AUSTRALIA'S CURRENT ACCOUNT: HYPE OR DOOMSDAY ?
Markets are panicking, the dollar's plummeting, overseas debt rockets upwards. The Government
can kiss good-bye to an election this year as interest rates and inflation rise. So the media
hype would have us believe based on May's current account deficit.
The rise in import costs and the fall in export earnings are reported to be leading Australia to
its doom. But what always remains in small print is the fact that annual deficits in Australia's
balance of payments are mostly due to interest on our foreign debt, and dividends paid to
foreign owners of Australian businesses, not to the gap between export earnings and import
expenditures. This gap has as often been positive as negative in the last ten years. Overall,
there has been a steady increase in export earnings for more than a decade from $24 billion
in 1993/4 to $64 billion in 1993/4.
But overseas payments have risen from $5 billion to $14 billion, as current account deficits
have increased from $7 billion to $16 billion over the same decade. And the May 95 figures
will blow this out even more - some say to $28b.
So Who Owns the Foreign Debt ?
Governments are responsible for an increasing percentage of foreign debt, with public
sector foreign debt increasing to 46% of gross foreign debt in 1993/4 compared with 42%
in 1990/91.
How Bad is the Foreign Debt ?
Australia's gross foreign debt is more than $200 billion incurred by both the public and
private sectors (also expressed as net foreign debt of between $160-$170 billion). A
shortage of domestic savings accentuated by government deficits are blamed for the
need for overseas borrowing, and to justify tax concessions, subsidies and other
incentives for foreign funding.
Net foreign debt has blown out from $7 billion in 1980 to $172 billion in 1993 (more than
24 times). By comparison our GDP rose only threefold from $123 billion in 1980 to
$402 billion in 1993. The same is true for debt and growth rates throughout the world,
the point being that the growth of debt has far out-stripped the growth of production
with which to pay the debt, or the natural resources to feed production.
The Government Response : Sell the Farm !
To reduce reliance on foreign borrowings, Australia accelerated foreign investment
nd ownership (as a % of GDP). Yet very little of this activity has resulted in additional
local employment although foreign ownership in Australia is almost the highest of any
industrialised or developing country.
Alarmingly the sale of private and government assets is also being used as a short-
term palliative in place of long-term solutions to balance of payments problems.
Spending on public infrastructure is now the lowest in 30 years and the second lowest
as a proportion of GDP for OECD countries, at a time when there are still plentywanting such work.
ERA's Solutions : Impex (Import/Export) and ReFIRB !
Impex : It's Time Has Come
Jack Iggulden's Impex system of foreign exchange management could very rapidly
get the current account deficit in shape. It would establish a free market in foreign
exchange which automatically balanced the current account by ensuring that no
money was spent overseas which had not already been earned overseas without
overseas borrowings, or sale of Australian assets. No overseas money could be
directly exchanged for Australian dollars, and all overseas currency would be bought
and auctioned on an Impex market for Impex dollars for the going Impex rate. Under
this system exporters and other earners of foreign exchange would own the foreign
exchange they earned, so they could sell it on the Impex market to those wanting
foreign exchange.
The Impex rate would reflect the ratio of overseas earnings to overseas payments.
While Australia's balance of payments showed a current account deficit, the Impex
rate would be high, effectively increasing the cost of imports and encouraging
Australian manufacturers to establish import replacement industries. A high Impex
rate would put a `tax' on all interest, services, and foreign profits out of Australia. All
overseas transactions would go through the Impex Facility where, as now happens,
the $A dollar value of each transaction would be calculated at the current rate of
exchange for the currency involved. The important difference is that instead of
merely getting the $A dollar value as now happens, earners of foreign exchange
would receive an Impex draft made out in Impex ($Imp) for the same amount.
Foreign exchange converting to $A1,000 would become a draft of $Imp1,000.
This Impex draft would then be sold for Australian dollars on the Impex market for
overseas expenditure and payments. These sales would establish a daily Impex
rate. So that the system could be phased in gradually, the government would
continue some overseas borrowing which would be fed into the Impex market to
hold down the initial Impex rate.
The advantages of the Impex system include :
1. An exact balance of payments;
2. Impex, being an internal economic adjustment, would not conflict with GATT or
similar agreements;
3. No changes would be required to existing tariffs, duties and exchange rates;
4. The public sector share of overseas debt could start to be paid down by the
government using its local funds to buy Impex dollars, at the same time
keeping the Impex rate above its natural market rate;
5. Impex will discourage overseas investment in favour of increased local investment;
6. As Australia's manufacturing base expands, tax evasion through off-shore
production, and transfer pricing will decrease;
7. Existing overseas debt can be gradually paid off by setting the Impex rate some-
what higher than the natural market rate;
8. Finally, Impex ensures that the less economically powerful nations can maintain
their independence in the international financial system;
ReFIRBing Foreign Ownership
It's vital the Impex system be supported by a Foreign Investment Review Board (FIRB)
whose approval criteria are based not only the estimated expenditure in Australia but
more importantly, on the estimated number of Australians employed long-term by such
projects. As well FIRB should ensure :
1. Detailed monitoring and regulation of foreign capital;
2. Investment of foreign capital in import replacement industries and enterprises
consistent with national environmental and social priorities;
3. Approval of foreign involvement in new ventures only where foreign capital,
technology and relevant expertise are not available in Australia;
4. Strict monitoring of export and import prices to reduce transfer pricing to avoid tax;
5. Foreign ownership reverts back to Australians after 10-15 years;
6. Prohibition of foreign investment used to acquire land for residential or
commercial purposes.
Jack Iggulden's first two books "The Revolution of the Good", and "How Things are
Wrong and How to Fix Them" are available from ERA for $20 plus postage. They
make economic and financial reform very readable.