Tuesday, April 25, 2006
Chapter 19 from: J.J. Ray (Ed.) "Conservatism as Heresy". Sydney: A.N.Z. Book Co., 1974
Economic Nationalism and Foreign Investment
THE AUSTRALIAN NATIONALISM that the Labor party is trying to foster is in principle something that conservatives heartily approve of. Two areas where they cannot be expected to approve of it, however, are where it implies a diminution of our family-type ties with Britain and where it clashes with our economic self-interest. Unfortunately, it is in their economic nationalism that the Labor party most clearly has the gut-reaction of the average Australian on its side: I refer to their opposition to foreign investment.
Foreign investment in fact seems to have almost no defenders in public life. The task of getting through to the average Australian the message that foreign investment is really a gift we are lucky to receive, is one of such great difficulty that wise politicians never attempt it.
That foreign investment is a gift to us can most easily be seen if we look at some overseas examples: Singapore. In the last fifteen years, Lee Kuan Yew has brought Singapore out of the underdeveloped world into the developed world. In fifteen years! Singapore is now one of the world's rich countries. We are used to accepting that Asian countries might in fact never catch up with the West. So how did Singapore do it? Foreign investment. In fact the economically sophisticated Singaporean leaders chased after foreign investment like no-one else before or since. They begged rich Americans to set up businesses and factories in Singapore and offered big incentives if they did. Foreign investors were even given reduced taxes to encourage them.
The reason is plain to see. In order to build factories and give the workers better machines to work with, someone has to save. They have to save large sums of money in order to buy what are called 'capital goods'. It is because he lacks the savings to buy capital goods, because he has only a wooden stick to plough with, that the average Asian peasant is so poor (poor by Western economic standards). Foreign investment, however, solves the problem overnight. Some American gives you his savings to work with. A gift! And it is a gift -- in spite of the fact that the American doesn't see it that way. He of course sees it as an investment earning interest. That investment, however, enables the Asian to earn by his labour not only enough to pay interest to the American, but also enough to buy far more for himself than he ever could before. Countries that receive foreign investment get most of the benefit of saving without actually having to do any saving first.
Foreign investment, then, is something that has benefits for both parties. The investor earns interest and the people receiving the investment increase their productivity per man. If that were not so, how could the two parties be persuaded to enter into such an arrangement?
In spite of the obvious differences between Australia and Asia, the same basic principles hold. Australians themselves do have a very high savings rate -- second only to Japan. This stems primarily from the high rate of saving among our migrant population. For all that, our savings are not adequate to take advantage of all the investment opportunities that we encounter. So we import other people's savings and give them a share of what those savings earn.
Unlike the Asian, we could perhaps afford not to have any foreign investment. If we did so, however, we would either have to increase our own savings rate or give up many of the productivity increases that we could have had. We would, in a word, be poorer.
Totalitarian countries have more choice. They can force their country to save more; simply by giving the workers minimum wages and having the government itself do the saving. That is how Soviet Russia progressed and how China may progress. That is doing it the hard way. Japan also did it the hard way. They progressed without much foreign investment because their workers voluntarily saved at an unprecedented rate.
If we want to do things the easy way, however, foreign investment is the way to do it. One way we could get by with less foreign investment would be to stop protecting so many of our industries. Because of Australia's high tariffs, precious savings are channelled off into industries where we are inefficient (relatively unproductive) -- such as making motor cars. Our own savings might go further if they were allowed to be more efficiently employed.
The disadvantage of foreign ownership is that we don't get all the benefit of new investment. It is, however, better to get some than none at all. Without foreign investment, our workers would still be working with older machines that give them only a fraction of the productivity that they have now. Higher productivity means higher wages so we benefit that way even though the foreign investor takes the profits as his benefit. We should not forget, however, that the foreign investor doesn't get all the profits. In relative terms, he doesn't have much left after our tax man is finished with him either. One possible unfair disadvantage that foreign investment brings is the 'marketing agreement'. This might happen if American Ford said to Australian Ford: 'You are making good cars that would sell well in Asia, but we forbid you to export them in case they compete with our American products.' If this happened, Australia would definitely be the loser.
Australia, however, currently seems to be the beneficiary rather than the loser from such arrangements. Foreign-owned firms account for a disproportionate part of our exports. They tend to export more than do Australian-owned firms. One reason for this could be that American multi-national corporations find that they encounter less resistance in Asia and elsewhere to a car produced in Australia than one produced in America. Australia is more popular internationally than is the U.S.A., so the product of the Australian subsidiary is more popular than is the product of the American parent firm.
It might be old-fashioned, but the simplest answer to anyone who advocates that we 'buy back the farm' is: 'Why?' We can only make ourselves poorer if we try.