats that new investment guidelines signalled “a stricter policy aimed squarely at China’s growing influence in Australia’s resources sector”.

The anti-China rationale was set out in confidential discussions with US embassy officers in late September 2009 by the head of the Treasury Foreign Investment Division, Patrick Colmer, who is also an executive member of the Foreign Investment Review Board.

The embassy report on MrColmer’s remarks, titled “New Foreign Investment guidelines target China” and classified “sensitive”, is among US embassy cables leaked to WikiLeaks and provided to the Herald.

Based on Mr Colmer’s briefing, US diplomats reported that the Australian government privately wished to “pose new disincentives for larger-scale Chinese investments”.

The documents also confirm that the recent liberalisation of FIRB review thresholds was designed to alleviate the administrative burden on an over-worked FIRB that has increasingly sought to micro-manage high-profile FDI transactions.

My own whistle blowing efforts in relation to Australian FDI policy can be found here, although I obtained the document legally through the Freedom of Information Act.

posted on 02 March 2011 by skirchner in Economics, Foreign Investment

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Offshore Perceptions of Australia: Hostage to ‘Ultranationlist Mavericks’

The FT’s Kevin Brown on the proposed ASX-SGX merger:

a handful of ultranationalist mavericks holds the balance of power in Australia’s divided parliament…

The tricky element in this strategy is finding a way to get the government and the opposition to move together, so that neither is able to outflank the other by suddenly adopting the nationalist agenda.

posted on 16 February 2011 by skirchner in Economics, Foreign Investment

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Speaking Truth to Bill Shorten

An investment banker speaking to Bill Shorten gets a less than cogent response:

IT WAS mid January and Bill Shorten, the Assistant Treasurer, was in Hong Kong attending an Australian Chamber of Commerce function.

In an address to a relaxed gathering of ‘‘Australians in finance’‘, Shorten told the audience of the importance of financial services, and if anyone had fresh ideas they should approach him in the informal setting.

David Webb, a former director of the Hong Kong Stock Exchange, elected on a corporate governance ticket by institutional investors, took up the offer. A well-known activist and retired investment banker, he now devotes much of his time to dealing with corporate governance in Hong Kong.

When Webb’s turn came for a chat, the Englishman told the minister that Australia should consider scrapping the Foreign Investment Review Board as it was an impediment to attracting foreign capital. Other regulators could consider contentious investments, he said.

According to Webb, Shorten said the board was necessary, turning the topic to a looming decision on the takeover of the Australian Securities Exchange by its Singapore counterpart…

But what Shorten said next surprised Webb.

‘‘His attitude about this was … that foreign ownership or a perceived foreign takeover would result in Australian investors being screwed. He didn’t make very cogent arguments to me.’‘

posted on 11 February 2011 by skirchner in Economics, Financial Markets, Foreign Investment, Rule of Law

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