Strangers in Paradise | Speeches (2024)

Watch video: 'Strangers in Paradise', Speech by Andrew Hauser, Deputy Governor, at the Citi A50 Australian Economic Forum

Introduction

Picture if you can a thriving trading hub on the Australian coast. It uses imported capital equipment andprocesses, and temporary migrant labour, to extract and process an abundant natural resource for on-saleto China. The business brings wealth and prosperity to the local community. Over time, public debateemerges about whether rewards are being fairly divided between locals and foreigners, and how to manageecological degradation.

A mine or refinery in present day Western Australia or Queensland? Could be. But what I have actually justdescribed are the arrangements for trading in trepang – or sea cucumbers, a Chinese delicacy– that began around 1700 between the Yolŋu people of Arnhem Land and itinerant fishermen fromMakassar on Sulawesi, part of modern-day Indonesia. By the mid-19th century, the Makassar fleet wassupplying an amazing 900tons of trepang to China every year.^[1]

The existence of such a striking historical echo of today’s debates is less surprising when oneremembers that Australia is home to the oldest continuing culture on earth. For more than65,000years this continent has been cultivated by First Nations peoples. In that context, I want toacknowledge the Gadigal people of the Eora Nation as the traditional owners and custodians of the land onwhich we are meeting this evening and pay my respects to Elders, past and present.

I also want to welcome all of you to the A50forum, an event initiated in 2016 to highlight thebenefits of investing in Australia. There are many important issues to discuss in the current climate,and the organisers have put together a fantastic program tomorrow, involving government leaders, theregulatory community and the corporate and financial sectors, to do just that. With such a rich maincourse to come, I have no intention of competing. Instead, I offer merely a light starter to puttomorrow’s discussions in context – reviewing the historical sources of economic growth inAustralia, and the role played by foreign investment.

When economic conditions are as challenging as they are today, it can be easy to forget just howprosperous modern Australia is. Measures of relative affluence, such as GDP or wealth per head, regularlyplace the country in the top echelon globally.^[2] Of course, the distribution of that prosperity is farfrom uniform – so it would be brave for a new and infatuated stranger to declare Australia anearthly paradise.^[3] But coming as I do from a country whose GDP per headhas been more or less static since the global financial crisis and lies between one-quarter and one-thirdlower than Australia’s, I can tell you that cross-country gap feels very real.

How Australia got here is long-debated; this evening I want to discuss three important drivers:^[4]

• Its unusually diverse range of resource endowments – below ground, above ground, and beyond theseas.
• Its strong but adaptable pro-growth institutions – supporting political, legal, macro andmicroeconomic and financial stability.
• Its longstanding welcoming environment for foreign investment.

Australia’s unusually diverse resource endowments

Many countries have resource endowments of some kind. What is different about Australia is it seems tohave the full set! That diversity can be seen in the evolving shape of its exports over the past200years (Graph1).^[5] But it also applies to its as-yet untapped potential.

To see that more clearly, let’s divide Australia’s endowments into three.

Below ground

It is sometimes said that Australia has long relied on ‘old world’ mining exports. But whileit’s true that more than half of today’s goods exports consist of iron ore, gas and coal, thatis not a longstanding feature of the economy. The only significant mining export in the 19th century wasgold – and for much of the 20th century, mining played only a modest part in Australia’s trade(Graph1).

More importantly for the future, Australia has large shares of global reserves of many of the mineralscritical to ‘new world’ technology and energy transition industries, with significant headroomto expand current production (Graph2), given the right investment and demand conditions.

Above ground

For over 150years, agriculture – particularly wool – dominated Australia’s goodsexports (Graph1). While that dominance has now pivoted to mining, other ‘above ground’resources have grown significantly. In particular, Australia’s human capital rankshighly globally, bucking the trend of countries with significant commodity dependencies (Graph3)and positioning the country well to take advantage of developments in the services and technologysectors. Indeed, nearly one-fifth of Australia’s total exports consist of services –principally inbound tourism and education.

But one of Australia’s most significant above ground resource endowments has no physical form at all:sunlight. Multiplying the intensity of the Australian sun (using the World Bank’s Global HorizontalIrradiation metric) by its enormous landmass, Australia has the largest assessed theoretical potentialsolar capacity in the world – many thousands of times the country’s domestic energy needs.^[6]Estimates of realisable capacity, after allowing for the many practical constraints of real-world powergeneration, lie well below this theoretical maximum. But they still suggest there is very substantialfurther headroom available, compared to today’s output.

Beyond the sea

Australia’s geographical position, lying as it does a long way from some of its closest partners, issometimes said to confer an economic disadvantage – the ‘tyranny of distance’. But as IanMcLean pointed out, this is too simplistic. During the 19th and a good part of the 20th centuries, acombination of comparative advantage, rapidly improving transport technologies and ‘colonialpreference’ meant that economic growth was supported by advantageous trading arrangements with theUnited Kingdom, despite it being as far away as it is possible to get! In recent decades, the focus oftrade relations has pivoted decisively towards Asia. But Australia has also maintained a broader anddeeper network of political and economic relationships, within and beyond the Asia-Pacific region, withwhich to navigate the shifting tides of economic opportunity.

Australia’s strong but adaptable pro-growth institutions

Strong resources alone are rarely sufficient to guarantee prosperity – indeed, the reverse is moreoften true, a phenomenon sometimes termed the ‘resource curse’. Donald Horne’s 1964polemic The Lucky Country predicted Australia would eventually be cursed too.^[7] But60years on, real GDP per head has more than tripled.^[8] That’s not just luck.

Endowments bring opportunity. But harnessing them for a country’s greater good takes something more– and Australia’s real secret sauce has been its strong but adaptable pro-growthinstitutions.^[9]

Among Australia’s greatest assets have been its political institutions, its legal system andits civil service. Australians may debate the merits of its political arrangements from timeto time. But the country regularly scores in the top deciles of objective global measures of liberaldemocracy.^[10] Through history, Australia has regularly had to maketough national economic decisions – on squatters’ rights in the 19th century, on theappropriate balance between agriculture, extraction and manufacturing in the mid-20th century, or on theappropriate pace of de-regulation in the 1980s and 1990s. In each case, the debate may have been noisy,drawn out and non-linear – but assisted by Australia’s top-flight legal and civil service, theoutcomes have much more often been right than wrong.

Australia’s macroeconomic framework has also been a clear strength over the past40years. Resource-rich countries can suffer significant economic volatility when the prices fortheir key outputs adjust – and Australia has certainly had its fair share of this over its longerhistory. But today it has powerful shock-absorbers in place to reduce that buffeting. First, unlike mostcommodity-exporters,^[11] Australia has a fully flexible exchange rate.Second, the RBA has independent authority for setting monetary policy to achieve a flexible inflationtarget that gives appropriate weight to employment outcomes – similar to that in the United States.And third, gross public debt lies well below that of many other developed countries – not least, ithas to be said, my own country of origin (Graph4)!

On the microeconomic side, the reforms of recent decades^[12] haveleft Australia with internationally open and transparent product markets,^[13] lowtariffs (Graph5) and a relatively open capital account.

And finally, financial stability is overseen by a comprehensive set of regulators. Themajor banks are liquid and strongly capitalised, there is a well-developed capital markets infrastructureand domestic non-banks are increasingly interested in coming in alongside overseas investors in onshoreprojects as part of joint ventures.

Australia’s welcoming environment for foreign investment

When Walter Wriston, Citibank’s CEO from 1967 to 1984, said ‘capital goes where it is welcome,and it stays where it is well treated’, he could have been describing Australia. And that matters– because other than a brief period around the turn of the 20th century, and another around theSecond World War, Australia has run a persistent current account deficit (i.e. drawn on overseasfinancing to help fund onshore investment) for most of the past 160years (Graph6).

In the early days, that financing sometimes came from rather unconventional sources.

Just north of where we are sitting tonight lies the cove originally known as Melia-Wool, but later renamedafter the businessman Robert Campbell. Campbell built the warehouses you can still see through thewindow, to hold the wares of 19th century trade: from sugar and wool to whale oil, sealskins – andPeruvian guano.^[14] He also ran the Sydney branch of the New South WalesSavings Bank, known colloquially as ‘Campbell’s Bank’. Newly arrived convicts were firstencouraged, and then from 1822 compelled, to deposit any assets they brought with them in the SavingsBank until ‘their condition was improved by their good behaviour’.^[15]

Though many of these deposits were pitifully small, some amounted to real money.^[16] Forexample, one Thomas Bolton deposited 42pounds, 18shillings and 4pence – roughlythe annual salary of a well-to-do London builder of the time. This money was used to fund localdevelopment. A Savings Bank document from 1824 shows a 100-acre parcel of land near present-day Petershampassing hands for £100. Today – 200years on – that land would be worth at least $2billion: a striking illustration of the scale of change in the Australian economy over thatperiod.^[17]

Persistent current account deficits can sometimes drive a sense of national angst that you are livingbeyond your means, risking a sudden drying up in credit or an unaffordable rise in funding costs.Australia found itself in a particularly challenging situation between the World Wars, when a combinationof weak growth, over-borrowing in sterling, and the British determination to stick to the Gold Standardcaused the public debt burden to balloon dangerously. In August 1930, Sir Otto Niemeyer – a Bank ofEngland official, I regret to say – delivered a pretty obnoxious speech to the Melbourne Conferenceof Commonwealth and State Leaders in which he warned Australia that ‘cold facts must be faced’,and that it had two years ‘to get its house in order’ before key debt tranches matured.^[18] Hisintervention was so profound it caused a split in the Labor Party.^[19]

Over the decades that followed, however, governments around the world came increasingly to the view thatpersistent overseas borrowing could in fact be sustained so long as it reflected the fundingof profitable onshore investment, or so-called ‘consumption smoothing’ (e.g. by younghouseholds, expecting their lifetime incomes to rise). That view – dubbed the ‘Pitchfordthesis’ in Australia in the 1980s – shaped a raft of policy reforms, including floating theexchange rate and reducing or eliminating a wide range of capital controls.^[20]External financing switched increasingly from the public to the private sector.

Of course, questions about external sustainability can still arise. After the 2016 Brexit referendum, forexample, the then Bank of England Governor Mark Carney described the United Kingdom’s currentaccount deficit as relying on the ‘kindness of strangers’ – Blanche DuBois’memorable last line in ‘A Streetcar Named Desire’.^[21]

Australia’s experience in recent decades has been more positive, for at least three reasons. First,Australia has generated substantial onshore investment opportunities, particularly during the‘mining boom’ of the noughties. Second, borrowing has been structured in ways that make itrelatively resilient to shocks, being denominated predominantly in (or hedged back to) local currency(reducing exposure to exchange rate adjustments), and issued at increasingly longer maturities (reducingrollover risk).^[22] But, third, Australia has been through an unusualperiod since 2019 of running current account surpluses – exporting rather thanimporting capital in net terms, helping to halve the country’s net overseas liabilities(Graph7).

These surpluses reflected a number of underlying causes. Part of it was a classic excess of nationalsaving over investment – with savings boosted by the sharp rise in the terms of trade, thestructural increase in super fund balances and precautionary accumulation during Covid; and investmentgrowth normalising somewhat after the highs of the mining boom. Australia’s net investment incomealso rose for a period as a result of changes in relative asset prices. And capital flows were affectedby mergers and acquisitions.^[23]

It is unclear whether such surpluses will persist. The most recent data suggest they may not.^[24] Buteven if they do, that does not mean Australia’s need for inward foreign investment is a thing of thepast. And that is because a substantial slice of national savings is placed in overseas assets, in orderto diversify risk and return (Graph8, left hand panel). The super funds alone hold nearly halftheir portfolio offshore.^[25]

With a substantial pipeline of investment projects waiting to be financed, that leaves many opportunitiesfor inward investment. Consistent with that, public and private Australian debt remains in strong demandright around the world (Graph8, right hand panel). And Australia remains one of the top recipientsof inward foreign direct investment (FDI) globally, when expressed as a share of GDP (Graph9).

Conclusion

Let me conclude.

No one has yet identified a single golden source of national prosperity. But Australia has come prettyclose. Three key things have helped it navigate massive changes in the global economic and financialsystem, generating wealth for its people and ensuring it remains an attractive location for investment inequal measure:

• Its unusually diverse range of resource endowments – below ground, in both ‘oldworld’ and ‘new world’ minerals; above ground, in human capital, agriculture and solarcapacity; and beyond the seas, in its geographical position.
• Its strong but adaptable pro-growth institutions – political, legal, macro and microeconomic,and financial stability.
• Its longstanding welcoming environment for foreign investment.

Of course, these things are not sufficient to guarantee prosperity in the future: as a small open economy,Australia relies on the continued functioning of global institutions. And it relies on making the rightpolicy calls. Tomorrow’s sessions are all about how to do that in the current climate. I wish youwell in those discussions.