Foreign Exchange Market Intervention a Risk to Taxpayers
I have an op-ed in the Business Spectator arguing that foreign exchange market intervention is a risk to taxpayers who would be better served if the RBA matched its foreign currency assets and liabilities. I also debunk the notion that Australia is a victim of a ‘currency war’:
It has been argued that Australia is somehow a victim of a ‘currency war’ being waged between foreign central banks engaged in quantitative easing. Yet there is nothing unusual about the effects of quantitative easing on exchange rates.
Quantitative easing is simply a change in the operating instrument of the central bank, from a price variable (the official interest rate) to a quantity variable (base money).
In itself, quantitative easing tell us nothing about whether central bank policy is easy or tight. Low inflation and low interest rates in countries like Japan and the United States imply policy settings are if anything too tight, not too easy.
The exchange rate is just one of the channels through which a change in monetary policy is transmitted to the rest of the economy and quantitative easing does not fundamentally alter this transmission mechanism.
In previous decades, Australians worried about a low exchange rate and capital flight. In the current international environment, foreign capital inflows are an affirmation of our relatively sound economic fundamentals and not a bad problem to have.
A model of inward foreign direct investment for Australia is estimated. Foreign direct investment is found to be positively related to economic and productivity growth and negatively related to foreign portfolio investment, trade openness, the exchange rate and the foreign real interest rate. Foreign direct investment is found to be a substitute for both portfolio investment and trade in goods and services. The exchange rate and the US bond rate affect foreign direct investment through the relative attractiveness of domestic assets. Actual foreign direct investment outperforms a model-derived forecast in recent years, consistent with the liberalisation of foreign investment screening rules following the Australia–US Free Trade Agreement.
We Welcome Foreign Investment, Except When We Don’t
I have an op-ed in today’s Australian arguing the federal coalition had the right policy on foreign direct investment 24 years ago when it was committed to abolishing the Foreign Investment Review Board. The recent debate on this issue within the coalition almost perfectly mirrors a similar debate in the late 1980s, only this time, the National Party seems to be getting its way. Full text below the fold (may differ slightly from published version).
Qantas is lobbying politicians for FDI restrictions to prevent Etihad from acquiring Virgin or to ease the foreign ownership restrictions in the Qantas Sale Act. Australia’s Hansonite political class will likely choose the former over the latter, at least in the short-run. In the long-run, however, the government will probably have to choose between a majority foreign-owned Qantas or taking Qantas back into public ownership as a loss-making ward of the state.
New FIRB chairman Brian Wilson promises greater openness in an interview with Glenda Korporaal:
The former investment banker, who has been on the board of FIRB since 2009 and took over as chairman last month, says FIRB is making a greater effort to communicate the government’s foreign investment policies through its website and in briefing sessions for advisers. “It is important for all our constituencies—the Australian public, Australian business, foreign investors and their governments—to understand that the processes FIRB goes through are sensible and rigorous, and open and consistent,” he says. “Being a little more forthcoming, and having a little more transparency, will actually reduce, for some, the suspicion that we hear or read about from time to time.”
Wilson says FIRB is now putting up a lot more on its website about Australia’s foreign investment policies.
The FIRB has some catching up to do when it comes to posting things on their web site. The fundamental problem with the legislation the FIRB administers remains:
“There is only one test—is the proposal contrary to the national interest? What that may be varies over time depending on economic circumstances, community attitudes, geopolitics, a whole gamut of things.”
Then there is this:
“So, I wouldn’t have thought talking to FIRB about a concept or a possible transaction would tip you over the ASX disclosure threshhold.”
Probably not quite the level of certainty investors are looking for, but perhaps a good quote for the M&A lawyers to file away for future reference.
Some Political Leadership on Foreign Direct Investment
Trade minister Craig Emerson has called for increased foreign direct investment in agriculture, in contrast to the federal Coalition’s calls for increased Foreign Investment Review Board scrutiny of foreign investment in the sector. It is one of the few acts of political leadership in this policy area since the late 1980s.
It is hard to believe now, but in the 1980s there was something of a bidding war between the federal Labor government and the opposition Coalition to liberalise the regulation of FDI. It culminated in then opposition leader John Howard’s undertaking to abolish the FIRB in his 1988 Future Directions manifesto. Both sides of politics recognised that restricting FDI increased foreign debt at the expense of foreign equity. The federal Coalition took a principled stand not to make a political issue of the Hawke-Keating government’s liberalisation measures.
Australia has often relied on external pressure rather than domestic political leadership in liberalising FDI. The 2005 Australia-US Free Trade Agreement resulted in a significant liberalisation of FDI screening thresholds in response to US concerns that would have been unlikely in the absence of the agreement.
The conventional wisdom holds that the existing discretionary regime for the regulation of FDI is as much liberalisation as the Australian political system can sustain. Yet the current system replaced an open-door regime that was in place until the early 1970s, at least if we ignore the statutory restrictions in certain sectors. The Australian political system has historically supported a more liberal FDI regime at times when economic nationalism and xenophobia were even more pronounced than they are today.
The shift to a discretionary regulatory regime from the early 1970s has normalised the idea that foreign direct investment should be regulated at the border rather than in-country on a national treatment basis. It is a legacy of the economic nationalism of Gough Whitlam and Rex Connor that continues to hold Australia back.
FIRB Transparency and the Colmer Doctrine Revisited
Nomura’s head of mergers and acquisitions, Grant Chamberlain, has called for greater transparency in the regulation of foreign direct investment, as reported in The Australian:
There were generally clear guidelines when it came to FIRB policy, but “but when it comes to SOEs, the picture changes”.
He said the only public information recently had been the “Colmer doctrine”, comments made by then FIRB executive director Patrick Colmer at a conference on Australia-China investment in September 2009.
Mr Colmer said the Australian government preferred that foreign investment by state-owned enterprises was kept to less than 50 per cent for greenfields projects and less than 15 per cent for major producers.
Mr Chamberlain said that it was impossible to actually get a copy of Colmer’s comments and that there was confusion about what would be considered as a “major producer”.
In fact, it is possible to get a copy of the speech here, but only due to a Freedom of Information request I made of the FIRB. The saga behind the speech and my efforts to obtain a copy are detailed in this op-ed in The Australian. Chamberlain’s speech proves the point I made in my original FOI application that releasing the speech was in the public interest.
South Africa looks to Australia’s Foreign Investment Review Board as a model:
THE establishment in SA of a body similar to the Australian Foreign Investment Review Board will be vital in regulating the government’s rules on foreign direct investment and removing uncertainty of the kind around this year’s controversial Walmart-Massmart merger.
However, competition experts warn that for the body to function properly, it will have to be independent from the government, will have to be governed by rules that clearly define its role and jurisdiction, and will have to have absolute transparency.
Australia’s FIRB has none of those characteristics.
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.