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ECB to Adopt QE in H2 2014

I have an op-ed in Business Spectator arguing that the ECB will likely resort to QE in the second half of this year. This will be a vindication of the long-standing criticisms of ECB monetary policy made by the new market monetarists. Inflation outcomes, nominal GDP and the euro exchange rate are all consistent with monetary policy having been too tight rather than too easy. The emerging divergence between ECB/BoJ and Fed monetary policy should set the stage for broad-based USD outperformance.

posted on 11 April 2014 by skirchner in Economics, Financial Markets, Monetary Policy

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Do Financial Markets Care About the G20?

An ECB Working Paper looks at the impact of G20 meetings on financial markets:

In this paper we run an event study to test whether G20 meetings at ministerial and Leaders level have had an impact on global financial markets. We focus on the period from 2007 to 2013, looking at equity returns, bond yields and measures of market risk such as implied volatility, skewness and kurtosis. Our main finding is that G20 summits have not had a strong, consistent and durable effect on any of the markets that we consider, suggesting that the information and decision content of G20 summits is of limited relevance for market participants.

That won’t stop the Australian federal government spending $500 million on a process markets have deemed an irrelevance.

posted on 05 April 2014 by skirchner in Economics, Financial Markets

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Bob Shiller, Ex-Ante and Ex-Post

Scott Sumner has a nice comparison of Robert Shiller’s investment advice with that from one of my favourite supply-side economists, Alan Reynolds. Loyal readers of this blog will not be surprised to see that Scott’s post has my name all over it.

Scott asks, ‘Can people find me the dates where Shiller recommended people buy stocks?’

Sure. In his 2009 book with George Ackerlof, Shiller wrote: ‘there has been one way, at least in the past, in which almost everyone could become at least moderately rich … Invest it for the long term in the stock market, where the rate of return after adjustment for inflation has been 7% per year’ (p. 117).

Unfortunately, Shiller’s ex-post observations on stock market returns in 2009 do not sit well with his ex-ante prediction in 1996: ‘long run investors should stay out of the market for the next decade.’

posted on 25 March 2014 by skirchner in Economics, Financial Markets

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Scapegoating Foreigners for Domestic Policy Failures in Housing

I have an op-ed in the SMH on foreign direct investment in the Australian housing market noting that foreigners are being used as scapegoats for what are really domestic policy failures. The House Economics Committee will now inquire into the issue:

According to committee chair Kelly O’Dwyer, the inquiry will consider whether the current restrictions on foreign investment in residential real estate serve to increase supply, as is their stated intention, or raise prices.

This is rather like asking whether foreign tourists increase the production of goods and services or raise consumer prices. The answer depends on how flexibly Australian producers can accommodate changes in foreign as well as local demand through increased output.

It is pointless blaming foreigners for inflexible elements on the supply-side of the Australian economy. For that, we should blame local politicians.

Ironically, the inquiry could result in a bringing forward of foreign demand in anticipation of increased controls on FDI in residential real estate. The inquiry should recommend the abolition of the existing controls on FDI in real estate. My guess is the Committee will instead recommend extra conditions be attached to FIRB approvals, along with some additional quantitative controls.

I am also quoted in this story in today’s AFR on anti-dumping measures on imported tomatoes.

posted on 20 March 2014 by skirchner in Economics, Foreign Investment, Free Trade & Protectionism

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Regulating Foreign Direct Investment in Australia

Regulating Foreign Direct Investment in Australia: Discussion Paper, Financial Services Institute of Australia (FINSIA), February 2014.

posted on 02 March 2014 by skirchner

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Finsia Industry Lunch Forum on FDI Regulation

I will be speaking at a Finsia Industry Lunch Forum on the regulation of foreign direct investment on 28 February. Other speakers include Ian Harper, Anthony Latimer and Tony Mahar. Details and registration here.

UPDATE 28 February: A write up of my presentation by David Uren. Finsia discussion paper here.

posted on 14 February 2014 by skirchner in Foreign Investment

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‘Australian of the Year’ as Contrarian Sell Signal

In January 2010, The Australian named then Prime Minister Kevin Rudd as ‘Australian of the Year’ ‘because of the way he dealt with the global financial crisis’. From affiliate EWI’s 2014 State of the Global Markets Report:

We correctly called the award a sell signal for Australian stocks - the All Ords would make no net progress for the next three-and-a-half years.

posted on 30 January 2014 by skirchner in Financial Markets

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Nina Munk on Jeff Sachs

Nina Munk’s summation in her Econtalk interview is not at all surprising, but no less devastating for that:

they were now really living in a kind of squalor that I hadn’t seen on my first visit. Their huts were jammed together; they were patched with those horrible polyurethane bags that one sees all over Africa, covered in sort of burlap bags and sort of plastic tarps from the UN refugee service. There were streams of slop that were going down between these tightly packed huts. And the latrines had overflowed or were clogged. And no one was able to agree on whose job it was to maintain them. And there were ditches piled high with garbage. And it was just—it made my heart just sink. And I thought to myself: You know what, Jeffrey Sachs? You came to this village once. That’s not true. I think he came a second time in a helicopter the second time. He’s been to that village twice. And on both times he was received like a welcoming monarchy. All the people come out to greet him, and the local officials come out in their best Sunday suit. And everyone’s out there giving grand speeches on a microphone, and they sing songs and they dance for him and they thank him and they praise him and they pray for him. But you know, when you leave and you go back home to your townhouse on the upper west side of Manhattan and you return back to your comforts, you know, these people are left really with nothing. With nothing. And arguably they are left with something that is more dismal and worse than it was before he tried to impose his ideas of progress on them.

posted on 30 January 2014 by skirchner in Economics

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House Prices Up, Time to Blame Negative Gearing

I have an op-ed in today’s Australian beating the housing supply drum at the expense of the anti-negative gearing brigade. In particular, I address the argument that demand for investment property is largely met through existing rather than newly built dwellings:

This reflects the fact that the flow of new houses is small relative to the existing dwelling stock. But it is about as relevant as noting that investors in the stockmarket mostly buy already held rather than newly issued shares. It is only supply-side constraints that prevent demand for existing dwellings from inducing new construction.

Negative gearing is first and foremost a tax policy issue and should be addressed as such as part of a broader tax reform effort. I could live with the Henry review’s proposed discount for income derived from saving, although ideally it would be much larger than his suggested 40%.

posted on 22 January 2014 by skirchner in Economics, House Prices

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De-Risking the RBA

I had an op-ed in the AFR over the break on the federal government’s injection of funds into the RBA’s Reserve Fund. The article notes that the public policy issue is not the subtraction from the budget bottom line from the injection, but whether the benefits of holding foreign exchange reserves are worth the risk of potential valuation losses and forgone income on higher yielding domestic assets. Foreign exchange reserves are not necessary for the effective conduct of monetary and exchange rate policy in Australia. An alternative policy approach is to hold smaller reserves. Full text below the fold (may differ slightly from published AFR text).

Hockey Loads the RBA’s Guns

When Treasurer Joe Hockey announced an $8.8 billion injection of funds into the Reserve Bank’s Reserve Fund, he said that the RBA needed ‘all the ammunition in the guns for what’s before us.’ The purpose of the Reserve Fund is to cover potential valuation losses on the RBA’s $46 billion in foreign exchange reserves. Yet Hockey’s language could also be interpreted as priming the Reserve Bank for possible future intervention in foreign exchange markets to influence the value of the Australian dollar.

The government’s Mid-Year Economic and Fiscal Outlook stated that the injection ‘will enhance the Reserve Bank’s capacity to conduct its monetary policy and foreign exchange operations.’

The public policy issue is not the subtraction from the budget bottom line. The Reserve Bank is part of the public sector and pays dividends to the government based on its underlying earnings and realised gains or losses on its portfolio of assets, less its expenses.

The Reserve Bank’s conduct of monetary policy and portfolio management have implications for the size of the RBA dividend from one year to the next, but these are very much secondary to the objectives of monetary policy and the Reserve Bank’s other functions.

The issue for public policy is the extent to which the risks associated with holding foreign exchange reserves are necessary for the effective conduct of monetary and exchange rate policy.

An alternative policy approach to dealing with potential valuation losses arising from swings in the value of foreign exchange reserves is to re-risk the RBA’s balance sheet by holding smaller reserves.

A central bank’s solvency is not generally an issue, not least because its balance sheet is denominated in its own (ultimately irredeemable) monetary liabilities and taxpayers stand behind any losses.

The balance sheet is not a constraint on its ability to conduct monetary policy. Indeed, central bank balance sheet expansion has been a vital tool underpinning the ability of monetary policy in other countries to respond to the deflationary shock emanating from the global financial crisis.

While excessive balance sheet expansion could be inflationary, the bigger problem in the context of the global financial crisis has been the reluctance of foreign central banks to make even greater use of the quantitative policy instruments available to them.

Although a severe global deflation was averted, inflation in the advanced economies generally remains very low in the wake of the crisis. This implies that monetary policy has not been especially expansionary, either in Australia or abroad, despite frequent commentary to the contrary.

The RBA’s foreign exchange reserves are a constraint on its ability to hold the exchange rate above its market-clearing value, but this is not a problem for a country with a floating exchange rate. While the RBA occasionally intervenes to support the Australian dollar, it would not do so in the expectation of being able to hold the exchange rate significantly above it market-clearing level for any length of time. This would be an open invitation for a speculative attack on the RBA’s finite foreign exchange reserves. The most the RBA could hope for is to temporarily introduce two-way risk into the market when it might otherwise be absent.

By contrast, there is no in-principle limit on the ability of a central bank to weaken the exchange rate, although it needs to be mindful of the inflationary implications. Foreign exchange reserves are not necessary to weaken the exchange rate, although the accumulation of these reserves may be a by-product of such a policy.

The question for taxpayers is whether the capacity to intervene in foreign exchange markets is worth the risks associated with taking on significant exposures to foreign currency assets. Apart from potential valuations losses on these assets, the Reserve Bank forgoes the higher rate of return generally available on Australian dollar-denominated assets. Foreign exchange reserves are effectively a loan to foreign governments.

Reserve Bank Governor Glenn Stevens has recently argued that the costs of intervention to weaken the Australia dollar are greater than the potential benefits. By all accounts, the effects of intervention are modest and not very persistent because foreign exchange reserves are small relative to the depth and liquidity of foreign exchange markets.

By contrast, the Reserve Bank’s official cash rate remains a relatively powerful instrument that works in part by changing the appeal of Australian dollar-denominated assets to foreign investors. While not the only factor influencing the exchange rate, the intense focus on monetary policy decisions by foreign exchange traders shows that it is an important one.

Before Treasurer Hockey next considers loading the RBA’s guns, he might also consider whether there are cheaper and less risky weapons at the Bank’s disposal for managing monetary and exchange rate policy.

Dr Stephen Kirchner is a Research Fellow at the Centre for Independent Studies.

posted on 12 January 2014 by skirchner in Economics, Financial Markets, Monetary Policy

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Op-eds - 2014

‘Europe holds its breath for ECB action’, Business Spectator, 11 April 2011.

‘Official statistics need culture change’, Business Spectator, 27 March 2014.

‘Don’t blame foreigners for rising house prices’, The Sydney Morning Herald, 20 March 2014.

‘Forget trying to curb demand, build more houses’, The Australian, 23 January 2014.

‘Playing the currencies game is fraught with risk’, The Australian Financial Review, 5 January 2014.

posted on 12 January 2014 by skirchner

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Bob Shiller Still Can’t Define a ‘Bubble’

John Cochrane reviews Bob Shiller’s Nobel lecture and notes that he still can’t define the idea for which he is most well known. Moreover:

In an entire lecture, Bob did not give a single concrete example of how “listening to psychologists” produces one concrete positive step to understanding “bubbles.”

Cochrane then tries to rehabilitate Shiller by suggesting he is doing something terribly profound:

I realized just how deep and audacious Bob’s project is. He is telling us to abandon the “scientific” pretense. He wants us to adopt a literary style, where we look at the world, are inspired by psychology, and write interpretive prose as he has done.  When he says that the definition of a a bubble is a fad, he isn’t being sneaky and avoiding the argument. He means exactly what he says and wants us to think and write this way too. A bubble, to Bob, is defined as any time a time that he, writing about it, informed by psychology, and reading newspapers, thinks a “fad” is going on. And he invites us to think and write like that too. A model is, to Bob, wrapped up in one person’s judgement and not an objective machine. If I complain that this is ex-post story telling, he might say sure, stop pretending to be physics, write ex-post stories. If I complain that there are no rules and that this is no better than “the gods are angry,” he might say, no, read psychology not ancient theology, and the rules are you have to couch your story telling in their terms. He does not want us to try to construct models, either psychological or rational, that make quantitative predictions.

This is consistent with my observation that much of Shiller’s work is simply assertion rather than science. It is audacious, but not in a good way. While Cochrane means to praise Shiller, I think he effectively buries him.

posted on 19 December 2013 by skirchner in Economics, Financial Markets

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Strengthening Australia’s Fiscal Institutions

I have a new paper in the CIS Target 30 series, Strengthening Australia’s Fiscal Institutions, that re-states the case for legislated fiscal rules to be monitored and enforced by an independent statutory Fiscal Commission.

It is often argued that fiscal rules are unlikely to serve as an effective discipline on fiscal policy in the absence of political will. This is undoubtedly true, but fiscal rules can be seen as a mechanism through which the political will to tackle issues in relation to long-run fiscal sustainability can find more effective expression. If politicians are unwilling to put into law what they say they are committed to doing, then it is less likely that they will deliver on these commitments. The willingness to adopt fiscal rules can thus be seen as a test of the degree of political commitment.

Measures to strengthen Australia’s fiscal institutions should be a key recommendation of the Abbott government’s Commission of Audit.

posted on 11 December 2013 by skirchner in Economics, Fiscal Policy

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Strengthening Australia’s Fiscal Institutions

Strengthening Australia’s Fiscal Institutions, T30.06, Centre for Independent Studies, December 2013.

posted on 11 December 2013 by skirchner

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Debt Limits and Fiscal Rules

This week’s abolition of the local federal debt limit is a welcome development, but only because a debt limit in absolute dollar terms is not a well specified fiscal rule and was never intended to serve as such. The US debt limit, from which Australia’s took its inspiration, was also never intended to be a binding constraint on government borrowing, although threatened to become one on the back of poor fiscal outturns.

The US debt ceiling was first put in place in the 1930s. Its purpose was to alleviate the US Treasury from having to seek Congressional authorisation for each individual debt issue. Instead, Treasury was given discretion to issue debt within the overall limit specified by Congress, but not in the expectation that it would serve as a binding constraint on government borrowing. Since 1960, the US debt limit has been amended by Congress 78 times. More recently, the US debt limit has been politicised and used a proxy fiscal rule, but is unfit for this purpose. Government borrowing is ultimately a product of government spending in excess of revenue and it is government spending that needs to be controlled.

A net debt limit specified as a share of GDP rather than in absolute dollar terms is a better specification and a useful addition to a suite of fiscal rules designed to impose fiscal discipline, as I have argued elsewhere.

A traditional objection to fiscal rules is that they might force a fiscal consolidation or prevent the operation of automatic stabilisers so that fiscal policy becomes pro- rather than counter-cyclical. However, as argued in my AFR op-ed Monday, this is only a problem in the absence of an independent monetary and exchange rate policy. An inflation targeting central bank and a floating exchange rate allows fiscal policy to focus on supply-side issues and long-run fiscal sustainability without being pre-occupied by aggregate demand management and macroeconomic stabilisation.

posted on 09 December 2013 by skirchner in Economics, Financial Markets, Fiscal Policy

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The 30th Anniversary of the Floating of the Australian Dollar

I have an op-ed in today’s AFR on the occasion of the 30th anniversary of the decision to float the Australian dollar. This year also marks the 20th anniversary of the adoption of implicit inflation targeting by the Reserve Bank, although a formal inflation target was not adopted until August 1996. As I note in the op-ed, the combination of these two macroeconomic institutions fundamentally changed the role of fiscal policy in the economy. Yet much of our macroeconomic policy debate remains stuck in the pre-float era. Full text below the fold (may differ somewhat from edited AFR text).

Economic thinking still mired in pre-float era

The ninth of December will mark the 30th anniversary of the decision to end Australia’s officially managed foreign exchange rate regime in favour of a market-based one. Together with the liberalisation of the capital account and the deregulation of interest rates, the floating of the dollar transformed the Australian economy. Yet much of our macroeconomic policy debate, especially about the role of fiscal policy, is still stuck in the pre-float era.

Prior to 1983, the managed foreign exchange rate regime was the tail that wagged the Australian economy. Economic shocks that did not lead to an adjustment in the officially-determined exchange rate had to be accommodated through adjustments in the domestic economy.

Milton Friedman made the intellectual case for a floating exchange rate regime as early as 1953. Friedman’s logic was compelling. A floating exchange rate would allow the economy to accommodate a wide range of external and internal economic shocks through the adjustment of a single relative price, rather than thousands of domestic prices.

Most managed exchange rate regimes eventually fail. Today, the decision to float the dollar is portrayed as an act of policy heroism. But like many other countries, Australia was forced to float by external pressures. 

As then Reserve Bank Governor Bob Johnston later described it, ‘we didn’t make a formal decision to float until the deathknock.’ Foreign capital inflows driven by speculation about yet another official revaluation of the exchange rate undermined the Reserve Bank’s ability to control the domestic money supply, forcing the Hawke government’s hand.

The most significant implication of the float was that it allowed the Reserve Bank to conduct an independent monetary policy better suited to the domestic economy rather than one subordinate to the official exchange rate.

Unfortunately, some of the potential benefits from an independent monetary policy were lost in the first 10 years of the float by the Reserve Bank’s failure to focus its monetary policy on the goal of price stability.

It was not until the onset of implicit inflation targeting from 1993 and the adoption of an explicit inflation target in August 1996 that the Australian economy realised the benefits of an independent monetary policy focused on controlling inflation.

The floating of the exchange rate and the adoption of inflation targeting by the central bank also had radical, although still widely misunderstood, implications for the efficacy of fiscal policy.

Government borrowing, rather than driving up domestic interest rates, now sees an increase in foreign capital inflows and an appreciation in the Australian dollar. The corollary of these capital inflows is a widening in the current account deficit and a smaller contribution to economic growth from net exports.

This crowding-out of government spending via the exchange rate and net exports can be reduced to the extent that private saving rises to offset increased government borrowing in anticipation of higher future tax burdens. Empirical estimates suggest that changes in private saving offset around half of any change in government saving. Yet this in itself is a hurdle for any discretionary fiscal policy that is meant to stimulate the economy through increased private consumption.

The other significant hurdle to the effectiveness of discretionary fiscal policy is the Reserve Bank’s monetary policy. With monetary policy already given the task of managing aggregate demand, discretionary fiscal policy is at best traded-off against changes in official interest rates. As US economist Scott Sumner has argued, ‘estimates of (positive) fiscal multipliers become little more than forecasts of central bank incompetence’ when the central bank manages aggregate demand.

In the context of the recent global financial crisis, Treasury and Reserve Bank officials acknowledged this trade-off between monetary and fiscal policy. They defended discretionary fiscal policy on the basis that it was better to rely on a mix of policy instruments rather than just monetary policy to accommodate a large negative external shock. It was suggested that very low nominal interest rates might have adverse side effects.

It has also been argued that the zero lower bound on nominal interest rates is a constraint on monetary policy. But overseas experience shows that the main constraint on monetary policy has not been the zero lower bound, but the unwillingness of central banks to make even greater use of quantitative operating instruments. While monetary policy mistakes are always possible, this is an argument for better monetary policy, not greater reliance on fiscal policy.

It is unfortunate that 30 years on from the float and 20 years after the adoption of inflation targeting, thinking about the role of fiscal policy in the economy still remains mired in an earlier era when committees of politicians and bureaucrats set foreign exchange and interest rates.

Dr Stephen Kirchner is a Research Fellow at the Centre for Independent Studies.

posted on 08 December 2013 by skirchner in Economics, Financial Markets, Fiscal Policy, Monetary Policy

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The Financial System Inquiry – Dealing RBA Governance Back In

I participated in a roundtable discussion on the Financial System Inquiry’s draft terms of reference organised by federal Treasury. Item 7 of the draft terms of reference states that:

In reaching its conclusions, the Inquiry will take account of, but not make recommendations on the objectives and procedures of the Reserve Bank in its conduct of monetary policy.

This can be read a number of ways. I think the intent is to take RBA independence and inflation targeting off the table, but it can also be read as shutting down any consideration of RBA governance. The RBA is internationally anomalous in failing to separate monetary policy decision-making from the overall governance of the bank. This puts the board in the position of oversighting itself in the conduct of monetary policy, the bank’s most important function.

As I argue in this paper, external board members are also conflicted in being notionally appointed to represent particular interests and perspectives, but their role as monetary policy decision-makers requires them to put aside these interests in favour of the public interest. This results in the contributions of individual board members to monetary policy deliberations being suppressed, reducing transparency and accountability in the conduct of monetary policy. The RBA is also exceptional in affording a government representative voting rights (as opposed to non-voting representation) in setting monetary policy.

I also argued at the roundtable, consistent with my article in yesterday’s AFR, that the role of both the Foreign Acquisitions and Takeovers Act and the Foreign Investment Review Board needed to be explicitly included in the terms of reference because of their implications for the cost of capital and the financial system’s international integration with global capital markets. I briefly canvass reform options for the regulation of foreign direct investment in this article in the December issue of Infinance.

My concern is that unless RBA governance, the role of FATA and the FIRB are explicitly raised in the final terms of reference, these issues will not be adequately examined by the Inquiry.

Submissions on the draft terms of reference close Thursday 5 December. If you think these are important issues, it is not too late to put in a submission.

posted on 04 December 2013 by skirchner in Economics, Financial Markets

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Policy Reforms in Australia and What they Mean for Canada

Policy Reforms in Australia and What they Mean for Canada, The Fraser Institute, December 2013.

posted on 03 December 2013 by skirchner

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Treasurer Joe Hockey’s Capital Xenophobia

I have an op-ed in the AFR on Treasurer Joe Hockey’s decision to exercise his discretion under the Foreign Acquisitions and Takeovers Act to reject ADM’s bid for Graincorp. Full text under the fold (may differ slightly from edited AFR text). As I note in the op-ed, a re-examination of the FATA and the Foreign Investment Review Board should form part of the terms of reference for the Financial System Inquiry. I will be participating in a roundtable on the draft terms of reference organised by federal Treasury in Sydney tomorrow. I will be arguing, inter alia, for the final terms of reference to address this issue explicitly.

Not So ‘Open for Business’

Stephen Kirchner

When Prime Minister Tony Abbott rose to give his victory speech following this year’s election, he declared the country was once again ‘open for business.’ Just three months later, Treasurer Joe Hockey exercised his powers under the Foreign Acquisitions and Takeovers Act to reject Archer Daniels Midland’s $3.4 billion takeover bid for grain handler Graincorp as ‘contrary to the national interest.’ The decision is the latest example of the politicisation of cross-border acquisitions that flows from a flawed regulatory framework for foreign direct investment (FDI).

The government cited Graincorp’s dominant position in the domestic market as a reason for rejecting the decision. Yet the competition regulator, the Australian Competition and Consumer Commission, had already cleared the deal back in June, noting that ‘the proposed acquisition would be unlikely to substantially lessen competition as the merged entity would continue to face competition from a number of sources.’

Even if one accepts the government’s argument that there are unresolved competition issues in grain handling, blocking the acquisition does nothing to address them. It does, however, deny Australia’s grain handling infrastructure a much needed injection of capital.

The competition policy issues raised by the government are widely seen as a fig-leaf for the more prosaic political concerns of the National Party.

While the former Labor government might have been more sympathetic to the deal, it left the decision as a political poison pill for the incoming Abbott government to swallow.

The decision highlights the fundamental flaw in Australia’s regulation of FDI. The Foreign Acquisitions and Takeovers Act gives the Treasurer an unfettered discretion to reject transactions deemed ‘contrary to the national interest.’ The ‘national interest’ is deliberately left undefined to put the Treasurer’s discretion outside the scope of judicial review.

The regulation of FDI ‘at the border’ adds little to Australia’s already robust domestic regulatory frameworks for business investment ‘behind the border.’ Foreign-owned firms operating in Australia must comply with the same corporations, securities, competition, tax, industrial relations, planning, development and environmental laws and policies as Australian-owned firms.

If there are flaws or shortcomings in any of these laws or policies, then they need to be addressed on a non-discriminatory basis. Blocking foreign acquisitions is a costly, second-best approach to plugging perceived holes in domestic regulatory frameworks.

Australia’s controls over FDI at the border add nothing useful to the regulation of business investment other than to provide a vehicle for political interference in cross-border acquisitions.

The Abbott government has followed its predecessors in arguing that Australia’s regulatory regime for FDI and the rejection of the bid for Graincorp is necessary to maintain community support for foreign investment.

In fact, the current regulatory regime normalises political interference in cross-border acquisitions and acts as a lightning rod for political opposition to these transactions.

The government portrays this latest rejection as an isolated one. Yet Australia had more inward cross-border acquisitions fail for regulatory or political reasons than any other country between 2008 and 2012, according to the United Nations Conference on Trade and Development’s latest World Investment Report. Australia is a world leader in capital xenophobia.

Successive Australian governments have stretched the concept of the ‘national interest’ into a laundry list of unlegislated policy considerations that are often poorly defined, sometimes explicitly protectionist in intent, and far removed from genuinely vital national interests.

The current regulatory framework is efficient from the standpoint of politicians because it allows them to choose what they see as the politically-optimal course of action in response to foreign acquisitions, but it is inefficient from the standpoint of foreign investors and the vendors of domestic assets who want the certainty and clarity a politicised regulatory regime cannot provide.

The cost of Australia’s regulatory framework for FDI is not just lost investment but also the loss of associated knowledge transfers, productivity spillovers and access to global managerial networks and supply chains.

The current regulatory regime is a historical aberration, a departure from the open-door policy Australia maintained until at least the late 1960s, foreign exchange controls notwithstanding. In the late 1980s, the federal Coalition was even committed to abolishing the Foreign Investment Review Board (FIRB).

The draft terms of reference for the government’s Financial System Inquiry include the issues of how Australia funds its growth, the cost of capital and international integration.

The final terms of reference should call for a re-examination of Australia’s costly and redundant regulation of inward FDI at the border, including the role of the Foreign Acquisitions and Takeovers Act and the FIRB.

Dr Stephen Kirchner is a Research Fellow at the Centre for Independent Studies.

posted on 02 December 2013 by skirchner in Economics, Foreign Investment

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Lessons from the Australian Experience (with Horizontal Fiscal Equalisation)

‘Lessons from the Australian Experience,’ in Jason Clemens and Niels Veldhuis (eds) Federalism and Fiscal Transfers: Essays on Australia, Germany, Switzerland, and the United States, Fraser Institute, October 2013.

posted on 23 October 2013 by skirchner

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