Trade: Debt will return to haunt usby Colin TeeseNews Weekly
, January 12, 2002
Debt problems have been more or less off the economic (and for that matter, political) agenda since 1996. Readers will remember at the time of that election, the then Shadow Treasurer, Mr Costello, alerted us to what he called the Labour "debt truck". His specific promise at that time was to lighten its load. For the record, the truck has been loaded with significantly more debt since 1996. Today it stands at A$331 billion, compared with A$194 billion at the end of Labor's term in office.
Not that they have anything to boast about. In eleven years of office, Labor managed to increase Australia's foreign debt from A$25 billion to A$193 billion.
So how did all of this come about?
There is no mystery about foreign debt. It is nothing more than the difference between the value of what we can sell to the world in terms of goods and services and that which we import. If the value of what we buy offshore exceeds what we sell, then the current account which registers these transactions must be brought into balance by either selling assets or borrowing offshore - or a combination of both.
The fact that we have been accumulating debt since the beginning of deregulation means simply this: the goods and services we produce here and sell offshore, are insufficient to pay for our import needs.
A disinterested outsider might conclude that short term, foreign investment can help deal with this problem, but ultimately that, too, has to be paid back. Longer term, the solution lies either in importing less or exporting more. Since the imbalance is far greater than can be corrected by any realistic assessment of possible increases in exports, the only solution is a cut back on imports.
Such action would require a change in our present economic policies. As they apply to industry protection, deregulation and privatisation - all of which operate to increase imports. In other words our commitment to economic rationalism is directly and significantly linked with our current debt problems.
But for all his criticism of Labor's so-called "debt truck", don't expect the current Treasurer to identify "economic rationalism" as the culprit.
Nor the Labor Party for that matter. Remember them in office? First we were solemnly informed that the foreign debt problem was directly linked to the budget deficit. That was also the official Treasury line.
There never was substance to this idea. Neither does anything in economic theory support the proposition. And, examples could be drawn from all over the world to demonstrate that, in practice, no link exists between budget deficits and foreign debt. Japan is a shining example of a country running a huge budget deficit alongside a massive surplus on its current account. And there are examples of the opposite: countries with massive budget surpluses and large current account deficits.
When the Australian budget was brought into surplus in the 1980s (by means, incidentally, of a mirrors' trick in the form of the sale of government assets), there was - to the dismay of both Treasury and the government - no turn around in the current account. The level of foreign debt continued to increase.
Dismay took hold in Treasury. One senior official who had been among the architects of the change in economic policy direction lamented as follows: "We're stuffed. We've done everything right and we're stuffed." Pity he had not said so publicly.
A new set of excuses had to be found, and were. Savings was the key, so it was claimed. A report was hastily produced which demonstrated that, compared with the rest of the world -except, tellingly, the United States - Australia's savings rate was appalling.
Australians must save more, if catastrophe was to be averted. Had this advice been followed, it is hard to imagine how it could have helped.
Surely there would have been a corresponding contraction of demand (both for domestic and imported goods and services) with a consequent impact on economic growth. And, while halting the flow of imports would certainly have improved the state of the current account (assuming exports held up), Australians, and indeed the government of the day, may not have enjoyed the flow-on consequences of slowing growth.
Fortunately, the idea never took hold. As it turns out, our lack of savings, and willingness to absorb all available credit is, in fact, sustaining present levels of new housing starts, motor vehicle registrations and retail sales growth. And these are the very measures we use to determine the health or otherwise of the economy.
The interesting thing about the savings debate is that so many leading businessmen and politicians, all of whom should have known better, were among those who came out strongly in favour of the idea.
It is a chilling reality to realise that business can sometimes support ideas which actually run against its own interest.
When the savings idea collapsed, Mr Keating, then Prime Minister, undaunted, took hold of another straw. The mounting foreign debt should not be a concern, he assured us, because it was a temporary aberration brought about by the teething troubles of deregulating the economy. In any event, he further contended, once the benefits of the accumulation of superannuation were fed into the investment side of the economy after the year 2000, then the debt would be quickly wiped out. Meanwhile, such was the strength of the economy that interest payments on the existing debt posed no problem.
As we now know the expectations of Keating about superannuation have not been realised.
The present Prime Minister has taken a different, but no less questionable, approach. Our foreign debt does not matter, he insists, because it is private debt, and that is an issue between lender and borrower. What really matters is government debt, and that, Mr Howard points out, his government has almost paid out.Assurances?
Not much comfort can be taken from Mr Howard's assurances. Problems arise for the nation if - whatever the nature of its borrowings - there arises an incapacity to pay, from export earnings, at least the interest on outstanding loans.
If nothing else, the Asian crisis of the late 1990s made that point obvious. The International Monetary Fund stood ready at the moment of crisis - and in respect of debt almost entirely privately inspired - to impose draconian economic solutions on those governments
Since the Asian crisis there have been further developments, and, it has to be said, some modification of its previously heavy-handed approach by the IMF. Nevertheless, there are worrying portents for the future, for any country over-burdened with debt.
It happened that those Asian economies who accepted IMF prescriptions were hindered rather than helped by those measures, but that is another story. The point was then, and still remains, that countries accumulating debts beyond their capacity to service invite international interventions which can undermine not merely their sovereignty, but their economic viability.
Argentina is a perfect example. In the context of its difficulties, the Financial Review
, early in December, enthused editorially about an IMF plan to deal with so-called bankrupt countries.
Argentina is undoubtedly in trouble with debt. Already its currency is pegged to the US dollar. This "pegging" plan was hatched by the IMF after the Asian crisis. The idea was that countries in financial trouble should attach their currency to a 'stable'currency. How this would help has never been made clear, but it looks suspiciously like a backdoor attempt to re-establish fixed currency relativities - at least for debt plagued countries.
The irony of this is that in some cases at least, floating exchange rates may have been an underlying cause of their economic troubles in the first place.
But that isn't all. The IMF is also toying with the idea of a kind of bankruptcy provision for such countries, rather like the US law that applies to business bankruptcy in that country. The Chapter 11 clause in US bankruptcy law enables companies to hold creditors at bay while they try to arrange a refinancing or rescheduling of their debts.
But is this possible, or desirable, for countries? Companies who cannot pay their debts can be driven into bankruptcy by pursuing creditors. Can the same ever be true of countries?
Previously, the idea has been that countries that do not pay debts may become, temporarily at least, international pariahs, but nothing more. There have been examples of this, including Germany, after World War I.
Argentinian debt seems already to have delivered Argentina a fate no less undesirable than bankruptcy. As a result of pegging its currency to the US dollar, Argentina may well have surrendered an important element of economic, and ultimately, political sovereignty.
It could be that Argentina is on the way to becoming - de facto - a colony of the dominant economy of its region. Is this the shape of things to come?
This writer believes not - at least for the foreseeable future.
More likely is that a solution to the debt problem will be reached by other means no less unpalatable for countries such as Australia.
It seems possible that the current distinction between developed and developing countries will shortly disappear. Of itself, that may be no bad thing, if only because the distinction has never been less relevant. China, for example, under the old definition, is placed on the same footing as Bangladesh.
As well, the world could well divide into geographically defined blocs, with the dominant nation in each bloc acting as a kind of commander guiding the politics and economics within its region. Among other things the blocs would, logically, operate with a single currency, and would follow identical economic and, most likely, social policies. International relations between blocs would be handled not by individual countries, but by the command nations.
In that event, Mr Keating's and Mr Howard's predictions that our debt was of no real concern might well be fulfilled, though in ways neither would find comforting.
On the other hand if the blocs don't take the shape I have suggested, and Australia continues to accumulate debt, then the point may ultimately be reached when we cannot service the borrowings. If so, we could find ourselves in the same predicament as Argentina, with our currency pegged to another "stable" currency and our capacity for economic manoeuvre, determined outside Australia.
Surely it is better to avoid all of these possibilities and fix the problem ourselves, rather than wait until others insist on doing it for us.