The macroeconomics of foreign investment in Australia

Abstract

This thesis examines the causes and consequences of Australia's external "imbalance" in the 1980's by highlighting the macroeconomic gains from international trade in saving. After developing an extended international accounting and measurement framework which includes new infl ation-adjusted measures, several stylized facts are presented as the basis for subsequent theoretical and empirical analysis. Traditional theoretical approaches to external account determination, such as the classical, elasticities, absorption, monetary and Mundell-Fleming models, are critically evaluated against the measurement framework and are found wanting because they fail to systematically tie the current account, the capital account and foreign investment to the process of real international capital transfer. Alternatively, more meaningful capitaltheoretic models of the external accounts which link saving, domestic investment and foreign investment are adapted to demonstrate the macroeconomic gains from international capital mobility and foreign investment. From a saving-investment perspective, it is argued that Australia's widened external imbalance in the 1980's primarily reflected a rise in private investment activity, though fiscal activity also influenced domestic saving behaviour. It is also argued that greater capital mobility and increased global integration of financial markets were facilitating factors behind the increase in Australia's capital account surplus. Using the precepts of the capital-oriented approaches to external account determination, econometric estimates gauge the extent to which the higher capital inflow and associated current account imbalances improved national output and income over the 1980's. Relatedly, new stock measures reveal that national net worth improved substantially over this time, notwithstanding the sharp rise in external debt. Finally, the thesis questions official and popular concerns about Australia's external position and the effectiveness of industry based proposals to address it. Macroeconomic policy responses which target the external accounts are also considered misplaced in light of Australia's dependence on capital imports.