OVERSEAS DEBT: by Patrick J. ByrneNews Weekly
Foreign debt grows as we live beyond our means
, July 3, 2004
Australia's net foreign debt has hit $374 billion, and will almost certainly hit $400 billion by the end of the year.
In the early eighties, foreign debt was only 6% of our Gross Domestic Product. Now it is 47% of GDP.
When the Coalition came to power, net foreign debt was $193 billion, a matter of such concern that they paraded "debt trucks" around the cities highlighting Labor's folly. Since then the debt has almost doubled.
In the past two and a half years, the current account deficit - the amount by which the foreign debt grows annually - has trebled to $48 billion, or 6% of GDP. And this has happened at a time when world interest rates have been very low, almost zero in Japan, keeping our repayments low.The Age
's Tim Colebatch recently argued strongly that Australia's foreign debt threatened our economic stability.
He said that there is nothing wrong with foreign debt when it is invested to produce things we could not otherwise produce. Our domestic car industry is dependent on foreign investment. It is also good when it helps Australia produce globally competitive exports.Investment
When this happens, a country is using its borrowings to build industries that can repay the debt.
For example, Singapore and South Korea borrowed heavily overseas in their early years of development. But the industries they build saw them eventually turn huge current account deficits into large current account surpluses.
This is not what is happening in Australia. Over the past five years, much of the foreign debt borrowing has been for the Australian housing industry, spurred on by record low world interest rates. In that time, "the banks and other financial institutions have lent a net $82 billion to business and $345 billion to households."Export incentives
Colebatch argues that a combination of factors, including Labor's export incentives, saw export volumes rise by an average 10% pa between 1986 and 1997, and manufactured exports by 15% pa, rising almost five-fold in 11 years.
"Had that continued, the current account deficit by now wouldn't matter.
"But it hasn't. In the seven years since the Coalition pulled the plug on most of Labor's export and industry programs, the average growth in export volumes has slumped from 10% to 4%. The average growth in manufactured exports has slumped from 15% to 5%."
This sustained slump is due to more than just the drought and weaker world growth.
Indeed, much of agriculture is in crisis and manufacturing has shrunk to just 11% of GDP, compared to about 19% across the developed countries.
As Colebatch argues, the way to afford the good life is to focus on exporting more and on making more for yourself.
If we don't, eventually the international financial markets will demand we come to live within our means.