My review of Paul Cleary’s book ‘Too Much Luck’ is up at The Conversation. The original review included a discussion of the role of the exchange rate which unfortunately hit the cutting room floor, but can be found below the fold. The review draws on a monograph by Robert Carling and I making the case against a sovereign wealth fund for Australia that will be published by CIS in the New Year.
The government looks set to proceed with a media inquiry. Twenty years ago, Kerry Packer demonstrated the right amount of respect and deference to be afforded the parliament in relation to such inquiries. It is still the most colourful defence of the rule of law in relation to cross-border acquisitions ever mounted in Australian public life. I was working in Parliament House at the time and I think it is fair to say that most of the politicians on the print media inquiry felt ashamed of themselves at the end of that hearing.
Data versus Anecdote on Foreign Acquisitions in Agriculture
The debate over foreign acquisitions of both agricultural and urban land has been driven by anecdote rather than data. Some high profile acquisitions have gained considerable media attention, but this has obscured the underlying reality that Australia’s broadacre, dairy and other farms remain overwhelmingly Australian-owned.
The Australian Bureau of Statistics (ABS) and the Rural Industries Research and Development Corporation (RIRDC) have been engaged in a data gathering exercise to measure the level of foreign ownership in Australian agriculture. As of 31 December 2010, the ABS finds that:
99% of agricultural businesses in Australia were entirely Australian owned;
89% of agricultural land was entirely Australian owned; and
91% of water entitlements for agricultural purposes were entirely Australian owned
This helps put the current debate in proper perspective. Foreign investment in agriculture should be welcomed, but agriculture in Australia is likely to remain overwhelmingly Australian-owned.
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.
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”.
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.
‘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.
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.
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.
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.
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.
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.
“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.
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.